New Bookmarks
Year 2011 Quarter 1:  January 1 - March 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

Choose a Date Below for Additions to the Bookmarks File

2011

January 31       March 31

March 31, 2011

Bob Jensen's New Bookmarks February 1-March 31, 2011
Bob Jensen at Trinity University 

For earlier editions of Fraud Updates go to http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 

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

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

In some ways the AAA's Issues in Accounting Education did not have such a good year.
The Editor's 2010 Report IAE has two tables of interest. Especially note Table 2 ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=IAEXXX000025000004000795000001&idtype=cvips&prog=normal

Compare this with the Editor's Report for Accounting Horizons ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACHXXX000024000004000715000001&idtype=cvips&prog=normal

And then compare these with the Editor's Report for The Accounting Review ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACHXXX000024000004000715000001&idtype=cvips&prog=normal

Jensen Comment
I really don't want to make a lengthy comment at this time except to say that it is very sad the accounting researchers do not take more interest in accounting education.

The following history paper seems to be increasingly and sadly relevant today ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Humor Between February 1 and March 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor033111 

Humor Between January 1 and January 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor013111 

Deloitte University --- http://careers.deloitte.com/united-states/students/csc_general.aspx?CountryContentID=16027

Update on Bob Herz (with a note on his interest in accounting technology) --- http://accounting.smartpros.com/x71457.xml

CPA Exam Slated for International Debut in August --- http://www.journalofaccountancy.com/Web/20113892.htm

Bob Jensen's threads on the CPA Examination --- http://www.trinity.edu/rjensen/BookBob1.htm#010303CPAExam

"Comparing CPA Review Courses," by Junior Deputy Accountant Adrienne Gonzalaz ---
http://goingconcern.com/2011/03/comparing-cpa-review-courses/#more-27710

We’ve gone over how to choose a CPA review course in the past but it seems we’ve been getting more emails than usual asking about specific review programs. Due to a potential perceived bias (this author was employed in CPA Review for four years), we have avoided covering this subject in detail until now.

The following list of review courses is by no means comprehensive and we do not endorse any of these courses (unless, of course, they would like to get in touch with our advertising folks and set up a sweet deal to be pimped out). CPA exam candidates are highly encouraged to do their own research by checking blogs and forums. Coworkers can also be a good source of info but keep in mind colleagues are less likely than strangers on the Internet to be honest about their own performance so take any information you glean from them with a grain of salt.

Many have asked if additional supplemental products are necessary when dropping a big chunk of cash on CPA review. I generally tell candidates to save their pennies, get a $2 pack of index cards and make their own flash cards. Not only do you save money, by writing them out yourself you’ll actually see that you’re understanding the concepts better simply due to the mechanical motion of putting pen to paper.

We’ve included links to CPAnet where appropriate so you can check out actual candidate feedback (the positive and negative) which former students of each of these courses have posted on the forums there.

• Becker: Retail Price: $3,065 (all four parts)
Per part if ordered individually: $990 (CPAnet)

• CPAexcel: Retail price (Gold Medal option): $1690 (four parts) Per part if ordered individually: $580 (CPAnet)

• Kaplan, Gleim and Bisk: Considered self-study or supplemental, check CPAnet for feedback on these courses.

• Roger: Retail Price: $2095 – $1695 (all four parts) Per part if ordered individually: $595 – $695 (CPAnet)

• Wiley: Price varies based on options. (CPAnet)

• Yaeger: Retail price: $1787 (four parts) Per part if ordered individually: $545 (CPAnet)

This is where our lovely GC readers come in. We know you all are really proud of how you’ve kicked the CPA exam’s ass, so please let us know in the comments what worked for you. If you all can get extra excited about this, we can put together a GC reader CPA review deathmatch based on your input.

Note: prices current as of 3/29/11 based on available information. If you have a correction, please get in touch.

 

Jensen Comment
This approach to comparing alternatives will make most accountics professors shudder. Can't you just imagine the course managers' contacting their "alumni" requesting that you send Going Concern raving reviews about their CPA Review "alma maters?"

Actually most any way I can think of to compare these coaching course alternatives makes me shudder. These coaching courses are often very important to some exam takers, but in every instance a coaching course is only one variable leading to success, and it's not an independent variable. It's a variable that interacts with many other factors in complicated and dynamic ways. I defy anybody in the real world to isolate its first-order plus its higher order impacts and to robustly extrapolate the findings to a person comparing these coaching course alternatives.

Firstly, exam takers may not know what factors really led to success when they took the CPA Examination and/or they may falsely attribute success to factors that in the grand scheme of things were truly less important. For example, coaching courses have a "recent-timing bias" in that they are the last big efforts to study for the exam when in reality the success may be largely attributable to some parts of undergraduate courses they took years ago.

Secondly, exam takers may attribute too much to things that don't necessarily differ greatly between coaching courses. Some exam takers attribute success to coaching courses that kick butt and force them to study a lot weekly. But since nearly all the coaching courses kick butt in one way or another, this hardly distinguishes the best butt kickers. Other exam takers attribute success to the coaching course "wizards" who successfully predicted what would be on a particular exam. But coaching courses may have varying success in this regard over time and with varying degrees of luck.

Thirdly, when education researchers compare different pedagogies among good students, the general finding is that there's no significant difference between one pedagogy versus another. Good students adjust to different instructors, different textbooks, different teaching methods, different coaching, etc. ---
http://www.trinity.edu/rjensen/assess.htm#AssessmentIssues

I think there are many ways coaching courses can be compared on the input side. I don't see a good way of comparing them on the output side. Also it's not at all clear to me that many students get what they pay for, although the fault for this may vary. Some coaching courses are overpriced in my viewpoint. Going for the most expensive course does not mean you get what you paid extra for to pass the exam.

Some things are probably more important than coaching courses. For example, how much time off does your employer give you to study for the exam and how efficiently do you make use of that free time? Do you have to study in hotel rooms more than you can study conveniently at home? Do you have to study for the exam while having to also bounce a child on each knee most of the time? WC Fields said there's only one good way to have kids --- cooked. How much do you really, really, really want to pass this exam? Are you really studying so intently that you have to change underwear six times a day? Are there too many outside distractions in your life such as excessive success or failure in your love life? Are you spending too much time pouring over Bob Jensen's AECM messaging?

When the Great Scorer at NASBA comes to write against your name, he writes if you won or lost, not how you played the game.

Bob Jensen's threads on the CPA Examination are at
http://www.trinity.edu/rjensen/BookBob1.htm#010303CPAExam

"Video:  Behavioral Finance from PBS Nova," by Jim Mahar, Finance Professor Blog, March 27, 2011---
http://financeprofessorblog.blogspot.com/2011/03/behavioarl-finance-from-pbs-nova.html

Bob Jensen's threads on behavioral finance and economics
http://www.trinity.edu/rjensen/Theory01.htm#Behavioral  

An Ethics Case
This might be a good video to use in an ethics class. It demonstrates how convincing scam artists can become and how they pray on investors by demonstrating their "superior" research. One of the most common tactics of investment analysts and advisers to exaggerate their past records of success.

Stansberry Investment Research --- http://www.stansberryresearch.com/

Video:  A controversial and negative video forecast of a collapse of the U.S. monetary system and rioting in the streets of America ---
http://www.stansberryresearch.com/pro/1011PSIENDVD/LPSIM224/PR
Jensen Comment
I linked to the above Stansberry video as food for thought and not because I buy into all of this somewhat self-serving gloom about what the Zimbabwe Theory of Finance will do to bring down the United States.  The end of this video gets a bit too mysterious to me in an effort sell his newsletter. But the early parts of the video are sobering. What the video demonstrates most to me is how sales pitches can be so convincing by scam artists. This might be a good video to use in an ethics class. It demonstrates how convincing scam artists can become and how they pray on investors by demonstrating their "superior" research. One of the most common tactics of investment analysts and advisers to exaggerate their past records of success.

"AGORA, INC., PIRATE INVESTOR, LLC and FRANK PORTER STANSBERRY, SEC Civil Action No. MJG 03 CV 1042
http://www.sec.gov/litigation/complaints/comp18090.htm

"Catching SEC-Busted Stansberry Research In 4 Blatant Lies & Why Porter Stansberry Is The Real Life Hyman Roth," by Timothy Sykes, October 4, 2010 ---
http://www.timothysykes.com/2010/10/catching-sec-busted-stansberry-research-in-4-blatant-lies-why-porter-stansberry-is-the-real-life-hyman-roth/

I’ve previously written about Stansberry Research by exposing their $1.5 million SEC fine and how they use certainly unethical, but-not-always-illegal manipulative language to market their “picks” using sucker-inducing marketing messages like ““This is the kind of situation that can change your life… where a $10,000 stake can allow you to literally quit work, forever.”

Continued in article

Also see http://briandeer.com/vaxgen/stansberry-fraud.htm

Stansberry's defense of the SEC charges against him proving how clever these guys are in the face of adversity ---
http://dailyreckoning.com/why-the-sec-sued-me-and-why-you-should-care/

Suggested Student Assignment
Assign a debate where students take up both sides of Stansberry's defense and his advice for investing in these troubled economic times.

Report: Bomber of Moscow Airport Was an Accounting Student ‘Pumped Full of Drugs’ ---
http://goingconcern.com/2011/02/report-bomber-of-moscow-airport-was-an-accounting-student-pumped-full-of-drugs/#more-24935

Jensen Comment
But the lingering questions are the usual questions about where he got the bomb and the training to be a terrorist. Accounting students generally bomb in other ways.

A roundup of posts on Apple software and products.
"From the Archives: Apple Edition," by Natalie Houston, Chronicle of Higher Education, March 14, 2011 ---
 http://chronicle.com/blogs/profhacker/from-the-archives-apple-edition/31807?sid=wc&utm_source=wc&utm_medium=en

Bob Jensen's threads on education technology ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm

GASB Issues Requests for Proposals for Academic Research Funding, AccountingEducation.com, March 21, 2011 ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151484

In a continuing effort to foster more collaborative research efforts with the academic community, the Governmental Accounting Standards Board (GASB) has issued the 2011 Request for Research (RR) for the Gil Crain Memorial Research Grant. Under this program, the GASB offers grants of up to $5,000 for research on both existing standards and issues the Board has yet to address. The deadline for sending a request for research funding is May 27, with grants to be awarded June 17, 2011.

The GASB technical staff is relatively small. Therefore, the GASB seeks to leverage research efforts by encouraging the academic community to conduct applied research that is relevant to the GASB’s standards-setting activities. Two broad areas of research are particularly important to the GASB: (1) research on existing standards, including the monitoring of new standards for implementation difficulties, as well as reviewing standards in place not less than five years, and (2) studies of issues that have not yet been addressed.

The RR enumerates the areas on GASB's research agenda on which it seeks assistance (see pages 5-13). These areas can be broadly characterized as asset retirement obligations, electronic filing reporting, financial performance measurements, government-wide financial statements, infrastructure reporting, in-kind contributions, popular reporting, reporting unit presentations, potential re-examination projects, and re-examination of pre-November 30, 1989 FASB and AICPA pronouncements. Candidates may suggest research topics not specifically addressed in this document.

Full details of research needs, application requirements, and deadlines are included in the RR. Once again, the deadline for submitting an application is May 27, 2011.

Bob Jensen's threads on the sad state of governmental accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

Journal of Accountancy Video on How to Combat IT Security Threats ---
http://www.journalofaccountancy.com/Multimedia/

Bob Jensen's threads on computer and networking security ---
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection

Is your life stuck in the mud --- a creative idea on how to get moving
Here is what a REAL Norwegian does when his tractor gets stuck! ---
http://www.boreme.com/posting.php?viral_id=28504&page=1

"The Four Hottest Areas in Litigation Consulting," by Rick Telberg, CPA Trendlines, March 2011 ---
http://cpatrendlines.com/2011/03/14/the-four-hottest-areas-in-litigation-consulting/

"Moral for CEOs Is Choose Your Fraud Carefully:," by Jonathan Weil, Bloomberg, March 16, 2011 ---
http://www.bloomberg.com/news/2011-03-16/moral-for-ceos-is-choose-your-fraud-carefully-commentary-by-jonathan-weil.html

Of all the stories to come out of the 2008 collapses of Fannie Mae and Freddie Mac, this one may be the most incredible: To this day, neither company has admitted that any of the numbers on its financial statements that year were wrong.

It seems the Securities and Exchange Commission won’t be doing anything to challenge that pretense, either, and that this may be by design. The SEC for years has been bending over backward to avoid accusing major financial institutions of cooking their books, even when it’s obvious they did. So much for upholding financial integrity.

Last week the regulator notified former Fannie Mae Chief Executive Officer Daniel Mudd that it may file civil claims against him. The allegations wouldn’t be about Fannie Mae’s accounting, though. They would focus on whether the government- chartered housing financier accurately disclosed to investors how much of its loans were subprime.

“The disclosures and procedures that are the subject of the staff’s investigation were accurate and complete,” Mudd said in a statement last week. He said he would submit a written response “that will make clear why the SEC staff should not pursue any action in this matter.”

There’s a pattern here. When the SEC in 2009 accused former Countrywide Financial Corp. CEO Angelo Mozilo of securities fraud, it claimed the lender’s management foresaw as early as 2004 that the company would suffer massive credit losses on the home loans it was making. The SEC’s complaint accused Mozilo of “disclosure fraud” for hiding such information from investors. Accounting Violation

Yet if the SEC’s allegation were true, it would mean Countrywide had been overstating its earnings for years, by delaying the recognition of losses long past the point when management knew they were probable. That would be an accounting violation. The SEC never made that connection in its complaint, though, and clearly had made a decision not to. Mozilo later paid $67.5 million to settle the suit, without admitting or denying the regulator’s claims.

Similarly, when the SEC accused three former IndyMac Bancorp Inc. (IDMCQ) executives of securities fraud last month, it claimed they had made false and misleading disclosures about the company’s financial stability. IndyMac’s regulator, the Office of Thrift Supervision, by then had already admitted to letting the company backdate a capital contribution to its main banking unit in May 2008, so it would appear in the prior quarter. IndyMac Collapse

That was a violation of generally accepted accounting principles, the Treasury Department’s inspector general said in a 2009 report. Yet the SEC didn’t identify any accounting errors at IndyMac. The company showed shareholder equity of $959 million, as of March 31, 2008. By July 2008, IndyMac had failed, costing the Federal Deposit Insurance Corp. $10.7 billion.

Likewise, last month Freddie Mac’s former chief financial officer, Anthony “Buddy” Piszel, said he received a Wells notice from the SEC, indicating the regulator might sue him. Piszel said the inquiry concerned “certain disclosure matters,” according to a press release by CoreLogic Inc., where he was CFO until Feb. 10. There was no mention of Freddie’s accounting. Freddie’s former CEO, Richard Syron, received a similar Wells notice last month.

That Fannie’s and Freddie’s books were a farce is beyond dispute. At the time they were placed into conservatorship, both companies had overvalued their deferred tax assets by billions of dollars. The bigger their losses got, the more their tax assets grew, based on the companies’ ludicrous claim that they would use all these credits to offset future tax bills because they would be wildly profitable for decades to come. Paper Losses

Both companies kept billions of dollars of paper losses on mortgage-backed securities out of their earnings and regulatory capital by labeling them as “temporary,” when it was obvious the declines were anything but that. They also claimed, falsely, to be adequately capitalized.

And they did it all in broad daylight with the full knowledge and approval of their regulator, the Federal Housing Finance Agency. That helps explain why the SEC is trying to dig up something other than accounting misdeeds as it tries to build cases against former Fannie and Freddie executives. The toughest challenge for the SEC will be finding violations that the government didn’t know about while they were going on.

The biggest beneficiaries of the SEC’s see-no-accounting- evil approach are the Big Four accounting firms. Freddie Mac is audited by PricewaterhouseCoopers LLP. Deloitte & Touche LLP audits Fannie Mae. KPMG LLP audited Countrywide. Ernst & Young LLP audited IndyMac. Shielding Auditors

As long as the SEC clings to the position that there were no errors in those companies’ financial statements, it can’t allege there was anything wrong with the firms’ audits. That helps shield the auditors from potentially crippling liability in private securities litigation.

It also limits the SEC’s ability to accuse any of the companies’ executives of fudging their numbers. And so the SEC has to resort to convoluted claims like the one against Mozilo, where Countrywide’s disclosures were false and misleading but somehow its balance sheet was pristine.

Continued in article

 

Video on the efforts of some members of Congress seeking to cover up accounting fraud at Fannie Mae ---
http://www.youtube.com/watch?v=1RZVw3no2A4

The Largest Earnings Management Fraud in History
and Congressional Efforts to Cover it Up

Video on the efforts of some members of Congress seeking to cover up accounting fraud at Fannie Mae ---
http://www.youtube.com/watch?v=1RZVw3no2A4

Bob Jensen's threads on earnings management and creative accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

Question
Why can't the highest scoring CPA Exam taker in the nation probably can't become a licensed CPA in Texas?

Answer
Because in Texas, unlike the other 49 states, nobody can become a CPA without having taken at least five accounting courses onsite. Distance education graduates need not apply for a CPA certificate if they have distance education degrees and/or did not take about half of the required accounting, auditing, and tax courses onsite instead of online.

In effect this means that Texas does not allow full distance education accounting degrees such that even flagship universities like Texas and Texas A&M like flagship universities in Connecticut, Wisconsin, and Maryland have distance education accounting degrees.

March 31, 2011 message from Barbara Scofield

In the state of Texas educators are struggling with ever more onerous rules for candidacy. The AICPA, however, seems to be ignoring issues that loom large for the TSBPA. One of their newly featured "new CPAs" at the link below is an award winner from Colorado (not a 150 hour state) who took her accounting courses online (Texas requires 15 credit hours face to face of upper division accounting courses) from DeVry.

http://www.thiswaytocpa.com/exam-licensure/exam-diary/leslie-rezgui/

Could this person work as a CPA in Texas?

Barbara W. Scofield, PhD, CPA
Chair of Graduate Business Studies
Professor of Accounting
The University of Texas of the Permian Basin
4901 E. University Dr. Odessa, TX 79762
432-552-2183 (Office)

November 5,. 2010 reply from Bruce Lubich <BLubich@umuc.edu>
Note that Bruce is the Director of an online accounting distance education program in the University of Maryland System

Hi Bob,  

When TX first went to the 15 credit requirement, we had a couple of  University of Maryland University College students apply for the exam there,  and be rejected. Our transcript doesn't show which courses were taken  online. Apparently it's on the TX paperwork. Lying on that is not  something to be encouraged for future CPAs. So, unless a student has no  desire to sit for the CPA exam or they just need to fill in a few holes to  qualify, the TX market has dried up for all online programs.

Evidently, the  TX board takes this requirement very seriously, so my guess is that your  Deloitte hire would be denied the ability to sit. Seems to me Deloitte  would need to send the student to a different office until they pass the  exam.   As for reciprocity, I haven't heard of any problems. That doesn't mean  they're not out there, but I haven't heard of them.   Bottom line is TX has protected their investment in their brick & mortar  schools.   At one time LA and New Mexico had similar, though weaker rules like this.  I believe both have woken up and done away with those rules.  

Bruce Lubich 
University of Maryland University College

November 6, 2010 reply from Bob Jensen

Hi Bruce,

Thanks for this.
What you are saying is that the Texas Board may be cooperating with Texas Universities to reserve all entry-level accounting jobs in Texas for only graduates of Texas universities. Graduates from your program in the University of Maryland system can, thereby, not compete for jobs in Texas CPA firms. .

Out-of-state graduates need not apply. Seems like a great idea for the other 49 states so that graduates of a given state have a monopoly on jobs within the state. Of course the national and international CPA firms might object to complications this creates in hiring. And students who want to leave a state might object to not having jobs available anywhere other than the state where they graduated.

Why didn't the European Union think of this as a clever way of restricting labor flows between borders?

Bob Jensen

My threads (rough draft notes) on this antiquated and absurd ruling by the TSBCPA (read that Big Brother) can be found at
http://www.cs.trinity.edu/~rjensen/temp/TexasBigBrother.htm

"Enabling Vibrant Learning Communities," Chronicle of Higher Education, March 2011 ---
http://chronicle.com/section/Online-Learning/471/

Bob Jensen's threads on tools and systems for online learning ---
http://www.trinity.edu/rjensen/290wp/290wp.htm

Bob Jensen's threads for online training and education alternatives ---
http://www.trinity.edu/rjensen/crossborder.htm

Tools and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

Bob Jensen's threads on the dark side ---
http://www.trinity.edu/rjensen/000aaa/theworry.htm

Bob Jensen's threads on education technology in general ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm

Could this at last be the long-awaited Certified Public Cognitor (later changed to XYZ)?
http://www.journalofaccountancy.com/Issues/2001/Oct/TheXyzCredential
Also see http://www.journalofaccountancy.com/Issues/2001/May/CpasSpeakUpOnNewGlobalCredential

"AICPA, CIMA Joint Venture Would Offer New Management Accounting Designation," Journal of Accountancy, March 17, 2011 ---
http://www.journalofaccountancy.com/Web/20113959.htm

The AICPA and the London-based Chartered Institute of Management Accountants (CIMA) are proposing forming a joint venture to develop and promote a new global management accounting designation. The joint venture is designed to give management accounting a higher profile in the United States, advance the science of management accounting worldwide, and promote the U.S. CPA designation as a worldwide standard of professional excellence in accounting, according to a press release from the organizations.

The AICPA, founded in 1887, is the world’s largest association representing the accounting profession, with nearly 370,000 members in 128 countries. CIMA, founded in 1919, is the world’s largest professional body of management accountants, with 183,000 members and students in 168 countries. The proposed joint venture would combine the strength of the AICPA in North America with CIMA’s footprint in Europe, the Middle East, Africa, Asia and elsewhere. Together, the organizations represent more than 550,000 members and students.

“This joint venture would help produce and recognize professionals around the world committed to excellence in management accounting, enterprise and performance strategy,” AICPA President and CEO Barry Melancon said in a press release.

“This agreement would give CIMA and AICPA truly global reach," said CIMA President George Glass. “The new venture would have an unrivaled depth of resources to meet the needs of both organizations and their individual members around the world.”

The pathways for obtaining the new credential would vary. Recognizing the significant educational and professional background of U.S. CPAs, AICPA voting members with at least three years working in management accounting or a financial management role would qualify for an accelerated route to obtaining the new designation. Non-voting AICPA members in the United States would not be eligible to obtain the credential.

CIMA Chief Executive Charles Tilley said: “Management accountants provide the expertise and information that enable organizations to make business-critical decisions. Professionals who earn the new designation will have achieved proficiency and leadership in management accounting.”

The proposal will be vetted through the AICPA’s governance process. It has been reviewed by the AICPA Board of Directors, which approved advancing the proposal to the Institute’s regional Council meetings this month to gain input.

The initiative is subject to approval by the governing bodies of both organizations and will be voted on separately by the CIMA and AICPA councils in May, according to the press release. If approved, the joint venture would launch in 2012.

Under the terms of the proposed agreement, CIMA and the AICPA would create a nonprofit joint venture called the Association of International Certified Professional Accountants. The AICPA would own 60% of the entity; CIMA would own 40%; and the board of directors would be split evenly between the organizations, with CIMA and the AICPA rotating in the role of chairman.

Both the AICPA and CIMA would continue to exist as stand-alone membership organizations. The joint venture would authorize issuance of the designation on behalf of each membership organization. The joint venture is intended to become self-supporting within three years.

Continued in article

March 19, 2011 reply from Paul Bjorklund

First we had standards overload, now there is credential overload. These folks need to tend to business and stop acting like frenzied bureaucrats building more towers of babel. As you point out with their previous quixotic ventures, the track record is embarrassing. I think layoffs and dues reductions are in order.

Paul Bjorklund, CPA Bjorklund
Consulting, Ltd.
Flagstaff, Arizona

March 19, 2011 reply from Denny Beresford

As a nearly 50 year member of the Institute of Management Accountants and the holder of one of the first CMA certificates (number 6, I believe), I was very disappointed to read this news. If the AICPA is truly interested in giving “management accounting a higher profile in the United States” it seems to me it should be pursuing a venture with the IMA rather than the CIMA. It’s hard for me to believe that U.S. management accountants, who comprise a good percentage of those who have also earned CPA certificates and may also continue to be AICPA members, will benefit from a CIMA designation. On the other hand, the AICPA putting its resources behind the IMA and CMA could greatly enhance the value of that certificate, which has struggled to gain as much credibility as it should. On the surface, this proposal seems to be primarily for the benefit of the AICPA in extending its global reach rather than for its U.S. members (nearly all at present?). I’m sure there are good reasons for the AICPA action that aren’t clear to me on the surface, but I hope that professional and academic management accountants in the U.S. will consider this proposal carefully and let the AICPA know how they feel before a final decision is made.

Denny Beresford

 

Teaching Case on Why Companies Declare Dividends

From The Wall Street Journal Accounting Weekly Review on March 25, 2011

Cash-Rich Cisco to Begin Paying Dividend .
by: Roger Cheng
Mar 19, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Accounting, Cash Management, Dividends, Financial Accounting

SUMMARY: Cisco Systems Inc. finally heeded to years of investor clamoring and approved its first-ever dividend, the latest technology giant to do so as its business matures. The networking giant, like many of its technology peers, has long built up a war chest of cash and investments. As of Jan. 29, the company had $4.9 billion in cash and $35.3 billion in investments. The dividend would cost the Cisco some $335 million a quarter.

CLASSROOM APPLICATION: This article could serve as a basis for a discussion of how to account for dividends, as well as the reasons for dividends and why a company would declare them.

QUESTIONS: 
1. (Introductory) What is a dividend? When can they be declared? Who makes the decision to declare a dividend for a company?

2. (Introductory) How do you book a dividend and its payment into the accounting records? What dates are significant? What accounts are affected? How are balance sheet accounts impacted? How are income statement accounts impacted?

3. (Advanced) Why do companies declare dividends? What factors should management consider when declaring a dividend? What are other options does management have for the use of cash?

4. (Advanced) What is the difference between an "income company" and a "growth company"? What part do dividends play in these classifications? Why do some companies choose one category or the other? What are the different goals and priorities of management between these classifications?

5. (Advanced) How has Cisco used its cash in the past? Why has it made the decision to pay dividends at this point?

6. (Advanced) The article states "the dividend would cost Cisco some $335 million a quarter." Is a dividend an expense? What does the reporter mean by this statement?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Cisco's Dividend Debut!: Six Cents.
by Matt Phillips
Mar 18, 2011
Online Exclusive

"Cash-Rich Cisco to Begin Paying Dividend," by: Roger Cheng, The Wall Street Journal, March 19, 2011 ---
http://online.wsj.com/article/SB10001424052748704608504576208482968995562.html?mod=djem_jiewr_AC_domainid

Cisco Systems Inc. finally heeded to years of investor clamoring and approved its first-ever dividend, the latest technology giant to do so as its business matures.

Read more: http://online.wsj.com/article/SB10001424052748704608504576208482968995562.html#ixzz1HcAaWdbm

Cisco will pay a quarterly dividend of six cents a share. The company will make the payment on April 30 to shareholders of record on March 31.

The networking giant, like many of its technology peers, has long built up a war chest of cash and investments. As of Jan. 29, the company had $4.9 billion in cash and $35.3 billion in investments. The dividend would cost the Cisco some $335 million a quarter.

The dividend payout comes as Cisco faces questions about the strength of its core networking business. Cisco has been combating the notion that it is no longer a growth company, exacerbated by several quarters of disappointing results. Cisco shares recently rose 1.9% to $17.32. The stock has been down roughly 35% over the past year.

"Cisco's leadership position in the markets we serve is strong, and the time is right for Cisco to pay our first-ever cash dividend," Chief Financial Officer Frank Calderoni said.

Cisco first said in September that it would begin paying a dividend, targeting a yield of 1% to 2%. At the time, Chief Executive John Chambers said the dividend would be funded through cash generated from its North American operations.

Standard & Poor's equity analyst Ari Bensinger said the current amount would result in a 1.4% yield. "We like that Cisco is increasing its commitment to enhancing shareholder value and putting some of its large $40 billion cash stockpile and strong free cash flow generation to better use," Mr. Bensinger said in a note.

Cisco previously used its cash stockpile to make acquisitions, such as the $3.3 billion purchase of teleconferencing company Tandberg. On Monday, it purchased digital media company Inlet Technologies for $95 million in cash. It also preferred repurchasing stock over dividends.

Read more: http://online.wsj.com/article/SB10001424052748704608504576208482968995562.html#ixzz1HcAfyjMl

Continued in article

Jensen Comment
It is extremely important in elementary accounting to explain both why stock dividends are fundamentally different from cash dividends and why the accounting for both types of "dividends" is fundamentally different. Why is the term "stock dividend" really an oxymoron? What is the difference between a stock dividend and a stock split?

From IAS Plus on March 8, 2011 --- http://www.iasplus.com/index.htm

Financial Accounting Foundation broadens webcast coverage of FASB meetings

The Financial Accounting Foundation (FAF), responsible for the oversight of the Financial Accounting Standards Board (FASB), has announced that it will begin live video webcasting of all education sessions hosted by the FASB.

In December 2010, the FAF announced the commencement of live webcasting of decision-making FASB meetings (see our ealier story). This step widens the scope to include education sessions where no official FASB decisions are made, which are usually held one week before a public Board meeting is held on that same topic. The first education session to be webcast will be held on 9 March 2011.

The webcasts will be available here. Click for FAF press release (link to FAF website).

International Accountant 57 is now available in digital format. In particular this issue has an interesting article on creative accounting case studies --- http://www.aiaworldwide.com/content/InternationalAccountant/Issue57.htm

Jensen Comment
I'm generally frustrated by the difficulty of navigating and searching issues of this journal. It seems to be technology run amuck.

Bob Jensen's threads on creative accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

Evil Empire Ethics Dilemmas in Star Wars and in Libya
"Consulting for the Evil Empire," by Jimmy Guterman, Harvard Business Review Blog, March 4, 2011 --- Click Here
http://blogs.hbr.org/hbr/hbreditors/2011/03/consulting_for_the_evil_empire.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Tom Selling conjectures (tongue in cheek) that a CPA audit does not add total value to an audit client over and above the costs of an audit?
He then asked me to find evidence to support the counter argument.

After I posted what I thought was some evidence of the benefits of auditing, David Albrecht followed with a posting on his blog that takes a very negative view of the benefits of auditing ---
"Audit Credibility," by David Albrecht, The Summa, January 31, 2011 ---
http://profalbrecht.wordpress.com/2011/01/31/audit-credibility/

I think my original posting that triggered David's reply was much more positive about the benefits of auditing and, unlike David, I did attempt to provide some various types of evidence of overwhelming auditing benefits. It should be especially noted that many organizations pay for voluntary CPA external audits even when not required to do so because they feel these audits add considerable credibility to their financial reports. For example, Trinity University pays Ernst and Young to audit its financial reports. Among other things, Trinity University wants to voluntarily add credibility to these reports as part of its stewardship assurances to past and future donors.

To avoid any confusion I repeat my original posting to the AECM and CPA-L. In my opinion the writers that are extremely negative about the benefits of auditin (e.g., Francine McKenna, David Albrecht, and Jim Peterson) just do not put issue of CPA audits in the total perspective of the proportion of the tens of thousands of such audits that do not go bad. I'm reminded of the (hypothetical) Exxon billboard:

"EXXON:  Why is the media never interested when we don't spill something?"

Credibility?

Question
Do credible CPA audit firms add benefits to clients that exceed the audit costs?

Tom Selling conjectures (tongue in cheek) that a CPA audit does not add total value to an audit client over and above the costs of an audit?
He then asks me to find evidence to support the counter argument.
I could pull a "Calvin" here and ask him to support his own conjecture, but I will resist a Calvinistic response in this case.

This thread commenced when Patricia Walters questioned my assumption of the value of requiring credibility for numbers reported in financial statements? It appears that in her eyes unaudited fair values, such as real estate appraisals and management estimates of long-term executory contract fair values, are as valuable or even more valuable than more credible numbers that are attested to by auditing firms in financial statements. She does not seem to worry much about moral hazards of unaudited numbers that CPAs either will not or are not allowed to attest to on financial statements. I might add that at the moment fair values of financial contracts are required or soon will be required to be audited by independent CPA auditors. She, however, supports aggregating  non-audited fair values of non-financial items like real estate with the audited numbers like Cash, Accounts Receivable, and Notes Receivable.

I don't mind when clients provide separate schedules of many unaudited fair values, but I think that all items in the main financial statements should be subject to attestation. In my opinion, separate schedules or columns are required when unaudited numbers are less credible. I think aggregating audited numbers with unaudited numbers presents clients with enormous moral hazards.

Anecdotal Evidence
Let me first provide anecdotal evidence where more concern with credibility of audited numbers might've prevent billions of dollars from being bilked in various hedge fund Ponzi schemes. The SEC has obscure jurisdiction over over hedge funds and completely failed public investors, in spite of receiving credible warnings at the SEC, while Bernie Madoff stole over a billion dollars in his infamous Ponzi scheme. The SEC and thousands of investors assumed that since Madoff engaged a CPA "auditor" that Madoff's stewardship over their investments was legitimate.
Ponzi Schemes Where Madoff was King --- http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

The SEC did not bother to investigate whether this lone and obscure Madoff hedge fund auditor was even licensed to be a CPA auditor. Nobody, including the SEC, questioned whether the audit firm was credible --- it was not! The moral of this story is that there are degrees of credibility of a CPA auditing firms, and one test of credibility is to verify the licensure and general auditing reputation of that firm. Another test is to investigate the depths of the pockets of a CPA auditing firm in lawsuits and the proportion of its audits that end up in civil court. If Deloitte had been engaged by Madoff, investors would've lost much less even in the case where  Deloitte conducted an incompetent or fraudulent audit. And, contrary to what Francine and Tom would like us to believe, the proportion of Deloitte's audits that end up in civil court or are settled out of court is a miniscule in terms of the number of all audits conducted globally by Deloitte auditors.

As a second piece of anecdotal evidence of non-cpa firm auditor lack of credibility we might lament why taxpayers do not question the credibility of government auditors in local, state, and federal agencies when it came to auditing public pension funds. It turns out that undetected accounting and accountability frauds, yes outright deliberate frauds, have now brought entire states to the brink of bankruptcy ---
The Sad State of Governmental Accounting and Accountability --- http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Try suing California for pension reporting audit failures when California cannot even pay its public pension liabilities.

Historical Evidence
There is a long history of historical evidence that CPA certifications of GAAP conformance by credible auditors lowers a client's cost of capital. The evidence here is the voluntary choice of clients to pay for CPA audits of GAAP conformance prior to when such audits became required by the SEC in the 1930s. It would seem that if CPA audits did not lower costs of capital that clients would not of their own free will pay for such audits.

There is also evidence today when clients like charities and universities, that are not required by the SEC to have CPA audits, still choose to pay for such audits --- such as when stakeholders feel that CPA audits will keep manager agents more accurate and honest.

Empirical Evidence
Hypothesis
As the global reputation of an auditing firm declines a point is reached where engaging that firm as an auditor raises cost of capital relative to cost of capital when the client engages a more credible auditing firm.

Loss of Reputation is a Kiss of Death for One Public Accounting Firm: 
An Empirical StudyAndersen Audits Increased Clients' Cost of Capital Relative to Clients of Other Auditing Firms

"The Demise of Arthur Andersen," by Clifford F. Thies, Ludwig Von Mises Institute, April 12, 2002 ---
http://www.mises.org/fullstory.asp?control=932&FS=The+Demise+of+Arthur+Andersen

From Yahoo.com, Andrew and I downloaded the daily adjusted closing prices of the stocks of these companies (the adjustment taking into account splits and dividends). I then constructed portfolios based on an equal dollar investment in the stocks of each of the companies and tracked the performance of the two portfolios from August 1, 2001, to March 1, 2002. Indexes of the values of these portfolios are juxtaposed in Figure 1.

From August 1, 2001, to November 30, 2001, the values of the two portfolios are very highly correlated. In particular, the values of the two portfolios fell following the September 11 terrorist attack on our country and then quickly recovered. You would expect a very high correlation in the values of truly matched portfolios. Then, two deviations stand out.

In early December 2001, a wedge temporarily opened up between the values of the two portfolios. This followed the SEC subpoena. Then, in early February, a second and persistent wedge opened. This followed the news of the coming DOJ indictment. It appears that an Andersen signature (relative to a "Final Four" signature) costs a company 6 percent of its market capitalization. No wonder corporate clients--including several of the companies that were in the Andersen-audited portfolio Andrew and I constructed--are leaving Andersen.

Prior to the demise of Arthur Andersen, the Big 5 firms seemed to have a "lock" on reputation. It is possible that these firms may have felt free to trade on their names in search of additional sources of revenue. If that is what happened at Andersen, it was a big mistake. In a free market, nobody has a lock on anything. Every day that you don’t earn your reputation afresh by serving your customers well is a day you risk losing your reputation. And, in a service-oriented economy, losing your reputation is the kiss of death.

The Total Benefits of an Audit are Impossible to Measure:  Errors and Frauds That Might've Transpired Without Audits

If we exclude incompetent surgeons, the costs in 2010 of errors made by credible surgeons who made mistakes is enormous in terms of pain, suffering, costs of correcting mistakes, and death. But it would be absurd to conjecture that the total benefits of credible surgeons was less than the "costs" of their mistakes.

Along a somewhat similar vein,  the costs in 2010 of errors made by credible auditors who made mistakes is enormous in terms of pain, suffering, costs of correcting mistakes, and possibly even death (yes some of Madoff's investors in despair committed suicide). But it would be absurd to conjecture that the total benefits of credible auditors were less than the "costs" of their mistakes and frauds.

Tom and Patricia fail to mention the tremendous benefit from CPA audits in terms of GAAP errors and financial frauds that might've transpired if clients were not subjected to audits. I conjecture that it's impossible to measure benefits of error and fraud prevention.

1.  Error Prevention
The fact that external CPA auditors will be looking for GAAP errors makes clients more responsible in understanding GAAP and installing internal controls that prevent GAAP errors and embarrassments accompanying CPA auditor discovery of GAAP errors.
  .

2. Fraud Prevention
CPA auditors aren't generally engaged to detect frauds that do not significantly impact the numbers on financial statements. In truth they are usually not very good at even detecting such frauds even when engaged to do so. But existence of remote chances that frauds such as kiting will be detected by external CPA auditors probably prevents trillions of dollars from being pilfered by employees around the world.

.

Think of the cost and  trouble it took for Lehman to conspire (with auditor consent) a way of hiding poisoned assets in such a manner that its CPA auditors would go along with in the financial statements. If Lehman was not subjected to CPA firm audits Lehman  would've quite simply not disclosed the extent of the poison and would've not had to concoct expensive Repo 105/108 schemes required by its auditors.

In other words, if we are to consider the "total benefits" of CPA audits we must consider the externalities as well as the direct benefits to clients who are seeking lower costs of capital by paying for CPA audits.

This does not mean that there are no credible alternatives to CPA audits as we know them today
I think shifting CPA audits from the private sector to the public sector is a bad idea given the track record of public sector auditors over the years and the degree to which government auditors are pressured by politicians and lobby powers. But there are some other alternatives to private sector "auditing."

Josh Ronen at NYU is a long-time advocate in replacing CPA assurance with insurance --- - http://pages.stern.nyu.edu/~jronen/ 

CPA audit firms in essence would become insurance firms that reimburse investors and creditors for a client's violations of GAAP. Such insurance schemes would probably not totally eliminate client audits but insurance might change many auditing procedures, e.g., more analytical reviews and less detail testing. Presumably small auditing firms would not necessarily be driven out of business if they participated in insurance pools.

But it would take many years of research and experimentation before insured CPA audits could be implemented. One of the biggest challenges lies in determining the insurance payoffs for violations of GAAP and the problems of moral hazards. If customers throw banana peelings on supermarket floors and then sue for spine injuries, there will also be employees in clients that cause GAAP violations to collect the insurance money for their girl friends and third cousins. As long as the law is lenient with offenders, insurance schemes are doomed to failure ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

February 12, 2011 reply from Jim Peterson

Dear Bob and Dave --

A note of greeting from Chicago, picking up on your extended thread ended (I think) last Monday. I write only to the two of you, for two reasons: first, as a late-career arrival to the academic world I am almost completely unfamiliar with and incompetent to use ListServe; and second, I will probably offer some thoughts better shared only among adult participants in the issues on which we share common concerns.

Unable to resist a good discussion, however -- and only regretting either a forum where we could converse tete-a-tete at length and/or the lack of a sponsor who could bring together the dozen or so best observers in this area -- I will offer up here a number of observations on your thread -- roughly in order as I read down from the top.

First, for a number of reasons I entirely share Bob's concerns about the ability of government to supply audit services that would have any value to the markets at all. The international complexities are a place to start -- the aridity of thinking among the "leaders" continues to be remarkable -- Michele Barnier being the latest, or perhaps Jim Doty. The fact that the PCAOB points with pride to its arrangements with the Brits, almost nine years after the passage of Sarbox, speaks to the unreality of real global supervision and oversight.

As for the notion of "free audits paid for by taxpayers" -- there might conceivably be some function for government audit, which could be on an "issuer pays" basis. But the result would be in the same vein as other compliance licenses issued by functionaries -- examples coming to mind would include drivers' licenses, restaurant inspections and building permits; the administration would be elaborate and expensive and a nuisance, the incidence of failures would be large, and the assurance of real quality rather than sub-standard behavior among the performers -- drivers, chefs and builders -- would be negligible.

(There is, by the way, an absence of experience suggesting that putting civil servants on a "bounty" basis would yield credible, useful and non-corrupt results -- not to mention the conversion such a system would entail to a completely adversarial relationship between issuers and government agents, as opposed to the partially adversarial one prevailing now in the wake of Sarbox.)

(While at it, by the way, I would observe that the notion of auditors rooting out and reporting on "ALL departures from GAAP" misses quite a basic point, I would urge, which is that the great bulk of the manipulations over the course of my 35 years of experience have been not accounting driven but essentially audit related and audit-failure based -- arising out of either executive looting of a company, hidden from the auditors by manipulations and over-rides -- Koss, Parmalat, etc -- or manipulations for the sake of stock price effect -- going back to Equity Funding and American Express but coming down through Waste Management and its cousins to Satyam and Lehman. Major areas of manipulation of accounting principles, on the other hand, have revealed the opportunities lurking in the politicized nature of the standard-setting process itself -- running from the sector-wide S&L exploits of the 1980's to Enron itself to the banks' treatment of financial instruments during the recent crisis.)

That said, if such a system were to come into being -- mainly to satisfy the politically-based needs of those who would benefit -- namely the lawmakers and the bureaucrats -- the market would open up for the private delivery of assurance that would have real value and that issuers and users would pay for.

The large firms would have to re-tool, however, and also would have to deal with real competition from niche players (by industry or geography) who could deliver such services without the need for the scale of the Big Four.

Is that possible? Since you have invoked my name as a skeptic on the value of today's audit report -- which I am -- I speak up to clarify that I view the profession very differently from its most inflamed and rabid critics, who are persuaded that the large firms are corrupt, venal and in thrall to their clients (Francine, for example, having just re-cycled one of her more aggressive screeds from a couple years ago).

Much as I admire what Francine has done in building her platform, my own view is very different -- namely that the profession generally comprises a collection of skilled and talented people, acting almost entirely in good faith, most of the time genuinely doing the best they can in the circumstances -- the problem being that it is enmeshed in an inter-locking set of competing interests in which a "good faith, most of the time" effort is insufficient and unsatisfactory. To make matters worse, the lack of vision and leadership in the profession itself leaves it captive to its current business model, in which innovation to develop new forms of assurance cannot occur under the pressure on the leaders from their partners who depend on the model in place since the 1930's -- probably the high-water mark of the profession's relationship with the user and regulatory community.

So it may be "possible but not likely" -- unless (as I believe) the Big Four franchise is taken down by a litigation/enforcement shock of the type so profoundly denied by the leadership -- a "black swan" of the type that we now know can happen (Enron, with Bankest pending) -- and is surely lurking in the pending litigation portfolios -- potential events include Bear Stearns and WaMu for Deloitte, Lehman for E&Y, PwC's AIG, Madoff and the Iceland banks (likely not Satyam), and KPMG's Fannie and Freddie among others.

In that case all the discussion and the academic arguments about the value of "voluntary audits" -- which I believe are naively based on a failure to appreciate that the commodity language of the obligatory audit report for public companies trumps all aspects of discussions about purported "choice" -- becomes irrelevant. Assurance will be re-invented, but only after the catastrophic loss of intelligence and expertise that would go with the disintegration of the large networks.

By the way would investors "abandon capital markets if public corporations had no audits"? Not a chance. Money has to go somewhere, and will. And if today's audit report goes away, because the firms disintegrate and there are no providers, the stock exchanges would open on schedule the next Monday and the system would carry on without a hiccup. (I put this proposition to Mary Schapiro recently, who did not disagree a bit -- although in fairness, a discussion with her about the challenges of the accounting profession brings to mind Oscar Wilde's observation that it is not sporting to engage in a battle of wits with someone who is unarmed.)

As for Ronen and the "insurance" alternative -- I had thought this stream of thinking had been stopped some time since. At least, all that is needed to reveal its utter impracticality is to talk with those in the industry itself -- which has long ago abandoned the field because of the fundamental failure to satisfy the conditions of insurability -- diversity, predictability and quantifiability. If there were any form of assurance that would enable the insurance industry to underwrite risks in this area, surely it would have been discovered by now -- and the absence of such tools or industry interest is instead fully on view.

A couple more words on my skepticism about the value of the current audit model -- here two points on the supposed value of the "thousands of audits that do not go bad." The first is that, partly because the report is in commodity form and purchased by users as such, neither the profession itself nor the user community has the means to differentiate between a situation where real quality work was done and one where all concerned were simply lucky to avoid a catastrophe -- and it is impossible to impute value to a process if you don't know and can't tell the difference between "good" and "lucky." The second, going back to the point on mega-exposures, is that just as elsewhere in life where the routine events are merely routine and don't really matter very much, it is of no consequence at all that most audits are done well, if the one that goes "worst case" is big enough to blow you up. Passing for a moment the question of a prevailing corrupt mind-set at Andersen in its last years, the fact remains that the great bulk of its work was done to good standards by people doing honest, competent work -- all to no avail. A business unable to learn from its failures has no chance of evolving or improving by merely repeating what it perceives to be its successes.

By extension, the "anecdote" that Big Four audit would have prevented Madoff misses two points. The first is that proof of the negative does not support the positive -- the failure of a no-name auditor does not give any comfort that a Big Four audit would have done better -- the parade of conspicuous failures over the recent decades being the evidence for the contrary -- many of them based on defects in performance that with hindsight would have failed Auditing 101. The second is the more profound point that the fact that Madoff did what he did over decades with a no-name auditor shows the basic lack of value placed on the audit process itself -- since the contrary position was always there for anyone to pursue, only no one did.

As for the argument that comfort is provided to charities and non-profits, it should be observed that these are sectors where traditionally B work is done by B players, with significant outbursts of irregularity out of all proportion to any fees or (more usually) a "feel good" factor -- thinking of Baptist Hospital and United Way as two that come quickly to mind.

Finally -- and bravo if you are still with me -- I would put it that the "cost of failure" comparison to a surgeon is misplaced, because the analogy is wrong. The auditor is not there to perform the equivalent of surgery -- but offers something more like the annual physical -- or perhaps the exam of the proctologist. In that environment, the analogy becomes more compelling, because the dynamics of luck vs skill and deferral or disregard of opportunities become  significant in the cost/benefit calculus.

Whew -- time to pause, if not to stop.

Thanks -- reactions and extension of the dialog are both very welcome.

Best regards --
Jim

Psssst! Want to hear a secret?
The sentencing of Madoff's Ponzi Fund "auditor" keeps getting delayed ---
http://blogs.forbes.com/walterpavlo/2011/03/21/madoff-accountant-now-auditing-to-save-his-a/

Question
What is your accounting program doing to upgrade faculty and the curriculum on the rapidly changing times for XBRL?

"XBRL US Expands Education Program to Meet Growing Public Company Filer Demand," XBRL US, February 11, 2011 ---
http://xbrl.us/News/Pages/20110211.aspx

XBRL US, the national consortium for XML standards in business reporting, has increased the number and coverage of educational programs offered in 2011 to meet rising demand from an estimated 8,000 public companies that will be filing XBRL-formatted financials in 2011 for the first time. A new monthly webinar 'Detailed Footnote Tagging in XBRL', a 60-minute program to help companies that are getting started on the second phase of the Securities and Exchange Commission (SEC) rollout, has been added. XBRL US SEC Filer Training Workshops have been expanded to include a 90-minute online preparatory session in addition to the full-day in-person training, and will now be offered eight times in 2011. Upcoming programs include:

Implementing XBRL for SEC Reporting, 2/16, 3pm ET – Free introductory program. No CPE available.
Covers the essentials of implementing XBRL for SEC reporting including organizing data – mapping, extending, tagging, creating the XBRL document; quality control and validation; updates on taxonomy development and findings from the XBRL data to date. Learn more and register at http://xbrl.us/webinars.

Detailed Footnote Tagging in XBRL, 2/23, 3pm ET, 60 minutes. Earn 1 CPE.
Provides the skills to begin mapping and tagging detailed footnotes including handling tables and establishing the correct process. Covers review of SEC requirements and approach to timing for footnote tagging; differences between year one and year two tagging of footnotes; examples of simple and more complex detailed footnote tagging. Learn more and register at http://xbrl.us/DFTwebinar.

In-Person Training: SEC Filer Training Workshop, 3/4 online session and 3/10 in-person training in New York, NY. Earn up to 10 CPE.
This interactive 2-part workshop explains how to use the US GAAP Taxonomy, convert primary financial statements and block tag footnotes in XBRL format. Learn more and register at http://xbrl.us/training.

Who should attend: CFOs, Controllers, Assistant Controllers, External Reporting Managers, and finance staff members who have direct responsibility for implementing SEC XBRL filing requirements.

About XBRL US
XBRL US is the non-profit consortium for XML business reporting standards in the U.S. and it represents the business information supply chain. Its mission is to support the implementation of XML business reporting standards through the development of taxonomies for use by U.S. public and private sectors, with a goal of interoperability between sectors, and by promoting XBRL adoption through marketplace collaboration. XBRL US has developed taxonomies for U.S. GAAP, credit rating and mutual fund reporting under contract with the U.S. Securities and Exchange Commission. XBRL US Labs, the research and development arm of XBRL US, leverages the XBRL US platform, methodologies and people to address the quality of taxonomies and the harmonization of XBRL with other XML standards. For more information, go to xbrl.us.

From Ernst & Young's Week in Review, March 3, 2011

For additional information on the SEC's rule regarding the use of XBRL, we encourage you to monitor the XBRL page on the SEC's website (http://xbrl.sec.gov) and to consider our publications and webcast, which are available on AccountingLink:

• Implementing XBRL - Developing a roadmap for the SEC mandate (SCORE No. BB1710)
• Technical Line: SEC publishes final rule requiring XBRL (SCORE No. CC0275)
• Hot Topic: XBRL Update (SCORE No. BB1786)
• Hot Topic: Annual re-assessment of compliance with SEC XBRL phase-in (SCORE No.CC0300)
• Technical Line: XBRL update: 2010 observations and insights (SCORE No. CC0310)
• Talkin' Tags: XBRL - common mistakes and insights Webcast
• XBRL Software Vendors and Service Providers Information (SCORE No. BB2073)

March 9, 2011 reply from Glen Gray

Another nice source of XBRL classroom material is available from Kelly Williams, Rick Elam, and Mitch Wenger. The contact person is Mitch at mrwenger@olemiss.edu 

They start with XML exercises and then move on to XBRL. They use XML and XBRL software from Altova at
www.altova.com  who provides free licensing of their products to educators.

Glen L. Gray, PhD, CPA
Dept. of Accounting & Information Systems
College of Business & Economics
California State University, Northridge
18111 Nordhoff ST
Northridge, CA 91330-8372
818.677.3948
http://www.csun.edu/~vcact00f

Steve Hornik suggested Dipity ---
http://www.dipity.com/timeline/SEC-XBRL/#timeline

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

An Illustration of Future Free TV News on the Web
Non-Profit CEO Gets 10 Year Prison Sentence --- http://nonprofittimes.tv/non-profit-times-tv-march-9th-2011

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

"Seven Accounting Changes That Will Affect Your 2010 Annual Report," by Jim Brendel, SmartPros, March 3, 2011 ---
http://accounting.smartpros.com/x71479.xml

"Which Traits Predict Success? (The Importance of Grit)," by Jonah Lehrer, Wired News, March 14, 2011 ---
http://www.wired.com/wiredscience/2011/03/what-is-success-true-grit/

Jensen Comment
This article focuses mainly on accomplishments that require unbelievable amounts of practice such as in solo performances in music and athletics.

More interesting and much more difficult is prediction of "success" following graduation from an MBA program. Years ago I took a psychology course from Tom Harrell at Stanford University. Professor Harrell received a rather large research grant from the U.S. Navy to track graduates of Stanford's MBA Program. While the students were in the program, he administered a time consuming battery of psychological and intelligence test, including personality tests. He additionally had access to student records such as undergraduate degree information, GMAT scores, grades un undergraduate and graduate courses, occupational history, etc.

The he annually tracked each graduate's career path. I don't think he got into other personal details such as marriage, children, divorce, etc., although I could be wrong about this. He did gather substantial information about compensation, promotions, job details, etc.

"Which Traits Predict Success? (The Importance of Grit)," by Jonah Lehrer, Wired News, March 14, 2011 ---
http://www.wired.com/wiredscience/2011/03/what-is-success-true-grit/

Jensen Comment
This article focuses mainly on accomplishments that require unbelievable amounts of practice such as in solo performances in music and athletics.

More interesting and much more difficult is prediction of "success" following graduation from an MBA program. Years ago I took a psychology course from Tom Harrell at Stanford University. Professor Harrell received a rather large research grant from the U.S. Navy to track graduates of Stanford's MBA Program. While the students were in the program, he administered a time consuming battery of psychological and intelligence test, including personality tests. He additionally had access to student records such as undergraduate degree information, GMAT scores, grades un undergraduate and graduate courses, occupational history, etc.

The he annually tracked each graduate's career path. I don't think he got into other personal details such as marriage, children, divorce, etc., although I could be wrong about this. He did gather substantial information about compensation, promotions, job details, etc.

Question
What is the biggest stumbling block in predicting success of MBA graduates?

Answer
The major problem is that of defining "success." Professor Harrell called it "The Criterion Problem." ---
http://www.trinity.edu/rjensen/assess.htm#CriterionProblem

Income is a misleading criterion for a variety of reasons. Students who graduated from Stanford to immediately become executives in their family's business can hardly be compared with graduates who commenced working for banks or accounting firms at relatively low paid staff training levels.

A fair number of Stanford's MBA students were on active duty career tracks with the Navy. I remember one who was a Lieutenant JG and another who was a Lieutenant Commander while enrolled in the MBA Program. Their career paths and compensation following graduation from the MBA Program are just not comparable.

And there are a lot of intervening variables that cannot be compared. Suppose one graduate subsequently enrolled in the doctoral program of Carnegie-Mellon whereas another graduate, like MSNBC's Chris Matthews, joined the Peace Corps and another graduate became partially paralyzed in an accident. In all three instances post-graduate factors are likely to become much more important than the final gpa in Stanford's MBA Program.

Tom Harrell also conducted similar studies for other branches of the military. You might take a look at the following reference:
Harrell, T.W. (1992). "Some history of the army general classifications test," Journal of Applied Psychology, 77, 875-878.

Even when comparing athletic performance it becomes very difficult to factor out circumstantial causes and effects. We can hardly compare the number of game wins of Pitcher A who plays for the best hitting team in the league with Pitcher B who pitches for the Bad News Bears. Earned run averages are hardly comparable between the Boston Red Sox having a short left field fence as their home field and the Boys of Summer in Yankee Stadium.

And such things as medal counts are often misleading. During the Cold War the bias of judges from the Soviet Union was no joke in winter and in summer Olympics. And authors of best selling popular books can hardly be compared with an author who wins a Nobel Prize for a research monograph that sold less than 200 copies to small subset of advanced biomedical researchers.

Lastly its very difficult to factor out serendipity of life when comparing success of different people. Remember that well known story about when the maggot that fell from a bird's butt into a manure pile encounters his brother who fell into a pavement crack. The manure pile maggot attributed his great success to "brains and personality" superiority when in fact most of his success was due to wind current.

"TARP Was No Win for the Taxpayers : Treasury's claim that the bank bailouts will return a profit ignores the other, more costly programs enabling the banks to repay their TARP funds," by Paul Atkins, Mark McWatters, and Kenneth Troske, The Wall Street Journal, March 17, 2011 ---
http://online.wsj.com/article/SB10001424052748703899704576204383282043422.html?mod=djemEditorialPage_t

Today the Senate Banking Committee will explore the Troubled Asset Relief Program (TARP). Almost 30 months after its birth, TARP is far from dead. More than 550 banks, AIG, GM, Chrysler and others still have approximately $160 billion of taxpayer money outstanding.

Even so, the administration would have us believe that TARP has been a success because it supposedly alleviated the financial crisis and is (so far) being paid back at an apparent profit for taxpayers. Perhaps because he helped invent TARP before he joined the Obama administration, Treasury Secretary Timothy Geithner has called TARP the "most effective government program in recent memory."

Treasury's view is misleading. First, it hides the full story of the government's financial crisis effort, of which TARP is but a minor part. Moreover, Treasury has not been content using rhetoric alone to try to put TARP in the best light. The Special Inspector General for TARP criticized Treasury in October for inadequately disclosing a change in its valuation methodology that reduced a $45 billion loss in AIG to $5 billion, making TARP losses appear smaller than they really are. This data manipulation is only part of a much larger problem with Treasury's representations regarding the supposed success of the bank bailout payments that lie at the heart of TARP.

The focus on repayment fails to consider the huge taxpayer costs from non-TARP programs that directly and indirectly enabled many of the large banks to repay their TARP funds. These intertwined programs, operated by the Treasury and the Federal Reserve, dwarf the size of TARP and lack its accountability.

The financial crisis was born in the housing bubble caused by the policies of Fannie Mae and Freddie Mac, the two bankrupt government-sponsored entities (GSEs) charged with buying and packaging mortgages into mortgage-backed securities (MBS). TARP banks own billions of dollars worth of MBS and have remained liquid in part because the Federal Reserve has bought more than $1.1 trillion of these GSE-guaranteed MBS in the securities markets—all outside TARP.

The Fed purchased the MBS at fair market value, but this value reflects Treasury's bailout and continued support of the GSEs—also done outside of TARP with taxpayer money. Had the GSEs failed, TARP recipients probably would have been stuck with these MBS, writing them down at significant loss. Their ability to pay back TARP funding would have been hurt, and they might have had to obtain more TARP funds or go bust.

So the taxpayer-backed GSE guarantee enables the Fed to prop up the market with taxpayer funds, in turn allowing the TARP banks to "repay" their TARP funds. The bailout of the GSEs by Treasury thus shifts potential losses from TARP to other programs that have less oversight and public scrutiny. Any evaluation of TARP's success must take into account the interaction among all government programs designed to prop-up the financial system, and the shifting of costs among these programs.

The Congressional Budget Office estimates that Treasury's bailout of the GSEs will cost the taxpayers approximately $380 billion through fiscal year 2021. If only one-fourth of CBO's estimate ultimately benefits TARP recipients and other financial institutions, taxpayers will have provided a subsidy to these institutions of approximately $100 billion, which is not accounted for under TARP.

Also seldom mentioned are future costs resulting from using TARP funds to rescue "systemically important" financial and other firms. TARP exacerbates the "too big to fail" phenomenon by targeting much of its funding toward large banks and automobile firms, solidifying the market's belief in an implicit guarantee from the government for these firms. As credit-rating agencies have recognized, these large firms can borrow much more cheaply than their small-enough-to-fail competitors, which will lead to less competition, a more concentrated financial sector, and higher prices paid by consumers.

In addition, creating larger, more systemically important financial firms increases the likelihood of future financial crises because these firms have an incentive to invest in riskier projects as a result of the implicit government guarantee. The additional costs borne by consumers in the form of higher prices for financial services and the additional costs that result from future financial crises need to be included in any accounting of the costs of the TARP.

TARP was never where the real action was happening. In fact, other Fed and FDIC programs added another $2 trillion of taxpayer money at risk to the 19 stress-tested banks alone, on top of the $1.1 trillion of MBS purchased by the Fed. TARP is but one-eighth of that total.

The government's efforts inside and outside of TARP have sown the seeds for the next crisis and, unfortunately, last year's 2,319-page Dodd-Frank Act does nothing to fix these problems. Treasury must be more transparent regarding TARP. The real myth that the Treasury secretary should dispel is that TARP is a big win for the taxpayer.

Mr. Atkins was a member of the Congressional Oversight Panel from 2009-2010. Messrs. McWatters and Troske are current members of the panel.

Bob Jensen's threads on the Bailout of Banksters and the Greatest Swindle in the History of the World are at
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

"Qaddafi's Son Expelled from IE Business School," by Louis Lavelle, Business Week, March 4, 2011 ---
http://www.businessweek.com/bschools/blogs/mba_admissions/archives/2011/03/qaddafis_son_expelled_from_ie_business_school.html?link_position=link7

Also note the comments.

“As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it."

"How Did Citigroup’s Internal Controls Cut the Mustard with KPMG?" by Caleb Newquist, Going Concern, February 24, 2011 ---
http://goingconcern.com/2011/02/how-did-citigroups-internal-controls-cut-the-mustard-with-kpmg/#more-25882

Jonathan Weil writes in his column today about Citigroup and their “acceptable group of auditors,” (aka KPMG) and he’s having trouble connecting the dots on a few things. Specifically, how a love letter (it was sent on February 14, 2008, after all) sent by the Office of the Comptroller of the Currency to Citigroup CEO Vikram Pandit:

The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation methods for subprime mortgage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.

Okay, so the bank’s internal controls weren’t worth the paper they were printed on. Ordinarily, one could reasonably expect management and perhaps their auditors to be aware of such a fact and that they were handling the situation accordingly. We said, “ordinarily”:

Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.

The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.

Huh. There has to be an explanation, right? It’s just one of the largest banks on Earth audited by one of the largest audit firm on Earth. You’d think these guys would be more than willing to stand by their work. Funny thing – no one felt compelled to return JW’s calls. So, he had no choice to piece it together himself:

[S]omehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, [Ed. note: OH, right. That.] still sporting a balance sheet that made it seem healthy.

Actually, just kidding, he ran it by an expert:

“As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it."

"What Vikram Pandit Knew, and When He Knew It: Jonathan Weil," by Jonathon Weil, Bloomberg News, February 23, 2011 ---
http://www.bloomberg.com/news/2011-02-24/what-vikram-pandit-knew-and-when-he-knew-it-commentary-by-jonathan-weil.html

Yet somehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, still sporting a balance sheet that made it seem healthy.

“As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it.”

One company that did get a cautionary note from its auditor that same quarter was American International Group Inc. In February 2008, PricewaterhouseCoopers LLP warned of a material weakness related to AIG’s valuations for credit-default swaps. So at least investors were told AIG’s numbers might be off. That turned out to be a gross understatement.

At Citigroup, there was no such warning. The public deserves to know why.

Continued in article

In Frank Portnoy's video below note how Citigroup got its auditors to certify absurdly low loan loss reserves and highly misleading (off balance sheet hideaway) financial statements right up to the point where the Federal Government had to bailout this enormous bank. Where were the auditors?

Frank Partnoy and Lynn Turner contend that Wall Street bank accounting is an exercise in writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!

Bob Jensen's threads on the good things and not-so-good things done by KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm

"Former Vice President of Iona College Pleads Guilty to Embezzling $850,000," Chronicle of Higher Education, March 9, 2011 --- Click here
http://chronicle.com/blogs/ticker/former-vice-president-of-iona-college-pleads-guilty-to-embezzling-850000/31202?sid=at&utm_source=at&utm_medium=en

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

"Blogging in the Classroom," by David Albrecht, Summa, March 25, 2011 ---
http://profalbrecht.wordpress.com/2011/03/25/conference-presentation/,
Slide Show --- http://profalbrecht.files.wordpress.com/2011/03/classroom-blogging.pdf

Bob Jensen's threads on blogging (including links to accounting bloggers) ---
http://www.trinity.edu/rjensen/ListservRoles.htm

Sanjay Sharma has been appointed Dean of the School of Business Administration at the University of Vermont ---
http://www.indiajournal.com/?p=1158 

"UVM’s new dean: the rest of the story," by Tim Johnson, Burlington Free Press, March 9, 2011 ---
http://blogs.burlingtonfreepress.com/highered/tag/sanjay-sharma/

After we took note of the new UVM business dean’s handsome salary the other day, we learned there’s more to this package than UVM put in its news release about his appointment.

His wife is joining the faculty too, as a full professor, at an annual salary of $180,000, which is more than most of her UVM faculty peers earn. (The typical range for that position at UVM’s business school is $139,000-$155,000. An exception is Rocki-Lee DeWitt, a former dean, who earns a tad more than $180,000.)

Together, Sanjay Sharma, the dean-to-be, and Promodita Sharma, who will assume the new post of Sanders professor in the School of Business Administration in August, will be drawing $500,000 in salary. How many other half-million-dollar couples do we have in little ol’, don’t-confuse-us-with-Wall-Street Burlington?

The dean will have a secondary appointment as professor of business. Both he and his wife have been through the school’s tenure review process, so both will have tenure upon arrival. Promodita Sharma

Promodita Sharma

The school now has five full professors. Next fall, there will be seven. Retirements of three associate professors in May will help make room for the new arrivals.

At UVM, the Sharmas will be reprising their professional configuration at Concordia University in Montreal, where Sanjay Sharma is dean of the John Molson School of Business, and Pramodita Sharma is CIBC Distinguished Professor of Family Business.

 . . .

What’s the Sanders Professorship?
We put the question to UVM and were informed that it’s an endowment, established in 1968 from alumni donations, named for Daniel Clarke Sanders, UVM’s first president. The fund is used as faculty support at the discretion of the president or the president’s designee.

Promodita Sharma will receive $20,000 per year from the Sanders endowment earnings for research activities. .

Continued in article

Jensen Comment
The compensation package is not shocking by national standards for business school deans these days. The University of Colorado just appointed a new business school dean for over $400,000 that will not be compensating a spouse. But the pay package is an outlier in terms of what state universities in Vermont, New Hampshire, and Maine pay their faculty and administrators.

It is also somewhat unusual nationally for business school deans to be paid such a large annual stipend for research responsibilities.

I wonder what kind of pay package Dean Sharma will eventually be paying accounting professors at the University of Vermont?

A new one from my old behavioral accounting friend Jake
"Is Neuroaccounting Waiting in the Wings?" Jacob G. Birnberg and Ananda R. Ganguly, SSRN, February 10 ,2011 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1759460

Abstract:
This paper reviews a recently published handbook on neuroeconomics (Glimcher et al. 2009H) and extends the discussion to reasons why this newly emerging discipline should be of interest to behavioral accounting researchers. We evaluate the achieved and potential contribution of neuroeconomics to the study of human economic behavior, and examine what behavioral accountants can learn from neuroeconomics and whether we should expect to see a similar sub-field emerge within behavioral accounting in the near future. We conclude that while a separate sub-field within behavioral accounting is not likely in the near future due mostly to practical reasons, the behavioral accounting researcher would do well to follow this discipline closely, and behavioral accountants are likely to collaborate with neuroeconomists when feasible to examine questions of mutual interest.

Keywords: Neuroeconomics, Neuroaccounting, Behavioral Accounting

Jensen Comment
This ties in somewhat with the work of John Dickhaut ---
http://www.neuroeconomics.org/dickhaut-memorial/in-memory-of-john-dickhaut

The lead article in the November 2009 issue of The Accounting Review is like a blue plate special that differs greatly from the usual accountics offerings on the TAR menu over the past four decades. TAR does not usually publish case studies, field studies, or theory papers or commentaries or conjectures that do not qualify as research on testable hypotheses or analytical mathematics. But the November 2009 lead article by John Dickhout is an exception.

Before reading the TAR tidbit below you should perhaps read a bit about John Dichaut at the University of Minnesota, apart from the fact that he's an old guy of my vintage with new ideas that somehow leapt out of the accountics publishing shackles that typically restrain creative ideas and "search" apart from "research."

"Gambling on Trust:  John Dickhaut uses "neuroeconomics" to study how people make decisions," OVPR, University of Minnesota --- 

On the surface, it's obvious that trust makes the economic world go round. A worker trusts that he or she will get paid at the end of the week. Investors trust that earnings reports are based on fact, not fiction. Back in the mid-1700s, Adam Smith-the father of economics-built portions of his theories on this principle, which he termed "sympathy." In the years since then, economists and other thinkers have developed hundreds of further insights into the ways that people and economies function. But what if Adam Smith was wrong about sympathy?

Professor John Dickhaut of the Carlson School of Management's accounting department is one of a growing number of researchers who uses verifiable laboratory techniques to put principles like this one to the test. "I'm interested in how people make choices and how these choices affect the economy," says Dickhaut. A decade ago, he and his colleagues developed the trust game, an experiment that tracks trust levels in financial situations between strangers. "The trust game mimics real-world situations," he says.

Luckily for modern economics-and for anyone planning an investment-Dickhaut's modern-day scientific methods verify Adam Smith's insight. People tend to err on the side of trust than mistrust-are more likely to be a little generous than a little bit stingy. In fact, a basic tendency to be trusting and to reward trustworthy behavior may be a norm of human behavior, upon which the laws of society are built. And that's just the beginning of what the trust game and the field of experimental economics can teach us.

Trust around the world

Since Dickhaut and his co-authors first published the results of their research, the trust game has traveled from the Carlson School at the University of Minnesota all the way to Russia, China, and France. It's tested gender differences and other variations.

"It's an experiment that bred a cottage industry," says Dickhaut. Because the trust game has proved so reliable, researchers now use it to explore new areas. George Mason University's Vernon Smith, 2002 Nobel Laureate for his work in experimental economics, used the trust game in some of his path-breaking work. University of Minnesota researcher and Dickhaut co-author Aldo Rustichini is discovering that people's moods can be altered in the trust games so that participants become increasingly organized in their behavior, as if this can impact the outcome. This happens after the participants are repeatedly put in situations where their trust has been violated.

Although it's too soon to be certain, such research could reveal why people respond to troubled times by tightening up regulations or imposing new ones, such as Sarbanes-Oxley. This new research suggests that calls for tighter rules may reveal more about the brain than reduce chaos in the world of finance.

Researchers who study the brain during economic transactions, or neuroeconomists, scanned the brains of trust game players in labs across the country to discover the parts of the brain that "light up" during decision-making. Already, neuroeconomists have discovered that the section of the brain investors use when making a risky investment, like in the New York Stock Exchange, is different than the one used when they invest in a less risky alternative, like a U.S. Treasury bill.

"People don't lay out a complete decision tree every time they make a choice," Dickhaut says. Understanding the part of the brain accessed during various situations may help to uncover the regulatory structures that would be most effective-since people think of different types of investments so differently, they might react to rules in different ways as well. Such knowledge might also point to why behaviors differ when faced with long- or short-term gains.

Dickhaut's original paper, "Trust, Reciprocity, and Social History," is still a hit. Despite an original publication date of 1995, the paper recently ranked first in ScienceDirect's top 25 downloads from the journal Games and Economic Behavior.

Risky business

Dickhaut hasn't spent the past 10 years resting on his laurels. Instead, he's challenged long-held beliefs with startling new data. In his latest research, Dickhaut and his coauthors create lab tests that mimic E-Bay style auctions, bidding contests for major public works projects, and others types of auctions. The results may be surprising.

"People don't appear to take risks based on some general assessment of whether they're risk-seeking or risk-averse," says Dickhaut. In other words, it's easy to make faulty assumptions about how a person will respond to risk. Even people who test as risk-averse might be willing to make a risky gamble in a certain type of auction.

This research could turn the evaluation of risk aversion upside down. Insurance company questionnaires are meant to evaluate how risky a prospective client's behavior might be. In fact, the questionnaires could simply reveal how a person answers a certain kind of question, not how he or she would behave when faced with a risky proposition.

Bubble and bust, laboratory style

In related research, Dickhaut and his students seek that most elusive of explanations: what produces a stock-market collapse? His students have successfully created models that explain market crash situations in the lab. In these crashes, brokers try to hold off selling until the last possible moment, hoping that they'll get out at the peak. Buyers try to wait until the prices are the lowest they're going to get. It's a complicated setting that happens every day-and infrequently leads to a bubble and a crash.

"It must be more than price alone," says Dickhaut. "Traditional economics tells us that people are price takers who don't see that their actions influence prices. Stock buyers don't expect their purchases to impact a stock's prices. Instead, they think of themselves as taking advantages of outcomes."

He urges thinkers to take into account that people are always trying to manipulate the market. "This is almost always going to happen," he says. "One person will always think he knows more than the other."

Transparency-giving a buyer all of the information about a company-is often suggested as the answer to avoiding inflated prices that can lead to a crash. Common sense says that the more knowledge a buyer has, the less likely he or she is to pay more than a stock is worth. Surprisingly, Dickhaut's findings refute this seemingly logical answer. His lab tests prove that transparency can cause worse outcomes than in a market with poorer information. In other words, transparent doesn't equal clearly understood. "People fail to coordinate understanding," explains Dickhaut. "They don't communicate their expectations, and they might think that they understand more than they do about a company."

Do stock prices balloon and crash because of genuine misunderstandings? Can better communication about a stock's value really be the key to avoiding future market crashes? "I wish you could say for sure," says Dickhaut. "That's one of the things we want to find out."

Experimental economics is still a young discipline, and it seems to raise new questions even as it answers old ones. Even so, the contributions are real. In 2005 John Dickhaut was awarded the Carlson School's first career research award, a signal that his research has been of significant value in his field. "It's fun," he says with a grin. "There's a lot out there to learn."

Reprinted with permission from the July 2005 edition of Insights@Carlson School, a publication of the Carlson School of Management.

 

"The Brain as the Original Accounting Institution"
John Dickhaut
The Accounting Review 84(6), 1703 (2009) (10 pages)
TAR is not a free online journal, although articles can be purchased --- http://aaahq.org/pubs.cfm

ABSTRACT:
The evolved brain neuronally processed information on human interaction long before the development of formal accounting institutions. Could the neuronal processes represent the underpinnings of the accounting principles that exist today? This question is pursued several ways: first as an examination of parallel structures that exist between the brain and accounting principles, second as an explanation of why such parallels might exist, and third as an explicit description of a paradigm that shows how the benefits of an accounting procedure can emerge in an experiment.

The following are noteworthy in terms of this being a blue plate special apart from the usual accountics fare at the TAR Restaurant:

• There are no equations that amount to anything beyond a seventh grade algebra equation.
   
• There are no statistical inference tests, although much of the discussion is based upon prior experimental models and tests.
   
• The paper is largely descriptive conjecture by brain analogy.
   
• I view this paper as a commentary even though the current Editor of TAR declared he will not publish commentaries.
   
• The paper goes far back in history with the brain analogy.
   
• To date the TAR Editor has not been fired by the AAA Accountics Tribunal for accepting and publishing this commentary that is neither empirical nor advanced mathematical analysis. However, you must remember that it's a November 2009 edition of TAR, and I'm writing this tidbit in late November. Thunder and lightning from above could still wipe out Sarasota before the year end.
   
• The paper is far out in the conjectural ether. I think John is lifting the brain metaphor to where the air is thin and a bit too hot for me, but perhaps I'm an aging luddite with a failing brain. I reached my limit of the brain analogy in my metacognitive learning paper (which is also brain conjecture by analogy) ---
  http://www.trinity.edu/rjensen/265wp.htm
  Professor Dickhaut presents a much wider discussion of all parts of the brain. My research never went beyond the tiny hippocampus part of the brain.

John was saved from the wrath of the AAA Accountics Tribunal by also having an accountics paper (with complicated equations) published in the same November 2009 edition of TAR.
"Market Efficiencies and Drift: A Computational Model"
John Dickhaut and Baohua Xin
The Accounting Review 84(6), 1805 (2009) (27 pages)

Whew!
Good work John!
John died in April 2010 at the age of 68.

Two-Year Semester Credit Hour Load:  27=24+3; 21=18+3; 15=12+3
It's not clear how much credit-hour relief can be granted to those who serve doctoral programs and administrative duties.
Presumably the spirit of the law is that every tenure track professor who teaches at least one course in two years will add at least one course.
Will allowances be made for probationary faculty not yet granted tenure?
Will faculty who teach in quarters rather than semesters have to add six quarter hours or four credit hours or three quarter hours?

"A Heavier Load in Ohio," by Dan Berrett, Inside Higher Ed, March 22, 2011 ---
http://www.insidehighered.com/news/2011/03/22/ohio_plan_to_increase_faculty_course_loads_mirrors_other_efforts_but_without_buy_in 

Jensen Comment
Such a law could hit some schools hard like Michigan State University that gives one quarter's relief from all teaching every two years. Keeping this quarter's relief plan in operation when being required to teach two added quarter courses becomes a relatively heavy teaching load in some teaching quarters. To my knowledge this proposal has not yet jumped from Ohio to Michigan and probably will not do so since the Michigan governor is pro labor union. Not so for the governors of Ohio and Wisconsin.

The question is whether some universities will require teaching and added course whether or not heavier loads are mandated from above. With shrinking budgets this can be a way to free up some money and/or retaining some tenure track positions that might otherwise be lost in budget cutting crises.

Is this better than the current approach of increasing teaching loads by increasing class sizes --- something that Patricia Walters and others have complained about several times on the AECM?

Video Lecure by Nobel Lauriate Robert Merton
The Future of Finance
MIT World
http://mitworld.mit.edu/video/881

In his keynote address, Robert Merton chooses not to focus on the financial crisis. It is clear to him there were “fools and knaves,” as well as “many structural elements that would have happened even if people were well behaved and well informed” -- risks are simply “embedded in our systems.” Instead, Merton explores how financial engineering is essential in preparing for the inevitable next crisis, and in solving critical challenges. “The world has changed; we can’t go back. Let’s talk about what we should do going forward.”

To illustrate society’s need for financial innovation, Merton uses “a live case study:” the vast problem of retirement funding. In the past decade, stock market declines and falling interest rates have hit mainstream employer pension plans hard. Municipal pension plans may be underfunded to the tune of three trillion dollars. (“It makes the S&L crisis look like nothing.”) But people seek, and are due, “the standard of living during retirement they enjoyed in the latter part of their work life.”

Generally, determining this standard of living means adding up likely medical, housing and general consumption costs, and Merton describes how to target such retirement income. The main ways to achieve the desired goal are by saving more, working longer or taking more risk. Merton would like to design a software-based tool for ordinary people, simple on the user end, complex on the provider end, which would serve as a “next generation pension solution,” offering a way to manipulate the key variables in retirement income and demonstrate potential financial outcomes. This tool would help users continuously optimize risk to help them reach their retirement funding goals.

There are regulatory obstacles now to the implementation of such a method on a widespread basis, and a gap between how managers, advisers and financial institutions think about pension assets, and what Merton has in mind. Nevertheless, he says, “What we need to do for most of the people who don’t have extra money and must do the most with their assets is deliver a simple, easy to use, and if they don’t use it still gets them there, solution.” Merton acknowledges those who think the giant problem of pension funding can be solved by what’s already available -- bond and equity markets, bank loans – and who hanker “to get rid of all the complexity, go back to 1930, ’50 or ’80.” From his perspective, this means “throwing away a lot of what you could do, because the market-proven strategies people have developed and used…can do a much better job for people.”

Jensen Comment
Contributing to the pension crisis has been a willingness of the accounting and auditing profession to allow both the public and private sectors to deceive taxpayers and investors about the extend to which contracted pension obligations are off the balance sheet and not even disclosed properly.

The sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

Off Balance Sheet Financing (OBSF) ---
http://www.trinity.edu/rjensen/Theory02.htm#OBSF2

Teaching Case on Pension Accounting Trends
From The Wall Street Journal Weekly Accounting Review on March 11, 2011

Rewriting Pension History
by: Michael Rapoport
Mar 09, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Changes and Error Corrections, Pension Accounting, Post Retirement Benefits

SUMMARY: AT&T Inc., Verizon Communications Inc. and Honeywell International Inc. recently changed their longstanding pension accounting in which they smooth out gains and losses on pension assets over time. These companies now include all actuarial gains and losses in income (via pension expense calculations) as they occur; the article states that they are including all gains and losses on pension assets in income as they occur. The change in accounting principle is being handled in accordance with Accounting Standards Codification 250-10-05-2 which requires retrospective application whenever practicable. Retrospective application is defined in the codification glossary as the application of a different accounting principle to one or more previously issued financial statements, or to the statement of financial position at the beginning of the current period, as if that principle had always been used, or a change to financial statements of prior accounting periods to present the financial statements of a new reporting entity as if it had existed in those prior years. ASC 250-10-45-2(b) requires that a change in accounting principle be adopted only if "the entity can justify the use of an allowable alternative accounting principle on the basis that it is preferable."

CLASSROOM APPLICATION: The article is useful when covering pension accounting and when covering accounting changes, typically in advanced financial reporting or MBA classes. **Note that answers to some questions are given in the summary so that faculty using this review may want to edit before distributing to students.

QUESTIONS: 
1. (Advanced) What is a defined benefit pension plan?

2. (Advanced) What are the objectives in accounting for this type of pension plan? Cite your source for this answer from the Accounting Standards Codification.

3. (Introductory) Summarize the accounting change for pension plans described in the article. In your answer, summarize how pension accounting "smoothes" large gains and losses generated by pension assets.

4. (Advanced) Access the AT&T Form 10-K filing for 2010 made on March 1, 2011 and available at http://www.sec.gov/cgi-bin/viewer?action=view&cik=732717&accession_number=0000732717-11-000014&xbrl_type=v Proceed to Pension and Post Retirement Benefits (Note 11) under Notes to Financial Statements and read the third paragraph which begins "in January 2011, we announced a change in our method of recognizing actuarial gains and losses..." Are actuarial gains and losses the same as gains and losses on plan assets? Do they impact pension calculations similarly? Explain your answers.

5. (Introductory) How is this accounting change being reflected in these companies' financial statements? Why will this accounting change impact 2008 the most?

6. (Advanced) What accounting standard codification section promulgates the requirements for the accounting described in this article? What requirement must be met for any company to undertake any change in accounting principle, including the pension change discussed in this article?

7. (Advanced) Compare the statements in AT&T's pension footnote to the objectives of pension accounting you identified in answer to question 2. Clearly explain what you think is the basis for justifying this change in accounting principle.
 

Reviewed By: Judy Beckman, University of Rhode Island

"Rewriting Pension History," by Michael Rapoport, The Wall Street Journal, March 9, 2011 ---
http://online.wsj.com/article/SB10001424052748703662804576188843415326976.html?mod=djem_jiewr_AC_domainid

Some big companies are changing how they account for their pension plans in a way that could make their earnings look better in coming years.

AT&T Inc., Verizon Communications Inc. and Honeywell International Inc. recently ended a longstanding practice in which they "smooth" large gains and losses generated by pension assets into their financial results over a period of years. From now on, these companies will count all such gains and losses in the same year they are incurred.

While the moves might seem like arcane accounting steps, they have important implications for investors. The companies say the changes will make their earnings reporting more transparent, but they also sweep away tens of billions in past pension losses the companies have yet to smooth into—and hurt—their results. By charging them against their earnings from 2008, when the losses were incurred, they are taking lumps for years that many investors may no longer care about.

"They'll put the bad news behind them" said David Zion, an accounting analyst with Credit Suisse.

Still, the accounting change will make it clearer to investors how pension plans' performance affects the companies' income statements, where it is factored into operating earnings. And the current rock-bottom interest rates make it a good time to make such a change. Any increases in rates could improve pension-plan performance, and clearing away the old losses will heighten the impact that better performance has on the companies' earnings.

Under current accounting rules, companies with defined-benefit pension plans, which promise to pay specified amounts to retirees, have the option to take several years to spread the cost of large pension gains and losses into earnings. That means that when a plan's investment results are much better or worse than expected—as with the 2008 market downturn—it can have a significant effect on earnings for years.

For that and other reasons, the system of accounting for pension results in earnings long has been widely criticized. The Financial Accounting Standards Board, the U.S. accounting rule maker, has examined the issue before but hasn't made any changes, though they may revisit it soon. AT&T, Verizon and Honeywell changed their accounting methods on their own initiative. While the details differ, all three said they would start recognizing some or all of their deferred losses in the year they occur, through a "mark-to-market" adjustment to fourth-quarter earnings to reflect their pension plan's returns for the year.

All three assessed the bulk of the change's impact against 2008 earnings, the height of the market meltdown. AT&T, for example, said its 2008 pension costs would increase by $24.9 billion because of the change, compared to a $3 billion increase for 2010. The company reduced its 2008 earnings by $15.5 billion as a result, from a profit of $12.9 billion to a loss of $2.6 billion.

An increase in interest rates could benefit the companies' pension plans if, as expected, they move higher. That is because pension obligations that may be paid out decades into the future are discounted back to their present value. When rates are low, there's less discounting, and the obligations stay relatively high. But when rates rise, the future obligations will be discounted more aggressively, moving their present value lower.

That means a lower base on which the company has to pay interest costs, which could translate into lower pension costs, improved pension performance and better earnings.

"Clearly the mark-to-market approach is preferable accounting," said Kathleen Winters, Honeywell's controller. But she acknowledged that "the low interest-rate environment made this a good time to do this."

Continued in article

Bob Jensen's threads on pension accounting and post-retirement benefits are at
http://www.trinity.edu/rjensen/Theory02.htm#Pensions

Teaching Case on Auditor Firm's Denial of a Going Concern Opinion
From The Wall Street Journal Accounting Weekly Review on March 11, 2011

Dynegy Auditor Issues Warning (not available online)
by: John Kell
Mar 09, 2011
 

TOPICS: Audit Report, Auditing

SUMMARY: Dynegy's auditors, Ernst & Young, have issued a going concern opinion on the company's 2010 financial statements. The going concern issue has arisen because Dynegy expects it likely will not meet a debt covering related to the level of EBITDA over consolidated interest expense.

CLASSROOM APPLICATION: The article is useful to cover types of audit opinions in an auditing class. Questions further allow discussion of the meaning behind the going concern assumption versus an assessment of the company's financial health. The questions also refer to the Form10-K filing and management's discussion and analysis that specifically identifies the debt covenant failure that is expected to occur; the article therefore can be used in covering long term debt. While there is no on line article link, the related article covers a lot of the issues and questions direct the student to the Dynegy 10-K filing and the associated auditor's report.

QUESTIONS: 
1. (Advanced) What are the types of audit opinions that may be issued? What type was issued by Ernst & Young on Dynegy's financial statements?

2. (Introductory) What problem led to the auditor's conclusion that Ernst & Young (E&Y) should issue a "going concern opinion" on the Dynegy financial statements? Was it the result of E&Y's assessment of the financial health of Dynegy? Explain.

3. (Introductory) What is a debt covenant? Based on your understanding of the statements in the article, is Dynegy currently in violation of its debt covenants? Explain.

4. (Advanced) Access the Dynegy annual report for 2010 filed on Form 10-K with the SEC available at http://sec.gov/Archives/edgar/data/1105055/000114036111015138/form_10-k.htm#a009v1 Scroll down to the Table of Contents, then click on Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Read through the first three paragraphs under "Overview." What specific financial ratio is Dynegy expecting to be unable to meet? What does this ratio measure? What are the potential results of this failure?

5. (Introductory) What corporate actions have kept Dynegy from undertaking transactions that might save it from bankruptcy proceedings?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Dynegy Warns of Chapter 11
by Rebecca Smith
Mar 09, 2011
Online Exclusive

Question
Why weren't there similar denials of going concern opinions on thousands of failed banks shortly after 2009?

Where were the auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

CommerceConnect (business helpers from the U.S. Dept. of Commerce) --- http://commerceconnect.gov/

Bob Jensen's small business helpers ---
http://www.trinity.edu/rjensen/BookBob1.htm#SmallBusiness

From the Harvard Business School
Buy Now, Pay Later: A History of Personal Credit --- http://www.library.hbs.edu/hc/credit/

Jensen Comment
When teaching about accounting for liabilities and credit cards, it might be interesting to introduce students to the history of liabilities ---
Buy Now, Pay Later: A History of Personal Credit --- http://www.library.hbs.edu/hc/credit/

Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Historical Myth a Month (with a Nevada focus) ---
http://nsla.nevadaculture.org/index.php?option=com_content&task=view&id=683&Itemid=418

The above site has nothing to do with accounting, but it struck me as an interesting way to introduce accounting history into most any accounting course. For assignments (maybe for each class) students could be asked to verify accounting history myths.

Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Bob Jensen's threads on Tools and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

"Inside The Mind of An Inside Trader," by Francine McKenna, re:TheAuditors, March 5, 2011 ---
http://retheauditors.com/2011/03/05/inside-the-mind-of-an-inside-trader/

No Big 4 audit firms or their partners have been named in the insider trading scandal surrounding the now-defunct hedge fund Galleon Management. But the SEC has accused one of the most prominent businessmen ever implicated in such crimes, Rajat Gupta, a former McKinsey & Company Global Managing Director.

Mark O’Connor, CEO of Monadnock Research, put together a research note for his subscribers that gives us the details of the accusations. He also provides new insight into why a guy like Gupta may have committed these alleged crimes.

Gupta is alleged to have tipped Galleon’s Rajaratnam, a friend and business associate, providing him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards. Gupta reportedly made calls to Rajaratnam “within seconds” of leaving board sessions where market-moving information was discussed.

The complaint alleges that Rajaratnam then either used the inside information on Goldman and P&G to execute trades on behalf of some of Galleon’s hedge funds, or shared it with others at Galleon, who then traded on it ahead of public disclosure. The SEC claims the insider trading scheme generated more than $18 million in a combination of illicit profits and loss avoidance.

The SEC also says that Gupta was, at the time of the alleged disclosures of confidential non-public information, a direct or indirect investor in at least some of Galleon’s hedge funds, and had other business interests with Rajaratnam.

Gupta, as a McKinsey veteran, embodied the “trusted advisor” consulting ethos and personified the McKinsey “advisor to CEOs” business strategy and brand. The firm’s value to its clients and its effectiveness as an advisor requires knowing their secrets and holding them close to the vest.

Gupta was McKinsey & Company’s worldwide Managing Director for 9 years from 1994 through 2003…Gupta, now 62, stepped down as a McKinsey partner in 2007, and has since served as Managing Director Emeritus, according to his profile at the Indian School of Business (ISB). Gupta was instrumental in co-founding ISB in 2001, and continues to serve as its current Governing Board Chairman and Executive Board Chairman. He is also a current or former board member (or trustee) of AMR Corp., the parent of American Airlines; the Rockefeller Foundation; the University of Chicago; Harman International Industries; Genpact India; the World Economic Forum; the International Chamber of Commerce, World Business Organization; New Silk Route and New Silk Route Private Equity; and the Emergency Management and Research Institute. Galleon’s Rajaratnam was also associated with the New Silk Route ventures, where Gupta continues as Chairman. Rajaratnam is no longer associated with those entities.

Several media commentators have openly wondered whether the accusations against Gupta, and earlier accusations in the same scandal against McKinsey senior partner and Gupta protégé Anil Kumar, strike a deadly blow to McKinsey.

Will Rajat Gupta Destroy McKinsey? John Carney, NetNet, March 2, 2011

McKinsey’s clients are attracted by its reputation for excellence and discretion—and its stellar network of alumni. Its consultants often refuse to even disclose who their clients are.

If the charges against Gupta prove true, it could be a mortal threat to the firm. Even if there’s no evidence that confidentiality was breached while Gupta was at the firm, being led by a man who would later leak insider information would be devastating. If Gupta is shown to have engaged in similar actions while he was at McKinsey, that could be the end for the Firm.

“At that point, I think we go the way of Arthur Andersen,” another former McKinsey consultant said, referring to the once-prestigious accounting company brought down by its connections to Enron.

Loose Lips, Reuters BreakingViews, Robert Cyran and Rob Cox, March 3, 2011

McKinsey’s reputation rests on its ability to keep secrets. Consultancies, unlike investment banks, don’t provide access to financial markets.  All they offer is counsel, which relies partly on confidences revealed by their clients. According to McKinsey, “Our clients should never doubt that we will treat any information they give us with absolute discretion.” The allegations against Gupta make it hard for clients not to wonder.

It’s understandable that, in the heat of this moment, some might naïvely compare the consequences of the criminal indictment of an audit firm with civil charges against an individual, albeit one who trades on – pun intended – his association with a prestigious professional services firm.

It’s not the same thing.

Extrapolating Gupta’s behavior to McKinsey as a whole is a stretch. I’m no McKinsey apologist but one man, even a former Global Managing Director, does not make this firm.

On the contrary. The firm made him and he’s the one whose currency is now worth less.

"Here Are The Things The Raj Defense Team And The Prosecution DON'T Want The Jury To Hear," by Courtney Comstock, Business Insider, March 7, 2011 ---
http://www.businessinsider.com/defense-prosecution-block-raj-trial-2011

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

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

The New York Times has just proposed to turn us all into Seinfeld's Elaine Benes.

The article below has a really weird introduction to say the least, especially for a venerable journal like the Harvard Business Review.

The article is really about the new New York Times way of charging readers, which is a very, very complicated scheme to say the least.

"Is Paul Krugman "Click-Worthy"?" by Joshua Gans, Harvard Business Review Blog, March 18. 2011 --- Click Here
http://blogs.hbr.org/cs/2011/03/is_paul_krugman_click-worth.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Last year, one of the most famous economists in the world, Avinash Dixit, released a paper, "An Option Value Model from Seinfeld," based on this episode (you can download it here). ---
http://www.princeton.edu/~dixitak/home/Elaine-Final-Web.pdf

Bob Jensen's threads on option valuation are here ---
http:/www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

Bob Jensen's Threads on Real Options, Option Pricing Theory, and Arbitrage Pricing Theory ---
http://www.trinity.edu/rjensen/realopt.htm 

Bob Jensen's threads on option pricing theory are at
http://www.trinity.edu/rjensen/149wp/149wp.htm

"A Few People Are Not Satisfied with the $624 Million Countrywide Settlement," by Caleb Newquist, Going Concern, February 25, 2011 ---
http://goingconcern.com/2011/02/a-few-people-are-not-satisfied-with-the-624-million-countrywide-settlement/#more-26016

And, unfortunately for Bank of America and KPMG, that could mean digging through the couch cushions.

Several large institutional investors have rejected a court settlement where Countrywide Financial Corp. had agreed to pay $600 million to a number of national pension funds. Those pulling out of the agreement include BlackRock Inc.; the California Public Employees Retirement System, or Calpers; T. Rowe Price Group Inc.; Nuveen Investments Inc.; and the Maryland State Retirement and Pension System, according to a document from the suit filed in U.S. District Court in Los Angeles. The investors decided the settlement, initially agreed to last May, wasn’t enough and will seek their own terms with the mortgage originator and its current owner Bank of America Corp., as well as Countrywide’s auditor KPMG LLP. KPMG had committed another $24 million to the settlement.

In typical HofK fashion, the firm didn’t bother commenting for the Journal’s story however BofA managed to express their disappointment, “It is unfortunate that some investors chose to opt out of what we believe is a fair and equitable agreement to settle these issues.” Right. Because the likes of BlackRock and Calpers should be tickled pink with the pleasure of splitting $624 million with dozens of other investors.

Big Investors Refuse Countrywide Settlement [WSJ]

"Big Investors Refuse Countrywide Settlement," by David Benoit, The Wall Street Journal, February 25, 2011 ---
http://online.wsj.com/article/SB10001424052748704150604576166382331877062.html

Several large institutional investors have rejected a court settlement where Countrywide Financial Corp. had agreed to pay $600 million to a number of national pension funds.

Those pulling out of the agreement include BlackRock Inc.; the California Public Employees Retirement System, or Calpers; T. Rowe Price Group Inc.; Nuveen Investments Inc.; and the Maryland State Retirement and Pension System, according to a document from the suit filed in U.S. District Court in Los Angeles.

The investors decided the settlement, initially agreed to last May, wasn't enough and will seek their own terms with the mortgage originator and its current owner Bank of America Corp., as well as Countrywide's auditor KPMG LLP. KPMG had committed another $24 million to the settlement.

A spokesman for New York State Comptroller Thomas P. DiNapoli, who represented the massive New York State Common Retirement Fund in the litigation, said the fund intends to remain part of the "very reasonable settlement." Ola Fadahunsi, the spokesman, noted the comptroller's office is "very happy" with the work of its counsel on the case.

Shirley Norton, a Bank of America spokeswoman, said, "It is unfortunate that some investors chose to opt out of what we believe is a fair and equitable agreement to settle these issues."

KPMG declined to comment.

The settlement agreement, which is facing a final approval hearing before a federal judge in Los Angeles Friday, was amended last month as a result of the investors leaving. The new agreement, which remains at a total of $624 million, now includes a provision that allows Countrywide and KPMG to take up to $22.5 million of that amount to pay the investors who rejected the agreement. The amount must be used within two years.

Blair A Nicholas, a lawyer representing some of the largest institutional investors to pull out of the agreement, including BlackRock, Calpers and T. Rowe, said his clients "exercised their legal right to opt out in order to maximize the recovery" of their damages.

"If our clients are unable to resolve their claims to recovery, they are fully committed to pursuing their claims at trial to hold Countrywide's former executives fully accountable for the pervasive fraud at Countrywide," Mr. Nicholas said.

The L.A. Times had reported earlier that investors were leaving the settlement.

The lawsuit alleged Countrywide made false statements and omissions about its policies and procedures for underwriting loans, exposing investors to excessive undisclosed risk.

According to the court document, 33 investors, including names of some individuals, were withdrawing. Some of these investors include Montana Board of Investments, Teacher Retirement System of Texas, Oregon Public Employees Retirement Fund, and the Michigan State Treasurer, on behalf of several public pension funds in the state.

Bob Jensen's threads on Countrywide sleaze are at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Bob Jensen's threads on KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm

"F.D.I.C. Sues Ex-Chief of Big Bank That Failed," by Eric Dash, The New York Times, March 17, 2011 ---
http://www.nytimes.com/2011/03/18/business/18bank.html?_r=1

The Federal Deposit Insurance Corporation sued the former chief executive of Washington Mutual and two of his top lieutenants, accusing them of reckless lending before the 2008 collapse of what was the nation’s largest savings bank.

F.D.I.C. Sues Ex-Chief of Big Bank That Failed By ERIC DASH Published: March 17, 2011

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The Federal Deposit Insurance Corporation sued the former chief executive of Washington Mutual and two of his top lieutenants, accusing them of reckless lending before the 2008 collapse of what was the nation’s largest savings bank.

The civil lawsuit, seeking to recover $900 million, is the first against a major bank chief executive by the regulator and follows escalating public pressure to hold bankers accountable for actions leading up to the financial crisis.

Kerry K. Killinger, Washington Mutual’s longtime chief executive, led the bank on a “lending spree” knowing that the housing market was in a bubble and failed to put in place the proper risk management systems and internal controls, according to a complaint filed on Thursday in federal court in Seattle.

David C. Schneider, WaMu’s president of home lending, and Stephen J. Rotella, its chief operation officer, were also accused of negligence for their roles in developing and leading the bank’s aggressive growth strategy.

“They focused on short-term gains to increase their own compensation, with reckless disregard for WaMu’s long-term safety and soundness,” the agency said in the 63-page complaint. “The F.D.I.C. brings this complaint to hold these highly paid senior executives, who were chiefly responsible for WaMu’s higher-risk home lending program, accountable for the resulting losses.”

In addition, the complaint says that Mr. Killinger and his wife, Linda, set up two trusts in August 2008 to keep his homes in California and Washington out of the reach of the bank’s creditors. Months earlier, in the spring of 2008, Mr. Rotella and his wife, Esther, made similar arrangements. The F.D.I.C. is seeking to freeze the assets of both couples and named the wives as defendants in the lawsuit.

In unusually vigorous denials, Mr. Killinger and Mr. Rotella came out swinging against the F.D.I.C. Mr. Killinger said the agency’s claims were “baseless and unworthy of the government” and its legal conclusions were “political theater.” Mr. Rotella said the action “runs counter to the facts about my relatively short time at the company,” calling it “unfair and an abuse of power.” He said the trust was for normal estate planning purposes and was set up before the bank’s downfall. Mr. Schneider, who is represented by the same lawyer as Mr. Rotella, did not release a public statement.

Although the F.D.I.C. is mainly known for its role in shuttering failed lenders, the agency has a legal obligation to bring lawsuits against former directors and officers when it finds evidence of wrongdoing.

So far, the F.D.I.C. has brought claims against 158 individuals at about 20 small banks that failed during the recent crisis. The agency is seeking a total of more than $2.6 billion in damages. But the $900 million case against the former WaMu officials is its biggest and most prominent action to date.

Federal regulators have come under fire for failing to hold executives responsible for their involvement in the worst financial crisis since the Great Depression. Last fall, the Securities and Exchange Commission reached a settlement with Angelo R. Mozilo, the former chief executive of Countrywide Financial, to pay a $22.5 million penalty over misleading investors about the financial condition of the giant mortgage lender.

The New York attorney general’s office has brought a civil suit against Kenneth D. Lewis over improper disclosures related to the 2008 rescue of Merrill Lynch by Bank of America, of which he was chief executive.

Continued in article

A massive shareholder lawsuit is also pending against WaMu's auditor, Deloitte ---
http://www.nytimes.com/2011/03/18/business/18bank.html?_r=1
WaMu's loan loss reserves were not only massively understated, WaMu should've been audited as a non-going concern ---
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

More Headaches for Deloitte After Auditing the Biggest Bank to Ever Fail
"Investigation finds fraud in WaMu lending:  Senate report: Failed bank’s own action couldn’t stop deceptive practices," by Marcy Gordon, MSNBC, April 12, 2010 --- http://www.msnbc.msn.com/id/36440421/ns/business-mortgage_mess/?ocid=twitter

The mortgage lending operations of Washington Mutual Inc., the biggest U.S. bank ever to fail, were threaded through with fraud, Senate investigators have found.

And the bank's own probes failed to stem the deceptive practices, the investigators said in a report on the 2008 failure of WaMu.

The panel said the bank's pay system rewarded loan officers for the volume and speed of the subprime mortgage loans they closed. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to the report being released Tuesday by the investigative panel of the Senate Homeland Security and Governmental Affairs Committee.

Sen. Carl Levin, D-Mich., the chairman, said Monday the panel won't decide until after hearings this week whether to make a formal referral to the Justice Department for possible criminal prosecution. Justice, the FBI and the Securities and Exchange Commission opened investigations into Washington Mutual soon after its collapse in September 2008.

The report said the top WaMu producers, loan officers and sales executives who made high-risk loans or packaged them into securities for sale to Wall Street, were eligible for the bank's President's Club, with trips to swank resorts, such as to Maui in 2005.

Fueled by the housing boom, Seattle-based Washington Mutual's sales to investors of packaged subprime mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, collapsed in September 2008. It was sold for $1.9 billion to JPMorgan Chase & Co. in a deal brokered by the Federal Deposit Insurance Corp.

Jennifer Zuccarelli, a spokeswoman for JPMorgan Chase, declined to comment on the subcommittee report.

WaMu was one of the biggest makers of so-called "option ARM" mortgages. These mortgages allowed borrowers to make payments so low that loan debt actually increased every month.

The Senate subcommittee investigated the Washington Mutual failure for a year and a half. It focused on the thrift as a case study for the financial crisis that brought the recession and the loss of jobs or homes for millions of Americans.

The panel is holding hearings Tuesday and Friday to take testimony from former senior executives of Washington Mutual, including ex-CEO Kerry Killinger, and former and current federal regulators.

Washington Mutual "was one of the worst," Levin told reporters Monday. "This was a Main Street bank that got taken in by these Wall Street profits that were offered to it."

The investors who bought the mortgage securities from Washington Mutual weren't informed of the fraudulent practices, the Senate investigators found. WaMu "dumped the polluted water" of toxic mortgage securities into the stream of the U.S. financial system, Levin said.

In some cases, sales associates in WaMu offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements. The company's own probe in 2005, three years before the bank collapsed, found that two top producing offices — in Downey and Montebello, Calif. — had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.

Washington Mutual was repeatedly criticized over the years by its internal auditors and federal regulators for sloppy lending that resulted in high default rates by borrowers, according to the report. Violations were so serious that in 2007, Washington Mutual closed its big affiliate Long Beach Mortgage Co. as a separate entity and took over its subprime lending operations.

Senior executives of the bank were aware of the prevalence of fraud, the Senate investigators found.

In late 2006, Washington Mutual's primary regulator, the U.S. Office of Thrift Supervision, allowed the bank an additional year to comply with new, stricter guidelines for issuing subprime loans.

According to an internal bank e-mail cited in the report, Washington Mutual would have lost about a third of the volume of its subprime loans if it applied the stricter requirements.

Deloitte is Included in the Shareholder Lawsuit Against Washington Mutual (WaMu)

"Feds Investigating WaMu Collapse," SmartPros, October 16, 2008 --- http://accounting.smartpros.com/x63521.xml

Oct. 16, 2008 (The Seattle Times) — U.S. Attorney Jeffrey Sullivan's office [Wednesday] announced that it is conducting an investigation of Washington Mutual and the events leading up to its takeover by the FDIC and sale to JP Morgan Chase.

Said Sullivan in a statement: "Due to the intense public interest in the failure of Washington Mutual, I want to assure our community that federal law enforcement is examining activities at the bank to determine if any federal laws were violated."

Sullivan's task force includes investigators from the FBI, Federal Deposit Insurance Corp.'s Office of Inspector General, Securities and Exchange Commission and the Internal Revenue Service Criminal Investigations division.

Sullivan's office asks that anyone with information for the task force call 1-866-915-8299; or e-mail fbise@leo.gov.

"For more than 100 years Washington Mutual was a highly regarded financial institution headquartered in Seattle," Sullivan said. "Given the significant losses to investors, employees, and our community, it is fully appropriate that we scrutinize the activities of the bank, its leaders, and others to determine if any federal laws were violated."

WaMu was seized by the FDIC on Sept. 25, and its banking operations were sold to JPMorgan Chase, prompting a Chapter 11 bankruptcy filing by Washington Mutual Inc., the bank's holding company. The takeover was preceded by an effort to sell the entire company, but no firm bids emerged.

The Associated Press reported Sept. 23 that the FBI is investigating four other major U.S. financial institutions whose collapse helped trigger the $700 billion bailout plan by the Bush administration.

The AP report cited two unnamed law-enforcement officials who said that the FBI is looking at potential fraud by mortgage-finance giants Fannie Mae and Freddie Mac, and insurer American International Group (AIG). Additionally, a senior law-enforcement official said Lehman Brothers Holdings is under investigation. The inquiries will focus on the financial institutions and the individuals who ran them, the senior law-enforcement official said.

FBI Director Robert Mueller said in September that about two dozen large financial firms were under investigation. He did not name any of the companies but said the FBI also was looking at whether any of them have misrepresented their assets.

"Federal Official Confirms Probe Into Washington Mutual's Collapse," by Pierre Thomas and Lauren Pearle, ABC News, October 15, 2008 --- http://abcnews.go.com/TheLaw/story?id=6043588&page=1

 

The federal government is investigating whether the leadership of shuttered bank Washington Mutual broke federal laws in the run-up to its collapse, the largest in U.S. history.

. . .

Eighty-nine former WaMu employees are confidential witnesses in a shareholder class action lawsuit against the bank, and some former insiders spoke exclusively to ABC News, describing their claims that the bank ignored key advice from its own risk management team so they could maximize profits during the housing boom.

In court documents, the insiders said the company's risk managers, the "gatekeepers" who were supposed to protect the bank from taking undue risks, were ignored, marginalized and, in some cases, fired. At the same time, some of the bank's lenders and underwriters, who sold mortgages directly to home owners, said they felt pressure to sell as many loans as possible and push risky, but lucrative, loans onto all borrowers, according to insiders who spoke to ABC News.

Continued in article

 

Allegedly "Deloitte Failed to Audit WaMu in Accordance with GAAS" (see Page 351) --- Click Here
Deloitte issued unqualified opinions and is a defendant in this lawsuit (see Page 335)
In particular note Paragraphs 893-901 with respect to the alleged negligence of Deloitte.

More on Deloitte's woes in the wake of the WaMu collapse ---
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte 

Skin in the Game Accounting
This will greatly complicate accounting for sales transactions and financial risk accounting
How do we account for "skin in the game?"

"F.D.I.C. Advances New Rules for Mortgage Securities," by Ben Pritessm, The New York Times (DealB%k), March 29, 2011 ---
http://dealbook.nytimes.com/2011/03/29/f-d-i-c-advances-new-rules-for-mortgage-securities/

Federal regulators voted Tuesday to propose new rules that would prohibit Wall Street banks from unloading packages of risky mortgages on investors without keeping some of the risk on their own books, a leading cause of the financial crisis.

The proposed rule would require banks to retain 5 percent of the credit risk on certain securities backed by mortgages, leaving the banks with the so-called “skin in the game” on all but the safest loans.

Wall Street banks, which lobbied to temper the rules, won some limited concessions from regulators. The rules do not apply to so-called “qualified residential mortgages,” conservative loans that meet strict underwriting criteria set by regulators. Banks, under the

The Federal Deposit Insurance Corporation’s board voted unanimously in favor of the proposal, opening it up to public comment. The proposal was mandated by the Dodd-Frank Act, the financial regulatory law signed by President Obama in July.

The law aimed to prevent Wall Street from returning to its old tricks. During the mortgage bubble, lenders churned out dubious loans and Wall Street eagerly sold the loans to investors. None of those players had a stake in the assets when they ultimately crumbled.

“This will encourage better underwriting by assuring that originators and securitizers cannot escape the consequences of their own lending practices,” Sheila C. Bair, the F.D.I.C.’s chairwoman, said at a public hearing on Tuesday.

But for now, the rules are unlikely to cause much of a shakeup in the mortgage business, as regulators drafted a gaping exemption: mortgage-backed securities sold or guaranteed by Fannie Mae and Freddie Mac. As long as the government owns Fannie Mae and Freddie Mac, the mortgage giants will not have to retain any risk associated with their mortgage-backed securities.

The two mortgage finance companies, along with several other government agencies that are exempt under the proposal, collectively cover more than 90 percent of the market. The private securitization market froze during the financial crisis and is only now starting to see some action.

The new proposal “pretty much preserves the status quo in the mortgage market,” Jaret Seiberg, an analyst at MF Global’s Washington Research Group, said in a note on Tuesday. “That means few changes in how things work today for mortgage insurers and originators.”

But the rules are not yet complete — and bank lobbyists are only getting started. Banks argue that the new restrictions will cause the private mortgage market to shrink even further, making it harder for consumers to obtain loans.

Ms. Bair contends that will not happen. “The intent of this rule-making is not to kill private mortgage securitization — the financial crisis has already done that,” she said. “Our intent is to restore sound practices in lending, securitization and loan servicing, and bring this market back better than before.”

Still, banks are sure to push for a broader definition of “qualified residential mortgages,” the safer loans exempt from the 5 percent retention requirement.

“I don’t think they’ll go bananas,” said Jason Kravitt, a partner at Mayer Brown and founder of the law firm’s securitization practice. “But the industry will have to work very hard indeed to broaden the definition of qualified mortgages.”

Under the proposal, borrowers must put a 20 percent down payment on their home purchases for a bank to securitize the loan without keeping a stake. The proposal also requires borrowers to be current on other loans and to earn a certain income if a bank wants the exemption.

The proposal would not exempt notoriously risky loans, like interest-only mortgages and adjustable-rate mortgages that feature potentially huge interest rate increases.

Regulators reassured lenders that the government is open to tweaking the requirements or scrapping them in favor of an alternative approach. The proposal includes nearly 150 questions for the industry to address.

But Mr. Kravitt said Wall Street was unlikely to force an overhaul of the proposal.

Continued in article

The Controversy Over Revenue Reporting and HFV 
--- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

RLC = Return on Lobbying Congress
"G.E.’s Strategies Let It Avoid Taxes Altogether," by David Kocieniewski, The New York Times, March 24, 2011 ---
http://www.nytimes.com/2011/03/25/business/economy/25tax.html?_r=1&partner=rss&emc=rss

General Electric, the nation’s largest corporation, had a very good year in 2010.

The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

That may be hard to fathom for the millions of American business owners and households now preparing their own returns, but low taxes are nothing new for G.E. The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

While General Electric is one of the most skilled at reducing its tax burden, many other companies have become better at this as well. Although the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less.

In a regulatory filing just a week before the Japanese disaster put a spotlight on the company’s nuclear reactor business, G.E. reported that its tax burden was 7.4 percent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.

Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals, have pushed down the corporate share of the nation’s tax receipts — from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.

Yet many companies say the current level is so high it hobbles them in competing with foreign rivals. Even as the government faces a mounting budget deficit, the talk in Washington is about lower rates. President Obama has said he is considering an overhaul of the corporate tax system, with an eye to lowering the top rate, ending some tax subsidies and loopholes and generating the same amount of revenue. He has designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes.

“He understands what it takes for America to compete in the global economy,” Mr. Obama said of Mr. Immelt, on his appointment in January, after touring a G.E. factory in upstate New York that makes turbines and generators for sale around the world.

A review of company filings and Congressional records shows that one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.

Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines. But the most lucrative of these measures allows G.E. to operate a vast leasing and lending business abroad with profits that face little foreign taxes and no American taxes as long as the money remains overseas.

Company officials say that these measures are necessary for G.E. to compete against global rivals and that they are acting as responsible citizens. “G.E. is committed to acting with integrity in relation to our tax obligations,” said Anne Eisele, a spokeswoman. “We are committed to complying with tax rules and paying all legally obliged taxes. At the same time, we have a responsibility to our shareholders to legally minimize our costs.”

The assortment of tax breaks G.E. has won in Washington has provided a significant short-term gain for the company’s executives and shareholders. While the financial crisis led G.E. to post a loss in the United States in 2009, regulatory filings show that in the last five years, G.E. has accumulated $26 billion in American profits, and received a net tax benefit from the I.R.S. of $4.1 billion.

But critics say the use of so many shelters amounts to corporate welfare, allowing G.E. not just to avoid taxes on profitable overseas lending but also to amass tax credits and write-offs that can be used to reduce taxes on billions of dollars of profit from domestic manufacturing. They say that the assertive tax avoidance of multinationals like G.E. not only shortchanges the Treasury, but also harms the economy by discouraging investment and hiring in the United States.

Continued in article

From CBS Sixty Minutes on March 27, 2011
How to Shift Profits Offshore --- http://www.cbsnews.com/video/watch/?id=7360934n&tag=contentMain;contentBody
Economist Martin Sullivan explains to Lesley Stahl how American multi-national companies shift their profits overseas.
Read more: http://www.cbsnews.com/video/watch/?id=7360934n&tag=contentMain;contentBody#ixzz1HvmebOLs

Comedian Jon Stewart Reacts to GE’s Tax Savviness ---
http://goingconcern.com/2011/03/jon-stewart-reacts-to-ges-tax-savviness/#more-27713

March 31, 2011 reply from Francine McKenna

Bob,

 

I wrote at Forbes yesterday about KPMG's lack of independence with regard to their audit client GE.

 

http://blogs.forbes.com/francinemckenna/2011/03/29/ge-auditor-kpmg-supporting-their-tax-strategy-for-102-years/

 

My other problems with GE go back to the legacy of Jack Welch, GE’s insidious influence on how people all over the corporate world aremeasured and rewarded, and their history as a bad actor when it comes to internal controls and accounting manipulation.

So it’s not surprising that GE uses their auditor, KPMG, to help them put their “zero” tax return together.

The Sarbanes-Oxley Act of 2002 started out tough on tax. The rules regarding prohibited activities by the auditor, intended to preserve their independence, scared the living daylights out of the largest firms. It appeared initially that the SEC would prohibit the tax side of the firms from providing highly lucrative tax advice to their audit clients. Many of those professionals started planning an exit from their firms so they could continue working with long time clients.

A compromise was reached. The result is one of the loosest and most generous exceptions to auditor independence rules on the books.

Francine McKenna

Managing Editor

My site: http://retheauditors.com

At Forbes: http://blogs.forbes.com/francinemckenna

@ReTheAuditors on Twitter

312-730-4884

Bob Jensen's threads on KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm

"KPMG Sued For Giving Tom Hicks "Clean Audit" a Year Before $525-Million Loan Default," by Robert Wilonsky, Dallas Observer, March 30, 2011 ---
http://blogs.dallasobserver.com/unfairpark/2011/03/kpmg_sued_for_giving_tom_hicks_clean_audit_a_year_before_525-million_loan_default.php

Courthouse News has the lawsuit: GSP Finance LLC v. KPMG LLC, an alphabet soup's worth of names that sounds thoroughly uninteresting. Until, that is, you crack open the case and discover that GSP Finance is the lending arm of Galatioto Sports Partners -- the same company Hicks hired in February 2010 to find prospective investors in or a buyer for the Dallas Stars after Hicks Sports Group defaulted on that $525 million in loans in the spring of '09.

Says the suit, GSP Finance loaned Hicks's HSG Sports Group $67 million based upon KPMG's audit, which said everything was fine even though it was far from.

Continued in article

Bob Jensen's threads on KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm

"Brazil Merry Go Round – KPMG Acquires BDO Who Acquires Crowe Howarth…," Big Four Blog, March 30, 2011 ---
http://www.big4.com/blog/brazil-merry-go-round-%E2%80%93-kpmg-acquires-bdo-who-acquires-crowe-howarth%E2%80%A6-707

Jensen Comment
As GM is now discovering, the biggest economy in North and South America combined may well become Brazil. Brazil is one of the BRICs.

A BRIC nation at the moment is a nation that has vast resources and virtually no entitlement obligations that drag down economic growth --- http://en.wikipedia.org/wiki/BRIC

In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries") is an acronym that refers to the fast-growing developing economies of Brazil, Russia, India, and China. The acronym was first coined and prominently used by Goldman Sachs in 2001. According to a paper published in 2005, Mexico and South Korea are the only other countries comparable to the BRICs, but their economies were excluded initially because they were considered already more developed. Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

Research Opportunity for Accounting Faculty and Doctoral Students
I think that accounting faculty and doctoral students could provide various types of health care research studies that could help the State of Vermont deal with this very creative and controversial initiative that's virtually certain to be passed in Vermont in 2011 without really knowing what the costs and financial risks are in the legislation. Many accounting and financing questions are unanswered at this point in time and will be studied in years to come.

This seems to be quite different from the universal health care law passed under the leadership of Mitt Romney when he was Governor of Massachusetts. Presumably Vermont intends to overcome the dire coverage and funding troubles plaguing the Massachusetts plan at the moment.

Vermont might even fund some well-prepared accounting and finance research proposals as well as provide databases to mine.

"Vt. House passes single-payer bill," by Dave Gram, Burlington Banner, March 24m 2011 ---
http://www.benningtonbanner.com/ci_17695099?source=rss_viewed

Every Vermonter could sign up for state-financed health insurance under a bill passed by the House on Thursday that would put the state on a path to a single-payer health care system by the middle of this decade.

Senate next

"This bill takes our state one step closer to a system that ensures that all Vermonters have access to the care they deserve and contains costs," House Speaker Shap Smith said shortly after the House passed the bill 92-49.

The measure now goes to the Senate, where it is expected to pass, but with some possible changes.

Gov. Peter Shumlin, who made single-payer health care a centerpiece of his gubernatorial campaign last year, also praised the legislation. He said it would make Vermont "the first state in the country to make the first substantive step to deliver a health care system where health care will be a right and not a privilege, where health care will follow the individual, not be a requirement of the employer, and where we’ll have an affordable system that contains costs."

Costs are an open question. The bill sets up a five-member state board to design a benefit package to be called Green Mountain Care, but doesn’t require the governor to propose a way to pay for it until 2013. That drew fire from minority Republicans in the House, who said the hard partof reform -- paying for it -- won’t be tackled until after Shumlin campaigns for a second two-year term in

. . .

The Shumlin administration and supporters of the bill need to address numerous uncertainties as the process goes forward. One concerns the more than 100,000 Vermonters who get health coverage from employers who are self-insured, meaning they assume the financial risks of coverage, and are chartered under federal law.

The House defeated a proposed amendment to allow those employers, among them the state’s largest, like IBM, to be exempt from paying taxes to support Green Mountain Care. Rep. Anne Donahue, R-Northfield, said that would leave them in a similar situation to parents who send their children to private schools, but pay taxes to support public ones.

Jensen Comment
One enormous problem faced by such a small state is that so many of its residents must go elsewhere for specialized medical care, including such medical centers as Dartmouth Hitchcock in New Hampshire and the various medical centers in Boston and Canada. Cost containment is more difficult when a provider of insurance cannot regulate the cost of services. Presumably Vermont does not want to deny low income people coverage that they cannot afford under current private insurance plans. This most likely will make coverage more costly than the costs currently being covered in private-company plans.

There are other questions such as whether the State of Vermont will pick up the supplemental Medicare insurance now provided by private companies such as Blue Cross Anthem. With such a small population (about 626,000 residents statewide), this can be troublesome when spreading the insurance risks among a small funding base (many residents are too young or too poor to pay any income taxes). One of the heavy hits taken by supplemental Medicare insurers is for the high cost of dying when older folks must be hospitalized for lengthy stays, often in intensive care units. CBS on Sixty Minutes claims the major issue with Medicare and its supplemental insurers is the "High Cost of Dying."

On November 22, 2009 CBS Sixty Minutes aired a video featuring experts (including physicians) explaining how the single largest drain on the Medicare insurance fund is keeping dying people hopelessly alive who could otherwise be allowed to die quicker and painlessly without artificially prolonging life on ICU machines.
"The Cost of Dying," CBS Sixty Minutes Video, November 22, 2009 ---
http://www.cbsnews.com/stories/2009/11/19/60minutes/main5711689.shtml?tag=mncol;lst;1  

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 25, 2011

For Some, Currency Hedging Is No Gain
by: Dana Mattioli And Chan R. Shoenberger
Feb 19, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Foreign Currency Exchange Rates, Hedging, International Accounting

SUMMARY: A number of companies are finding fees on options, forward and futures contracts too high-or reporting of hedging gains and losses too distracting-to justify the benefits of descreased risk expected in 2011. This assessment, based on recent reduction in worldwide currency volatility, is leading many to discontinue foreign exchange transaction and translation hedging activities.

CLASSROOM APPLICATION: The article is useful to introduce foreign exchange transactions, foreign currency translation, and hedging activities.

QUESTIONS: 
1. (Advanced) What types of contracts to entities with foreign operations enter into in order to hedge against fluctuations in currency values? Specifically describe a contract that a company with foreign sales may enter into, then describe a contract for companies expecting to make purchases in foreign currencies.

2. (Introductory) Into which of the above categories do you place Progress Software Corp., the company described in this article?

3. (Advanced) What are the differences among an option contract, a forward contract, and a futures contract? Which of these types of contracts did Progress Software use? What situation led the company to use this contract?

4. (Introductory) What trade off is Mr. Rick Reidy, Chief Executive of Progress Software, considering in deciding that he will "hold off this year" on entering into foreign currency hedging contracts?

5. (Advanced) Explain your understanding of the term "natural hedges."

6. (Advanced) What is the difference between a foreign currency transaction gain or loss and a financial statement translation gain or loss? Why might companies want to stop hedging against translation gains and losses but continue hedging against transaction gains and losses?

7. (Advanced) What is speculation in foreign currencies? Identify a company cited in the article that you think is engaging in speculation. Support your assessment.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"For Some, Currency Hedging Is No Gain," by Dana Mattioli And Chan R. Shoenberger, The Wall Street Journal, February 19, 2011 ---
http://online.wsj.com/article/SB10001424052748703803904576152442756363116.html?mod=djem_jiewr_AC_domainid

Progress Software Corp. is walking away from currency hedging, bucking a corporate practice that became commonplace in the wake of the global financial crisis. "This year the price is just too high for us," says Chief Executive Rick Reidy.

The Bedford, Mass., business-software developer, which gets 60% of its $529 million in annual revenue outside the U.S., is joining a small minority of multinationals abandoning or lessening their use of hedging.

Although companies have hedged currency risks for decades, widespread use began after the recession stopped the dollar's downward run and unleashed a period of sharp swings in foreign exchange rates. Companies with global operations rushed to embrace hedging instruments such as forward contracts, which let them lock in an exchange rate in the future at a fixed amount, and options, or the right to buy or sell a currency for a specific price at some future date.

Progress Software bought a currency option in 2010 after exchange-rate fluctuations the prior year caused its reported revenue to decline by $30 million. But with such options, essentially year-long insurance contracts, getting more expensive and currencies becoming less volatile, Mr. Reidy says he'll hold off this year.

"We are considering doing quarterly [contracts] that tend to be more reasonable," he says.

Companies that have stopped hedging exchange rates say they avoid the costs of hedging, which can be steep for thinly traded currencies or contracts that lock in rates for long periods of time. Others, such as Nissan Motor Co., which has a longstanding no-hedge policy, say diversified global operations, create a natural hedge by matching revenue to expenses in local currencies.

Autoliv Inc., a Stockholm-based seatbelt and airbag maker, earlier this month said it would continue to rely on natural hedges, such as its factories in China. Although its fourth-quarter European sales were down 6%, to $717 million, primarily on unfavorable exchange rates, Autoliv doesn't plan on purchasing forward contacts, a practice it stopped in 2004, Chief Financial Officer Mats Wallinsays.

Medical-products maker Becton Dickinson & Co. stopped hedging its so-called translational exposures—incurred when the company brings foreign currencies back to the U.S. and converts to dollars—starting in October, although it still hedges transactions. The cost of options used for currency hedging became too expensive a few years ago, says Chief Financial Officer David Elkins, and it began using forward contracts instead.

In its last fiscal year, Becton reported a roughly $31 million hedging loss compared with a $100 million hedging gain the prior year. Executives were spending too much time explaining hedges to investors, Mr. Elkins says. "We want to do away with that distraction."

Hedging risks are a growing issue for pharmaceutical investors, says Tony Butler, a managing director at Barclays Capital, who notes investors have asked him to detail individual companies' foreign exchange sensitivity. "There was an increasing discussion of [foreign exchange], away from the fundamentals of the business," he says.

Going cold turkey on hedging can lead to wide revenue fluctuations as exchange rates change. That isn't a great idea, said Jiro Okochi, chief executive of Reval, which provides software to help companies manage foreign exchange, commodities and interest rate risks.

Some investors look for that exposure, says Jeffrey Wallace, managing partner of Greenwich Treasury Advisors in Boulder, Colo. "The very large companies sometimes say to their shareholders, 'You bought me because you wanted global risk, and I'm going to give it to you.'"

For some companies, a switch away from currency hedging is actually a bet that a currency will move in a certain direction. Moscow-based Mobile TeleSystems stopped its currency hedging this year and won't hedge unless the Russian ruble starts to depreciate, says Alexey Kornya, the company's chief financial officer.

This differs from the company's strategy in 2009 and 2010, when volatility in the markets led the company to hedge heavily. About 90% of MTS's revenue is derived in rubles, but it is also exposed to other currencies in Eastern Europe, especially Ukraine, Armenia and Uzbekistan.

In 2009, the telecommunications operator hedged about $1.4 billion of its debt portfolio, says Mr. Kornya. In 2010, it only hedged $200 million of its U.S. dollar exposure and the company moved toward financing in rubles rather than dollars, he says. This year, Mr. Kornya says he doesn't see the need to hedge yet, but is keeping a close eye on the ruble's value. If the trade surplus began to diminish and the ruble depreciated, the company would take hedging actions, he says.

Continued in article

Bob Jensen's tutorials and videos on accounting for hedging transactions ---
http://www.trinity.edu/rjensen/caseans/000index.htm

"Lehman Brothers Deceived JPMorgan With 'Goat Poo' Assets, Lawsuit Says," Reuters via The Huffington Post, February 18, 2011 ---
http://www.huffingtonpost.com/2011/02/18/jpmorgan-says-lehman-brot_n_825406.html

Lehman Brothers and Barclays deceived JPMorgan Chase & Co with bad assets that the failed investment bank's own employees dubbed "goat poo," according to new court papers that escalate a legal battle between the financial firms.

JPMorgan filed new court claims in the case, contending that Lehman left it with $25 billion (£15.4 billion) in unpaid loans secured by undesirable assets like those left out of the sale to Barclays.

Lehman Brothers Holdings Inc. filed for bankruptcy on September 15, 2008 and then quickly sold its prize investment banking assets to Barclays Bank. JPMorgan had been Lehman's banker.

The court papers, filed in U.S. Bankruptcy Court in Manhattan on Thursday, said that Barclays and Lehman called certain Lehman assets "toxic waste" and "goat poo" and knowingly excluded them from their sale agreement.

A Lehman spokeswoman declined to make an immediate comment on the lawsuit. JPMorgan declined comment. A spokesman for Barclays declined to comment.

Thursday's filing revised a lawsuit that was first filed in December in response to Lehman's own $8.6 billion suit against JPMorgan. Lehman's suit, filed last May, accused JPMorgan of siphoning off collateral ahead of Lehman's bankruptcy filing.

Lehman employees wrote in emails that contrary to Lehman's and Barclays' portrayal of their deal to bankruptcy court as including all related assets, Barclays did not have to purchase certain "toxic waste" securities, JPMorgan contends. Those securities included certain Lehman commercial paper known as "RACERS" -- restructured asset certificates with enhanced returns.

Lehman employees also called these assets "goat poo" in emails, JPMorgan said in the lawsuit. According to the emails cited by JPMorgan, Lehman employees also said the balance sheet that the company had sent to bankruptcy court was wrong because it showed that Barclays was buying all of Lehman Brothers' positions.

Continued in article

Jensen Comments
And the Ernst & Young approval of Repo 105 and 108 transactions constituted RePoo!

Bob Jensen's threads on the Lehman scandals ---
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

Accounting Scandals
The funny thing is that I never looked up this item before now. Jim Mahar noted that it is a good link.

Accounting Scandals --- http://en.wikipedia.org/wiki/Accounting_scandals

Bob Jensen's threads on accounting scandals are in various documents:

Accounting Firms --- http://www.trinity.edu/rjensen/Fraud001.htm

Fraud Conclusion --- http://www.trinity.edu/rjensen/FraudConclusion.htm

Enron --- http://www.trinity.edu/rjensen/FraudEnron.htm

Rotten to the Core --- http://www.trinity.edu/rjensen/FraudRotten.htm

Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

American History of Fraud --- http://www.trinity.edu/rjensen/FraudAmericanHistory.htm

Fraud in General --- http://www.trinity.edu/rjensen/Fraud.htm

Business Week's rankings of the best part-time business programs (slide show, click on the arrows)   ---
http://images.businessweek.com/ss/09/11/1105_best_part_time_business_schools/index.htm?campaign_id=bschools_related

These are the Top 10
Rank 1 Worcester Polytechnic Institute
Rank 2 UCLA (Anderson)
Rank 3 UC Berkeley (Haas)
Rank 4 University of Nebraska
Rank 5 University of Michigan (Ross)
Rank 6 Elon University (Love)
Rank 7 Carnegie Mellon University (Tepper)
Rank 8 Rice University (Jones)
Rank 9 Indiana University Southeast
Rank 10 Drexel University (LeBow)

Jensen Comment
Interestingly, some of the top-ranked research business schools (like University of Texas at Austin, Chicago, Emory, USC, Case Western, Maryland, Wake Forest, and Southern Methodist) that also have part-time programs received lower ranks for their part-time programs. However, most received higher regional rankings.

I don't know how many part-time programs are ranked, but the lowest ranked university in the slide show has Rank 55.

I did not even know that some prestigious universities like Rice And Chicago even had part-time programs.

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

Some of your advisees might be somewhat interested in this
What Business Week thinks are the top 2011 business schools in Europe ---
http://www.businessweek.com/globalbiz/europe/special_reports/20110318european_bschools_2011.htm?link_position=link1

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

Google Public Data Explorer
Data visualizations for a changing world --- http://www.google.com/publicdata/home

Available Data Sets --- http://www.google.com/publicdata/directory

Bob Jensen's threads on Multivariate Data (including faces) ---
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm 

"Bing is Copying Your Clicks, Not Google's Results: Google's results can be accessed because Bing is snooping on IE users," by Tom Simonite, MIT's Technology Review, February 2, 2011 ---
http://www.technologyreview.com/blog/editors/26336/?nlid=4082

Jensen Comment
But IE users are using billions of Google searches. If we ignore price differentials is this a bit like getting almost new goods in yard sales that recently passed through retail dealers. Bing makes money for Microsoft from advertising. Seems like Microsoft is indirectly getting a free service from Google whether Microsoft will admit it or not.

See http://googleblog.blogspot.com/2011/02/microsofts-bing-uses-google-search.html

"B-School Deans Worth Following On Twitter," by John A. Byrne, Poets and Quants, February 2, 2011 ---
http://poetsandquants.com/2011/01/25/b-school-deans-who-tweet/

"The Pulse: Faculty and Social Media," Inside Higher Ed, February 9, 2011 ---
http://www.insidehighered.com/news/2011/02/09/qt#250726

The February 2011 edition of The Pulse, our monthly technology podcast by Rod Murray, features an interview with Brian Hughes, associate director of design, publishing and service at Teachers College's Library at Columbia University. He discusses the best ways to get faculty members comfortable with using social media in teaching. Find out more about The Pulse, and listen to selections from its archive, here.

Bob Jensen's links to blogs and social networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's links to accounting news ---
http://www.trinity.edu/rjensen/AccountingNews.htm

Wow:  A Must Read for Sure

"Cooking the Books Why do firms issue financial misstatements? Based on the Research of Jap Efendi, Anup Srivastava And Edward P. Swanson," Kellog Insight, February 2011 ---
http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/cooking_the_books/#When:18:17:07Z

When the dot-com bubble of the late 1990s sent stock prices soaring, something else soared, too: CEOs’ perceptions of their net wealth. That theory alone may explain a large part of the psychology and behavior of why some corporate managers allowed their accounting books to get cooked.

On March 10, 2000, the dot-com bubble burst abruptly and as a result many firms had to issue accounting restatements well into the next decade. Let’s face it, a lot of people lost a lot of money, and not just the CEOs who watched large portions of their own stock holdings in their own companies vaporize. Let’s also not forget the chasm of broken trust that opened between the business community and the public.

So what happened? Did the CEOs transmogrify into greed-poisoned crooks? That answer may satisfy our human desire for a villain, but that is not exactly how things played out, says Anup Srivastava, an assistant professor of accounting information and management at the Kellogg School of Management.

While most firms were not guilty of accounting irregularities or criminal activity, a few were. Srivastava and Jap Efendi, an assistant professor at University of Texas at Arlington, and Edward P. Swanson, a professor at Texas A&M, dug into the problem of overvaluation of firms’ equity, and they developed several reasons why CEOs may have overseen the release of false or misleading financial statements. At the heart of the matter was a confluence of CEO compensation structuring with a little idea (holding large implications) about how very large incentives can cause normally law-abiding citizens to step outside the law’s bounds.

Taking Risks Srivastava explains that in 2005, Harvard professor emeritus and noted financial economist Michael C. Jensen wrote a paper titled “Agency costs of overvalued equity,” which was published in the journal Financial Management. “In this paper, Jensen argues that managers are normal human beings but when the stakes are very high, normal human beings begin making extremely risky decisions,” Srivastava says. “Our paper examining the overvaluation of a firm’s equity during the dot-com years is the only paper that has tested his theory.”

When Srivastava says a firm is overvalued, he is referring to extreme situations where the stock may be worth 100 to 1,000 percent of its fundamental value. When this happens, the firm’s fundamentals cannot justify the stock price and so managers begin to “do things.”

“They start taking extreme risks. They make acquisitions and play with their accounting numbers,” Srivastava explains. “This is very destructive to society. Decisions based on overvalued equity are not good for society because they lead to a loss of wealth.”

Srivastava says that an important trend in CEO compensation over the past two decades has been an increasing emphasis placed on company stock options. When this collides with market overvaluation, CEOs may find that their in-the-money stock options balloon into the stratosphere to nearly one hundred times the value of their salary.

“Let’s say their in-the-money stock options are worth a billion dollars now,” Srivastava says. “They may start to think, ‘I’m a billionaire.’” By confusing their overinflated stock options with their net wealth, these CEOs begin to make riskier and riskier decisions, perhaps to preserve their perceived wealth. It is a fragile zone to live within; a 10 percent decline in their company’s stock price could spell out a 50 percent decline in their net wealth.

“In this scenario, they will do anything and everything to keep the stock values high,” Srivastava says. But this motivation may also extend beyond their own personal gain; they may want to maintain the status quo by not liquidating their holdings as to avoid attention from the Securities and Exchange Commission or their investors regarding the overvaluation problem.

“What we highlight in our paper is the fact that when equity is overvalued, and overvaluation in equity results in large in-the-money options for managers, then managers have incentives to take very risky accounting decisions,” Srivastava says.

Show Me the Money The researchers used ninety-five sample firms—pinpointed from a Government Accountability Office (GAO) database of companies that restated a previously issued financial statement—and compared these to ninety-five control firms that had not issued restatements but were matched in terms of size, industry, and asset values. They then examined the firms that announced a restatement between January 1, 2001, and June 30, 2002, for accounting errors in prior years, extending back to April 1995. (Firms often announce a restatement one to two years after the year being restated, e.g., a restatement announced in January 2001 could be for the accounting year 1999 or 2000.) The team used press releases and annual reports to discover the exact year of the misstatement, a detail the GAO database lacks.

For example, say an Internet company called WidgetTechs tanked in the 2000 bust and announced a restatement of its accounts later. Srivastava and his team basically poked through records to find WidgetTechs’ historic stock prices and its compensation package. Then they dissected this data to look for trends that associated aspects of compensation to time points right before, during, and after accounting irregularities, or criminal activity, was said to have occurred.

By doing this, Srivastava and his colleagues found that the best predictors of accounting misstatements turned out to be in-the-money values of stock options held by CEOs. To illuminate the magnitude of in-the-money option holdings, they found the average holdings for CEOs at restating firms was approximately $50 million, which greatly exceeded the average of $9 million at matched firms that did not announce a restatement. Stated another way, the CEOs of restating firms held options with in-the-money value that was forty-six times their salary, compared with options six times the salary of CEOs in control firms.

The team then parsed the restating firms into two main categories based on accounting issue classifications assigned by the GAO—non-malfeasance and malfeasance—that describe the degree of seriousness of the firm’s accounting error. (A malfeasance category correlates to fraudulent behavior or an SEC-induced restatement, while a non-malfeasance category correlates to a non-criminal, less serious issue or irregularity.)

The researchers found that the in-the-money value of options for CEOs at restating firms with evidence of accounting malfeasance was even higher, averaging approximately $130 million (compared to an average of $50 million for all restating firms).

One of the study’s key insights centered on the degree to which options were in-the-money. The analysis detected no difference between the value or number of options issued by restatement and control firms to their CEOs. In other words, the larger in-the-money values of restatement firms were not due to the number of options held but the degree to which the firm’s stock options were in-the-money. Within both the restating firms and the control firms, the research team analyzed CEO compensation to look for predictors that a firm would issue a restatement. They tested the base salary, bonus, options grant, in-the-money stock options, restricted stock grants, and restricted stock holdings. The only statistically significant variable turned out to be in-the-money options.

Continued in article

February 20, 2011 reply from Amy Dunbar

A colleague told me:

“It’s been a few years since that paper was published in JFE.  There is a follow-up study published in JAR that questions the results, claiming that once you properly address the endogeneous nature of compensation plans the link between option compensation and misstatements disappears.”

Amy Dunbar

UConn

Jensen Comment
I'm not sure which publication Amy is referring to, but I don't think the following JAR paper is necessarily a definitive rebuttal of the JFE paper ---
http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2009.00361.x/abstract
Perhaps Amy has some other rebuttal in mind.

Some recent financial media outlets totally ignore any JAR rebuttal (2011) ---
http://www.bnet.com/blog/business-research/another-reason-to-cut-executives-8217-stock-options/857
So much for efficiency in the market for information.

Srivastava himself seems to still ignore the JAR rebuttal.(2011)
Weird?
http://news.morningstar.com/articlenet/SubmissionsArticle.aspx?submissionid=111729.xml&part=2

Bob Jensen's recipes for cooking the books ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

Pentatonic Scale --- http://en.wikipedia.org/wiki/Pentatonic_scale
World Science Festival 2009: Bobby McFerrin Demonstrates the Power of the Pentatonic Scale ---
http://www.youtube.com/watch?v=ne6tB2KiZuk

Jensen Comment
This illustrates one way to get an audience involved in learning audience involved in learning.

It also illustrates a possible student assignment in which students are asked to write a conceptual framework definition of an accounting concept such as a "liability." Would students learn something interesting by rewriting the following paragraphs in the context of the "liability" concept by also conceptualizing and maybe leaving out mezzanine debt and complicated conversion features? They could then expand upon the pure concept of a liability by adding dissonant intervals between differing pitches of debt.
.
Paragraph 1
The ubiquity of pentatonic scales, specifically anhemitonic (without semitones) modes, can be attributed to the total lack of the most dissonant intervals between any pitches; there are neither any minor seconds (and therefore also no complementary major sevenths) nor any tritones. This means any pitches of such a scale may be played in any order or combination without clashing.


Paragraph 2
The pentatonic scale plays a significant role in music education, particularly in Orff-based methodologies at the primary/elementary level. The Orff system places a heavy emphasis on developing creativity through improvisation in children, largely through use of the pentatonic scale. Orff instruments, such as xylophones, bells and other metallophones, use wooden bars, metal bars or bells which can be removed by the teacher leaving only those corresponding to the pentatonic scale, which Carl Orff himself believed to be children's native tonality.Children begin improvising using only these bars, and over time, more bars are added at the teacher's discretion until the complete diatonic scale is being used. Orff believed that the use of the pentatonic scale at such a young age was appropriate to the development of each child, since the nature of the scale meant that it was impossible for the child to make any real harmonic mistakes.

Mr. Buffett, who has interests in both companies, claimed there was another agenda (aside from hedging with derivatives). “The reason many of them do it (invest in derivative contracts) is that they want to smooth earnings,” he said, referring to the idea of trying to make quarterly numbers less volatile. “And I’m not saying there’s anything wrong with that, but that is the motivation.”
"Derivatives, as Accused by Buffett," by Andrew Ross Sorkin, The New York Times, March 14, 2011 ---
http://dealbook.nytimes.com/2011/03/14/derivatives-as-accused-by-buffett/?ref=business

Mr. Buffett once described derivatives as “financial weapons of mass destruction.” Yet some of his most ardent fans have quietly raised eyebrows at his pontifications, given that he plays in the opaque market. In the fourth quarter alone, Berkshire made $222 million on derivatives. TheStreet.com published a column last spring with the headline: “Warren Buffett Is a Hypocrite.”

¶His comments, which were released last month by the financial crisis commission, come as the government is writing rules for derivatives as part of the Dodd-Frank financial regulatory overhaul. And the statements could influence the debate.

¶Mr. Buffett appeared to backpedal from his oft-quoted line, explaining: “I don’t think they’re evil per se. It’s just, they, I mean there’s nothing wrong with having a futures contract or something of the sort. But they do let people engage in massive mischief.”

¶The problems arise, Mr. Buffett said, when a bank’s exposure to derivatives balloons to grand proportions and uninformed investors start using them.

¶It “doesn’t make much difference if it’s, you know, one guy rolling dice against another, and they’re doing $5 a throw. But it makes a lot of difference when you get into big numbers.”

¶What worries him most is the big financial institutions that have millions of contracts. “If I look at JPMorgan, I see two trillion in receivables, two trillion in payables, a trillion and seven netted off on each side and $300 billion remaining, maybe $200 billion collateralized,” he said, walking through his thinking. “That’s all fine. But I don’t know what discontinuities are going to do to those numbers overnight if there’s a major nuclear, chemical or biological terrorist action that really is disruptive to the whole financial system.”

¶“Who the hell knows what happens to those numbers?” he asked. “I think it’s virtually unmanageable.”

¶Mr. Buffett defended Berkshire Hathaway’s use of derivatives, arguing that the company maintains a limited amount. At the time of the interview, the company had only about 250 derivative contracts. (It’s now down to 203.) “I want to know every contract, and I can do that with the way we’ve done it. But I can’t do it with 23,000 that a bunch of traders are putting on.”

¶He noted that when Berkshire bought General Re in 1998, the reinsurance company had 23,000 derivative contracts. “I could have hired 15 of the smartest people, you know, math majors, Ph.D.’s. I could have given them carte blanche to devise any reporting system that would enable me to get my mind around what exposure that I had, and it wouldn’t have worked,” he said to the government panel. “Can you imagine 23,000 contracts with 900 institutions all over the world with probably 200 of them names I can’t pronounce?” Berkshire decided to unwind the derivative deals, incurring some $400 million in losses.

¶Mr. Buffett said he used derivatives to capitalize on discrepancies in the market. (That’s what other investors must think they are doing — just not as successfully.)

¶Perhaps the most insightful nugget in the interview was Mr. Buffett’s explanation of why corporations use derivatives — and why they probably shouldn’t.

¶Many companies, as diverse as Coca-Cola and Burlington Northern, argue that they employ derivatives to hedge their risk.

¶The United States-based Coca-Cola tries to protect against fluctuations in currencies since it does business around the world. Burlington Northern, the railroad giant, uses the investments to limit the effect of fuel prices.

¶Mr. Buffett, who has interests in both companies, claimed there was another agenda. “The reason many of them do it is that they want to smooth earnings,” he said, referring to the idea of trying to make quarterly numbers less volatile. “And I’m not saying there’s anything wrong with that, but that is the motivation.”

¶The numbers all even out eventually, he cautioned, so derivatives don’t really make much difference in the long term.

¶“They’re going to lose as much on the diesel fuel contracts over time as they make,” he said of Burlington Northern. “I wouldn’t do it.”

Continued in article

March 16, 2011 reply from Kimberly Shanahan

This is great reading - if you follow one of the links in the article, it shows you the transcript of Mr. Buffet's interview with the Financial Crisis Inquiry Commission. I had not seen it previously. Also, a great read.

Thanks Bob for forwarding!

Kimberly Shanahan

Bob Jensen's threads on creative accounting, smoothing, and earnings management ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

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

Teaching Case on Executive Compensation and Stock Options

From The Wall Street Journal Accounting Weekly Review on March 4, 2011

J&J CEO's 2010 Bonus Cut by 45%
by: Peter Loftus
Feb 28, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Compensation, Executive Compensation, Stock Options

SUMMARY: Johnson & Johnson's chief executive's pay has been reduced following a year of product recalls due to manufacturing problems. The company does not acknowledge that the pay reduction is related to this specific problem, but notes that the compensation review encompasses many company performance factors.

CLASSROOM APPLICATION: The article is useful to introduce compensation package issues and accounting for these plans.

QUESTIONS: 
1. (Introductory) From where did the reporter get the information in this article about bonus pay and other compensation awarded to the Johnson & Johnson (J&J) chief executive William Weldon?

2. (Introductory) Who evaluated William Weldon's performance in 2010? On what basis did they do so? Why was Mr. Weldon's overall compensation reduced in 2010 relative to 2009?

3. (Introductory) What items comprise Mr. Weldon's compensation package?

4. (Advanced) Access the Johnson & Johnson financial statements filed on Form 10-K with the SEC on and available at http://www.sec.gov/cgi-bin/viewer?action=view&cik=200406&accession_number=0000950123-11-018128&xbrl_type=v# Proceed to the Notes to Financial Statements, No. 17. Common Stock, Stock Option Plans, and Stock Compensation Plans. Summarize the information found in this footnote.

5. (Advanced) From where does the company obtain the shares of its common stock needed to be issued to executives and employees who exercise their stock options?

6. (Advanced) Over what range of stock prices may J&J option holders exercise their options? How does that compare to the company's current stock price? Over how long a time period may employees exercise these options?

7. (Advanced) What is restricted stock? How does J&J satisfy obligations to issue shares of stock to its executives and employees under these plans?
 

Reviewed By: Judy Beckman, University of Rhode Island

"J&J CEO's 2010 Bonus Cut by 45%," by: Peter Loftus, The Wall Street Journal, February 28, 2011 ---
http://online.wsj.com/article/SB10001424052748704150604576166313696650734.html?mod=djem_jiewr_AC_domainid

Johnson & Johnson slashed Chief Executive William Weldon's performance bonus by 45% for 2010, a year in which the health-care giant issued a series of product recalls due to manufacturing-quality lapses.

The recalls are continuing, with the company saying this past week that certain packages of the decongestant Sudafed were being recalled because of a misprint on product directions.

In an annual report filed with the Securities and Exchange Commission Friday, J&J said Mr. Weldon's performance bonus for 2010 was $1.98 million, down from $3.6 million for 2009. The bonus, which was approved by the compensation committee of J&J's board in January, is paid out in the form of 85% cash and 15% in J&J shares.

In addition, the New Brunswick, N.J., company granted fewer stock options, restricted share units and nonequity incentive compensation units to Mr. Weldon this year than last year. He was granted 560,691 stock options in January, with an exercise price of $62.20, versus 586,873 options last year with an exercise price of $62.62.

J&J did, however, boost Mr. Weldon's base salary for 2011 by 3% to $1.9 million, according to the SEC filing. The year-earlier figures were contained in last year's annual report.

J&J spokeswoman Carol Goodrich said the board's compensation committee evaluated Mr. Weldon and other senior executives against a set of financial and strategic objectives that will be disclosed in a proxy statement expected to be filed with the SEC in March. She said the objectives are based on a pay-for-performance philosophy, but declined to be more specific.

Ms. Goodrich declined to say whether the reduction in Mr. Weldon's performance bonus was related to the product recalls.

Mr. Weldon's total compensation was valued at $30.8 million for 2009, the last full year for which total compensation was reported. The figure included salary, bonus, changes in pension value and other items.

Continued in article

Bob Jensen's threads on outrageous executive compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

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

Two from the Journal of Accountancy on March 4, 2011

XBRL TAGS UPDATED
> SEC OKs New GAAP Taxonomy for XBRL
March 1, 2011
The SEC approved the 2011 U.S. GAAP Financial Reporting Taxonomy for creating XBRL-tagged interactive data files. The new taxonomy contains
updates for accounting standards and other improvements to the official taxonomy previously used by SEC issuers.
http://email.aicpa.org/cgi-bin15/DM/t/ehmt0bAne80GPA0tBN0E5

MONEY LAUNDERING
> FinCEN Amends Rules on FBAR Filing Requirements
Feb. 24, 2011
To further its mission of combating money laundering and preventing financial fraud, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) issued final regulations that amend certain aspects of the Report of Foreign Bank and Financial Accounts (FBAR) filing
requirements such as whether an account is foreign and therefore reportable as a foreign financial account and the definition of key terms like "signature or other authority."
http://email.aicpa.org/cgi-bin15/DM/t/ehmt0bAne80GPA0tBS0EB

Property Tax Relief for the Rich and Famous
"Tax breaks on real estate deals for people like A-Rod cost city 900M a year," by Juan Gonzalez, NY Daily News, February 25, 2011 ---
http://www.nydailynews.com/ny_local/2011/02/25/2011-02-25_tax_breaks_on_real_estate_deals_for_people_like_arod_cost_city_900m_a_year.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+nydnrss/home+%28Home%29

Yankees star Alex Rodriguez will pay virtually no property tax for a $6 million apartment he is buying on the upper West Side.

Rodriguez will be billed around $1,200 this year in real estate tax for his 3,000-square-foot, five-bedroom penthouse with spectacular views of the Hudson River.

Over the next 10 years Rodriguez and his fellow residents will continue to receive huge discounts on their tax, a city housing official said.

For Rodriguez, a full tax bill would be at least $60,000 annually, the latest city assessment records show.

A spokeswoman for Extell, the company that built the 2-year-old luxury Rushmore Towers near the West Side Highway, declined to discuss the taxes on the slugger's new bachelor pad.

But the only two penthouses that went into contract this month at the Rushmore, each of which was listed at more than $6 million, have been assessed at a little over $100 per month in taxes, one real estate expert told the Daily News.

So how is it possible that tens of thousands of ordinary city residents struggle each year with soaring tax bills for their co-ops, condos and homes, while the Yankees' $33-million-a-year star gets to pay next to nothing?

Well, Rodriguez and many other well-heeled New Yorkers have learned to take advantage of a little-known tax abatement program that has existed for decades.

The politicians and real estate insiders call it the "421A" program. It grants as much as a 98% percent tax abatement for up to 25 years to condo owners in newly built housing.

The bulk of the 421A benefit has gone to luxury housing in Manhattan, though a few reforms by City Hall and the Legislature in 2007 at least required developers to build 20% affordable housing to qualify for the tax abatement.

This year alone, the 421A program will cost our city more than $900 million in lost revenues, the Independent Budget Office says.

That's money that could prevent layoffs of firefighters and teachers. That could fund senior citizen centers and pay for after-school programs.

Continued in article

Wow:  A Must Read for Sure

"Cooking the Books Why do firms issue financial misstatements? Based on the Research of Jap Efendi, Anup Srivastava And Edward P. Swanson," Kellog Insight, February 2011 ---
http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/cooking_the_books/#When:18:17:07Z

When the dot-com bubble of the late 1990s sent stock prices soaring, something else soared, too: CEOs’ perceptions of their net wealth. That theory alone may explain a large part of the psychology and behavior of why some corporate managers allowed their accounting books to get cooked.

On March 10, 2000, the dot-com bubble burst abruptly and as a result many firms had to issue accounting restatements well into the next decade. Let’s face it, a lot of people lost a lot of money, and not just the CEOs who watched large portions of their own stock holdings in their own companies vaporize. Let’s also not forget the chasm of broken trust that opened between the business community and the public.

So what happened? Did the CEOs transmogrify into greed-poisoned crooks? That answer may satisfy our human desire for a villain, but that is not exactly how things played out, says Anup Srivastava, an assistant professor of accounting information and management at the Kellogg School of Management.

While most firms were not guilty of accounting irregularities or criminal activity, a few were. Srivastava and Jap Efendi, an assistant professor at University of Texas at Arlington, and Edward P. Swanson, a professor at Texas A&M, dug into the problem of overvaluation of firms’ equity, and they developed several reasons why CEOs may have overseen the release of false or misleading financial statements. At the heart of the matter was a confluence of CEO compensation structuring with a little idea (holding large implications) about how very large incentives can cause normally law-abiding citizens to step outside the law’s bounds.

Taking Risks Srivastava explains that in 2005, Harvard professor emeritus and noted financial economist Michael C. Jensen wrote a paper titled “Agency costs of overvalued equity,” which was published in the journal Financial Management. “In this paper, Jensen argues that managers are normal human beings but when the stakes are very high, normal human beings begin making extremely risky decisions,” Srivastava says. “Our paper examining the overvaluation of a firm’s equity during the dot-com years is the only paper that has tested his theory.”

When Srivastava says a firm is overvalued, he is referring to extreme situations where the stock may be worth 100 to 1,000 percent of its fundamental value. When this happens, the firm’s fundamentals cannot justify the stock price and so managers begin to “do things.”

“They start taking extreme risks. They make acquisitions and play with their accounting numbers,” Srivastava explains. “This is very destructive to society. Decisions based on overvalued equity are not good for society because they lead to a loss of wealth.”

Srivastava says that an important trend in CEO compensation over the past two decades has been an increasing emphasis placed on company stock options. When this collides with market overvaluation, CEOs may find that their in-the-money stock options balloon into the stratosphere to nearly one hundred times the value of their salary.

“Let’s say their in-the-money stock options are worth a billion dollars now,” Srivastava says. “They may start to think, ‘I’m a billionaire.’” By confusing their overinflated stock options with their net wealth, these CEOs begin to make riskier and riskier decisions, perhaps to preserve their perceived wealth. It is a fragile zone to live within; a 10 percent decline in their company’s stock price could spell out a 50 percent decline in their net wealth.

“In this scenario, they will do anything and everything to keep the stock values high,” Srivastava says. But this motivation may also extend beyond their own personal gain; they may want to maintain the status quo by not liquidating their holdings as to avoid attention from the Securities and Exchange Commission or their investors regarding the overvaluation problem.

“What we highlight in our paper is the fact that when equity is overvalued, and overvaluation in equity results in large in-the-money options for managers, then managers have incentives to take very risky accounting decisions,” Srivastava says.

Show Me the Money The researchers used ninety-five sample firms—pinpointed from a Government Accountability Office (GAO) database of companies that restated a previously issued financial statement—and compared these to ninety-five control firms that had not issued restatements but were matched in terms of size, industry, and asset values. They then examined the firms that announced a restatement between January 1, 2001, and June 30, 2002, for accounting errors in prior years, extending back to April 1995. (Firms often announce a restatement one to two years after the year being restated, e.g., a restatement announced in January 2001 could be for the accounting year 1999 or 2000.) The team used press releases and annual reports to discover the exact year of the misstatement, a detail the GAO database lacks.

For example, say an Internet company called WidgetTechs tanked in the 2000 bust and announced a restatement of its accounts later. Srivastava and his team basically poked through records to find WidgetTechs’ historic stock prices and its compensation package. Then they dissected this data to look for trends that associated aspects of compensation to time points right before, during, and after accounting irregularities, or criminal activity, was said to have occurred.

By doing this, Srivastava and his colleagues found that the best predictors of accounting misstatements turned out to be in-the-money values of stock options held by CEOs. To illuminate the magnitude of in-the-money option holdings, they found the average holdings for CEOs at restating firms was approximately $50 million, which greatly exceeded the average of $9 million at matched firms that did not announce a restatement. Stated another way, the CEOs of restating firms held options with in-the-money value that was forty-six times their salary, compared with options six times the salary of CEOs in control firms.

The team then parsed the restating firms into two main categories based on accounting issue classifications assigned by the GAO—non-malfeasance and malfeasance—that describe the degree of seriousness of the firm’s accounting error. (A malfeasance category correlates to fraudulent behavior or an SEC-induced restatement, while a non-malfeasance category correlates to a non-criminal, less serious issue or irregularity.)

The researchers found that the in-the-money value of options for CEOs at restating firms with evidence of accounting malfeasance was even higher, averaging approximately $130 million (compared to an average of $50 million for all restating firms).

One of the study’s key insights centered on the degree to which options were in-the-money. The analysis detected no difference between the value or number of options issued by restatement and control firms to their CEOs. In other words, the larger in-the-money values of restatement firms were not due to the number of options held but the degree to which the firm’s stock options were in-the-money. Within both the restating firms and the control firms, the research team analyzed CEO compensation to look for predictors that a firm would issue a restatement. They tested the base salary, bonus, options grant, in-the-money stock options, restricted stock grants, and restricted stock holdings. The only statistically significant variable turned out to be in-the-money options.

Continued in article

Bob Jensen's recipes for cooking the books ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

Video:  The manufacturing of a Southwest Airlines jetliner (Florida One) --- http://www.youtube.com/watch_popup?v=zKnsyYbfC60&feature=popular
This short video might be used to have students identify direct mfg. costs, indirect mfg. costs, inventory costs, overhead expenses, etc.
The video also illustrates how selling and administrative expenses can become direct costs in the supply chain. For example, GE's selling and administrative expenses and profits factored into the price of an engine become direct materials  inventory costs in Boeing's airplane direct materials inventory.

Thus the "cost" of an engine purchased by Boeing from GE might contain many non-manufacturing costs and profits accumulated in the supply chain. However, each engine is a fully developed direct material component in this video such that in this assembly line the entire cost of the engine is a direct cost of the airliner being assembled. This would not necessarily be the case if Boeing also manufactured the engine.

If Boeing has a standard cost system, the "standard cost" of one airplane thus varies regarding what components such as engines are manufactured by Boeing versus what components are purchased from outside vendors and are merely assembled by Boeing. This explains why standard costs of finished goods inventory in some companies cannot be compared with standard costs of identical finished goods inventory in other more fully integrated manufacturing companies. What becomes capitalized cost versus period expenses thus varies along alternative supply chains. This also matters to the IRS since the timing of income tax collections varies with alternative supply chains.

"Bing's Travel Search, So Much Better Than Google, Gets Even Better," by Marshall Kirkpatrick, ReadWriteWeb, February 25, 2011 ---
http://www.readwriteweb.com/archives/bings_travel_search_so_much_better_than_google_get.php

Google does almost nothing interesting in travel search. Bing offers a much more compelling travel search experience and today added a new little feature that makes me want to use it even more.

Search on Bing for the phrase "fly to..." and the name of a major destination city and you will now see an automatic display of the best dates to fly from where you are to that place, with the lowest price for a round trip ticket and advice about whether the price is likely to go up or down if you waited to buy the ticket later. It's really cool.

Bob Jensen's travel helpers ---
http://www.trinity.edu/rjensen/Bookbob3.htm#Travel

History of Quantitative Finance
"Four features in appreciation of the life and work of Benoit Mandelbrot," Simoleon Sense, February 3, 2011 ---
http://www.simoleonsense.com/four-features-in-appreciation-of-the-life-and-work-of-benoit-mandelbrot/

JAR is providing free access to the following paper
"The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity," by Hollis Ashbaugh-skaife, Daniel W. Collins, William R. Kinney, and Ryan Lafond, Journal of Accounting Research, December 2008 ---
http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2008.00315.x/abstract
Full article --- http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2008.00315.x/full

ABSTRACT

The Sarbanes-Oxley Act (SOX) mandates management evaluation and independent audits of internal control effectiveness. The mandate is costly to firms but may yield benefits through lower information risk that translates into lower cost of equity. We use unaudited pre–SOX 404 disclosures and SOX 404 audit opinions to assess how changes in internal control quality affect firm risk and cost of equity. After controlling for other risk factors, we find that firms with internal control deficiencies have significantly higher idiosyncratic risk, systematic risk, and cost of equity. Our change analyses document that auditor-confirmed changes in internal control effectiveness (including remediation of previously disclosed internal control deficiencies) are followed by significant changes in the cost of equity that range from 50 to 150 basis points. Overall, our cross-sectional and intertemporal change test results are consistent with internal control reports affecting investors' risk assessments and firms' cost of equity.

Also see
http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2010.00388.x/abstract

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

“Assume that you make the personal decision that, over the next 12 months, you would like to become a slightly better teacher. Maybe it was your Valentine's Day resolution for 2011. Let’s assume, for example, that you currently view yourself as a B teacher and you’d like to feel like a B+ teacher by this day in 2012. Seems like a reasonable goal. My question is this: What would be the most important thing that would keep you from achieving that goal? I’m just looking for one thing but I’ll accept more than one thing. I’m not asking for a lot of thinking—just tell me what comes to your mind right off the top of your head.

“Notice that I didn't ask what keeps most people from getting better over the next 12 months -- I want to know what would keep you from getting better over the next 12 months.”

What was the purpose of this question? That is simple – it seems to me that if we come face to face with the thing that is holding us back we can decide if we really want to be held back in that way. I’m a big believer that self-reflection can make us better (in many, many ways).

So, how would you have answered my question? Be honest with yourself—what is keeping you from being a better teacher over the next 12 months? Once you have identified your own personal wall, you can decide whether you are willing to be limited in that way. Maybe you are but maybe not. You can’t address the wall preventing you from going forward if you never identify it.

Here’s what my colleagues had to say (I’m going to paraphrase these a bit). Maybe some of these apply to you. Maybe they will make you think more about your own teaching and what really does prevent you from getting better over the next 12 months.

I’ll let you guess which one of these I wrote.

1---Lack of willpower to review every lecture carefully before class, when I might tell myself I already know the material well.

2---If something is working (albeit not as successfully as I would like), it is difficult to try something new for fear that it will get worse. That is, my natural reaction is to dig in and do what I’ve been doing more intently rather than make changes that have an uncertain result.

3---The quality of my teaching is directly related to the amount of time that I put into it. It is my opinion that to be an effective teacher most people need just two things: 1.) a real desire to be an effective teacher; and 2.) the willingness to put the time into it that is required. If you are truly committed to being an effective teacher (i.e. you want to improve from a B to a B+), then you’ve met the first criterion. All you really need then is a willingness to put in the time. The time to prepare more for each and every class, the time to meet with students during and outside of office hours, the time to create materials (problem sets, extra questions, study materials, etc.) to supplement the class. So the only thing that really “prevents” me from improving my own teaching is that I don’t put in the extra time. Why not? Every extra hour I devote to teaching is an extra hour I cannot spend on something else. One less hour on research. One less hour on committee/service work. One less hour with my family.

4---I think the lack of feedback that I get from the students on what works and what doesn’t would be the thing.

5---For me, the most difficult part of the teaching process is being able (or maybe willing) to be well prepared for each and every class. When I really prepare, class usually goes well. It is just hard to take the time to be that well prepared on a very consistent basis.

6---I think at this point in my career I have taught so many courses for the first time that I haven’t been able to fully develop any course. It helps me to see what works and then make changes and try different methods. So I would say too many preps too close in time would prevent me from achieving that goal. Also, there is always the issue of finding that perfect balance between the time spent on research and teaching.

7---If I push my students to do better, they will start coming by and asking questions and wanting assistance and I just don’t have the time necessary to do that. I’d really like for them to do better without me having to do any additional work.

8---I am pulled in so many directions and believe if I had more dedicated time to focus on teaching techniques--rather than on completing tasks--then I would be a better teacher.

9---The weight and importance we put on the teaching effectiveness questions found on the student course evaluations in combination with the three-year evaluation window. This greatly reduces my incentive to experiment with new ideas and teaching techniques.

10---I don’t seem to know what I might do to improve or change. Thus, I am not certain how to get better.

11---I have discovered that, for many things in life, the closer you get to the ideal, the more effort it takes to squeeze out the last little bit of excellence. It is easy to be average, quite a bit harder to get to 90%, but that last 10% is harder than the entire first 90%. And the last 5% is harder than the first 95% and so on asymptotically approaching 100% (whatever that is). I have had semesters where I KNOW I wasn’t at my best and I’ve had times that I knew I was close to doing as well as I can do. The truth is that the students don’t really notice – or, more accurately, they don’t appreciate that last 10% as much as they do the first 90%. I put in a good bit of time and energy already and probably get 85-90% of what I’m capable of consistently. On the other hand, reviewers for journals and my scholarly colleagues DO notice that last 5% effort. Similarly, I think my colleagues here do as well when we speak of school and university service work. I’m also confident that my friends and family notice my investments in them as I consider work/life balance. With this in mind, if I have an extra hour or two (my most scarce resource), where do I invest that time (i.e., marginal investment). Should I put it into making improvements to my classroom work (likely to go largely unnoticed) or should I put it into making my scholarship, university or family life better (likely to be noticed and sincerely appreciated)? So, my greatest obstacle to improved teaching is the competing demands and the return I get out of investments in those projects relative to the returns I get from teaching.

12---First -- Lack of knowledge. For example, I would like to help my students write better, but I really don’t know how to do it. Second -- Fear of failure. I’m a B teacher and I have an extremely risk-averse personality. Any change that has the potential to improve the class also has the potential to mess up what is already working reasonably well.

13---My spontaneous answer is not being able to “read” the student’s learning process as well as I would like to. Some students seem to be doing fine when you interact with them but then their exams and assignments disappoints you. Other students seem inactive but they surprise you when they deliver strong exam results and great assignments. Thus, not fully understanding the student’s learning process might be what hinders me from reaching the next level as a lecturer.

14---The way to improve teaching is to know your students just slightly beyond their names (for example, know their major or graduation year or area where they are from…nothing that is especially difficult to find out) because then the teacher can engage them in class because they have become more “real” to you. What will prevent me from doing it is the fact that it is so easy to not do it and it sounds so trivial to be beneficial.

15---For me, the pressure put on the teaching effectiveness questions on the teaching evaluations. I often feel that I am at the mercy of the students and their push-back.

16---It seems that no matter what attempts I make, if it requires the students to “get into it”, they resist. I sometimes feel like we have established an unrealistic, romanticized vision of what our student body is really like. As a result, perhaps I have unrealistic expectations of their intrinsic interest in engaging in the learning process. Or maybe the problem is that I am approaching this the wrong way.

17---I don’t think there is anything in my way other than I don’t listen enough. Sometimes we get into our routine, thinking that what we have done in the past is still as good as it once was – and don’t listen or respond when change is called for. I also have to constantly remind myself that teaching is ONLY about student learning. It doesn’t matter if students like me or don’t, it doesn’t matter if I’ve been fabulously entertaining or not – all that matters is that I have created an environment where they are maximizing their learning.

18---My deficiencies boil down to a small number of root causes. The central of these causes are disorganization and poor time management.

Recognize yourself and your own walls?
What is keeping you from becoming better as a teacher and moving on toward greatness?

Perhaps the first thing you need to do is identify what is holding you back and then deciding whether you want to be held back.

Jensen Comment
To these I would add the following:

1. Stop being a chicken about teaching evaluations when assigning grades. Limit the A grades to a top percentile such as 15%-20% and make top students work harder for their A grades.
    
2. Stop worrying about what disgruntled students will write in teaching evaluations because they think you made the course too tough. Think of how much harder students worked when teaching evaluations were private communications between students and teachers such that these evaluations were not shared with administrators and RateMyProfessor.
    
3. Consider becoming less of a teacher and more of a learning facilitator who makes students learn more on their own ---
   http://www.trinity.edu/rjensen/265wp.htm
   Be prepared that it's much more difficult to be a learning facilitator than a great lecturing professor.
    
4. Get to know each of your students on a first name basis if at all possible. Keep in mind, however, that some of your great colleagues may be better hand holders for students than you in your role as a tougher and perhaps more expert SOB. A great education department needs both hand holders and tough SOBs that make students take on more responsibilities for their own learning.

"Motorola's Xoom Starts Tablet Wars With iPad ," by Walter S. Mossberg, The Wall Street Journal, February 24, 2011 ---
http://online.wsj.com/article/SB10001424052748703775704576162434292664662.html

After months of speculation, the tablet wars begin in earnest this week. Motorola is releasing its Xoom tablet on Feb. 24, and I consider it the first truly comparable competitor to Apple's hit iPad. That is partly because it is the first iPad challenger to run Honeycomb, an elegant new version of Google's Android operating system designed especially for tablets.

Both Motorola's hardware and Google's new software are impressive and, after testing it for about a week, I believe the Xoom beats the first-generation iPad in certain respects, though it lags in others. Like the iPad, the Xoom has a roomy 10-inch screen, and it's about the same thickness and weight as the iPad, albeit narrower and longer. And, like the iPad's operating system, Honeycomb gives software the ability to make good use of that screen real estate, with apps that are more computer-like than those on a smartphone.

The Xoom has a more potent processor than the current iPad; front and rear cameras versus none for the iPad; better speakers; and higher screen resolution. It also can be upgraded free later this year to support Verizon's faster 4G cellular data network (though monthly fees may rise.)

Is the Motorola Xoom tablet the first formidable competitor to the iPad? Its high price is its Achilles heel, says Walt Mossberg, but the Google Android Honeycomb operating system delivers. Plus: a market for cell phone re-sales emerges.

Motorola is taking aim at the iPad just as Apple is expected to announce, next week, a second-generation of its tablet. Little is known about this second iPad, but it's widely expected to take away at least one of the Xoom's advantages over the original iPad—cameras—and is rumored to be thinner and lighter, since weight was one of the most common complaints about the generally praised first iPad.

The iPad has way more tablet-specific apps—around 60,000 versus a handful—and, in my tests, much better battery life. Plus, whatever the specs say, it's a fast device with a beautiful screen that delights people daily. But, overall, the Xoom with Honeycomb is a strong alternative to the original iPad, and one that will only improve over time.

Unfortunately for consumers looking for iPad alternatives, the Xoom has an Achilles' heel: price. While iPads come in a range of models priced all the way up to $829—none of which requires a cellphone contract—Apple's entry price for the iPad is just $499. By contrast, the base price of a Xoom without a cellphone contract is $800—60% more. And even with a Verizon two-year contract at $20 to $80 a month—depending on the data limit you choose—the least you can pay for a Xoom is $600, or 20% more before counting the contract costs.

In fairness, the iPad model with the same memory as the Xoom and a 3G cellular modem like the Xoom's is $729, which is a closer comparison. But it is still less than $800, and consumers still focus on that $499 iPad entry price (for a Wi-Fi-only model.)

As much as I like the Xoom and Honeycomb, I'd advise consumers to wait to see what Apple has up its sleeve next before committing to a higher price for the Motorola product.

Meanwhile, here's what I found in testing the Xoom.

Hardware

Though it works fine in portrait, or vertical, mode, the Xoom is mainly designed as a landscape, or horizontal, device. The screen is long and narrow, proportioned to best fit widescreen video. The HD screen boasts a resolution of 1280 by 800, versus 1024 by 768 for the iPad.

. . .

Software

Perhaps even more impressive than the hardware is the Honeycomb software, which, for now, Google won't offer on cellphones, only tablets, of which the Xoom is the first.

I've always felt that Android had a rough-around-the edges, geeky feel, with too many steps to do things and too much reliance on menus. But Honeycomb eliminates much of that. Actions like composing emails, or changing settings are much more obvious and quicker. The smart but cluttered notification bar has been moved to the lower right and simplified. A tap on it pops up relevant information.

There is still a separate email app for Gmail, as opposed to other email services you may use. But, now, as on the iPad, email is presented in multiple columns and is more attractive and easier to use.

The browser is especially impressive, with PC-like features, such as visible tabs for open pages and the ability to open a private browsing session. Apps like Maps and YouTube have 3-D views. There's a movie-editing app and live widgets for the home screens that show email previews or video frames.

There are some downsides. The ability to play Flash video—a big Android selling point—won't work on the Xoom at launch. It will take some weeks to appear. And I found numerous apps in the Android Market that wouldn't work with the Xoom. I couldn't locate a working video download or rental service, though Google says these will be available soon.

Some apps for phones, like the popular game Angry Birds, filled the screen beautifully and worked fine.

Bottom line: The Xoom and Honeycomb are a promising pair that should give the iPad its stiffest competition. But price will be an obstacle, and Apple isn't standing still.

Jensen Comment
Meanwhile the Kindle market still booms for the specialized electronic book reader that excels in light weight and outdoor daylight reading and most certainly on low price. But the Kindle is not a tablet computer. But if you have a great laptop computer, the Kindle may be all you need until victory is declared in the tablet wars.

"CFOs’ Top Worry: IFRS:  But still years away from being ready," CPA Trendlines, March 11, 2011 ---
http://cpatrendlines.com/2011/03/11/cfos-top-worry-ifrs/

Some 34% of CFOs rank “convergence to IFRS” as their No. 1 issue. Cumulatively, CFOs rank IFRS convergence higher than any other accounting issue, according to the latest Duke University/CFO Magazine Global Business Outlook Survey.

Yet asked to describe their companies’ “readiness to comply with global accounting standards,” 44% said they hadn’t “begun to address convergence,” while 39% said they were preparing, “but far from ready.”

Corporations are “still several years away from having to implement a plan” to comply with a converged set of standards, says James Kaiser, U.S. Convergence IFRS leader for PricewaterhouseCoopers. Yet, as alarming as the state of awareness without preparedness sounds, it just about fits the current state of the regulatory outlook. “It’s important to monitor [regulatory developments] and develop a plan, but not get out in front of the standards until they’re finalized,” says Kaiser.

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

Question
Is your privacy on your office copier or, worse, on a public copy machine?

March 31, 2011 message from David Fordham

I find it disappointing just how many people in my generation aren't aware that times have changed since we were young, and aren't aware of the proliferation and promulgation of what they'd like to think is "personal" data. Whenever I show this video to my generation, they recoil in shock and horror (like the "journalist" intended). Show it to my students, and they just yawn and say, "And you are you surprised at this? Doesn't everyone know this?"

Since many AECM'er's are over 30, and probably also use commercial copiers on a daily basis, I thought I'd share this clip. Five minutes of the standard over-sensationalism, but still reasonably informative for some of us older folks. You might have to wait 15 seconds for the ad to finish... http://www.youtube.com/watch?v=iC38D5am7go 

David Fordham

I look forward to a new SmartPros column by Professors Ed Ketz and Tony Catanach
Grumpy Old Accountants 
by J. Edward Ketz & Anthony H. Catanach Jr.
http://accounting.smartpros.com/x71398.xml
The first article is "The Lying Culture," SmartPros, February 2011 ---
http://accounting.smartpros.com/x71398.xml

From time to time, it is good to stop and assess one's progress in life. Such an evaluation helps people to figure out how they are doing and to make strategic decisions to take advantage of upcoming opportunities and to meet future challenges. When we do this for the accounting profession, we shake our heads because accounting shenanigans remain abundant and the seeds for further scandals are sown, watered, and fertilized.

The kernel of this problem is simple: company managers and their advisers are liars. Ok, not all of them, but so many are liars that the business community is in danger of falling on its own petard. Maybe this is because American society has a problem with the truth, as exemplified by our political, military, bureaucratic, sports, and entertainment leaders. We often hear the mantra, “the truth shall make you free,” but our leaders apparently desire to enslave others through their destructively self-serving, lying behaviors.

One obvious current example is the toxic assets still held by banks in the wake of the financial crisis of 2008. These investments have real values lower than their carrying values, but banks refuse to write them down, citing mush about earnings volatility and the adverse effects of mark-to-market accounting. They reject fair value accounting because it would reveal the precarious position of the banking industry. In short, banks are lying about asset values and really are not well capitalized.

Continued in article

Jensen Comment
I greatly admire both of these professors. Ed has written years of Op "Eds" for SmartPros that are generally critical of the establishment. Tony is best known for his award-winning tremendous contributions to the BAM Pedagogy ---
http://www.trinity.edu/rjensen/265wp.htm

I especially look forward to when these "grumpy old professors" take on the failures of accountics research and lack of interest in replicating "accounting science" studies:

http://www.trinity.edu/rjensen/Theory01.htm#WhatWentWrong

http://www.trinity.edu/rjensen/TheoryTAR.htm

Their first article on "The Lying Culture"  is hard hitting but would've been more impressive in the Academy if it provided at least some scholarly references and links.

For the sad state of the GASB and governmental accounting in general  there are references, including references to some of Ed's former Op "Eds"  provided at
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

For references on creative accounting and book cooking recipes see
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

For systemic and other problems of fraud, I recommend finding references at http://www.trinity.edu/rjensen/fraud.htm

What I also look forward to is when these grumpy old professors take on the nitty gritty controversies like the following:

Systemic Problems in Accounting

Accounting for the Shadow Economy

Behavioral and Cultural Economics and Finance

Media Reporting Controversies

Efficient Markets (EMH) versus Inefficient Markets
(including Black Swans and Fat Tails)

Islamic and Social Responsibility Accounting

XBRL:  The Next Big Thing

The Controversy Over Revenue Reporting and HFV 
--- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

The Controversy Over Employee Stock Options as Compenation ---
http:/www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

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

Accounting Research Versus the Accountancy Profession
Some ideas for applied research

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

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

GMAT: Paying for Points

Accounting Journal Lack of Interest in Publishing Replications

Rankings of Academic Accounting Research Journals and Schools

Role of Accounting Standards in Efficient Equity Markets

Controversies in Setting Accounting Standards

Popular IFRS, IAS, and Other IASB Learning Resources:

Bright Lines Versus Principles-Based Rules

Comparisons of IFRS with Domestic Standards of Many Nations
http://www.iasplus.com/country/compare.htm

Should "principles-based" standards replace more detailed requirements for complex
financial contracts such as structured financing contracts and financial instruments derivatives contracts?

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

Cookie Jar Accounting and FAS 106
Go to http://www.trinity.edu/rjensen/theory01.htm#CookieJar

Synthetic Assets and Liabilities Accounting
Go to http://www.trinity.edu/rjensen/theory01.htm#Synthetics   

Time versus Money
Go go http://www.trinity.edu/rjensen/theory01.htm#Time

Intangibles and Contingencies:   Theory Disputes Focus Mainly on the Tip of the Iceberg
Go to http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

Radical Changes in Financial Reporting

The Controversy Between OCI versus Current Earnings

Accrual Accounting and Estimation

Controversy Over  the SEC's Rule 144a
Go to http://www.trinity.edu/rjensen/theory02.htm#144a 

Why do sales discounts have such high annual percentage rates?
Go to http://www.trinity.edu/rjensen/theory02.htm#SalesDiscounts

FIN 48 Liability if Transaction Is Later Disallowed by the IRS
Go to http://www.trinity.edu/rjensen/theory02.htm#FIN48

Controversy Over FAS 2 versus IAS 38 on Research and Development (R&D)
Go to http://www.trinity.edu/rjensen/theory02.htm#FAS02

Management ((Managerial) and Cost Accounting
Go to http://www.trinity.edu/rjensen/theory02.htm#ManagementAccounting

Creative Earnings Management, Agency Theory, and Accounting Manipulations to Cook the Books 
Go to http://www.trinity.edu/rjensen/theory02.htm#Manipulation

Goodwill Impairment Issues 
Go to http://www.trinity.edu/rjensen/theory02.htm#Impairment

Purchase Versus Pooling: The Never Ending Debate
Go to http://www.trinity.edu/rjensen/theory02.htm#Pooling

Minority Interests:  Lambs being led to slaughter?
Go to http://www.trinity.edu/rjensen/theory02.htm#MinorityInterests

Off-Balance Sheet Financing (OBSF)
Go to http://www.trinity.edu/rjensen/theory02.htm#OBSF2

Insurance:  A Scheme for Hiding Debt That Won't Go Away
Go to http://www.trinity.edu/rjensen/theory02.htm#Insurance

How do we account for lifetime warranties?
Go to http://www.trinity.edu/rjensen/theory02.htm#LifetimeWarranties

Disclosure provisions aimed at financing receivables
and Other Dislcosure Issues
Go to http://www.trinity.edu/rjensen/theory02.htm#CreditDisclosures

CDOs: A Securitization Scheme for Hiding Debt That Won't Go Away
Go to http://www.trinity.edu/rjensen/theory02.htm#CDO

Pensions and Post-retirement benefits:  Schemes for Hiding Debt
Go to http://www.trinity.edu/rjensen/theory02.htm#Pensions  

Leases:  A  Scheme for Hiding Debt That Won't Go Away
Go to http://www.trinity.edu/rjensen/theory02.htm#Leases  

Accounting for Executory Contracts Such as
Purchase/Sale Commitments and Loan Commitments
Go to http://www.trinity.edu/rjensen/TheoryOnFirmCommitments.htm

Debt Versus Equity (including shareholder earn-out contracts)
Go to http://www.trinity.edu/rjensen/theory02.htm#FAS150

Intangibles:  An Accounting Paradox
Go to http://www.trinity.edu/rjensen/theory02.htm#Paradox

Intangibles:  Selected References On Accounting for Intangibles
Go to http://www.trinity.edu/rjensen/theory02.htm#References

EBR:  Enhanced Business Reporting (including non-financial information)
Go to http://www.trinity.edu/rjensen/theory02.htm#EBR

The Controversy Over Revenue Reporting and HFV 
--- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

The Controversy Over Employee Stock Options as Compenation ---
http://www.trinity.edu/rjensen/theory02.htmhttp:/www.trinity.edu/rjensen/theory/sfas123/jensen01.htm  

Accounting for Options to Buy Real Estate
Go go http://www.trinity.edu/rjensen/theory02.htm#RealEstateOptions

The Controversy over Accounting for Securitizations and Loan Guarantees  
Go to http://www.trinity.edu/rjensen/theory02.htm#Securitizations

The Controversy Over Pro Forma Reporting
Go to http://www.trinity.edu/rjensen/theory02.htm#ProForma

 
Triple-Bottom (Social, Environmental) Reporting  
Go to http://www.trinity.edu/rjensen/theory02.htm#TripleBottom

The Sad State of Government (Governmental) Accounting and Accountability
Go to http://www.trinity.edu/rjensen/theory02.htm#GovernmentalAccounting

The Cost Conundrum:  What a Texas town can teach us about health care
Go to http://www.trinity.edu/rjensen/theory02.htm#CostConundrum 

Which is More Value-Relevant: Earnings or Cash Flows?
Go to http://www.trinity.edu/rjensen/theory02.htm#CashVsAccrualAcctg

LIFO Sucks Teaching Case on LIFO Layers in Years of Rising Prices
Go to http://www.trinity.edu/rjensen/theory02.htm#LIFO

The Controversy Over Fair Value (Mark-to-Market) Financial Reporting
Go to http://www.trinity.edu/rjensen/theory02.htm#FairValue

Underlying Bases of Balance Sheet Valuation
Go to http://www.trinity.edu/rjensen/theory02.htm#BasesAccounting

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

Fade, Gain, and Cost Shifting Analysis  in gross profit analysis in construction accounting
Go to http://www.trinity.edu/rjensen/theory02.htm#FadeAnalysis

Critical Thinking:  Why's It So Hard to Teach
Go to http://www.trinity.edu/rjensen/theory02.htm#CriticalThinking

Understanding the Issues 
Go to http://www.trinity.edu/rjensen/theory02.htm#UnderstandingIssues

Issues of Auditor Professionalism and Independence 
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
 

Quality of Earnings, Restatements, and Core Earnings
Go to http://www.trinity.edu/rjensen/theory02.htm#CoreEarnings

I will try to keep feeding these grumpy old accountants seeds for their new grist mill ---
http://www.trinity.edu/rjensen/threads.htm

Grumpy Old Accountants
"What's Up with Cash Balances?" by: J. Edward Ketz and Anthony H. Catanach Jr, SmartPros, March 2011 ---
http://accounting.smartpros.com/x71485.xml

The past decade has yielded a growing number of cases of cash reporting problems among global firms. According to Audit Analytics, corporate restatements in the United States for cash-related reporting soared from 0.49 percent of all restatements in 2001 to over 13 percent in 2008.

Between 2002 and 2005, Grant Thornton auditors failed to detect cash frauds totaling almost €4 billion at Parmalat, a global Italian dairy and food corporation.  In 2008, PricewaterhouseCoopers’ auditors missed a £1 billion in fraudulent cash balances at Satyam, the Indian technology outsourcing giant.  What’s going on?

Historically, cash has not been that hard to audit or report, and junior accountants in their first and second years have routinely been tasked with auditing balances and preparing disclosures for these assets.  After all, how hard can it be to audit and report cash assets, when verification and valuation generally are not issues?

Why aren’t companies reporting cash in an ethical and transparent manner? As analysts’ concern with earnings management has grown, they are devoting more attention to reported cash flows.  Global financial managers are aware of this new focus and have responded accordingly by either creatively or intentionally misreporting corporate cash flows.

Initially, most of the gimmickry related to inflating operating cash flows (OCF) by simply misclassifying cash flows in the statement of cash flows (SCF). Investing or financing cash inflows are reported as operating activities, and operating cash outflows are included in the investing and financing sections of the SCF.  While such games continue even today, corporate accountants continue to develop more sophisticated schemes to artificially inflate cash balances and related flows.  Managers now commonly achieve OCF targets via asset liquidations, by delaying payments on payables, and even by counting receivable collections as cash before they are actually received, and employing special purpose entities.

Note the following 8-K disclosure recently filed by Orbitz Worldwide, a leading global online travel company:

The Company determined that credit card receipts in-transit at its foreign operations (which are generally collected within two to three days) should have been classified as “Accounts Receivable” rather than “Cash and Cash Equivalents.”

The Pep Boys, a large U.S. automobile parts, tire, and service provider, also reported the following in its 10-K:

All credit and debit card transactions that settle in less than seven days are also classified as cash and cash equivalents.

Such practices clearly raise questions about the quality of reported cash balances and OCF, and recently the games have reached an all time low.  Managers now have decided to simply change the way they define cash in the balance sheet.  Every accounting student learns that a company reports as cash on their end-of-period balance sheet the amount reflected in the company’s general ledger; however, a growing number of companies are abandoning this generally accepted practice and now inflate their reported balance sheet cash flows by adding back outstanding checks (i.e., those than have not yet cleared the bank) written and mailed before period-end.  This practice not only increases reported cash balances, but also overstates OCF since the outstanding checks are added to accounts payable.  Note the following example from the recent 10-K of Dick’s Sporting Goods, a national U.S. sporting retailer:
 

Accounts payable at January 30, 2010 and January 31, 2009 include $74.2 million and $74.8 million, respectively, of checks drawn in excess of cash balances not yet presented for payment.
 

In this case, OCF were overstated by 89.16 percent in 2009 and 22.68 percent in 2010.  Then there is the case of Airgas, a nationwide distributor of gases, welding supplies, safety products, and tools, that reports in its 2010 10-K:

Cash principally represents the balance of customer checks that have not yet cleared through the banking system…Cash overdrafts represent the balance of outstanding checks and are classified with other current liabilities.

In this case, had the company reported its outstanding checks appropriately, its cash balance would have been negative at the end of 2010, and its OCF were overstated by $5.5 million as well.

Continued in article

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

One Way a Professor Can Become a Felon

"Prof Accused of Billing University for Travel as Consultant," Inside Highe Ed, February 4, 2011 ---
http://www.insidehighered.com/news/2011/02/04/qt#250321

Dov Borovsky, a professor of entomology at the University of Florida, was arrested last week on felony charges of grand theft and fraud based on his expense reimbursement claims, The Gainesville Sun reported. According to authorities, Borovsky took three trips to Malaysia as a consultant to a company based there, was reimbursed by the company for the travel, but also submitted expense forms to the university for travel reimbursement. Borovsky, whom the university has placed on leave, could not be reached for comment.

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

"Prisoners stole millions from the IRS in 2009," by Kevin McCoy, USA Today, February 17, 2011 ---
http://www.usatoday.com/money/perfi/taxes/2011-02-16-1Ainmates16_CV_N.htm

Prisoners in Florida, Georgia and California lead the nation's inmate population in scamming payments from an unlikely benefactor: the IRS.

• STATE-BY-STATE: Fraudulent federal tax refunds issued to prisoners

• CHART: Where inmates' false returns came from

Seemingly proving the adage that crime pays, even behind bars, prisoners in the three states received nearly $19 million in IRS refunds during 2009 after filing false or fraudulent tax returns, according to an IRS report to Congress that was included in a federal audit released in January.

Continued in article

Jensen Comment
Florida also leads the nation in Medicare fraud such as phony medical equipment billings where Cuban immigrants (possibly aided by the Cuban government) are often masters of deception.---
http://www.healthcarefraudblog.com/2009/07/medicare_fraud_and_cuba.html

Sort of makes me wonder how much of the IRS refunding fraud in Florida makes finds its ultimate home in Cuba.

February 22, 2011 message from Gerry Mueller

Hi, Bob + Erika -

We didn't get around to putting together our usual "annual report" this year. We did a fair bit of travel during the 2nd half of 2010, had a number of family get-togethers, and time got away from us. But thankfully we are reasonably healthy and well. Our major downsizing was a pain, but now we are glad we tackled it in 2009. How are you both? Hopefully you did not have to suffer through the cold, cold winter in the N.E.

Since you are both quite family oriented, I thought you might be interested in the completion of my professional biography by Dale Flesher at Ole Miss. I am very happy with the outcome. So I am enclosed the flyer about the book in the attachment hereto.

Be well and keep warm! Best greetings and regards,

Gerry & Coralie

Jensen Comment
Although the above message from Gerry Mueller is somewhat personal, I thought readers might like to hear from Gerry and to know about the recent biography about Gerry that was written by accounting historians Dale Flesher and Gary Previts:

Gerhard G. Mueller: Father of International Accounting Education
By Dale L. Flesher and Gary Previts
 Excerpts --- Click Here
 http://snipurl.com/gerrymueller
 http://books.google.com/books?id=AJVMGhLy-sEC&pg=PR9&lpg=PR9&dq=Flesher+Biography+%22Gerhard+Mueller%22&source=bl&ots=ke6Ixd4eYY&sig=caAPec9xbxIALLaj0pdfOXSW3Ww&hl=en&ei=2qBjTYD2JcSAlAeOmd3gCw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBkQ6AEwAA#v=onepage&q=Flesher%20Biography%20%22Gerhard%20Mueller%22&f=false

Although I've known Gerry and Coralie for years, we became much closer in the years that we were both on the Executive Committee of the American Accounting Association. Because there was significant outside funding for our EC meetings in those years, we had some wonderful trips with spouses to places like Amsterdam and Puerto Rico and Hawaii. When we met outside the U.S., Gerry usually had a purpose. For example, when we met in Amsterdam he organized meetings where we interacted with leaders of European accounting education. Gerry had more global contacts in accounting education than any person I've ever known other than the very, very long term serving international accounting professor Paul Garner.

These were exciting times for the Executive Committee because it was a time when the Big Eight accounting firms gave the AAA $4 million to establish the Accounting Education Change Commission ---
http://aaahq.org/AECC/history/cover.htm
Gerry Mueller was instrumental in organizing the entire AECC Program.

For  36 years when Gerry was at the University of Washington he was arguably the best known international accounting professor in the world. Gerry grew up in Germany and was fluent in several languages (including difficult German dialects). In addition to his various books on international accounting, Gerry chaired the doctoral dissertations of some outstanding international accounting students.

In addition to serving a AAA President, Gerry was on the FASB for a full five year appointment before he retired.

Gerry served the accounting profession and the Academy very well and was a mover and shaker in the globalization of accountancy.

My life is much richer for having served with Gerry!

"Bankruptcy Laws Drive Corporate Default Rates," Stanford Graduate School of Business News," January 2011 ---
http://www.gsb.stanford.edu/news/research/Strebulaev_bond_default.html?cmpid=alumni&source=gsbtoday

Permissive bankruptcy laws, not bad business downturns, seem to be the greatest cause of corporate bond defaults, according to Professor Ilya Strebulaev, co-author of a study that researched 150 years of figures.

When it comes to corporate defaults, the current recession is, as of now, child's play in comparison not only to the Great Depression, but another little-recalled period: the railroad crisis of 1873–1875.

New research from Stanford shows that over the past 150 years, the U.S. corporate bond market has repeatedly suffered clustered default events. In a surprise finding, the study reveals that default episodes are only weakly related to bad business downturns. Rather, they seem to be a function of permissive bankruptcy laws.

Ilya Strebulaev, associate professor of finance at the Stanford Graduate School of Business and Spence Faculty Scholar for 2010-2011, and three other researchers have developed the first set of data on bond defaults and debt prices reaching back to the 19th century. Their information, much of it hand-collected from historical financial records, has allowed for the first analysis of the relationship between various macroeconomic conditions –– business cycles –– and financial cycles, such as banking crises.

Continued in article

Jensen Comment
Congress tightened the rules against personal bankruptcy laws without sufficiently tightening the corporate bankruptcy laws..

A Must Read
Educause:  Emerging Trends in Education Technology --- http://www.insidehighered.com/news/2011/02/09/qt#250713

Educause and the New Media Consortium have released the 2011 Horizon Report, an annual study of emerging issues in technology in higher education. The issues that are seen as likely to have great impact:

• Over the next year: e-books and mobile devices.
• From two to three years out: augmented reality and game-based learning.
• From four to five years out: gesture-based computing and learning analytics.

Bob Jensen's threads on education technology are at
http://www.trinity.edu/rjensen/000aaa/0000start.htm

The AACSB Bridge Program for Increasing Accounting Faculty Without PhD Degrees in Accountancy ---
http://www.aacsb.edu/bridgetobusiness/default.asp

Actually the AACSB Bridge Program cuts across all business concentrations (accounting, management, finance, etc.). There are fewer universities that "bridge" accountants, and to be honest with you I never was optimistic that the Bridge Program would significantly impact the supply of accounting faculty, What I had not anticipated was the accompanying Pilot program that has been quite successful under the leadership of Kansas State's Dan Deines.:

"The Accounting Pilot and Bridge Project,"  by Joe Bittner, Dan Deines, and Glenda Eichman, New Accountant, February 2011 ---
http://newaccountantusa.com/Accounting_Pilot_and_Bridge_Project.pdf

The pilot course is a full-year course, based on approximately 90 – 100 contact hours with students from August/September through May/June. It is a rigorous, college-level course that emphasizes analytical and decision-making skills, and uses an integrated approach to teach financial accounting, managerial accounting, and financial statement analysis concepts. The course is structured so that students make business decisions and analyze the impact of those decisions on financial statements. As a result, students learn the critical role that accountants play in business.

To participate in the pilot course, teachers must attend an intensive three-day professional development workshop that offers subject-specific training on the content of the course, best practices for teaching accounting, and a forum for exchanging ideas about how to implement the course and exam. Now entering its fifth year, the Accounting Pilot and Bridge Project has trained approximately 450 teachers nationwide.

Continued in article

Management Education at Risk (AACSB, 2002) ---
http://www.aacsb.edu/publications/thoughtleadership/management-education-at-risk.pdf

Business School Faculty Trends in 2008 ---
http://www.aacsb.edu/dataandresearch/reports/Faculty-Trends-Selected-Highlights.pdf

The Sad State of Accounting Doctoral Programs ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

"Has the HAL 9000 Finally Arrived?" by Robert Plant, Harvard Business Review Blog, February 9, 2011 --- Click Here
http://blogs.hbr.org/cs/2011/02/has_the_hal_9000_finally_arriv.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Key Words:  Artificial Intelligence, AI, Stanley Kubrick and Arthur C. Clarke's 2001: A Space Odyssey

Best Undergraduate Business Schools According to Business Week ---
http://www.businessweek.com/bschools/special_reports/20110303best_undergrad_bschools.htm?link_position=link1

Bob Jensen's threads on the controversies of media rankings of colleges ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

In 2007, Kate Reiling enrolled in the Tuck School of Business at Dartmouth, specifically to develop a business plan for Morphology

"B-School Startups: The Birth of Morphology A bitter cold night in Minnesota spawns a hit board game for a Tuck MBA entrepreneur," by Sommer Saadi, Business Week, January 31, 2011 ---
http://www.businessweek.com/bschools/content/jan2011/bs20110128_553324.htm?link_position=link2

Editor's Note: This story is part of Bloomberg Businessweek's occasional series on the world of startups. The series focuses on MBAs and undergraduate business students who developed their ideas or launched their businesses while still in school and the many ways their schools helped them get their new ventures off the ground. For a look at some business students trying to build their own businesses, check out our slide show.

Kate Ryan Reiling's big idea came on a freezing Minnesota night in 2002. It was too cold to venture out, so Reiling and her friends decided to stay in and play board games. They didn't like their choices—Jenga or Pente—so they opted to invent their own game.

What they came up with was something similar to a 3D version of Pictionary. A member of a team picks a word, and using an assortment of objects, such as string, glass beads, colored cubes, and wooden sticks, she builds the word for her teammates to guess before time runs out.

 

. . .

Crucial Toolkit
In 2007, Reiling enrolled in the Tuck School of Business at Dartmouth, specifically to develop a business plan for Morphology. She had a good feeling about Tuck. "There was a really exciting energy around the entrepreneurship program," she says, "a real sense that this was something the school was focused on nurturing."

In a course called First-Year Project, taught by adjunct professor Gregg Fairbrothers, she learned about scheduling and organization and how to work with investors, suppliers, and distributors. Fairbrothers calls the course a toolkit for students. "There are a bunch of things a businessperson needs to learn somewhere, and we're providing an accelerated, comprehensive way of picking up those tools," he says.

For three-months, Reiling and a few of her classmates worked on her business idea—and by the end of the course had refined her prototype and put together a convincing business proposal. So convincing, in fact, that the venture capitalists evaluating her assignment were interested in investing. "The whole final presentation was validation for me that I was onto something," Reiling says. "I realized I had the idea; now I needed the company."

Despite everything she'd learned in her first year at Tuck, Reiling wanted more time before she started accepting funding. She did, however, sell her first prototype to Fairbrothers for $50.

Continued in article

Bob Jensen's threads on edutainment are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment

PwC 60-Minute Webcast on Demand:  IASB Proposed Changes in Hedge Accounting ---
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=MSRA-8DXRGY&ContentType=Webcast

Webcast Summary:
The International Accounting Standards Board (IASB) recently issued proposals to overhaul current hedge accounting requirements under IFRS. Are you prepared? The IASB proposals address general hedging of financial and non-financial items and will have an impact on most businesses. To help you learn more PwC offers this 60 minute on demand webcast highlighting both the positive aspects of the exposure draft, as well as those areas where it might not address current problems or have unintended consequences. The webcast will help you learn more about the proposals so that you can respond to the IASB by its deadline of March 9, 2011.

Webcast Details:

View this on demand webcast

The IASB just issued proposals to overhaul current hedge accounting requirements. Are you prepared?

The International Accounting Standards Board (IASB) proposals address general hedging of financial and non-financial items and will have an impact on most businesses.

To help you learn more we offer this 60 minute on demand webcast. The webcast highlights both the positive aspects of the exposure draft, as well as those areas where it might not address current problems or have unintended consequences. The webcast will help you learn more about the proposals so that you can respond to the IASB by its deadline of 9 March 2011.

It is presented by Sebastian di Paola, the lead partner from PwC's Treasury Advisory Practice and Chair of PwC's Corporate Treasury Technical Committee, and Sandra Thompson, a partner with PwC’s Global Accounting Consulting Services and a former Senior Project Manager at the IASB.

This is the only opportunity that you will have to influence the IASB in finalizing these important proposals.

Message from Ernst & Young on February 10, 2011

To the Point: Hedge accounting - FASB seeks reaction to IASB's proposed model

The FASB is seeking comment on the IASB's December 2010 hedge accounting proposal. The proposed IASB model would significantly change hedge accounting, going well beyond the changes the FASB proposed last year. Notably, the IASB proposes allowing hedges of components of non-financial risk (e.g., commodity risk) and hedges of net positions that share a common risk. Based on the feedback it receives, the FASB will contemplate whether (and how) to incorporate the IASB's ideas into the FASB's hedging model. Comments are due by 25 April 2011.

Reply from Bob Jensen to the AECM on February 10, 2011

The problem in the Academy is that nearly all accounting professors do not understand IAS 39 well enough to even comprehend the awful changes that are being proposed.

I think that the myth that the IASB is trying to make hedge accounting more transparent and less complex is just that --- a myth.

In the message below Ernst & Young does not mention my biggest gripe about the IASB's proposal. Replacing hedge effectiveness guidelines (such as the 80-125 dollar offset guideline in IAS 39) with ambiguities does not constitute simplification. What it really does is complicate both the task of auditing and the task of financial statement analysis.

Ernst & Young does hit hit on two changes below that also greatly complicate auditing and financial statement analysis.
.
The IASB proposed changes are yet another illustration that "the road to hell is paved with good intentions."

The problem in the Academy is that nearly all accounting professors do not understand IAS 39 well enough to even comprehend the awful changes that are being proposed.

Respectfully,
Bob Jensen

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

"Seven Tough Questions for the 'Cloud'," by Rick Telberg, CPA Trendlines, February 9, 2011 ---
http://cpatrendlines.com/2011/02/08/seven-tough-questions-for-the-cloud/

Wow! A torpedo just hit the second home market in New York to say nothing of condos owned for incidental use by out-of-state (read that Florida) residents.
Will out-of-state time share owners also get clobbered by this court decision?
If other states adopt this aggressive tax, it might go a long way toward killing the second home lifestyle and real estate market.

"Court: NY Can Tax All Income of Owner of NY Vacation Home Used 17 Days/Year," by Paul Carone, Tax Prof Blog, February 11, 2011 ---
http://taxprof.typepad.com/

Wall Street Journal, Out-of-State Owners Could Face Tax Bill:

Connecticut and New Jersey residents with a Hamptons summer cottage or a Manhattan pied-a-terre are about to get a nasty surprise: New York state wants more taxes from them.

A New York court ruled last month that all income earned by a New Canaan, Conn., couple is subject to New York state taxes because they own a summer home on Long Island they used only a few times a year. They have been hit with an additional tax bill of $1.06 million. [In re Barker, No. 822324 (NY Tax App. Jan. 13, 2011).] ....

For years, New York law stated that residents of another state who spend more than 183 days a year in New York have to pay taxes on any income they make in this state. But they generally haven't had to pay New York taxes on income they make outside of the state or on their spouses' income if they work elsewhere.

Under the recent ruling, this might change for many out-of-state residents who own vacation homes or apartments here. In effect, it reinterprets what counts as a permanent residence.

In defining a "permanent place of abode," New York tax code specifically excludes "a mere camp or cottage, which is suitable and used only for vacations." New York tax experts say the new ruling is the first they recall that counts summer homes as permanent residences. ....

[The judge] ruled that the couple's Long Island vacation home qualifies under the law as a permanent abode because it was suitable for living year-round—whether or not the couple actually stayed in the home wasn't relevant. Under the ruling, if an owner doesn't spend a single a day in a home it could still count toward a permanent residence.

The Napeague, Long Island, house was purchased by John and Laura Barker for $260,000 in 1997, according to court documents. From 2002 to 2004, the period that was assessed for back taxes, the Barkers said they spent only [17] days a year at the home, usually during the summer.

Jensen Comment
It might be a good year for New York residents to buy second homes and condos at fire sale prices. But don't count too much on making a bundle from  the resale market.

I propose that New Hampshire consider this for all the wealthy out-of-state second home owners. New Hampshire has no income or capital gains tax, but it does have a nasty surprise for them in a cash dividends and interest tax (5%) after a $5,000 deductible.

The following book is more of a practitioner's guide than a course textbook. But accounting educators and students may find it useful as a reference. The publisher claims the book is current on PCAOB requirements and differences between IFRS versus FASB rules for Property, Plant, and Equipment.

Internal Control of Fixed Assets: A Controller and Auditor's Guide
by Alfred King
Wiley ISBN: 978-0-470-53940-8
March 2011
http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470539402.html

"What the Demise of Fannie Mae and Freddie Mac Means for the Future of Homeownership," Knowledge@Wharton, March 16, 2011 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2737

By most accounts, the federally sponsored mortgage giants Fannie Mae and Freddie Mac did not cause the housing and mortgage crisis. But they were a big part of the problem, prompting a taxpayer bailout costing more than $130 billion.

Now, seeking to protect taxpayers from future meltdowns, the Obama administration wants to phase out the two firms over an unspecified period and leave the lion's share of the mortgage market to private lenders. It would be a dramatic change, given that the private market has shriveled in recent years, leaving Fannie, Freddie and the Federal Housing Administration to back about 90% of all new home loans. The administration also proposes a reduced role for the FHA, one that would focus on providing mortgages for the needy.

How would a phase-out of Fannie and Freddie affect the availability of mortgages, loan rates and home prices? In the end, would such a dramatic change be good for homeowners or not?

Opinions vary, and no one can know for sure. The mortgage and housing markets are complex, and a controlled experiment that removes Fannie and Freddie but leaves everything else the same is obviously not possible, says Wharton real estate professor Todd Sinai. "There's a debate over whether Fannie and Freddie successfully reduced mortgage rates paid by borrowers, or increased the mortgage availability for borrowers, or whether they just took their implicit [government] subsidy and generated higher returns for shareholders," Sinai says. "If Fannie and Freddie were successful in making mortgage credit cheaper and more available, then eliminating [them] would have a negative impact on house prices."

It is not clear that the private market can or would absorb the volume of business done by Fannie and Freddie, which cover trillions of dollars worth of loans, according to Wharton real estate professor Susan M. Wachter. "That's a good question," she says, noting that even if the private market were to take over, borrowers would probably not get the attractive deals they can today.

"The 30-year [mortgage] would become more expensive," she states, adding that some experts predict a three percentage point rate rise. With the 30-year, fixed-rate loan now averaging around 5%, that would take it to 8%, raising the monthly payment for every $100,000 borrowed from $537 to $733. This would make the 30-year fixed loan "noncompetitive" with adjustable-rate loans, Wachter says. ARMs can offer lower rates because lenders face less risk, given that they can raise rates as market conditions change

Jack M. Guttentag, an emeritus professor of finance at Wharton who runs a website called The Mortgage Professor, thinks fixed rates might go up only three quarters of a percentage point rather than three points. But with the two firms' loan guarantees removed from the market, lenders would probably demand larger down payments than they have in the past, and be less willing to provide loans to those with less-than-stellar credit. Indeed, today's tight lending standards, a reaction to the recent crisis, could become permanent.

"Things like qualification standards have become extremely strict," Guttentag says, noting that it is now all but impossible for a self-employed applicant to get a mortgage. "The biggest part of it would be the increase in the down payment; 20% would probably become the minimum throughout the marketplace."

Larger down payments reduce the lender's risk because borrowers are reluctant to default if they have equity in the home, and because a smaller loan relative to the home's value makes it easier for the lender to recover in a foreclosure. Currently, most lenders require 20% down payments; a few years ago, however, it was possible to get a loan with nothing down. The Obama administration wants underwriting standards to require at least 10%, though the FHA would continue to offer low-down payment loans to certain less-affluent borrowers.

Planning a Phase-out

Fannie, the Federal National Mortgage Association, was formed as a government agency in 1938 and was converted to a publicly traded company in 1968. Freddie, the Federal Home Loan Mortgage Corp., is a publicly traded company created by the government in 1970 to provide competition for Fannie. Their primary role is to buy and insure mortgages issued by private lenders. Some loans stay on Fannie and Freddie's books, but most are bundled into mortgage securities sold to investors like other types of government and corporate bonds. Fannie and Freddie provide investors certain guarantees that interest and principal payments will be made even if homeowners default.

Continued in article

Bob Jensen's threads on Fannie and Freddie are at the following links:

http://www.trinity.edu/rjensen/2008Bailout.htm

http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

In the United Kingdom
 "State pension age 'rises' to 70 for anyone under 30: Anyone under the age of 30 will not receive the state pension until they reach 70 years old under Government plans to increase the retirement age," by Myra Butterworth By Myra Butterworth, The Telegraph, March 24, 2011 ---
 http://www.telegraph.co.uk/finance/budget/8404788/State-pension-age-rises-to-70-for-anyone-under-30.html

BUSINESS SCHOOLS ON THE THRESHOLD OF UNPRECEDENTED CHANGE DUE TO GLOBALIZATION
AACSB Task Force Report Addresses the Most Significant Challenge to Business Schools in 50 years.
February 10, 2011
http://www.aacsb.edu/media/releases/2011/globalization-report.asp

Rarely, if ever, have business schools experienced change as far-reaching and powerful as the current wave of globalization. The need for business schools to understand these changes and respond accordingly is the core tenet of a groundbreaking report—The Globalization of Management Education: Changing International Structures, Adaptive Strategies, and the Impact on Institutions—released today by AACSB International.

In this comprehensive report, the AACSB Globalization of Management Education Task Force asserts that rising expectations from business and society for graduates with global competencies, coupled with the increasing complexity and global connectedness of higher education, command the attention of business schools around the world. The report’s findings draw upon results from a survey of AACSB member schools’ collaborative agreements, a survey of academic thought leaders regarding global content in curricula, and a series of case studies.

Connecting insights from this research with information gleaned through a comprehensive review of existing literature and current events, the Task Force presents a data-driven analysis of the global nature of management education. According to the Task Force, business schools have just begun to experience the wide range of implications of globalization, and to realize the full potential of the opportunities presented.

“The imperative for change is clear. We are at a critical inflection point, and now is the time for all business schools to respond,” said Task Force chair Bob Bruner, dean and Charles C. Abbott Professor of Business Administration at the University of Virginia’s Darden Graduate School of Business. “Schools must develop approaches that will positively impact globalization within the business community and broader society.”

But the Task Force goes beyond simply calling schools to attention. The report presents insights that will help guide individual school strategy development and implementation. Focusing on approaches that include curriculum design, faculty development, and the cultivation of strategic partnerships, the Task Force challenges all business schools to embrace globalization in ways that are mission-appropriate, manageable given available resources, and meaningful to the stakeholders being served.

The report also considers the role of industry-wide initiatives that will move business schools from keeping pace with the sweeping changes of globalization to leading the way. “This definitive report reveals important implications for cross-border alliances, information sharing and benchmarking, and global quality assurance,” said John J. Fernandes, president and chief executive officer of AACSB International. “The Task Force shows that through collaborations with one another and organizations like AACSB, business schools can accelerate and improve globalization.”

A complimentary electronic copy of The Globalization of Management Education: Changing International Structures, Adaptive Strategies, and the Impact on Institutions is available to AACSB member schools and media, and an electronic or hard copy is available for purchase by the general public. Please visit the AACSB Globalization of Management Education Resource Center for more information.

Jane McGonigal has a message: games are good
"Are Games Good for You?  Jane McGonigal, in her latest book and during her PAX East keynote, talks about the positive effects of playing," by Kristina Grifantini, MIT's Technology Review, March 16, 2011 ---
http://www.technologyreview.com/blog/editors/26528/?nlid=4250

Jensen Comment
I have my doubts when games become addictive to a point of disproportionate time allocation vis-a-vis other forms of learning and scholarship..
Bob Jensen's threads on edutainment, including games are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm

"The Pulse: Faculty and Social Media," Inside Higher Ed, February 9, 2011 ---
http://www.insidehighered.com/news/2011/02/09/qt#250726

The February 2011 edition of The Pulse, our monthly technology podcast by Rod Murray, features an interview with Brian Hughes, associate director of design, publishing and service at Teachers College's Library at Columbia University. He discusses the best ways to get faculty members comfortable with using social media in teaching. Find out more about The Pulse, and listen to selections from its archive, here.

Social Networking for Education:  The Beautiful and the Ugly
(including Google's Wave and Orcut for Social Networking and some education uses of Twitter)
Updates will be at http://www.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's links to accounting news ---
http://www.trinity.edu/rjensen/AccountingNews.htm

Last night on television news a clip was played of a robber in what I think was a book store. The robber was extremely polite and apologetic when claiming he would not be doing this if his kids were not hungry. But he insisted on taking all the cash in the drawer rather than the $40 offered by the store owner.

On the way out the door the polite robber promised that when he got a job and was back on his feet again he would pay all of the stolen money back.

Would the store owner have committed such a robbery if the roles were reversed?

Questions
Are ethics and morality variables that depend upon situational circumstances?
How does Sprite or Pepsi soda fit into the following lecture on morality?
What is heteronomy?

Video:  Immanuel Kant Assumes Categorical Imperatives in a World of Relativity (where we're slaves to our varying necessities)
Professor Sandel @ Harvard University
Here is Professor Sandel’s video introducing Immanuel Kant’s philosophy of ethics. In my opinion, one of the best lectures on ethics. Below is an extract for the one hour lesson --- |
http://sleightfraud.blogspot.com/2011/02/video-motives-morality-what-is-right.html

I'm not normally a big fan of Tom Selleck films. But this winter Erika and I have really enjoyed the mystery series in which Selleck plays the role of a crusty  alcoholic chief of police, Jesse Stone, in a town of last resort called Paradise. When asked if he shoots to kill or just wound, his automatic response is the categorical imperative "to kill" followed by reasoning decided early in his law enforcement career. Although we've not seen the entire series as of yet, to date all of his victims do not live to see another day.

"Deloitte’s Troubles Bubble To Surface," by Francine McKenna, re:TheAuditors, January 31, 2011 ---
http://retheauditors.com/2011/01/31/deloittes-troubles-bubble-to-surface/

Mainstream media, and the Financial Crisis Inquiry Commission, are focused mainly on Ernst & Young as the auditor whipping boy of the financial crisis. That’s really by default not by design and is thinly justified. No one has given fly-over journalists anything on a silver platter that would draw in the rest. Not that there aren’t a number of reasons to look hard at all of them. They are feigning outrage in the UK. But here in the US, we treat the audit firms as untouchable.

That doesn’t stop me from highlighting all the reasons why the rest of the Big 4 should be scrutinized as much or, perhaps, even more than Ernst & Young for their role in the crisis. And, of course, you know I believe there’s more than their behavior during the crisis to warrant significant scrutiny of the industry’s model and its methods. The popular perception is Ernst & Young is the most vulnerable of the largest firms because of its troubles with Lehman, but that’s more a public relations problem than a fact-based conclusion.

Granted, Ernst & Young hasn’t been very good at crisis communications. In fact, they’ve really sucked at it since last March. Their delay in responding to the original Lehman Bankruptcy Examiner’s report and the suit filed by the New York Attorney General is a case study in how not to respond. Because that’s what they did. Not respond. They either didn’t respond at all to journalists or issued the standard auditor response to any lawsuit. That’s the one with two sentences, or one long one, that includes the phrases “according to GAAP”, “followed all standards”, “stand by our work”, and “we just stand there”.

Give me a few minutes and I can make a case for PricewaterhouseCoopers as the one teetering on the edge of the abyss instead. Or KPMG.

But today, let’s talk about Deloitte.

A few weeks ago I detailed the case of Arnold McClellan, the Deloitte Tax partner who is accused of using his knowledge of Deloitte client private equity firm Hellman & Friedman’s acquisitions to pass insider trading tips to his UK relatives. Deloitte, the firm, is cooperating with FSA, SEC, and DOJ investigations of these allegations, as they did in the SEC’s investigations of their other partner inside trader – former Deloitte Vice Chairman Tom Flanagan. Mr. Flanagan’s case was settled with the SEC last summer and McClellan’s will eventually be settled, too. In both cases, Deloitte’s cooperation will save them from fines and sanctions or even a consent decree requiring them to clean up their compliance act.

How does that translate into trouble for Deloitte? After all, they’re skating away as a firm from major insider trading scandals, looking like the good firm. Well…Two serious insider trading cases, both involving partners and high profile target companies, playing out during the same time frame equals holes in Deloitte’s internal compliance processes you can drive a Mack truck through. Whether the SEC or Deloitte admit it publicly, the heat is on and it’s only a matter of time before another case bobs to the surface. Or more than one.

How many times can Deloitte claim the firm is being “duped” by its own partners? Eventually there will be an egregious case where the firm has to pay a fine or worse. I’m sure there’s already a lot more headaches in the annual independence process for partners and their families. If not, both the SEC and the firm are playing with fire.

Last week I wrote in Forbes about the victory for class action plaintiffs suing Bear Stearns executives and Deloitte for Bear Stearns’ part in the financial crisis. It’s a major accomplishment to get a crisis suit past the motions to dismiss, in general but especially significant, in particular, when thesuit also names the auditor as a defendant. Deloitte will now be subject to discovery and a trial – if they don’t settle first – to refute allegations they performed “no audit at all” at Bear Stearns.

That was the gist of allegations in the UK’s House of Lords regarding Deloitte’s audit of Royal Bank of Scotland. That failed bank was nationalized by the British government and never received a “going concern” qualification in enough time to warn anyone.

Continued in article

Jensen Comment
In spite of the mention of Ernst & Young above, it is my general feeling that Francine has it in for Deloitte more than the other three of the Big Four oligopoly. Of course she hammers at all of the Big Four now and then. But Deloitte seems to ruffle her feathers more than the rest.

Deloitte is the only one of the Big Four that did not sell or spin off its huge consulting division. However, I don't think, since the days of Andersen, that consulting is the main threat to auditor independence. The main threat, in my viewpoint, is that in certain practice offices in all the Big Four audit firms there are some audit clients too big to not get clean audit opinions.

Bob Jensen's threads on Deloitte and the rest are at
http://www.trinity.edu/rjensen/Fraud001.htm
One of Deloitte's worst audits had to be Washington Mutual just prior to when this enormous bank with what was probably the worst lending practices of all the failed banks got a clean opinion with badly underestimated loan losses from Deloitte. Instead WaMu should've gotten a going concern signal from the auditors before it went belly up!

"Auditors and Consulting: Claims Of No Conflict Strain Credibility," by Francine McKenna, re:TheAuditors, February 14, 2011 ---
http://retheauditors.com/2011/02/14/auditors-and-consulting-claims-of-no-conflict-strain-credibility/

Big 4 audit firms are focusing on growth in their global consulting businesses but the conflicts that drove three out of four of the firms to sell them after Enron are a bigger problem than ever before. Deloitte was the only firm that held on to its consulting arm after abuses of the privilege of doing everything for clients resulted in prohibitions in the Sarbanes-Oxley Act of 2002 on the scope of services auditors could provide.

Between 2000 and 2002, in response to the new rules, the IT consulting practices of four of the Big five accounting firms were either sold to public companies or spun off and IPO’d.

- In February 2000, Ernst & Young Consulting was sold to Cap Gemini.

- In February 2001, KPMG Consulting (later BearingPoint, Inc.) was floated with an IPO. (This IPO was delayed and re-priced several times in order to wait until more favorable market conditions after the millennium change, but finally took place and then went nowhere.)

- In July 2001, Accenture (known as Andersen Consulting before its split from Arthur Andersen) also went through an IPO.

- In October 2002, PricewaterhouseCoopers Consulting was sold to IBM. (They failed on their first attempt to sell to HP.)

Only Deloitte Consulting did not, in the end, separate from Deloitte & Touche.

Since the end of 2006, however, the audit firms have been rebuilding their consulting arms. All the largest accounting firms, including Deloitte, are making acquisitions and hiring to expand consulting practices. Fee increases from advising companies on Sarbanes Oxley started slowing down significantly in 2006 and other regulatory changes such as IFRS and XBRL mandates have seen repeated delays. M&A went into a slump that only now looks to be recovering slightly and the financial crisis caused significant contraction in the population of large financial services audit clients.

 

Global highlights via CPA Trendlines and International Accounting Bulletin

The report found that fee pressure is still widespread, but easing, and this has hit the audit sector hardest. However, revenues from audits have actually increased for most networks, with PwC taking the lead and Deloitte following.

Tax was the strongest performer, buoyed by a strong demand in transfer pricing work and international tax advice and PwC led the way in this sector too. The mid-tier are starting to make more noise in the sustainability services market, which continues to grow, but corporate finance, IPO services and transaction support remain flat

• Only four networks failed to grow revenue, a complete turnaround in fortunes from last year
• Deloitte takes the mantle as the world’s largest professional services network for the first time in history
• Deloitte reports $9 million more global revenue than PwC, the slenderest margin
• Consulting growth alone (12%), including major acquisitions in the US (Bearing Point) and UK (Driver’s Jonas) help propel Deloitte to top spot

• PwC is still the largest global audit firm and has the largest tax business. The steady growth in these core businesses in comparison to Deloitte places the network in a good position for 2011

Service lines

• Fee pressure still widespread in the developed economies although it is easing
• Audit the hardest hit by fee pressure although audit revenue from most networks increased. PwC is the top audit firm followed by Deloitte
• Tax was the strongest performer, buoyed by a strong demand in transfer pricing work and international tax advice. PwC leads tax followed by E&Y
• Advisory/consulting was a mixed bag with some networks growing particularly well and others losing out. There is healthy demand for risk management, internal audit and due diligence services
• Sustainability services continues to grow and the mid-tier are starting to become more involved

One of the selectively booming non-audit businesses has been workouts or bankruptcy advisory. PwC’s huge long-term engagement with the Lehman bankruptcy in the UK is a prime example. Some of PwC’s financial services audit clients JPMorgan Chase and Bank of America also grew because of acquisitions during the crisis. Combined with their audit of Goldman Sachs and involvement in Treasury TARP activities,  non-audit revenues are growing for PwC. But revenues and profitability are distributed unevenly by geography and service line in all the firms. Although Deloitte overtook PwC as the largest global firm in revenue this past year, those rankings are not only based on the firms own un-audited, self-reported figures, but show a definite emphasis on consulting and advisory services as a growth engine versus audit.

Continued in article

Bob Jensen's threads on audit professionalism and independence are at
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

"Auditors’ Independence: An Analysis of Montgomery’s Auditing Textbooks in the 20th Century"
by Hossein Nouri and Danielle Lombardi
Accounting Historians Journal
June 2009
http://umiss.lib.olemiss.edu:82/articles/1038280.7113/1.PDF 

For nearly two decades I've updated a Web document called "The Dark Side" in which I post things that worry me about advances in education and communication technology --- http://www.trinity.edu/rjensen/000aaa/theworry.htm

Business Week now has a very long cover story that fits right into "The Dark Side." I don't consider myself a prude or a religious nut. But this trend in networking most certainly discourages me about how technology sometimes eats away at morality and good name of technology. This is yet another dark side tidbit on the evils of technology that goes along with ID theft, malware spreading, Internet frauds, porn, plagiarism, malicious hacking, and the like. I was a bit surprised to find this article in Business Week rather than Newsweek or Time Magazine.
.
The infidelity economy may be "alive, well, and profitable." But so is porn!

Those of you teaching about advances in social networking should also cover the emerging dark sides of social networking.

"Cheating, Incorporated:  At Ashley Madison's website for "dating," the infidelity economy is alive, well, and profitable," by Sheelah Kolhatkar , Business Week, February 10, 2011 ---
http://www.businessweek.com/magazine/content/11_08/b4216060281516.htm?link_position=link2

Do you want to have an affair?

After hearing an ad on Howard Stern's radio show or seeing a schlocky commercial on late-night TV, you might find yourself on AshleyMadison.com—the premier "dating" website for aspiring adulterers. Type in the URL, and as the page loads a gauzy violet backdrop appears with a fuzzy image of a half-dressed couple going at it beyond a hotel doorway. "Join FREE & change your life today. Guaranteed!"

Setting up a profile costs nothing and takes about 12 seconds. First you check off your availability status: "attached male seeking females," "attached female seeking males," or, even though the concept of the site is that all users are in relationships and therefore equally invested in secrecy, "single female seeking males." Next you're asked for location, date of birth, height and weight, and whether you're looking for something "short term," "long term," "Cyber affair/Erotic Chat," "Whatever Excites Me," and so on. If you're like me, you choose a handle based on the cupcake you most recently ate—"redvelvet2"—and then shave a few years and pounds off your numbers.

Once you provide an e-mail address that your spouse would presumably never have access to, you're thrust into Ashley Madison's low-tech pink and purple interface. And then, if you're a woman, the onslaught begins.

Continued in article

February 12, 2011 reply from Francine McKenna

Bob,

 

Maybe you forgot it was that terrible Ashley Madison.com site, the one that advertises on CNBC and wanted to advertise on the Superbowl that lured the poor Ernst & Young partner into a debauched life of inside trading and illicit love triangles.

 

Bad, bad internets...

 

http://nymag.com/daily/intel/2009/07/insider_trading_as_common_as_f.html

In the fall of 2004, a fortysomething investment banker named Donna Murdoch logged into Ashley Madison, the discreet dating website married people visit "when divorce is not an option," and introduced herself to James Gansman, a partner at Ernst & Young in New York. The two struck up a relationship, meeting occasionally in hotels in Philly, New York, and California, and talking on the phone about their lives: James told Donna about how he was kicking ass at work, Donna told James about how she was struggling with her subprime mortgage.

Eventually the two settled into a comfortable day-to-day routine in their respective offices in New York and Philadelphia, staring at the same Yahoo Finance screen.

Sweet. Bill and Melinda Gates used to do kind of the same thing when they were long-distance dating. They'd see the same movies in different places and then talk about them on the phone. We just though we'd mention that, because that's the kind of information we have trapped inside our brains, and we hope that by releasing it we can make room for other things. Anyway, Donna and James's relationship did not go the way of Bill and Melinda's.

Eventually, their conversations about business grew more specific.

Mr. Gansman led Ms. Murdoch in a guessing game about which deals he was working on, she said. "The game was that I wouldn't be looking and he would give me hints: The market cap of two billion or market cap of 400 billion, and here's what they do, and he'd read it to me, and ultimately make sure I guessed," Ms. Murdoch testified. Before long, the guessing game fell away. Mr. Gansman told her more directly about upcoming deals of Ernst clients, she said.

She made $400, 000 off the deal, and the SEC noticed. He made nothing, and now he's going to jail. The end.

Insider Affair: An SEC Trial of the Heart [WSJ via Business Insider]

Francine McKenna

Managing Editor

My site: http://retheauditors.com

At Forbes: http://blogs.forbes.com/francinemckenna

@ReTheAuditors on Twitter

312-730-4884

 

February 12, 2011 reply from Jagdish Gangolly

Bob, Steve,

The forensic practices at the Big 4 are WAY ahead of the accounting academia in using the technology to cover the dark side of social networking in e-discovery. We in the accounting academia have been too busy regressing to take note.

I know of at least two who used it extensively in fraud examination as far back as 2008. They demonstrated its use to me while I was designing our fraud examination course.

One commercial product that is popular is attenex. See http://www.jurinnov.com/attenex.asp 

Jagdish

Bob Jensen's threads on social networking are at
http://www.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's threads on The Dark Side ---
http://www.trinity.edu/rjensen/000aaa/theworry.htm

Bob Jensen's threads on Education Technology ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm

"Brazil Merry Go Round – KPMG Acquires BDO Who Acquires Crowe Howarth…," Big Four Blog, March 30, 2011 ---
http://www.big4.com/blog/brazil-merry-go-round-%E2%80%93-kpmg-acquires-bdo-who-acquires-crowe-howarth%E2%80%A6-707

BDO is in need of a large infusion of cash
BDO = Big Dollars Out

BDO = Big Dollars Out

"$91M awarded in Batchelor case: A jury in Miami awarded millions to the estate and foundation of the late George Batchelor, settling a nine-year-old lawsuit," Miami Herald, February 1, 2011 ---
http://www.miamiherald.com/2011/02/01/2044270/91m-awarded-in-batchelor-case.html

A Circuit Court jury in Miami decided on Monday that the accounting firm BDO Seidman should pay the late philanthropist/aviation pioneer George Batchelor's estate and foundation $91 million for ``fraudulently'' concealing false information about a company in which Batchelor had invested.

The award consists of $55 million in punitive and $36 million in compensatory damages.

Steven Thomas of the Venice, Calif., firm Thomas, Alexander & Forrester, is lead Batchelor attorney. He said he thought that the punitive damage award was so hefty because ``BDO, right up to the end, denied it had a public duty -- and public is literally their middle name: CPA.''

A lawsuit filed in 2002 -- the year that Batchelor died at age 81 -- alleged that BDO Seidman covered up erroneous financial statements during an audit of Grand Court Lifestyles, a Boca Raton owner/manager of ``senior'' communities. Batchelor had invested in Grand Court, which filed for bankruptcy in 2000.

The jury decided that BDO owed the estate $34.4 million and the foundation $2.3 million in compensatory damages.

Thomas said that the entire award ``goes into the Foundation, which means dozens of organizations in Miami that are funded by the Foundation may be getting additional monies.''

Batchelor, who founded Arrow Air and Batch Air, had given an estimated $100 million to South Florida causes that benefited children, animals, the environment and medical facilities before he died. The foundation continues supporting many of those charities.

In a written statement, the accounting firm said it ``strongly'' disagreed with the verdict and planned to appeal.

Continued in article

"Prosecutors on defensive in BDO Seidman fraud case," by Andrew Longstreth, Reuters, February 4, 2011 ---
http://www.reuters.com/article/2011/02/04/accounting-intimidation-idUSN0424891620110204

NEW YORK, Feb 4 (Reuters Legal) - Federal prosecutors who ignited a legal firestorm five years ago for pressuring the accounting firm KPMG to stop paying its former employees' legal fees are facing the same accusations in another high-profile tax-fraud case.

BDO Seidman case has similarities to KPMG

The defendant in this case, Denis Field, ex-CEO of BDO Seidman, the world's fifth largest accounting firm, claims Manhattan prosecutors intimidated his former firm into curtailing and eventually cutting off payments to his lawyers. In recently filed court papers, he claims that the government deprived him of his constitutional right to counsel and seeks dismissal of the case. Field alleges that among other tactics, prosecutors threatened to indict the firm if it kept funding his defense. During a hearing on Thursday, U.S. Judge William Pauley III of the Southern District of New York, who is presiding over the case, closely questioned prosecutors about the accusations. A ruling is expected soon.

The controversy touches on the common arrangement among U.S. companies of paying the legal fees of executives. It raises the question of whether a government attempt to meddle with this practice amounts to depriving a defendant of his or her lawyer -- which could constitute a violation of the right to counsel under the 6th Amendment.

The Field prosecution, in which he is charged with creating phony tax shelters, is strikingly similar to the KPMG matter. That case was thrown out in 2007 after U.S. Judge Lewis Kaplan found that prosecutors had improperly "coerced" KPMG into cutting off the legal fees of 13 former KPMG partners and employees. "KPMG refused to pay because the government held the proverbial gun to its head," Kaplan wrote.

Two of the prosecutors called out by Judge Kaplan -- Stanley Okula and Shirah Neiman -- have also been involved in the Field case, a fact that is prominently noted by Field's lawyers in their motion to dismiss. "The reason for the government's conduct is obvious -- as with KPMG, the prosecutors believed BDO 'should not pay the fees' of allegedly culpable individuals," Field's lawyers argue. They cited the KPMG case no fewer than 50 times in their brief. Okula and Neiman declined comment, as did a spokesperson for the Manhattan U.S. Attorney's office.

Continued in article

Bob Jensen's threads on BDO are at
http://www.trinity.edu/rjensen/Fraud001.htm

Vundabar:  Getting Out of IFRS --- http://www.youtube.com/watch?v=205BqSO6lwk
"Bloomberg: NYSE deal means U.S. accounting (FASB Standards)  for all," Reuters, February 11, 2011 ---
http://www.reuters.com/article/2011/02/11/us-exchanges-bloomberg-idUSTRE71A5O020110211

Merging the iconic New York Stock Exchange with Germany's Deutsche Boerse AG will force European companies to switch to using U.S. accounting rules which have superior disclosures, Mayor Michael Bloomberg said on Friday.

"This will force a common set of accounting standards on the world; the American disclosures are better," Bloomberg said on his weekly WOR radio show, though he admitted U.S. rules did not prevent Bernard Madoff from swindling billions of dollars through a Ponzi scheme.

U.S. rulemakers have been working on aligning their accounting standards with international rules used by more than 100 countries, including European nations. The U.S. Securities and Exchange Commission has said it will decide some time this year whether to require U.S. companies to switch to international standards.

The next "natural link" for the Boerse and the Big Board, the centuries-old symbol of U.S. capitalism owned by NYSE Euronext, would be with Latin American exchanges, said the mayor, a political independent and former trader.

"It's all pretty much a common time zone," he said, explaining linking with Asian exchanges might be more difficult.

Bloomberg previously said the NYSE-Boerse deal will benefit New York City at London's expense by broadening both exchanges' markets and on Friday he said that New York's ability to remain a global financial center hinges on attracting the people who work in financial jobs outside of the exchange.

Floor-trading is dwindling as machine-driven activity rises, which is one of the reasons the exchanges are exploring a merger. "It is the jobs outside the exchange and support the exchange that are going to be here," Bloomberg said.

Saying the best way to keep businesses in New York was keeping crime rates low and making it a desirable place to live, Bloomberg listed one other requirement for a global financial capital.

"In order to have a great financial center you have to be an English-speaking country," or one in which many people speak English because this is the world's business language, he said.

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

Artificial Intelligence --- http://en.wikipedia.org/wiki/Artificial_intelligence

"Watson Is Far From Elementary:  Question-answering machines like IBM's 'Jeopardy!' champion will eventually force us to change what we learn and how we think," by Stephen Baker, The Wall Street Journal, March 14, 2011 ---
http://online.wsj.com/article/SB10001424052748704570904576180954262138300.html

In the weeks since IBM's computer, Watson, thrashed two flesh-and-blood champions in the quiz show "Jeopardy!," human intelligence has been punching back—at least on blogs and opinion pages. Watson doesn't "know" anything, experts say. It doesn't laugh at jokes, cannot carry on a conversation, has no sense of self, and commits bloopers no human would consider. (Toronto, a U.S. city?) What's more, it's horribly inefficient, requiring a roomful of computers to match what we carry between our ears. And it probably would not have won without its inhuman speed on the buzzer.

This is all enough to make you feel reinvigorated to be human. But focusing on Watson's shortcomings misses the point. It risks distracting people from the transformation that Watson all but announced on its "Jeopardy!" debut: These question-answering machines will soon be working alongside us in offices and laboratories, and forcing us to make adjustments in what we learn and how we think. Watson is an early sighting of a highly disruptive force.

The key is to regard these computers not as human wannabes but rather as powerful tools, ones that can handle jobs currently held by people. The "intelligence" of the tools matters little. What counts is the information they deliver.

In our history of making tools, we have long adjusted to the disruptions they cause. Imagine an Italian town in the 17th century. Perhaps there's one man who has a special sense for the weather. Let's call him Luigi. Using his magnificent brain, he picks up on signals—changes in the wind, certain odors, perhaps the flight paths of birds or noises coming from the barn. And he spreads word through the town that rain will be coming in two days, or that a cold front might freeze the crops. Luigi is a valuable member of society.

Along comes a traveling vendor who carries a new instrument invented in 1643 by Evangelista Torricelli. It's a barometer, and it predicts the weather about as well as Luigi. It's certainly not as smart as him, if it can be called smart at all. It has no sense of self, is deaf to the animals in the barn, blind to the flight patterns of birds. Yet it comes up with valuable information.

In a world with barometers, Luigi and similar weather savants must find other work for their fabulous minds. Perhaps using the new tool, they can deepen their analysis of weather patterns, keep careful records and then draw conclusions about optimal farming techniques. They might become consultants. Maybe some of them drop out of the weather business altogether. The new tool creates both displacement and economic opportunity. It forces people to reconsider how they use their heads.

The same is true of Watson and the coming generation of question-answering machines. We can carry on interesting discussions about how "smart" they are or aren't, but that's academic. They make sense of complex questions in English and fetch answers, scoring each one for the machines' level of confidence in it. When asked if Watson can "think," David Ferrucci, IBM's chief scientist on the "Jeopardy!" team, responds: "Can a submarine swim?"

Continued in article

Mr. Baker is the author of "Final Jeopardy—Man vs. Machine and the Quest to Know Everything" (Houghton Mifflin Harcourt, 2011).

A computer that lacks common sense, unfortunately, isn't an oddity. Maybe it should be.
Henry Lieberman, MIT

"Watson on Jeopardy, Part 2: The IBM machine's mistakes offered insights about how it works," by Henry Lieberman, MIT's Technology Review, February 16, 2011 ---
http://www.technologyreview.com/blog/guest/26396/?nlid=4141

What Watson failed to realize was that the word "leg," by itself, wasn't actually an answer to the question. This is common sense for people, because "leg" is an anatomical part, not an anatomical oddity, though Watson did realize that legs were involved somehow. What happened here might have been something more profound than a simple bug. David Ferrucci, Watson's project leader, attributed the failure to the difficulty of the word "oddity" in the question. To understand what might be odd, you have to compare it to what isn't odd—that is to say, what's common sense. A problem with Watson's approach is that if some sentence appears in its database, it can't tell whether someone put it there just because it's true, or because someone felt it was so unusual that it needed to be said.

A computer that lacks common sense, unfortunately, isn't an oddity. Maybe it should be.

Henry Lieberman is a research scientist who works on artificial intelligence at the Media Laboratory at MIT.

An audit firm that lacks common sense, unfortunately, isn't an oddity. Maybe it should be.
In the context of Repo 105/108 auditing of Lehman and C12 Capital Management auditing at Barclays where common sense should've prevailed but did not prevail in order to facilitate accounting deception. What happened to the common sense auditors? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

"Spitzer Calls Accountants 'Facilitators' for Corporate Abuse," by Michael Cohn, Accounting Today, February 8, 2011 --- Click Here
http://www.accountingtoday.com/debits_credits/Spitzer-Calls-Accountants-Enablers-Corporate-Abuse-57235-1.html?ET=webcpa:e1282:133851a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=WebCPA_Daily_020811

Former New York Governor and Attorney General Eliot Spitzer took aim at corporate influence in politics and blamed accountants, as well as lawyers and bankers, for allowing companies and their CEOs to get away with dodgy valuations and overblown compensation.

During a speech Tuesday at the New York University School of Law, sponsored by the American Constitution Society for Law and Policy, Spitzer derided the Obama administration’s increasing acquiescence to corporate America, including the recent extension of the Bush-era tax cuts.

“We have created a class in our society of what I call facilitators,” said Spitzer. “Facilitators — and we’re all part of it — lawyers, investment bankers and accountants. Our purpose is to be hired to justify the actions that are being taken by CEOs and others to run their businesses, and over time what has happened is that we have lost our backbone. We have lost our willingness to stand up and say, ‘Stop.’ There are a bunch of reasons for this. I’ve been in private practice and I know how those pressures are. We don’t like to look at our clients and say, ‘No, you can’t do that. I’m not writing an opinion letter that justifies that valuation.’ We don’t like to write a letter to the CEO saying, ‘No, you don’t deserve a 50 percent bonus.’ Those things don’t happen very often because we succumb to the pressures of our clients.”

Continued in article

Jensen Comment
Aside from his adulterous use of a prostitution ring, Spitzer has had some integrity lapses himself such as lying about campaign contributions, using campaign donations to pay for prostitutes, and the hiding of bribes ---
http://en.wikipedia.org/wiki/Eliot_Spitzer#Scandal_and_resignation .
As Attorney General and Governor of New York, he did take some unusual measures to combat corruption in state government, including orders to state police to conduct surveillances of some top legislators.

Be that as it may, Spitzer is a top Harvard Law School graduate and  in total seems to be dedicated, as a liberal Democrat, to fighting corruption in the private as well as the public sectors. Since the Kennedy era it seems more difficult for the public to forget sex scandals --- in part because of the changed practice of the media in no longer hiding those scandals from the public. Many of the affairs of John and Bobby Kennedy were suppressed by the press until after they were dead. Spitzer will probably never rise again to high office, but he will continue to be a force using his media jobs to hammer at corruption. It would, however, be better if he accompanied his future articles with more examples and facts.

Spitzer earned his reputation as a crime fighter by taking on the Gambino mob in the NYC area. Now he wants to take on the Big Four mob and the Wall Street mob. He's got guts.

Bob Jensen's threads on accounting and auditing scandals are at
http://www.trinity.edu/rjensen/Fraud001.htm

Where were the auditors? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

"What to Ask Your Company's Auditors," by Robert C. Pozen, Harvard Business Review Blog, February 16, 2011 --- Click Here
http://blogs.hbr.org/cs/2011/02/what_to_ask_your_companys_audi.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Despite Sarbanes Oxley, corporate executives still seem awfully good at keeping their boards in the dark. I find it hard to blame board members, though. They're deluged with lengthy reports — not least because of Sarbanes Oxley — and it's hard to know what information they should be worrying about.

So what can board members — specifically audit committee members — do about this problem? I personally find it helpful to ask the company's external auditor for answers to four relatively simple questions:

1. Are there any transactions going on that occur repeatedly at the end of quarters or financial years? It's reasonable enough if a company engages in a complex transaction in response to a unique set of circumstances. But if it's doing a lot of similar things near the end of a reporting period then the audit committee should know why.

    

2. What material items could be presented differently? For some financial information, accounting standards may allow different forms of presentation. Committee members should be fully briefed on whether and why the company decided to use or not use a particular reporting convention on a material item where there was a choice.

    

    

3. What does the competition do differently? Committee members need to know about any material differences in significant accounting policies between the company and its four or five main competitors. This comparative analysis should cover polices such as revenue recognition, warranty obligations, retirement plan obligations, tax reserves, and valuation of goodwill or other intangibles. Some of the differences in accounting treatment will be down to how the companies run their businesses; others will represent accounting judgments that the committee should fully understand.

    

    

4. How do market analysts rate the reporting? Analysts are quick to point out what they perceive as accounting gimmicks used by companies to improve their revenues or net income. They typically get to a company's core earnings by stripping away these gimmicks as well as non-recurring items, changes in tax rates, and gains/losses from currency movements. The less a company's analysts do this, the better the quality of the report.
    

 

All these pieces of information should be sent to the audit committee at least one week before the committee meets. During that week, the chairman of the audit committee should informally discuss with the auditor's engagement partner any specific issues raised by this information and more generally any "close calls" in the financial reports.

Continued in article

Jensen Comment

Additional Questions:

1 What's the added audit fee to get you to agree to underestimating loan loss reserves by 98%?

2 What's the added audit fee for letting us recognize revenue, like Lehman Bros., from repo sales that are certain to be returned?

3 What do you charge for one of those Barclays M12 structured deals on poison transfers to former ex-wives?

Super Teacher Joe Hoyle lists the five biggest mistakes of teachers in classrooms ---
http://joehoyle-teaching.blogspot.com/2011/03/big-mistakes.html
I might add that in terms of pedagogy Joe is almost 100% Socratic Method.
His criticisms tend to be somewhat more appropriate for Lecture Method enthusiasts.
For example, using too much PowerPoint is often more of a problem of a lecturer vis-a-vis a case method teacher.

Socratic Method --- http://en.wikipedia.org/wiki/Socratic_method

The big question mark in Socratic Method is whether a teacher ultimately certifies the best answers.
Former Harvard case method enthusiast Bill Bruns claimed to almost never give his blessings on particular answers.
He felt students should walk away still debating in their heads the answers given in case discussions by fellow students.
This is why "Teaching Notes" provided to instructors using Harvard Cases are often terribly disappointing to instructors seeking answer sheets.
Perhaps this is why Tuck's Richard Sansing will not provide Teaching Notes to cases that he shares on the AAA Commons.

The Oxford Handbook of Credit Derivatives (Oxford Handbooks)

Customers who have purchased or rated Credit Derivatives: Instruments, Applications, and Pricing (Frank J. Fabozzi Series) by Mark J. Anson PhD CFA might like to know that The Oxford Handbook of Credit Derivatives (Oxford Handbooks) will be released on March 22, 2011.  You can pre-order yours by following the link below.

"UK banker jailed for insider trading," by Jane Croft and Brooke Masters, Financial Times, February 2, 2011 ---
http://www.ft.com/cms/s/0/691281a6-2f00-11e0-88ec-00144feabdc0.html?ftcamp=rss#axzz1D5kTPnWC

A high-flying banker who netted £590,000 by trading on secret merger information he obtained at work has been jailed for more than three years, in what a judge described as the “biggest prosecution for insider trading ever brought” in Britain.

Christian Littlewood, who earned an annual salary of more than £350,000 working for Dresdner Kleinwort and Shore Capital , received the longest UK sentence for insider dealing after pleading guilty to illegal trading over a period of eight years.

The case marks the first successful criminal prosecution brought by the Financial Services Authority against a banker who was still working in the City at the time of his arrest. It is part of a deliberate decision by the watchdog to prioritise cases against City professionals and provide “credible deterrence” against market abuse.

Mr Littlewood’s Singaporean-born wife, Angie, received a suspended prison sentence. Her friend, Helmy Omar Sa’aid, who did much of the actual trading, was sentenced to two years in prison and faces deportation.

All three had previously pleaded guilty to eight counts of insider trading in stocks such as Viridian Group and RCO Holdings based on secret price-sensitive information supplied by Mr Littlewood. The trio invested £2.15m in trades and netted £590,000 in profits.

Sentencing the trio, Mr Justice Leonard QC said there was no doubt that the number of “unscrupulous investment bankers” using inside information “exceeds the number of people prosecuted for such offences”.

The judge rejected Mr Littlewood’s attempt to transfer culpability to his wife by arguing that he was not aware of the scale of the trading conducted by her and Mr Sa’aid. Mr Justice Leonard found that trading had been done by Mrs Littlewood “on behalf of the two of you”.

Continued in article

Bob Jensen's fraud updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

"University of Georgia Coach Sentenced for Not Reporting Income From Camps," by Paul Caron, Tax Professor Blog, February 5, 2011 ---
http://taxprof.typepad.com/

Former University of Georgia cheerleading coach Marilou Braswell on Friday was ordered by U.S. District Court Chief Judge C. Ashley Royal to pay $90,900 in restitution for not filing income tax returns from the money she received from cheerleading camps in 2003 and 2004 and sentenced to serve five years probation. She earned $27,641 in 2003 and $22,143 in 2004 in salary from the university and collected $708,278 and $538,005 from the cheerleading camps in those years. The camp tuition included housing in university dormitories, food in university dining halls and practice time in the university coliseum, but the university had to threaten to sue her to recover more than $300,000 for unpaid expenses associated with the camps. Ms. Braswell was fired after a Jewish cheerleader complained that her chances of making the team were hurt because she didn't participate in Bible studies and pregame prayers.  (Atlanta Journal-Constitution, Associated Press.)

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

Free Open Sharing Tutorials, Videos, and Course Materials

Bob Jensen's threads on open sharing lectures, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's threads on free tutorials and videos in various academic disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#EducationResearch

1,400+ Open Sharing "Tutorials" On YouTube from a Harvard Business School Graduate
Khan Academy Home Page --- http://www.khanacademy.org/
This site lists the course categories (none for accounting)

"A Self-Appointed Teacher Runs a One-Man 'Academy' on YouTube:  Are his 10-minute lectures the future?" by Jeffrey Young, Chronicle of Higher Education, June 6, 2010 ---
http://chronicle.com/article/A-Self-Appointed-Teacher-Runs/65793/?sid=wb&utm_source=wb&utm_medium=en

The most popular educator on YouTube does not have a Ph.D. He has never taught at a college or university. And he delivers all of his lectures from a bedroom closet.

This upstart is Salman Khan, a 33-year-old who quit his job as a financial analyst to spend more time making homemade lecture videos in his home studio. His unusual teaching materials started as a way to tutor his faraway cousins, but his lectures have grown into an online phenomenon—and a kind of protest against what he sees as a flawed educational system.

"My single biggest goal is to try to deliver things the way I wish they were delivered to me," he told me recently.

The resulting videos don't look or feel like typical college lectures or any of the lecture videos that traditional colleges put on their Web sites or YouTube channels. For one thing, these lectures are short—about 10 minutes each. And they're low-tech: Viewers see only the scrawls of equations or bad drawings that Mr. Khan writes on his digital sketchpad software as he narrates.

The lo-fi videos seem to work for students, many of whom have written glowing testimonials or even donated a few bucks via a PayPal link. The free videos have drawn hundreds of thousands of views, making them more popular than the lectures by the Massachusetts Institute of Technology, famous for making course materials free, or any other traditional institution online, according to the leaders of YouTube's education section.

Mr. Khan calls his collection of videos "Khan Academy," and he lists himself as founder and faculty. That means he teaches every subject, and he has produced 1,400 lectures since he started in 2006. Now he records one to five lectures per day.

He started with subject matter he knows best—math and engineering, which he studied as an undergraduate at MIT. But lately he has added history lectures about the French Revolution and biology lectures on "Embryonic Stem Cells" and "Introduction to Cellular Respiration."

If Mr. Khan is unfamiliar with a subject he wants to teach, he gives himself a crash course first. In a recent talk he explained how he prepared for his lecture on entropy: "I took two weeks off and I just pondered it, and I called every professor and everyone I could talk to and I said, Let's go have a glass of wine about entropy. After about two weeks it clicked in my brain, and I said, now I'm willing to make a video about entropy."

Some critics have blogged that this learn-as-you-go approach is no way to run an educational project—and they worry that the videos may contain errors or lead students astray.

But to Mr. Khan, occasional mistakes are part of his method. By watching him stumble through a problem, students see the process better, he argues. Sometimes they correct him in comments on his YouTube videos, and he says this makes students more engaged with the material. "Sometimes when it's a little rough, it's going to be a better product than when you overprepare," he says.

The Khan Academy explicitly challenges many of higher-education's most sacred assumptions: that professional academics make the best teachers; that hourlong lectures are the best way to relate material; and that in-person teaching is better than videos. Mr. Khan argues that his little lectures disprove all of that.

Watching his videos highlights how little the Web has changed higher education. Many online courses at traditional colleges simply replicate the in-person model—often in ways that are not as effective. And what happens in most classrooms varies little from 50 years ago (or more). Which is why Mr. Khan's videos come as a surprise, with their informal style, bite-sized units, and simple but effective use of multimedia.

The Khan Academy raises the question: What if colleges could be retooled with new technologies in mind?

College From Scratch Mr. Khan is not the only one asking that question these days.

Clay Shirky, an associate teacher at New York University and a popular Internet guru, recently challenged his more than 50,000 Twitter followers with a similar thought exercise:

"If you were going to create a college from scratch, what would you do?"

Bursts of creativity quickly Twittered in, and Mr. Shirky collected and organized the responses on a Web site. The resulting visions are either dreams of an education future or nightmares, depending on your viewpoint:

All students should be required to teach as well, said @djstrouse. Limit tenure to eight years, argued @jakewk. Have every high-school senior take a year before college to work in some kind of service project away from his or her hometown, said @alicebarr. Some Twittering brainstormers even named their fictional campuses. One was called FailureCollege, where every grade is an F to desensitize students to failure and encourage creativity. Another was dubbed LifeCollege, where only life lessons are taught.

When I caught up with Mr. Shirky recently, he described the overall tone of the responses as "bloody-minded." Did that surprise him?

"I was surprised—by the range of responses, but also partly by the heat of the responses," he said. "People were mad when they think about the gap between what is possible and what happened in their own educations."

Mr. Shirky declined to endorse any of the Twitter models or to offer his prediction of how soon or how much colleges will change. But he did argue that higher education is ripe for revolution.

For him the biggest question is not whether a new high-tech model of higher education will emerge, but whether the alternative will come from inside traditional higher education or from some new upstart.

Voting With Their Checkbooks Lately, several prominent technology entrepreneurs have taken an interest in Mr. Khan's model and have made generous contributions to the academy, which is now a nonprofit entity.

Mr. Khan said that several people he had never met have made $10,000 contributions. And last month, Ann and John Doerr, well-known venture capitalists, gave $100,000, making it possible for Mr. Khan to give himself a small salary for the academy so he can spend less of his time doing consulting projects to pay his mortgage. Over all, he said, he's collected about $150,000 in donations and makes $2,000 a month from ads on his Web site.

I called up one of the donors, Jason Fried, chief executive of 37signals, a hip business-services company, who recently gave an undisclosed amount to Khan Academy, to find out what the attraction was.

"The next bubble to burst is higher education," he said. "It's too expensive for people—there's no reason why parents should have to save up a hundred grand to send their kids to college. I like that there are alternative ways of thinking about teaching."

No one I talked to saw Khan Academy as an alternative to traditional colleges (for one thing, it doesn't grant degrees). When I called a couple of students who posted enthusiastic posts to Facebook, they said they saw it as a helpful supplement to the classroom experience.

Mr. Khan has a vision of turning his Web site into a kind of charter school for middle- and high-school students, by adding self-paced quizzes and ways for the site to certify that students have watched certain videos and passed related tests. "This could be the DNA for a physical school where students spend 20 percent of their day watching videos and doing self-paced exercises and the rest of the day building robots or painting pictures or composing music or whatever," he said.

The Khan Academy is a concrete answer to Mr. Shirky's challenge to create a school from scratch, and it's an example of something new in the education landscape that wasn't possible before. And it serves as a reminder to be less reverent about those long-held assumptions.

Jensen Comment

The YouTube Education Link --- http://www.youtube.com/education?lg=EN&b=400&s=pop
I could not find Khan Academy tutorials linked at the above site.

The Khan Academy YouTube Channel is at http://www.youtube.com/user/khanacademy
The above site also links to a PBS News item about Khan Academy

Khan Academy Home Page --- http://www.khanacademy.org/
This site lists the course categories (none for accounting)

Although Khan Academy has many general education tutorials and quite a few things in economics and finance, I could not find much on accounting.  One strength of the site seems to be in mathematics. There is also a category on Valuation and Investing which might be useful for personal finance.

Bob Jensen's threads on open sharing lectures, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's threads on free tutorials and videos in various academic disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#EducationResearch

Before there was a CAPM model there was the seminal portfolio theory contribution (1952) if Harry Markowitz who later wrote one of the most remarkable books  in the history of economics and finance. Markowitz's theory was outstanding but the practicality of inverting matrices of the order of 1,000 or more rows was out of the question, whereupon subsequent Nobel Prize winners (Treynor, Sharpe, and Lintner) independently developed a more practical single-index (CAPM) approach for implementing the portfolio theory of Harry Markowitz. --- http://en.wikipedia.org/wiki/CAPM

Nobel Laureate Harry Markowitz --- http://en.wikipedia.org/wiki/Harry_Markowitz

Video (apart from an introduction to Professor Markowitz that is entirely too long)
Markowitz' views on Modern Portfolio Theory in his own words ---
http://financeprofessorblog.blogspot.com/2011/02/markowitz-views-on-modern-portfolio.html

Aside from accountics research on human behavior, I'm not certain that any other discovery in history has had more impact on accountics research than the portfolio risk diversification theory of Harry Markowitz that is the root of the CAPM single-index model of portfolio risk.

Without the Markowitz portfolio of risk diversification and the subsequent CAPM accountics research might never have become so dominant in academic accounting research. In later years new findings about the limitations of a single index-model risk model like the CAPM became revealed to a point where many of the accountics research findings over decades of TAR, JAR, JAE, CAR, and BAR publishing are now in serious doubt. Students can even purchase and plagiarize from term paper mill essays of the limitations of the CAPM
http://www.coursework.info/GCSE/Business_Studies/Economy___Economics/CAPM_and_its_significance_L117403.html
Also scroll down at
http://www.coursework4you.co.uk/essays-and-dissertations/finance-and-accounting/cost-of-capital/costofcapital.php

The limitations of CAPM, however, do not detract from the outstanding seminal theory of Harry Markowitz on risk diversification in general.

February 20, 2011 reply from Jagdish Gangolly

Bob,

The following Nobel lecture by Markowitz is one of the clearest exposition of the genesis of portfolio theory I have come across: http://nobelprize.org/nobel_prizes/economics/laureates/1990/markowitz-lecture.pdf 

His autobiography is at http://nobelprize.org/nobel_prizes/economics/laureates/1990/markowitz-autobio.html 

I am not surprised, for his book on Portfolio Selection (one of the readings for an operations research course I took way back in 1967, when the finance and economics folks had pretty much ignored it) too is one of the clearest exposition of the mechanics of portfolio selection decision.

Markowitz also had serendipity on his side. He stood on the shoulders of Jacob Marschak, Leonard Savage, Milton Friedman, Tjalling Koopmans, and Milton Friedman among others. It is a pity that Marschak and Savage did not win the Nobels. Savage dies in 1971 and Marchak in 1977; the Nobel committee had probably not exhausted bestowing them on traditional economists palatable to mainstream ones. However, Jacob Marschak, Markowitz's advisor, may have been the only person all of whose doctoral students went on to win the Nobels: Markowitz, Hurwicz, and Modigliani.

In the last paragraph of the Nobel lecture Markowitz talks about his dissertation defense where Milton Friedman argued that the work was not in Economics. An example of the tunnel vision that economists usually suffer from.

Jagdish

"Under the Microscope: Microfinance's Latest Growing Pains,"  Knowledge@Wharton,  February 2, 2011 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2701      

The most recent crisis to hit microfinance began in India's southern state of Andhra Pradesh, where allegations of widespread over-indebtedness, heavy-handed collection tactics and borrower suicides have stirred a national debate about regulating the industry.

In October, the state government slapped restrictions on microfinance institutions that crippled lending and sent collection rates plummeting along with the share price of SKS Microfinance, India's largest for-profit microlender. On January 19, the Malegam Committee Report, released by the Reserve Bank of India, recommended a range of new regulations for India's microfinance institutions, including interest rate caps, loan limits and income ceilings for borrowers. Some observers welcomed the news; doomsayers predicted a credit crunch and industry collapse.

While it is too early to tell how the sector will respond, the crisis in Andhra Pradesh has sparked heated debate and soul-searching throughout the world's microfinance community. During a recent program for microfinance leaders at Wharton's Aresty Institute of Executive Education, discussion turned repeatedly to questions of over-indebtedness, rapid industry growth, and the fine line between profits and purpose.

Continued in article

"Dealing With The Truth ," by Joe Hoyle, Teaching Financial Accounting Blog, January 23, 2011 ---
http://joehoyle-teaching.blogspot.com/2011/01/dealing-with-truth.html

Jensen Comment
Joe beats around the bush in this posting, but it eventually boils down to grade inflation and dealing with underachieving students.

February 16, 2011 message from David Albrecht on February 16, 2011

Fascinating look at accounting/auditing in China by retired PWC
auditor now professor.
      http://chinaaccountingblog.com/weblog/untitled-text.html
 

We're going to eat your lunch.
Mike Milken (to not-for-profit colleges following his multimillion investment in for-profit ventures)
Now virtually none of the for-profits can make it on their own without Federal government loans to students. It really turns out that Mike Milken should've been referring to taxpayers in the above quotation.

"For-Profit Higher Ed: 20 Questions," by Joshua Kim, Inside Higher Ed, February 20, 2011 ---
http://www.insidehighered.com/blogs/technology_and_learning

1. Who is doing comparative research on the for-profit educational sector and the professionals who work in this industry?

2. Where can we find research on the for-profit educational sector that is unbiased and peer reviewed?

3. What researchers or institutions are conducting research on the for-profit education sector that presents balanced views of both the positives and negatives of this growing sector?

4. What can this research on for-profits teach us about the changing landscape of higher ed?

5. What can this research on for-profits teach us about improving the quality and affordability of all sectors of the postsecondary education market, including public and private non-profit institutions?

6. What is life like for a professor at a for-profit university?

7. How does an academic career at a for-profit resemble and differ from a career at a traditional nonprofit?
 
8. Does a full-time faculty position for a for-profit include research and service, or is it all about teaching?

9. Assuming that tenure is not a part of the picture of a for-profit professor (is this correct?), what sort of academic freedom and protection do for-profit full-time faculty enjoy?

10. Is a for-profit academic career a viable alternative for a new PhD?

11. How many full-time, teaching gigs exist at for-profits? How does this number compare to nonprofits?

12. How is the employment picture for full-time professors at for-profits changing?

13. What proportion of full-time faculty at for-profits have PhDs?

14. Is there a career path from part-time, adjunct faculty to full-time faculty at a for-profit?

15. What are the proportions for part-timers vs. full-timers across non-profits and for-profits?

16. What opportunities or forums or places exist for people who work in the non-profit and for-profit sectors to come together and honestly discuss what we are doing, and what we can learn from each other?

17. How would we rank for-profits in terms of quality and value for the money from a student perspective? Does such a ranking exist?

18. How would we compare and contrast the quality of non-profits with for-profits? Do such comparisons exist?

19. Who would be interested in research on the for-profit education sector, and why?

20. What are your questions about for-profit higher education?

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 25, 2011

Why Investors Can't Get More Cash Out of U.S. Companies
by: Jason Zweig
Feb 19, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Cash Management, Consolidations, Income Tax, International Taxation, Tax Avoidance, Tax Deferrals, Tax Laws, Tax Policy, Taxation

SUMMARY: The article describes the influence of U.S. tax law on corporations' willingness-or lack thereof-to repatriate earnings from foreign subsidiaries. The result is that large cash balances on corporate balance sheets are stashed in foreign locations and cannot be accessed without paying a large tax bill.

CLASSROOM APPLICATION: The article is useful in a tax class, and international accounting class covering global business transactions, or a class covering consolidations.

QUESTIONS: 
1. (Advanced) The article opens with the statement that Microsoft borrowed $2.25 billion in unsecured debt earlier in February, 2011. Define the term unsecured debt.

2. (Introductory) What is unusual about the fact that Microsoft issued corporate debt? Has Microsoft explained this unusual circumstance?

3. (Introductory) What are undistributed corporate profits? Why do U.S. companies' foreign subsidiaries have high balances of undistributed profits?

4. (Advanced) Do undistributed profits necessarily imply high cash balances? Explain.

5. (Advanced) How do cash balances maintained in foreign countries end up showing on U.S. corporations' consolidated balance sheets?

6. (Introductory) What is the problem with companies having too much cash?

7. (Advanced) Refer to the academic survey research done by Professor Michelle Hanlon at MIT. Does this research support the answer you gave about problems with corporations having too much cash? Explain.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Why Investors Can't Get More Cash Out of U.S. Companies," by Jason Zweig, The Wall Street Journal, February 19, 2011 ---
http://online.wsj.com/article/SB10001424052748703803904576152492475125636.html?mod=djem_jiewr_AC_domainid

Earlier this month, Microsoft borrowed $2.25 billion in unsecured debt. What in the world possesses a company with $40 billion in cash and short-term securities to go out and borrow money?

Rock-bottom interest rates are one reason. But the bizarre, byzantine U.S. tax code seems to be another.

Microsoft declined to comment on whether its recent borrowing was partly driven by tax considerations. But, like many purportedly cash-rich companies, Microsoft can't bring home much of its cash without writing a fat check to the Internal Revenue Service.

Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn't in the U.S.; it is abroad. And it isn't likely to come back home unless U.S. tax laws change.

David Zion, a tax and accounting analyst at Credit Suisse, estimates that the companies in the Standard & Poor's 500-stock index have "north of $1 trillion" in undistributed foreign earnings, or profits that have been parked overseas to avoid U.S. tax. Not all of that is cash; some is in the form of inventories or other assets.

U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries. They get a credit for any taxes paid to foreign governments—but, since the corporate-tax rate in the U.S. is one of the world's highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS.

That can put firms in the peculiar position of having tons of cash offshore that they might need but can't use at home without taking a tax hit.

The U.S. is the only major country that taxes foreign earnings of its own companies this way. American investors may not come out ahead either. In a 2007 survey of executives at more than 400 companies, Massachusetts Institute of Technology economist Michelle Hanlon found that the desire to avoid the repatriation tax led to a variety of distortions, most of which end up making companies less efficient.

For example, among the companies that had brought some profits home to the U.S., 30% had invested in lower-returning foreign assets rather than pay additional taxes to bring overseas profits back onshore. Another 56% had borrowed money in the U.S. rather than bring cash home. And 6% said they had declined to invest in a profitable project in the U.S. when funding it with foreign earnings would have triggered a tax hit.

These perverse effects can extend even to smaller companies. Consider Waters Corp., a laboratory-instrument manufacturer based in Milford, Mass. At last count, Waters had approximately $1.4 billion in earnings locked up at foreign subsidiaries. Of the company's $830 million in cash and short-term securities, around 80% sits abroad.

Waters borrowed $200 million last year to pay down higher-cost debt and "for general corporate purposes." Like many U.S. companies, Waters is "building up cash outside the U.S. while borrowing in the U.S.," says Eugene Cassis, its investor-relations director.

"We'd certainly like to be able to bring some of that money back," he says. "We would have a greater ability to invest here if we didn't have to pay a 'tollgate tax' to bring the cash home. Current tax policy creates a slight bias towards acquiring technology or assets outside the United States."

As the great financial analyst Benjamin Graham long argued, shareholders are usually better off when companies hold less cash, rather than more. Too much cash can lead to reckless acquisitions and a fat-and-happy culture of waste.

But, in this case, it isn't just management that is making companies sit on too much cash. It is tax policy, too. Congress and the White House are discussing whether the U.S. should follow the rest of the world and stop taxing repatriated offshore earnings from companies that already have paid taxes to foreign governments. Some gnarly technical details will have to be worked out if the repatriation tax is to be reduced or eliminated.

Continued in article

Bob Jensen's threads on cash earnings versus accrual earnings ---
http://www.trinity.edu/rjensen/theory02.htm#CashVsAccrualAcctg

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 25, 2011

For Some, Currency Hedging Is No Gain
by: Dana Mattioli And Chan R. Shoenberger
Feb 19, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Foreign Currency Exchange Rates, Hedging, International Accounting

SUMMARY: A number of companies are finding fees on options, forward and futures contracts too high-or reporting of hedging gains and losses too distracting-to justify the benefits of descreased risk expected in 2011. This assessment, based on recent reduction in worldwide currency volatility, is leading many to discontinue foreign exchange transaction and translation hedging activities.

CLASSROOM APPLICATION: The article is useful to introduce foreign exchange transactions, foreign currency translation, and hedging activities.

QUESTIONS: 
1. (Advanced) What types of contracts to entities with foreign operations enter into in order to hedge against fluctuations in currency values? Specifically describe a contract that a company with foreign sales may enter into, then describe a contract for companies expecting to make purchases in foreign currencies.

2. (Introductory) Into which of the above categories do you place Progress Software Corp., the company described in this article?

3. (Advanced) What are the differences among an option contract, a forward contract, and a futures contract? Which of these types of contracts did Progress Software use? What situation led the company to use this contract?

4. (Introductory) What trade off is Mr. Rick Reidy, Chief Executive of Progress Software, considering in deciding that he will "hold off this year" on entering into foreign currency hedging contracts?

5. (Advanced) Explain your understanding of the term "natural hedges."

6. (Advanced) What is the difference between a foreign currency transaction gain or loss and a financial statement translation gain or loss? Why might companies want to stop hedging against translation gains and losses but continue hedging against transaction gains and losses?

7. (Advanced) What is speculation in foreign currencies? Identify a company cited in the article that you think is engaging in speculation. Support your assessment.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"For Some, Currency Hedging Is No Gain," by Dana Mattioli And Chan R. Shoenberger, The Wall Street Journal, February 19, 2011 ---
http://online.wsj.com/article/SB10001424052748703803904576152442756363116.html?mod=djem_jiewr_AC_domainid

Progress Software Corp. is walking away from currency hedging, bucking a corporate practice that became commonplace in the wake of the global financial crisis. "This year the price is just too high for us," says Chief Executive Rick Reidy.

The Bedford, Mass., business-software developer, which gets 60% of its $529 million in annual revenue outside the U.S., is joining a small minority of multinationals abandoning or lessening their use of hedging.

Although companies have hedged currency risks for decades, widespread use began after the recession stopped the dollar's downward run and unleashed a period of sharp swings in foreign exchange rates. Companies with global operations rushed to embrace hedging instruments such as forward contracts, which let them lock in an exchange rate in the future at a fixed amount, and options, or the right to buy or sell a currency for a specific price at some future date.

Progress Software bought a currency option in 2010 after exchange-rate fluctuations the prior year caused its reported revenue to decline by $30 million. But with such options, essentially year-long insurance contracts, getting more expensive and currencies becoming less volatile, Mr. Reidy says he'll hold off this year.

"We are considering doing quarterly [contracts] that tend to be more reasonable," he says.

Companies that have stopped hedging exchange rates say they avoid the costs of hedging, which can be steep for thinly traded currencies or contracts that lock in rates for long periods of time. Others, such as Nissan Motor Co., which has a longstanding no-hedge policy, say diversified global operations, create a natural hedge by matching revenue to expenses in local currencies.

Autoliv Inc., a Stockholm-based seatbelt and airbag maker, earlier this month said it would continue to rely on natural hedges, such as its factories in China. Although its fourth-quarter European sales were down 6%, to $717 million, primarily on unfavorable exchange rates, Autoliv doesn't plan on purchasing forward contacts, a practice it stopped in 2004, Chief Financial Officer Mats Wallinsays.

Medical-products maker Becton Dickinson & Co. stopped hedging its so-called translational exposures—incurred when the company brings foreign currencies back to the U.S. and converts to dollars—starting in October, although it still hedges transactions. The cost of options used for currency hedging became too expensive a few years ago, says Chief Financial Officer David Elkins, and it began using forward contracts instead.

In its last fiscal year, Becton reported a roughly $31 million hedging loss compared with a $100 million hedging gain the prior year. Executives were spending too much time explaining hedges to investors, Mr. Elkins says. "We want to do away with that distraction."

Hedging risks are a growing issue for pharmaceutical investors, says Tony Butler, a managing director at Barclays Capital, who notes investors have asked him to detail individual companies' foreign exchange sensitivity. "There was an increasing discussion of [foreign exchange], away from the fundamentals of the business," he says.

Going cold turkey on hedging can lead to wide revenue fluctuations as exchange rates change. That isn't a great idea, said Jiro Okochi, chief executive of Reval, which provides software to help companies manage foreign exchange, commodities and interest rate risks.

Some investors look for that exposure, says Jeffrey Wallace, managing partner of Greenwich Treasury Advisors in Boulder, Colo. "The very large companies sometimes say to their shareholders, 'You bought me because you wanted global risk, and I'm going to give it to you.'"

For some companies, a switch away from currency hedging is actually a bet that a currency will move in a certain direction. Moscow-based Mobile TeleSystems stopped its currency hedging this year and won't hedge unless the Russian ruble starts to depreciate, says Alexey Kornya, the company's chief financial officer.

This differs from the company's strategy in 2009 and 2010, when volatility in the markets led the company to hedge heavily. About 90% of MTS's revenue is derived in rubles, but it is also exposed to other currencies in Eastern Europe, especially Ukraine, Armenia and Uzbekistan.

In 2009, the telecommunications operator hedged about $1.4 billion of its debt portfolio, says Mr. Kornya. In 2010, it only hedged $200 million of its U.S. dollar exposure and the company moved toward financing in rubles rather than dollars, he says. This year, Mr. Kornya says he doesn't see the need to hedge yet, but is keeping a close eye on the ruble's value. If the trade surplus began to diminish and the ruble depreciated, the company would take hedging actions, he says.

Continued in article

Bob Jensen's tutorials and videos on accounting for hedging transactions ---
http://www.trinity.edu/rjensen/caseans/000index.htm

Do great books sell themselves?
Apart from the Disappearing Spoons book itself, the article below has some things to say about book marketing. Some years back I remember receiving several copies of a book where each copy was contained in a really fancy box. After reading a goodly portion of the book I decided that the "gift" was more marketing hype than book content. I really did not care for the book in spite of really admiring one of the great authors who is also a friend. This book proved to me that really great scholars can write some pretty bad books --- especially when they are trying too hard to be creative. The book by the way is entitled:
Thog’s Guide to Quantum Economics: 50,000 Years of Accounting Basics for the Future 
Copyright 2005 by Mike Brown and Zoe-Vonna Palmrose with Illustrations by Warren Miller.
Distributed by MAC Productions (Duvall, WA), ISBN 0-9764694-0-5.
As of February 20, 2011 Amazon has four copies left and Barnes & Noble has no copies available.

"Sharing 'The Disappearing Spoon'," by Joshua Kim, Inside Higher Ed, February 10, 2010 ---
http://www.insidehighered.com/blogs/technology_and_learning/sharing_the_disappearing_spoon 

The nicest thing that one person can do for another is to give a book (maybe that is why I'm such a librarian groupie!). Imagine my joy when the UPS guy dropped off a big box full of 12 books! Actually 12 copies of The Disappearing Spoon: And Other True Tales of Madness, Love, and the History of the World from the Periodic Table of the Elements, by Sam Kean.

The books were sent by Amanda Tobier, a marketing manager at Little, Brown and Company. I had written a brief blog about the book, and Amanda reached out to me wondering if I'd like to share some copies of the book around campus. I'm not quite sure the best way to pass these books along to my campus community. Choices include:

• Drop the books off at the Department of Chemistry.

or

• Distribute the books through our Center for Advancement of Learning.

or

• Give the books to my colleagues in our Library, as that way they could circulate.

I just don't know.

Any ideas? How would you find loving homes on your campus for this wonderful book?

Anyway, I was so happy with this box of books I decided to ask Amanda what motivated her to send it along. Below is a quick e-mail interview that I did with Amanda:

My Question: Why did you decide to send a box of the The Disappearing Spoon to me? What were your motivations?

Amanda's Answer: I sent out copies of The Disappearing Spoon knowing (hoping!) that you would better be able to find the right academic audience for the book. I’m limited in how I can find readers of a particular niche, because I am not in that niche myself, so it is of immeasurable help to have that assistance.

My Question: What do you think would be the best way to get this book into the "consciousness" or "zeitgeist" of my institution? How do you think the copies of the book should be distributed.

Amanda's Answer: The best way to get into the zeitgeist is probably something you know best! Maybe your community responds to contests, or challenges. The responders who have the funniest/smartest/most unique request for the book, perhaps. Or maybe it can inspire some short blog posts of their own—each person who wins a copy would then write up a short review. Or maybe teachers/students would write about their own favorite element.

My Question: How common is it to send a box of popular nonfiction books, books that could (and should) be assigned in courses and read by our faculty / students / staff, to campuses.

Amanda's Answer: Sending out books like this is fairly unusual. Publishers generally depend on the outreach of their academic marketing departments, which issue catalogs and attend conferences where faculty can request books for consideration of adopting for their courses. In seeking out bloggers like you, I know there is already interest, and it is a more focused approach. It sometimes also requires more work, but that’s the fun part of my job.

My Question: You sent a box of hardcover books - but I read the book in audio format from audible.com. Do you think that there is room for "seeding" books like this on campus with digital copies (from either e-books or audiobooks). What would be the pros and cons.

Amanda's Answer: Digital copies are always a possibility, especially when we are offering enhanced versions of the ebook. It’s a great way to introduce potential readers to the extra components of an ebook, or an audio book. There are no cons, I think—it still promotes reading, and readers can choose how they prefer to view/read/listen to the book.

My Question: How much adoption on college campuses have you seen around The Disappearing Spoon. Have you worked on other titles (or can you think of other popular nonfiction books) that have really taken off on campuses?

Amanda's Answer:The Disappearing Spoon has been adopted by several schools (that we know of, there could be more.) And we know there will be many more when the book comes out in paperback this spring. We have had huge success with all of Malcolm Gladwell’s books, and more recently, with Jonathan Safran Foer’s book on vegetarianism, Eating Animals.

Continued in article

Teaching Case on Disclosure of Contingent Liabilities

The Financial Accounting Standards Board has tried twice in the past three years to toughen its rules on loss disclosures. Both times its attempts were beaten back by opposition from banks and other companies, who worried stricter rules would force them to disclose too much and thus tip their hands to legal adversaries.

From The Wall Street Journal's Accounting Review on March 4, 2011

Pressure Spurred Disclosures
by: Michael Rapoport
Mar 02, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Contingent Liabilities, Disclosure, Disclosure Requirements, SEC, Securities and Exchange Commission, Securitization

SUMMARY: Goldman Sachs Group Inc. disclosed the potential for $3.4 billion additional liabilities from lawsuits related to repurchasing securities it packaged and sold during the housing boom. Similar disclosures were made by J.P. Morgan Chase & Co, Citigroup Inc., Bank of America Corp., American Express Co. and Wells Fargo & Co. The SEC sent letters advising the financial services companies about "some of the criteria banks should use in determining potential losses, including those related to mortgages, to comply with disclosures rules."

CLASSROOM APPLICATION: The article provides an interesting discussion of disclosure by financial firms of reasonably possible litigation loss contingencies.

QUESTIONS: 
1. (Introductory) Who are the financial firms discussed in this article? What potential losses are they facing? From what transactions are these issues arising?

2. (Advanced) Under what authoritative standard must these financial firms disclose potential losses? Provide a specific reference to the professional citation of this accounting requirement and state the reporting requirement.

3. (Introductory) Based on the description in the article, what judgment is involved in deciding on disclosures to be made about potential losses?

4. (Advanced) What guidance has the SEC given in order to ensure these financial firms are meeting the authoritative requirements in this area? Is this guidance included in the accounting standard itself? Explain, including in your answer a comment on the role of the SEC in publicly-traded companies' financial reporting.

5. (Introductory) Why does the author speculate that the Financial Accounting Standards Board "also may have played a role" in forcing these additional disclosures?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Pressure Spurred Disclosures," by: Michael Rapoport, The Wall Street Journal, March 2, 2011 ---
http://online.wsj.com/article/SB10001424052748703409904576174912720646124.html?mod=djem_jiewr_AC_domainid

What forced Goldman to make the new disclosure? Regulatory pressure on big banks, as well as a desire to head off more-stringent accounting rules, pushed the firm and other companies to better disclose their potential legal losses.

Goldman's move follows similar disclosures from J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp., American Express Co. and Wells Fargo & Co. All told, those companies face potential losses that amount to more than $15 billion.

Companies have long had to disclose legal liabilities in their regulatory filings. Since 1975, companies have been required to set reserves for probable losses whose approximate amount is known. The rule says that when there is a reasonable possibility of a loss, companies don't have to reserve for it but they must disclose it and do their best to estimate the amount.

The Securities and Exchange Commission gave companies a pointed reminder of that rule in October, when it sent a "Dear CFO" letter to various financial-services companies, and recently followed up with detailed questions. The letter stressed they must disclose their potential risks and costs in the wake of the mortgage-foreclosure scandal and the subsequent repurchase demands from investors. It also spells out some of the criteria banks should use in determining potential losses, including those related to mortgages, to comply with disclosure rules.

The amounts disclosed aren't expected losses; they are worst-case scenarios based on losses that have more than a slight chance of happening, but are less than likely. But what constitutes "reasonably possible," as the rule states, is open to interpretation. That may lead banks to use different standards in determining what potential losses should be disclosed.

Some banks, such as J.P. Morgan and Citigroup, disclosed more than $4 billion each in additional potential losses. Morgan Stanley disclosed it is reasonably possible losses are $518 million, as it had previously disclosed regarding two individual lawsuits.

Linda Griggs, a partner in the securities practice of law firm Morgan Lewis & Bockius LLP, said that in addition to the "Dear CFO" letter, SEC staffers have been asking banks more frequently about disclosures of potential losses when they scrutinize the banks' regulatory filings. The commission "made it clear they should be better disclosed," she said.

An SEC spokesman declined to comment. A Goldman spokesman also declined to comment.

Accounting rule makers may also have played a role. The Financial Accounting Standards Board has tried twice in the past three years to toughen its rules on loss disclosures. Both times its attempts were beaten back by opposition from banks and other companies, who worried stricter rules would force them to disclose too much and thus tip their hands to legal adversaries.

In November, however, when the FASB last put off consideration of a tougher rule, the board said it would review year-end 2010 filings to see if companies were disclosing enough about possible litigation losses.

Continued in article

Bob Jensen's threads on accounting for contingencies and intangibles are at
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

"A preliminary psychology of homework," BPS Research, March 15, 2011 ---
http://bps-research-digest.blogspot.com/2011/03/preliminary-psychology-of-homework.html

The beneficial effect of homework, if they get round to it, on pupils' subsequent academic grades has been shown before. It's somewhat surprising, therefore, how little research has looked at how teenagers feel about homework, where they do it and who they do it with. Hayal Zackar and her team have made a start.

The researchers asked 331 high school and middle school pupils (aged 11 to 18) in the USA to wear for one week a special watch that beeped eight times a day at random intervals. When the watch went off, the teenagers had to fill out a brief form indicating what they were doing, who they were with and how they felt. This process, known as the experience sampling method, captured a total of 1315 homework episodes in various places.

Continued in article

"Rigor Please," by Mike Adams, Townhall, March 20, 2011 ---
http://townhall.com/columnists/mikeadams/2011/03/21/rigor_please

For some time, I have made a habit of asking students their major (and minor) immediately after they ask me a silly question. This is necessary because I teach two basic studies courses per semester – both populated by students from across the spectrum of academic disciplines. I have found (consistently) that nearly all inane questions and comments come from students in just a handful of academic majors.

In the past, I’ve gotten myself in hot water for suggesting that the African American Center, LGBTQIA Center, Women’s Center, and El Centro Hispano be shut down in order to ease our current state budget crisis. But, today, I propose that we go further by eliminating all academic majors and minors ending with the word “studies.”

This is not meant to be prejudicial – although, having little else to do, the Arrogant American Centers will try to make it so. Let it be known that I propose eliminating more than just Arrogant American and Hyphenated American Studies. I also want to do away with Communication Studies, Environmental Studies, Liberal Studies, Women’s Studies, and Gay and Lesbian Studies. And I want the cuts to be implemented across our sixteen-campus system.

The data I plan to use to support my proposal is not scientific. If it were, the proponents of the various “studies” programs would not understand it. So I rely principally on an unscientifically gathered collection of stupid questions I have recently heard from students in the Fill-in-the-Blank Studies era of higher education. These student comments demonstrate that their “studies” professors are truly making a difference in their lives and in the dominant “society”: *At a local grill, the waitress, a UNCW “studies” major, asked "Would you like a sweet tea or a beer?" to which I responded "The latter." She then asked, "Which one is that?" I responded by asking her "Well, why don't you just guess? You have a fifty-fifty shot at getting it right." She responded by saying "I'm not in the mood to think."

Just two days before an exam I gave my students a review session. I told them they could ask any question as long as they did not ask me what to “focus on.” I explained that asking what to “focus on” was the same as asking “What is going to be on the test?”

First question: “What should we focus on in chapter three?”

When I refused to answer, the response was “There’s just so much to read. Where is our study guide?” (For the record, study guides are most often found in classes ending with the word “studies.” That is why “studies” students so often demand them. It’s an addiction).

Another student wrote to tell me she was going to be missing the next class. Her question was:

“Will we be talking about anything important?” It’s a fair question. Few of the professors in her major talk about anything important.

Continued in article

Mike Adams is a criminology professor at the University of North Carolina Wilmington and author of Feminists Say the Darndest Things: A Politically Incorrect Professor Confronts "Womyn" On Campus.

Bob Jensen's threads on Tricks and Tools of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

"Let’s Have an Adult Discussion About CPA Exam Scores," By Adrienne Gonzalez," by Jr. Deputy Accountant Adrienne Gonzalaz, Going Concern, March 25, 2011 ---
http://goingconcern.com/2011/03/lets-have-an-adult-discussion-about-cpa-exam-scores/#more-27540

Jensen Comment
Although Adrienne lives to toss out four-letter words, she's remarkably restrained (for her) in this tidbit.

Bob Jensen's threads on the CPA Examination are at
http://www.trinity.edu/rjensen/BookBob1.htm#010303CPAExam

Academically Adrift: Limited Learning on College Campuses
"What Really is to Blame?," by Joe Hoyle, March 9, 2010 ---
http://joehoyle-teaching.blogspot.com/2011/03/what-really-is-to-blame.html 

By now, everyone who reads this blog has probably heard of the book “Academically Adrift: Limited Learning on College Campuses” by Arum and Roksa that basically makes the claim that the emperor has no clothing by giving evidence that students do not learn much in their four years in college. If you have missed the release of the book, you can learn more at the following URL where the authors are quoted as stating "How much are students actually learning in contemporary higher education? The answer for many undergraduates, we have concluded, is not much.”

http://www.insidehighered.com/news/2011/01/18/study_finds_large_numbers_of_college_students_don_t_learn_much

What I find most interesting is that the blame game has started. Something is obviously wrong so what is to blame? Here are some culprits that I’ve heard mentioned: grade inflation, lack of education classes for college professors, the stress put on faculty to do research so they can’t focus on their teaching, lack of student preparation in K-12, student evaluations, lack of uniform requirements (students prefer to sign up for easier teachers – what a shock that one is), the desire of universities to retain students, increased use of adjuncts, the failure to reward good teachers appropriately, and on and on.

And, my response is—after 40 years in the classroom—certainly, all of these are a factor. We have built an education system with so many internal flaws that I’m surprised it works as well as it does. It is not one problem; there are many problems. Anyone with their eyes open should have seen this coming. You’d have to be totally in denial not to have expected these results. The only thing that surprised me about this study was that anyone was surprised.

. . .

The results of the study also indicated that 35 percent of students said they studied five hours per week or less, with a 50 percent overall decline in the number of hours spent studying compared to years past.

Sadly, I don’t doubt the data whatsoever. Excluding a small minority, we study less. I’d go as far to admit that I study less now than I did in high school. I remember spending hours on my Gateway computer typing up study guides for exams and writing extensive papers for various AP classes.

According to the study, 50 percent of the students said they didn’t have a single course that required them to write 20 pages total. I’m not shocked by that statistic either.

Granted, I am a journalism major and am writing constantly, however I do have many friends who say that when it comes to writing papers, they simply aren’t assigned them.

I can recall writing a 30-page research paper on inclusion in elementary education during my sophomore year of high school.

Thirty pages for one assignment makes all of the assignments from my general education classes at Richmond look like a two weeks paid vacation.

When I question why it is that we study less I think it all comes down to one thing: accountability. In high school I was held accountable by my parents, my teachers, my peers and more importantly, by myself.

If I didn’t put in the effort, I didn’t receive a good grade. And why should I have? I didn’t deserve one. Which was why I made sure I worked hard — always.

Accountability is not a word we hear very often in college, at least at this one. We’re all told that college is supposed to be hard.

That’s when the justifying starts. The fact that I got a C on an anthropology paper no longer has to do with the fact I wrote it the night before it was due, rather that I’m not an anthropologist. Justifications like these make lack of accountability a comfort.

Many professors are just as guilty as their students. Instead of demanding hard work, effort and, inevitably, respect from his or her students, he or she attempts to gain respect (possibly in the form of a good evaluation wink, wink) by catering to the “needs” of students.

Another possible explanation for the decrease in studying, authors of “Academically Adrift” say, may be that the pressure put on students to be socially engaged is too great. What do colleges care about? Student retention.

So a happy student means a student who is doing fun things on and around campus. Fun things on and around campus mean that student is coming back next year.

So when the admissions spiel sounds a little like, “We care about your happiness,” future generations of college students should smile because now they’re in on the joke.

Data from the CLA survey indicated that students who majored in more traditional liberal arts studies such as English or philosophy showed higher levels of critical thinking and writing skills. It makes sense. I can’t imagine it’d be easy to B.S. your way through an analysis of the Theory of Forms.

For those of you, like myself, who are questioning your personal improvement throughout your year(s) spent at University of Richmond, a word of advice: It’s not too late.

First step: Hold yourself accountable. No one will do it for you.

Second step: Challenge your teachers to challenge you.

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

Death Tax --- http://en.wikipedia.org/wiki/Death_tax#Future_of_tax_on_inheritances

I should preface this tidbit by stating that I personally prefer high estate taxes because I think descendants wealthy people should make there own way in life even though they probably were advantaged with exclusive private school educations, world travel, and fantastic medical care. Having said this, if a multimillionaire came to me for advice, I would tell them to avoid certain states at all costs, including such nice retirement states as Hawaii, Vermont, and Oregon. The Garden State has nice green grass over its graves but it's a lousy place to die if you're very wealthy.

If you live in one of the following states it is probably best to call a real estate agent and a moving van company as quickly as possible. And then die as soon as possible before Congress brings back the Federal death tax.

"Death Tax Ambush: Many States Now Have Crushing Burdens," The Wall Street Journal, February 8, 2011 ---
http://online.wsj.com/article/SB10001424052748703960804576120050963075390.html?mod=djemEditorialPage_h

Family business owners, ranchers, farmers and wealthy retirees can avoid that tax by relocating to Arizona, Florida, Georgia, Idaho, South Carolina and other states that don't impose inheritance taxes. There are plenty of attractive places to go.

New research indicates that high state death taxes may be financially self-defeating. A 2011 study by the Ocean State Policy Research Institute, a think tank in Rhode Island, examined Census Bureau migration data and discovered that "from 1995 to 2007 Rhode Island collected $341.3 million from the estate tax while it lost $540 million in other taxes due to out-migration."

Not all of those people left because of taxes, but the study found evidence that "the most significant driver of out-migration is the estate tax." After Florida eliminated its estate tax in 2004, there was a significant acceleration of exiles from Rhode Island to Florida.

Continued in article

Slemrod sees US tax/death experiment
Ig Nobel Prize winner Joel Slemrod (of the University of Michigan) celebrates/rues/assesses a grand US government experiment that will test his prize-winning theory:
http://improbable.com/2010/01/13/slemrod-sees-us-taxdeath-experiment/
Thank you Paul Polinski for the heads up

A few years ago I called Marc Abrahams offering to return my 2001 Ig Nobel Prize in economics (won jointly with Wojciech Kopczuk [of Columbia University). Our prize-winning research showed that when estate taxes are known in advance to be changing, some people time their deaths (or have their deaths timed for them) so as to save their heirs money. The evidence: in the U.S. history of estate taxes, when tax rates went up, there were less (than otherwise) deaths after the law change, and when tax rates went down, there were more deaths after the law change. Not many more (or less), but a statistically significant amount—and only for those rich enough that the estate tax actually would apply. My call to Marc was to inform him that our findings had recently been replicated in both Australian data and Swedish data. In 2001, the Prize criterion was for discoveries “that cannot, or should not, be reproduced,” but now our research had been reproduced (even if arguably it should not have been.) Marc told me not to worry because after 2001 the Ig criterion had been changed to achievements that “first make people laugh, and then make them think” and that our research therefore still qualified.

Continued in article

Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/BookBob1.htm#010304Taxation

2008-2010 E. Kent St. Pierre

2011- ? William Pasewark (Texas Tech)

The AAA Executive Committee decision to drop Issues in Accounting Education and Accounting Horizons followed by the grass roots Internet movement that blocked this decision and kept the two journals alive ---
http://www.trinity.edu/rjensen/AAAjournals.htm

2010- ?  Dana R. Hermanson (Kennesaw State University)

History of Accounting Horizons Editorial Policy ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#AccountingHorizons
 

PAST EDITORS of The Accounting Review

1976–1978 Don T. DeCoster

1978–1983 Stephen A. Zeff

1983–1987 Gary L. Sundem

1987–1990 William Kinn

1990–1994 A. Rashad Abdel-khalik

1994–1997 Robert P. Magee

1997–2000 Gerald L. Salamon

2000–2002 Linda Smith Bamber

2002–2005 Terry Shevlin

2005–2008 Dan S. Dhaliwal

2008-2011 Steven J. Kachelmeier

2011- ? John H. Evans, III (Harry) University of Pittsburgh

History of Editorial Policy of The Accounting Review ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Also see http://www.trinity.edu/rjensen/TheoryTAR.htm

Humor Between February 1 and March 31, 2011

The Internet was invented in 1969 and used various protocols (such as FTP) for transmission of messages and data for about 20 years before the World Wide Web's HTML protocol was invented ---
http://en.wikipedia.org/wiki/Internet

@ = "about?"
A Bit of Media History when Katie Couric cracks her knuckles
Here's a Today Show video segment demonstrating how some leading figures of the media were not yet informed about the Internet 25 years after it was invented and five years after the WWW was invented ---
http://tv.gawker.com/#!5746239/katie-couric-can-you-explain-what-internet-is

Two Mergers and Acquisitions Cases
From The Wall Street Journal Accounting Weekly Review on February 18, 2011

Investors Warm to Big Deals
by: Anupreeta Das and Gina Chon
Feb 11, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Mergers and Acquisitions, Stock Price Effects

SUMMARY: Worldwide mergers & acquisition activity totals $338 billion so far in 2011, "...a rate 25% higher than in the same period last year. And in the U.S., deal volume is more than double last year's rate, which makes 2011 the most active since 2008." M&A deals this year also are larger--with 12 deals worldwide, 8 in the U.S., above $5 billion-and are focused on consolidation "mostly in coal-mining, utilities and exchange companies." One unusual factor this year: not only are target firm share prices reacting positively to the transactions, but so are acquiring firms' share prices. Acquirers usually see their share prices fall as shareholders expect virtually all of the gains from business combinations to be paid out to target firm shareholders.

CLASSROOM APPLICATION: The article is useful to introduce general topics related to mergers and acquisitions, typically done in an Advanced Accounting class prior to teaching consolidation accounting.The general tone of the article also makes it useful for an MBA class.

QUESTIONS: 
1. (Introductory) Summarize the current state of mergers and acquisitions activity in 2011 compared to recent years.

2. (Introductory) What does this M&A activity indicate about corporate CEO confidence in the overall U.S./North American economy? Hint: you may also refer to discussion in the related video to answer this question.

3. (Advanced) "...The deals have had little sizzle, serving to consolidate mostly coal-mining, utilities and exchange companies." What does the term "consolidate" mean in this context?

4. (Advanced) How to acquiring firm and target firm share prices typically react to merger and acquisition announcements? How is that reaction measured? What is different about shareholder reaction to 2011 M&A activity?

5. (Advanced) How do "low interest rates" lead companies "back in the M&A game"?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

---

Sanofi, Genzyme May Announce Deal Wednesday
by: Gina Chon and Jonathan D. Rockoff
Feb 16, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Mergers and Acquisitions

SUMMARY: On Wednesday, February 17, 2011, Sanofi-Aventis and Genzyme announced that they had reached a deal for acquisition of Genzyme. The companies' boards agreed to a cash deal of about $19 billion plus contingent payments, leading the total to over $20 billion. "Now comes the hard part: making the marriage work."

CLASSROOM APPLICATION: The primary and related articles list factors to be considered that may inhibit success of an acquisition useful in introducing business combinations in an advanced financial accounting class or an MBA class.

QUESTIONS: 
1. (Introductory) Summarize this acquisition transaction. What is the strategic purpose behind the transaction? What is the consideration being paid, and to whom is it being paid?

2. (Advanced) Describe the process of negotiations culminating in the deal announcement described in this article. In your answer, define the phrase hostile takeover.

3. (Advanced) Categorize this acquisition as either vertical, horizontal, or conglomerate. Support your assessment.

4. (Introductory) What pitfalls have beset acquisitions in the pharmaceutical industry? What factors indicate whether or not this business combination might face similar difficulties?

5. (Introductory) What are contingent payments in an acquisition? What purpose do they serve in this deal for Sanofi-Aventis to acquire Genzyme?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Investors Warm to Big Deals," by: Anupreeta Das and Gina Chon, The Wall Street Journal, February 11, 2011 ---
http://online.wsj.com/article/SB10001424052748704132204576136553233927870.html?mod=djem_jiewr_AC_domainid

The big takeover deal has come back, reflecting increased corporate confidence and economic recovery. What should hearten prospective deal makers is how the stock market has reacted to the transactions: It has loved them.

Across the globe, deal volume stands at $338 billion so far this year, a rate 25% higher than in the same period last year. And in the U.S., deal volume is more than double last year's rate, which makes 2011 the most active since 2008.

The deals are getting bigger, too. In 2011, there have been 12 deals valued above $5 billion, eight of them in the U.S., according to Dealogic. There were only two such deals in the U.S. at the same time last year.

For all their size, the deals have had little sizzle, serving to consolidate mostly coal-mining, utilities and exchange companies. There was Alpha Natural Resources Inc.'s $7.1 billion deal to buy Massey Energy Co., a $13.7 billion merger of utility companies Duke Energy Corp. and Progress Energy Inc., and this week, the planned deal between London Stock Exchange Group PLC and Canada's TMX Group Inc., the company that owns the Toronto and Montreal exchanges.

One of the big differences from past merger run-ups: Investors are sending the acquirers' stock prices up, not down, after the deals are made public.

Shares of iron-ore producer Cliffs Natural Resources Inc. rose nearly 3% on Jan. 11 after it announced a deal for rival iron-ore producer Consolidated Thompson Iron Mines Ltd. for about $5 billion.

On Monday, Danaher Corp. agreed to pay $5.87 billion for Beckman Coulter Inc., which makes diagnostic equipment used in medical testing. Danaher is paying a 45% premium on Beckman shares, usually a sum that sparks acquiring-company shareholders to fear the company is spending too much. But Danaher stock rose on the news, as investors cheered the industrial conglomerate's move into a new, high-growth sector of life sciences. Swelling middle-class populations in emerging markets such as China and India are expected to drive demand for preventive medical care, of which clinical testing is a central feature.

Deutsche Bank analyst Nigel Coe called the deal "strategically coherent" and said the low cost of financing the deal, given the state of credit markets right now, will add more to Danaher's earnings.

Wall Street has welcomed these deals because many of these industries were ripe for consolidation before the recession, but deal-making was put on hold as the debt markets shut down and companies preferred to hold on to their cash.

For instance, Deutsche Börse AG and NYSE Euronext talked seriously about a deal in 2008 and 2009, but the fragile global economy discouraged a cross-border merger. The two are now close to a tie-up to form a company with a putative market value of $25 billion, and a deal could be sealed next week. The Big Board's stock shot up as much as 18% on news of the latest talks, which followed Tuesday's merger news between the owners of the London and Toronto exchanges. Shares of those companies climbed 9% and 4%, respectively.

"We saw a time period in 2009 and even in early 2010 when CEOs were primarily focused on tactical opportunities, but today they're focused more on strategic opportunities," said Jack MacDonald, co-head of Americas M&A at Bank of America Merrill Lynch.

Danaher, for instance, has had its eye on diagnostics companies for years. It was a confluence of factors, including the improving economy, with "headwinds dissipating, tailwinds getting stronger," that helped it seal a deal for Beckman, Danaher Chief Executive Lawrence Culp said in an interview Monday.

Low interest rates, strong corporate performance in 2010 and a sense that the global economy is moving forward have put companies "back in the M&A game," he added.

Continued in article

"Sanofi, Genzyme May Announce Deal Wednesday," by: Gina Chon and Jonathan D. Rockoff, The Wall Street Journal, February 16, 2011 ---
http://online.wsj.com/article/SB10001424052748704409004576146350470325700.html?mod=djem_jiewr_AC_domainid

Sanofi-Aventis SA is expected to acquire Genzyme Corp. for about $19 billion in cash, plus possible additional payments in the future, in a deal that could be announced as soon as Wednesday, people familiar with the matter said.

After Sanofi initially considered trying to obtain a slightly lower price, the parties largely agreed to the broad terms that they originally negotiated when Sanofi was given access to Genzyme's financial books on Jan. 31, these people said.

Talks are continuing and final details are still being worked out, these people added. The boards of both companies were meeting Tuesday and an announcement could come in the morning European time, ahead of Genzyme's earnings announcement.

As part of that broad agreement, Sanofi agreed to raise its offer from $69 a share to about $74 a share in cash, or about $19 billion, people familiar with the matter said.

Genzyme investors also would receive a so-called contingent value right, or CVR, that would entitle them to additional payments if the company meets certain sales goals. The CVR, which investors would be able to trade on a stock exchange, would have an initial trading value of at least $2 a share, people familiar with the matter said.

After Sanofi finished its due diligence on Genzyme, Sanofi executives pushed to change some of the original terms, and therefore some of the criteria for the CVR have been adjusted, these people added. Details of the terms of the CVR are still being finalized, they said.

The CVR would have an eventual value of between $5 and $6 a share if Genzyme meets sales targets for a drug used to treat leukemia, which is also being tested against multiple sclerosis. The future payments could be worth as much as $14 a share over the long term in the best-case scenario for sales of the drug to multiple-sclerosis patients, according to people familiar with the matter.

Sanofi didn't find any major issues in its examination of Genzyme's financial books and manufacturing facilities. There was a risk for Genzyme that Sanofi could discover some problems, given that the Cambridge, Mass., biotechnology firm is still recovering from manufacturing issues that temporarily shut down a Genzyme production facility in 2009.

A CVR is often used when parties can't agree on price. One of the issues between Sanofi and Genzyme is their differing predictions on the sale of the multiple-sclerosis drug. Genzyme has predicted those sales could reach $3.5 billion in 2017, a projection Sanofi has said is too optimistic.

Sanofi has been pursuing Genzyme for months, but the biotechnology firm had refused to talk to Sanofi because of its $69 a share offer, which Genzyme said was too low. In August, Sanofi made an unsolicited bid for Genzyme, and went hostile with its offer in October.

Some of Sanofi's biggest products, including the cancer drug Taxotere and the blood-thinner Lovenox, have lost sales to generic rivals, while another big drug, the blood thinner Plavix, is expected to confront generic competition in 2012. Plavix accounted for about 9% of Sanofi's $40 billion sales last year. Sanofi also suffered a research setback last month, when a breast-cancer drug it was testing didn't work as expected in a late-stage study.

Continued in article

Bob Jensen's threads on accounting theory ---
http://www.trinity.edu/rjensen/theory.htm

"General Mills Nears $1.1 Billion Deal to Buy Half of Yoplait," by Chris V. Nicholson, The New York Times, March 18, 2011 ---
http://dealbook.nytimes.com/2011/03/18/general-mills-set-to-buy-yoplait-stake-for-1-1-billion/?nl=business&emc=dlbka9

"AT&T to Buy T-Mobile: Here’s Why," by Shira Ovide, The Wall Street Journal, March 20, 2011 ---
http://blogs.wsj.com/deals/2011/03/20/att-buys-t-mobile-heres-why/

For his students, Jim Mahar contrasts these two current illustrations as vertical versus horizontal mergers (March 22, 2011)---
http://financeprofessorblog.blogspot.com/2011/03/vertical-and-horizontal-deals.html

Computing History Tidbit
"Dot Obits: First Woman to Design Computer," by Curt Hopkins, ReadWriteWeb Blog, March 25, 2011 ---
http://www.readwriteweb.com/archives/dot_obits_first_woman_to_design_computer.php

Media College (New Zealand: Tutorials on Production of Multi-media) --- http://www.mediacollege.com/

American University Computer History Museum --- http://www.computinghistorymuseum.org/ 

The Apple (Computer) Museum  --- http://www.theapplemuseum.com/ 

A History of Microsoft Windows (slide show from Wired News) --- http://www.wired.com/gadgets/pcs/multimedia/2007/01/wiredphotos31

Oldcomputers.com  --- http://www.old-computers.com/news/default.asp

From The Wall Street Journal Accounting Weekly Review on February 11, 2011

Weather Whacks Airlines' Revenue
by: Mike Esterl
Feb 03, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Cost Accounting, Disclosure, Disclosure Requirements, Financial Accounting, Managerial Accounting, Revenue Forecast, Revenue Recognition

SUMMARY: "A whopping 52,742 flights have been canceled at U.S. airports since Dec. 1, 2010, or 4.98% of those scheduled....The cancellations came in a period when travel demand is normally weaker anyway and airlines struggle to reap profits....'Given that the first quarter is always a tough one even in good years, a major storm that lasts several days and hits several hubs could make or break the quarter,' said John Heimlich, chief economist at the Air Transport Association...."

CLASSROOM APPLICATION: The article is useful to help students see the impact of external shocks such as the weather on company profits and to understand the disclosure process leading to analysis in the article. It may be used in any level of accounting class covering revenue recognition, fixed and variable costs, and quarterly reporting and disclosure.

QUESTIONS: 
1. (Introductory) Airline tickets are paid for in advance. Given that passengers have paid their fares, why do canceled flights cause revenues to decline?

2. (Introductory) "By flying fewer flights [due to weather-related cancellations], carriers also lower their costs." What types of costs are reduced in this way, fixed costs or variable costs? Define each of these costs in your answer.

3. (Advanced) Why is the first quarter of the year always a "tough one" for airlines to earn profits, even disregarding the effects of snowstorms? In your answer, comment on the role of high fixed costs in times of weak demand and revenues. Are costs reduced when this demand falls as they are due to weather-related flight cancellations?

4. (Advanced) "...Many carriers don't disclose the financial impact of storms until weeks later, if at all..." Consider requirements for quarterly financial reporting. Why should an airline company disclose the impact of a storm on its revenues and profits? How could a company management justify not disclosing these effects?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Weather Whacks Airlines' Revenue," by: Mike Esterl, The Wall Street Journal, February 3, 2011 ---
http://online.wsj.com/article/SB10001424052748704775604576120531230435802.html?mod=djem_jiewr_AC_domainid

This week's winter storm is cutting into the revenues of several U.S. airlines, which already were weighed down by rising fuel prices.

A series of rugged winter weather events since December already had slashed those airlines' revenues by tens of millions of dollars, according to the companies involved and industry analysts.

Carriers canceled more than 5,000 flights, or roughly 20% of those scheduled nationwide, for a second day in a row Wednesday as the storm barreled across much of the country. Chicago was a no-fly zone, more than 1,000 flights were canceled in New York and hundreds more were scratched in Dallas.

A whopping 52,742 flights have been canceled at U.S. airports since Dec. 1, 2010, or 4.98% of those scheduled, according to FlightStats, a flight-tracking service. That represented the highest tally in the past five winters over the same time period and a bit more than double last winter's rate.

The cancellations came in a period when travel demand is normally weaker anyway and airlines struggle to reap profits.

"Given that the first quarter is always a tough one even in good years, a major storm that lasts several days and hits several hubs could make or break the quarter," said John Heimlich, chief economist at the Air Transport Association, an umbrella group for U.S. carriers.

Many Wall Street analysts expected most U.S. airlines to post losses in the first quarter, but to still book a profit for 2011 as more travelers take to the skies and fares increase.

"I think at this point we're talking tens of millions of dollars in lost revenue. I don't think we're talking hundreds of millions,'' said Helane Becker, an analyst at Dahlman Rose, of the storms' impact so far in 2011.

The U.S. airline industry rode a rebounding economy to its first profit in three years in 2010. But the outlook has turned cloudy as fuel expenses—which make up 25% or more of carriers' overall costs—head higher. Each $1 increase in the price of a barrel of crude oil adds an estimated $400 million to U.S. airline industry costs annually.

Weather has a more muted impact on airlines. By flying fewer flights, carriers also lower their costs. Many passengers often rebook on subsequent flights, making for fuller planes and helping further cut costs.

U.S. airlines also managed to book their first fourth-quarter profit in a decade in the most recent reporting period ended Dec. 31, 2010—despite the major December storm that wreaked havoc on holiday travel.

But many carriers don't disclose the financial impact of storms until weeks later, if at all, creating uncertainty. Airlines said Wednesday it was too early to estimate the effect of this week's storm on their first-quarter financial performance. Some may provide initial estimates in the coming weeks as they roll out their monthly traffic reports.

Delta Air Lines Inc., the second-largest U.S. carrier by traffic, recently estimated that storms in the first half of January alone would drag down its first-quarter profit by $30 million. It also disclosed that December storms slashed its fourth-quarter profit by $45 million.

Continued in article

Jensen Comment
Additional considerations when teaching this case include the possible factoring in of global warming. I read where my wife and I can expect more and more snow each winter up here in the White Mountains and that other parts of the world can expect more and more snow, rain, and flooding. The reason is supposedly increased moisture in the air caused by warmer ocean temperatures. In the past industries like transportation, hotels, and agriculture factored in "normal" weather losses in prices. When does abnormal commence to become normal?

And there are tradeoffs. Whereas snow storms in the heartland of the United States greatly impacted the bottom line of hotels and airlines, here in the mountains of New England the hotels and ski resorts flourished with increased business due to the "best" snow depths in decades. Instead of flying to the Rocky Mountains of the west to ski, many skiers in Boston, Hartford, NYC, Philadelphia, etc. packed up their cars and headed for the deep snows of Vermont, Maine, and New Hampshire. How the West was Lost become How the East was Won.

In 2009 New Jersey, New York, and Connecticut hit residents with the highest state taxes, but with the enormous tax hikes in such states as Illinois and California, the top honors may shift in 2011. In 2011 states like New York are going to tax the incomes of people who own property in New York but spend very little, if any, time in New York. It would seem that owning second homes in New York has become a rather dumb decision for people actually living in other states. The new words of advice:  Sell that Sucker in New York!

Note that the "tax burdens" on individuals include state income taxes, property taxes, and sales taxes as well as other tax burdens. In many states if they don't get you one way, they hit you in another way. For example, having no income or sales taxes may shift much of the burden to property taxes. However, the high tax states in general may be high in most of the types of tax. California, however, gives some property tax relief to long-time owners because of the infamous Proposition 13.

The calculations are quite confusing since sales, lodging, and property taxes on out-of-state visitors and second home owners are reallocated back to states of residence in somewhat complicated formulas.

"State-Local Tax Burdens Fall in 2009 as Tax Revenues Shrink Faster than Income:  New Jersey’s Citizens Pay the Most, Alaska’s Least," Special Report 109, The Tax Foundation, February 2011 ---
http://taxfoundation.org/files/sr189.pdf

A Timeline of Computer Science --- http://www.scottaaronson.com/blog/?p=524

Jensen Comment
I don't care too much for the above timeline. Why is the slide rule a computer? Why not the abacus?
I much prefer the following links (that are admittedly in need of updates for the 21st Century):

Computing History Timeline --- http://trillian.randomstuff.org.uk/~stephen/history/timeline.html
Also see http://en.wikipedia.org/wiki/Timeline_of_computing

A complicated issue is where social networking falls into "computing history." If social networking is an application of computing technology, it begs the questions:
Why not add other applications to the "computing history timeline?"
Why not create an entirely new "computer applications history timeline?"
Other timelines suggested at  http://en.wikipedia.org/wiki/Timeline_of_computing

Jim Mahar's Finance Class Videos, February 16, 2011 --- http://financeprofessorblog.blogspot.com/2011/02/class-videos.html

Jim's Finance Professor Blog --- http://financeprofessorblog.blogspot.com/

Forwarded by Miguel (Simoleon Sense)

The economy is so bad that…

I got a pre-declined credit card in the mail.

I ordered a burger at McDonald’s, and the kid behind the counter asked, “Can you afford fries with that?”

CEOs are now playing miniature golf.

If the bank returns your check marked “Insufficient Funds,” you have to call them and ask if they mean you or them.

Hot Wheels and Matchbox stocks are trading higher than GM.

Parents in Beverly Hills and Malibu are firing their nannies and learning their children’s names.

A truckload of Americans were caught sneaking into Mexico.

Motel Six won’t leave the light on anymore.

The Mafia is laying off judges.

BP Oil laid off 25 congressmen.

Congress says they are looking into the Bernard Madoff scandal. Oh great! The guy who made $50 billion disappear is being investigated by the people who made $1.5 trillion disappear!

Forwarded by Gene and Joan

A little silver-haired lady calls her neighbor and says, "Please come over here and help me. I have a killer jigsaw puzzle, and I can't figure out how to get started."

Her neighbor asks, "What is it supposed to be when it's finished?"

The little silver haired lady says, "According to the picture on the box, it's a rooster."

Her neighbor decides to go over and help with the puzzle.

She lets him in and shows him where she has the puzzle spread all over the table.

He studies the pieces for a moment, then looks at the box, then turns to her and says,

"First of all, no matter what we do, we're not going to be able to assemble these pieces into anything resembling a rooster."

He takes her hand and says, "Secondly, I want you to relax. Let's have a nice cup of tea, and then," he said with a deep sigh ............

(scroll down)

"Let's put all the Corn Flakes back in the box."

Forwarded by Eileen

Terrorist Alerts by John Cleese (from Monty Python)

The English are feeling the pinch in relation to recent terrorist threats and have therefore raised their security level from "Miffed" to "Peeved." Soon, though, security levels may be raised yet again to "Irritated" or even "A Bit Cross." The English have not been "A Bit Cross" since the blitz in 1940 when tea supplies nearly ran out. Terrorists have been re-categorized from "Tiresome" to "A Bloody Nuisance." The last time the British issued a "Bloody Nuisance" warning level was in 1588, when threatened by the Spanish Armada.

The Scots have raised their threat level from "Pissed Off" to "Let's get the Bastards." They don't have any other levels. This is the reason they have been used on the front line of the British army for the last 300 years.

The French government announced yesterday that it has raised its terror alert level from "Run" to "Hide." The only two higher levels in France are “Collaborate" and "Surrender." The rise was precipitated by a recent fire that destroyed France’s white flag factory, effectively paralyzing the country's military capability.

Italy has increased the alert level from "Shout loudly and excitedly" to "Elaborate Military Posturing." Two more levels remain: "Ineffective Combat Operations" and "Change Sides."

The Germans have increased their alert state from "Disdainful Arrogance" to "Dress in Uniform and Sing Marching Songs." They also have two higher levels: "Invade a Neighbor" and "Lose."

Belgians, on the other hand, are all on holiday as usual; the only threat they are worried about is NATO pulling out of Brussels.

The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.

Forwarded by Auntie Bev

A minister decided that a visual demonstration would add emphasis to his Sunday sermon.

Four worms were placed into four separate jars.

The first worm was put into a container of alcohol.

The second worm was put into a container of cigarette smoke.

The third worm was put into a container of chocolate syrup.

The fourth worm was put into a container of good clean soil.

At the conclusion of the sermon, the Minister reported the following results:

The first worm in alcohol...Dead.

The second worm in cigarette smoke...Dead.

Third worm in chocolate syrup...Dead. 

Fourth worm in good clean soil...Alive .

So the Minister asked the congregation, What did you learn from this demonstration?

Maxine was sitting in the back, quickly raised her hand and said,
'As long as you drink, smoke and eat chocolate, you won't have worms!'

That pretty much ended the service!

Forwarded by Gene and Joan

A little boy comes down to breakfast. Since they live on a farm, his mother asks if he had done his chores.

"Not yet," said the little boy.

His mother tells him no breakfast until he does his chores.

Well, he's a little pissed off, so he goes to feed the chickens, and he kicks a chicken. He goes to feed the cows, and he kicks a cow. He goes to feed the pigs, and he kicks a pig. He goes back in for breakfast and his mother gives him a bowl of dry cereal.

"How come I don't get any eggs and bacon? Why don't I have any milk in my cereal?" he asks.

"Well," his mother says, "I saw you kick a chicken, so you don't get any eggs for a week. I saw you kick the pig, so you don't get any bacon for a week either. I saw you kick the cow so for a week you aren't getting any milk."

Just then, his father comes down for breakfast, trips on the cat, and kicks the cat aside..

The little boy looks up at his mother with a smile, and says, "You gonna tell him or should I?"

Video:  Two dogs dining in busy restaurant (neither one grabs for the check) ---
http://www.youtube.com/watch?v=UDXOzyGlJdg&feature=player_embedded#at=156

Forwarded by Auntie Bev

New dictionary definitions:

ADULT: A person who has stopped growing at both ends and is now growing in the middle.

BEAUTY PARLOR: A place where women curl up and dye. -----------------

CANNIBAL: Someone who is fed up with people. ----------------------------------

CHICKENS: The only animals you eat before they are born and after they are dead. ----------------------------------------

COMMITTEE: A body that keeps minutes and wastes hours. -------------------------------------------------------------------------------------------------

DUST: Mud with the juice squeezed out. --------------------------------------------------------

EGOTIST: Someone who is usually me-deep in conversation. ---------------------------------------------------

HANDKERCHIEF: Cold Storage. -----------------------------------------------------------------

INFLATION: Cutting money in half without damaging the paper. -------------------------------------------------

MOSQUITO: An insect that makes you like flies better. --------------------------------------------------------

RAISIN: Grape with sunburn. ---------------------------------------------------------------------

SECRET: Something you tell to one person at a time. ----------------------------------------------------------------

SKELETON: A bunch of bones with the person scraped off. --------------------------------------------------

TOOTHACHE: The pain that drives you to extraction. --------------------------------------------------------------------

TOMORROW: One of the greatest labour saving devices of today. ----------------------------------

YAWN: An honest opinion openly expressed. -----------------------------------------------------------------

and Auntie Bev's Favorite
WRINKLES: Something other people have, similar to my character lines. ------------------------

Forwarded by Gene and Joan

MY PRIVATE PART DIED
An old man, Mr.. Wallace, was living in a nursing home. One day he appeared to be very sad and depressed. Nurse Tracy asked him if there was anything wrong.
 

 'Yes, Nurse Tracy ,' said Mr. Wallace. 'My Private Part died today, and I am very sad.'

Knowing her patients were a little forgetful and sometimes a little crazy, she replied, 'Oh, I'm so sorry, Mr. Wallace. Please accept my condolences.'

The following day, Mr. Wallace was walking down the hall with his Private Part hanging out of his pajamas. He met Nurse Tracy. 'Mr. Wallace,' she said, 'You shouldn't be walking down the hall like that. Please put your Private Part back inside your pajamas.'

'But, Nurse Tracy I can't,' replied Mr. Wallace. 'I told you yesterday that my Private Part died.'

'Yes,' said Nurse Tracy , 'you did tell me that, but why is it hanging out of your pajamas?' '

Well,' he replied, 'Today is the viewing.'

Forwarded by Eileen

GENIE

While trying to escape through Pakistan, Osama Bin Laden found a bottle on the sand and picked it up.

Suddenly, a female genie rose from the bottle and with a smile said, "Master, may I grant you one wish?"

Osama responded," You ignorant, unworthy daughter-of-a-dog! Don't you know who I am? I don't need any common woman giving me anything."

The shocked genie said, "Please, I must grant you a wish or I will be returned to that bottle forever."

Osama thought a moment, then grumbled about the impertinence of the woman and said, "Very well, I want to awaken in the morning with three American women in my bed. So just do it and be off with you.

The annoyed genie said, "So be it!" and disappeared.

The next morning Bin Laden woke up in bed with Lorena Bobbitt, Tonya Harding and Sarah Palin at his side.

His penis was gone, his knees were broken, and he had no health insurance.

God is good.

Forwarded by Paula

Children Writing About the Ocean

1) - An octopus has eight testicles. (Kelly, age 6)

2) - Oysters' balls are called pearls. (Jerry, age 6)

3) - If you are surrounded by ocean, you are an island. If you don't have ocean all round you, you are incontinent. (, age 7)

4) - Sharks are ugly and mean, and have big teeth, just like Emily Richardson She's not my friend any more. (Kylie, age 6)

5) - A dolphin breaths through an asshole on the top of its head.. (Billy, age 8)

6) - My uncle goes out in his boat with 2 other men and a woman and pots and comes back with crabs. (Millie, age 6)

7) - When ships had sails, they used to use the trade winds to cross the ocean. Sometimes when the wind didn't blow the sailors would whistle to make the wind come. My brother said they would have been better off eating beans. (William, age 7)

8) - Mermaids live in the ocean. I like mermaids. They are beautiful and I like their shiny tails, but how on earth do mermaids get pregnant? Like, really? (Helen, age 6)

9) - I'm not going to write about the ocean. My baby brother is a always crying, my Dad keeps yelling at my Mom, and my big sister has just got pregnant, so I can't think what to write. (Amy, age 6)

10) - Some fish are dangerous. Jellyfish can sting. Electric eels can give you a shock. They have to live in caves under the sea where I think they have to plug themselves in to chargers. (Christopher, age 7)

11) - When you go swimming in the ocean, it is very cold, and it makes my wily small. (Kevin, age 6)

12) - Divers have to be safe when they go under the water. Divers can't go down alone, so they have to go down on each other. (Becky, age 8)

13) - On vacation my Mom went water skiing. She fell off when she was going very fast. She says she won't do it again because water fired right up her big fat ass.. (Julie, age 7)

14) - The ocean is made up of water and fish. Why the fish don't drown I don't know. (Bobby, age 6)

Forwarded by Dr. Wolff

When I bought my Blackberry, I thought about the 30-year business I ran with 1800 employees, all without a cell phone that plays music, takes videos, pictures and communicates with Facebook and Twitter. I signed up under duress for Twitter and Facebook, so my seven kids, their spouses, 13 grandkids and 2 great grand kids could communicate with me in the modern way. I figured I could handle something as simple as Twitter with only 140 characters of space.

That was before one of my grandkids hooked me up for Tweeter, Tweetree, Twhirl, Twitterfon, Tweetie and Twittererific Tweetdeck, Twitpix and something that sends every message to my cell phone and every other program within the texting world.

My phone was beeping every three minutes with the details of everything except the bowel movements of the entire next generation. I am not ready to live like this. I keep my cell phone in the garage in my golf bag.

The kids bought me a GPS for my last birthday because they say I get lost every now and then going over to the grocery store or library. I keep that in a box under my tool bench with the Blue tooth [it's red] phone I am supposed to use when I drive. I wore it once and was standing in line at Barnes and Noble talking to my wife and everyone in the nearest 50 yards was glaring at me. I had to take my hearing aid out to use it, and I got a little loud.

I mean the GPS looked pretty smart on my dash board, but the lady inside that gadget was the most annoying, rudest person I had run into in a long time. Every 10 minutes, she would sarcastically say, "Re-calc-u-lating." You would think that she could be nicer. It was like she could barely tolerate me. She would let go with a deep sigh and then tell me to make a U-turn at the next light. Then if I made a right turn instead. Well, it was not a good relationship. When I get really lost now, I call my wife and tell her the name of the cross streets and while she is starting to develop the same tone as Gypsy, the GPS lady, at least she loves me.

To be perfectly frank, I am still trying to learn how to use the cordless phones in our house. We have had them for 4 years, but I still haven't figured out how I can lose three phones all at once and have to run around digging under chair cushions and checking bathrooms and the dirty laundry baskets when the phone rings.

The world is just getting too complex for me. They even mess me up every time I go to the grocery store. You would think they could settle on something themselves but this sudden "Paper or Plastic?" every time I check out just knocks me for a loop. I bought some of those cloth reusable bags to avoid looking confused, but I never remember to take them in with me.

Now I toss it back to them. When they ask me, "Paper or Plastic?" I just say, "Doesn't matter to me. I am bi-sacksual." Then it's their turn to stare at me with a blank look.

I was recently asked if I tweet. I answered, No, but I do toot a lot."

Forwarded by Auntie Bev

You may remember the old Jewish Catskill comics: Shecky Greene, Red Buttons,Totie Fields, Joey Bishop, Milton Berle, Jan Murray, Danny Kaye, Henny Youngman, Sid Caesar, Groucho Marx, Jackie Mason, Victor Borge, Woody Allen,  George Burns, Allan Sherman, Jerry Lewis, Peter Sellers, Carl Reiner, Shelley Berman, Gene Wilder,  George Jessel, Alan King, Mel Brooks, Phil Silvers, Jack Carter, Rodney Dangerfield, Don Rickles,  Jack Benny and so many others.
And there was not one single swear word in their comedy. Here are a few examples: 

 

* I just got back from a pleasure trip. I took my mother-in-law to the airport.
* Someone stole all my credit cards but I won't be reporting it.      The thief spends less than my wife did.
* We always hold hands. If I let go, she shops
* My wife and I went back to the hotel where we spent our wedding night; only this time I stayed in the bathroom and cried
* My wife and I went to a hotel where we got a waterbed. My wife called it the Dead Sea .
* She was at the beauty shop for two hours. That was only for the estimate. She got a mudpack and looked great for two days. Then the mud fell off.
* The Doctor gave a man six months to live. The man couldn't pay his bill so the doctor gave him another six months.
* The Doctor called Mrs. Cohen saying, "Mrs. Cohen, your check came back. " Mrs. Cohen answered, "So did my arthritis!

Doctor: "You'll live to be 60!"
Patient: "I am 60!" 
Doctor: "See! What did I tell you?" 

Patient: "I have a ringing in my ears." 
Doctor: "Don't answer!" 

 A drunk was in front of a judge. The judge says, "You've been brought here for drinking."
The drunk says "Okay, let's get started."

Why do Jewish divorces cost so much?  They're worth it. 

The Harvard School of Medicine did a study of why Jewish women like Chinese food so much. The study revealed that this is due to the fact that Won Ton spelled backward is Not Now. 

 There is a big controversy on the Jewish view of when life begins. In Jewish tradition, the fetus is not considered viable until it graduates from medical school. 
Q: Why don't Jewish mothers drink?
A: Alcohol interferes with their suffering. 

Q: Why do Jewish mothers make great parole officers?
A: They never let anyone finish a sentence! 

A man called his mother in Florida:
"Mom, how are you?" 
"Not too good," said the mother. "I've been very weak." 
The son said, "Why are you so weak?" She said, "Because I haven't eaten in 38 days." 
The son said, "That's terrible. 
Why haven't you eaten in 38 days?" 
The mother answered, "Because I didn't want my mouth to be filled with food if you should call." 

A Jewish boy comes home from school and tells his mother he has a part in the play. She asks,
"What part is it?" 
The boy says, "I play the part of the Jewish husband." 
"The mother scowls and says, "Go back and tell the teacher you want a speaking part." 

Q: How many Jewish mothers does it take to change a light bulb? A: (Sigh) "Don't bother. I'll sit in the dark. I don't want to be a nuisance to anybody." 

Short summary of every Jewish holiday:
They tried to kill us. We won.  Let's eat. 

Did you hear about the bum who walked up to a Jewish mother on the street and said, "Lady, I haven't eaten in three days."
"Force yourself," she replied. 

Q: What's the difference between a Rottweiler and a Jewish mother?
A: Eventually, the Rottweiler lets go. 

 
Q: Why are Jewish men circumcised?
A: Because Jewish women don't like anything that isn't 20% off.

Video on How to Sell a Car in the South --- http://www.youtube.com/watch?v=J__T2dvaWww

"Squirrel rescued from toilet by Goose," by Simon Garner, Metro (in the United Kingdom), March 28, 2011 ---
 

Duncan Goose, 42, was in Malawi to check on aid projects backed by his company's One projects when he rescued the forlorn animal.

He was preparing for bed in his hotel room when he discovered the struggling squirrel.

He said: 'I was concerned it was going to jump out and bite me, so I put the lid back down and left it for a minute as I wasn't sure what to do.'

When he returned shortly after to take a second look he realised it was a squirrel and set about rescuing the poor critter.

His method was putting a hand towel down the toilet which allowed the squirrel to climb up.

Once out he placed it in a laundry basket, took it outside and released it.

Mr Goose said: 'It didn't seem too much the worse for wear so hopefully it's recovered from the experience and will go on to have a happy life devoid of toilet bowl experiences.'

Read more: http://www.metro.co.uk/news/859324-squirrel-rescued-from-toilet-by-goose#ixzz1HvihyovB

Jensen Comment
We might suspect that the squirrel was just looking for nuts, but that might be taking this Goose story a bit too far.

Years ago when I was living on the Bay Area the San Francisco Chronicle reported a story that a woman discovered a boa constrictor rising up in her commode.. The snake apparently had it's tail sticking up in its owner's apartment and the head sticking up in the neighboring apartment. I wonder if this became the start of a beautiful friendship? I doubt it!

Will Rogers, who died in a 1935 plane crash with his best friend, Wylie Post, was probably the greatest political sage the U.S. ever has known.

1. Never slap a man who's chewing tobacco.

2. Never kick a cow chip on a hot day.

3. There are two theories to arguing with a woman .. . . Neither works..

4. Never miss a good chance to shut up.

5. Always drink upstream from the herd.

9. Good judgment comes from experience, and a lot of that comes from bad judgment.

10. If you're riding' ahead of the herd, take a look back every now and then to make sure it's still there.

11. Lettin' the cat outta the bag is a whole lot easier'n  puttin' it back.

12. After eating an entire bull, a mountain lion felt so good he started roaring. He kept it up until a hunter came along and shot him. The moral: When you're full of bull, keep your mouth shut.

ABOUT GROWING OLDER...

First ~ Eventually you will reach a point when you stop lying about your age and start bragging about it..

Second ~ The older we get, the fewer things seem worth waiting in line for.

Third ~ Some people try to turn back their odometers. Not me; I want people to know 'why' I look this way. I've traveled a long way, and some of the roads weren't paved.

Fourth ~ When you are dissatisfied and would like to go back to youth, think of Algebra.

Fifth ~ You know you are getting old when everything either dries up or leaks.

Sixth ~ I don't know how I got over the hill without getting to the top.

Seventh ~ One of the many things no one tells you about aging is that it is such a nice change from being young.

Eighth ~ One must wait until evening to see how splendid the day has been.

Ninth ~ Being young is beautiful, but being old is comfortable.

Forwarded by Auntie Bev

Sign over a Gynecologist's Office: 
"Dr. Jones, at your cervix." 
************************** 
In a Podiatrist's office: 
"Time wounds all heels." 
************************** 
On a Septic Tank Truck: 
Yesterday's Meals on Wheels 
************************** 
At a Proctologist's door: 
"To expedite your visit, please back in. " 
************************** 
On a Plumber's truck: 
"We repair what your husband fixed." 
************************** 
On another Plumber's truck: 
"Don't sleep with a drip. Call your plumber." 
************************** 
On a Church's Bill board: 
"7 days without God makes one weak." 
************************** 
At a Tire Shop in Milwaukee : 
"Invite us to your next blowout."

************************** 
At a Towing company: 
"We don't charge an arm and a leg. We want tows.." 
************************** 
On an Electrician's truck: 
"Let us remove your shorts.." 
******** ****************** 
In a Nonsmoking Area: 
"If we see smoke, we will assume you are on fire and take appropriate action." 
************************** 
On a Maternity Room door: 
"Push. Push. Push." 
************************** 
At an Optometrist's Office: 
"If you don't see what you're looking for, you've come to the right place." 
************************** 
On a Taxidermist's window: 
"We really know our stuff." 
************************** 
On a Fence: 
"Salesmen welcome! Dog food is expensive!" 
************************** 
At a Car Dealership: 
"The best way to get back on your feet - miss a car payment." 
************************** 
Outside a Muffler Shop: 
"No appointment necessary. We hear you coming." 
************************** 
In a Veterinarian's waiting room: 
"Be back in 5 minutes. Sit! Stay!" 
************************** 
At the Electric Company 
"We would be delighted if you send in your payment. 
However, if you don't, you will be." 
************************** 
In a Restaurant window: 
"Don't stand there and be hungry; come on in and get fed up." 
************************** 
In the front yard of a Funeral Home: 
"Drive carefully. We'll wait." 
************************** 
At a Propane Filling Station: 
"Thank heaven for little grills." 
************************** 
And don't forget the sign at a 
CHICAGO RADIATOR SHOP:
"Best place in town to take a leak." 
********************** 
Sign on the back of another Septic Tank Truck: 
"Caution - This Truck is full of Political Promises"

Forwarded by Auntie Bev

An attractive blonde from Cork, Ireland arrived at the casino. She seemed a little intoxicated and bet twenty-thousand Euros on a single roll of the dice. She said, 'I hope you don't mind, but I feel much luckier when I'm completely nude'. With that, she stripped from the neck down, rolled the dice and with an Irish brogue yelled, 'Come on, baby, Mama needs new clothes!'

As the dice came to a stop, she jumped up and down and squealed...'YES! YES! I WON, I WON!'

She hugged each of the dealers and then picked up her winnings and her clothes and quickly departed.

The dealers stared at each other dumbfounded.

Finally, one of them asked, 'What did she roll?'

The other answered, 'I don't know - I thought you were watching.'

MORAL OF THE STORY - Not all Irish are drunks, not all blondes are dumb, but all men...are men.

Forwarded by Auntie Bev

The Best of Rodney Dangerfield

My wife only has sex with me for a purpose.  Last night she used me to time an egg.

It's tough to stay married.  My wife kisses the dog on the lips, yet she won't drink from my glass!

Last night my wife met me at the front door. She was wearing a sexy negligee. The only trouble was, she was coming home.

A girl phoned me and said, 'Come on over. There's nobody home.' I went over. Nobody was home!

A hooker once told me she had a headache.

I went to a massage parlor. It was self-service.

If it weren't for pickpockets, I'd have no sex life at all.

I was making love to this girl and she started crying I said, 'Are you going to hate yourself in the morning?' She said, 'No, I hate myself now.'

I knew a girl so ugly that she was known as a two-bagger. That's when you put a bag over your head in case the bag over her head comes off.

I knew a girl so ugly... they use her in prisons to cure sex offenders.

My wife is such a bad cook, if we leave dental floss in the kitchen the roaches hang themselves.

I'm so ugly I stuck my head out the window and got arrested for mooning.

The other day I came home and a guy was jogging, naked. I asked him, 'Why?' He said, 'Because you came home early.'

My wife's such a bad cook, the dog begs for Alka-Seltzer.

I know I'm not sexy. When I put my underwear on I can hear the Fruit-of-the-Loom guys giggling.

My wife is such a bad cook, in my house we pray after the meal.

My wife likes to talk on the phone during sex. She called me from Chicago last night.

My family was so poor that if I hadn't been born a boy, I wouldn't have had anything to play with...
 

Humor Between February 1 and March 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor033111 

Humor Between January 1 and January 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor013111 

And that's the way it was on March 31, 2011 with a little help from my friends.

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's Threads --- http://www.trinity.edu/rjensen/threads.htm

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

Free Online Textbooks, Videos, and Tutorials --- http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines --- http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses --- http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's Resume --- http://www.trinity.edu/rjensen/Resume.htm
 

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

Concerns That Academic Accounting Research is Out of Touch With Reality

Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites  --- http://www.trinity.edu/rjensen/AccountingNews.htm

Accounting Professors Who Blog --- http://www.trinity.edu/rjensen/ListservRoles.htm

Cool Search Engines That Are Not Google --- http://www.wired.com/epicenter/2009/06/coolsearchengines

Free (updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

CPA Examination --- http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle --- http://cpareviewforfree.com/
 

Bob Jensen's Personal History in Pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

January 31, 2011

Bob Jensen's New Bookmarks January 1-31, 2011
Bob Jensen at Trinity University 

For earlier editions of Fraud Updates go to http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 

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

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

In some ways the AAA's Issues in Accounting Education did not have such a good year.
The Editor's 2010 Report IAE has two tables of interest. Especially note Table 2 ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=IAEXXX000025000004000795000001&idtype=cvips&prog=normal

Compare this with the Editor's Report for Accounting Horizons ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACHXXX000024000004000715000001&idtype=cvips&prog=normal

And then compare these with the Editor's Report for The Accounting Review ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACHXXX000024000004000715000001&idtype=cvips&prog=normal

Jensen Comment
I really don't want to make a lengthy comment at this time except to say that it is very sad the accounting researchers do not take more interest in accounting education.

The following history paper seems to be increasingly and sadly relevant today ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Humor Between January 1 and January 31, 2010 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor013111 

AACSB Innovation Resource Center --- http://www.aacsb.edu/resources/innovation/default.asp

Get Ready for IFRS in the United States
AICPA updates IFRS Backgrounder --- http://www.iasplus.com/usa/aicpa/1101ifrsbackgrounder.pdf

Controversies in the Setting of Accounting Standards ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Dow 12000: More Fun Factoids --- http://blogs.wsj.com/marketbeat/2011/01/26/dow-12000-more-fun-factoids/
Thank you Jim Mahar for the heads up.

Ten Employment Trends to Watch in 2011 (in accounting firms) ---
http://accounting.smartpros.com/x71163.xml

Jensen Comment
As fuel prices and other travel expenses keep increasing, I think one of the most important trends will be the decline in physical travel when on the job. Technology in communications and telecommuting will probably take over. Note in the above link that job interviews will increasingly be conducted without physical presence.

Distance training and education will soar. And computer translating may become so good that we can even understand online sessions in France, China, Poland, and Finland. Well maybe not Finland since the language is so difficult.

As an aside, the increasingly boring argument that students can cheat more on distance education examinations will no longer be relevant.
Proctors will not even have to sit in the classroom when students are taking examinations onsite. Instead Webcams will be placed overhead that record each student's every move during an examination. There may even be a camera for each student. Sensitive microphones will even be embedded so that student whispering will be captured.

This begs the question about what things in hotel conferences will be lost when those conferences become more and more virtual. Of course the paid-vacation family vacation aspect of a conference will be lost for those professors who like to pack up spouses and children for vacations, including those on the opposite side of the world, reimbursed heavily by their employers. And those spontaneous sexual affairs will have to be virtual bummers.

Probably the biggest serious loss in hotel conferencing will be the informal networking and, yes, even the tremendous importance of evesdropping. I cannot tell you how much I've learned over the years simply by overhearing something at a conference. I've told this story before on the AECM, but one time I overheard an outgoing TAR editor tell an incoming TAR editor not to send Bob Jensen any manuscripts for refereeing because "Jensen never accepts anything."

This was when I was young and still full of myself. That one overheard bit of information changed my life as a journal referee and even as a professional person. I think that I became a much more empathetic person on such things as promotion and tenure committees. My colleagues the last three universities where I served on the faculty will tell you that I was probably a bit of a softie when it came to personnel evaluations. I don't think I should be described as a softie on paper refereeing but I became much more likely to write very critical comments and then close with "revise and resubmit" rather than "no hope on this one."

I may not have become this type of person if I'd not overheard one TAR editor talking to another TAR editor. Since I'm so good I might've remained full of myself for my entire career.

I'm really not a big fan of video or computer games, but this one from the popular Price is Right television show is both fun and has educational attributes.

Video:  Pay the Rent strategy on The Price is Right --- Click Here
http://mindyourdecisions.com/blog/2011/01/26/pay-the-rent-strategy-on-the-price-is-right/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+mindyourdecisions+%28Mind+Your+Decisions%29

"I'm an auditor --- so I really don't have all that many friends."

Video: Is This PwC Auditor Your Next American Idol?
http://goingconcern.com/2011/01/is-this-pwc-auditor-your-next-american-idol/#more-24553
Thank you for the heads up Caleb.

Financial Accounting Foundation Appoints Leslie F. Seidman Chairman of the Financial Accounting Standards Board --- Click here
http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=FAFContent_C&pagename=Foundation%2FFAFContent_C%2FFAFNewsPage&cid=1176158080171

"Making things hard to read 'can boost learning'," by Cordelia Hebblethwaite, BBC News, January 144, 2011 ---
http://www.bbc.co.uk/news/world-11573666

Difficult-to-read fonts make for better learning, according to scientists.

The finding is about to be published in the international journal Cognition.

Researchers at Princeton University employed volunteers to learn made-up information about different types of aliens - and found that those reading harder fonts recalled more when tested 15 minutes later.

They argue that schools could boost results by simply changing the font used in their basic teaching materials. Hard to digest

The 28 volunteers in the Princeton study were given 90 seconds to try to memorise a list of seven features for three different species of alien.

The idea was to re-create the kind of learning in a biology class. Aliens were chosen to be sure that none of the volunteers' prior knowledge interfered with the results.

One group was given the lists in 16-point Arial pure black font, which is generally regarded to be easy and clear to read. Continue reading the main story The alien test An extract from the test used by Princeton University, showing lists of features about made-up aliens in Arial and Comic Sans MS fonts

An extract from the Princeton University test The text at the top is in Arial; the bottom is in Comic Sans MS Volunteers were able to remember more when the information was written in the bottom font, or in the Bodoni MT font

Source: Princeton University

The other had the same information presented in either 12-point Comic Sans MS 75% greyscale font or 12-point Bodoni MT 75% greyscale.

The volunteers were distracted for 15 minutes, and then tested on how much they could remember.

Researchers found that, on average, those given the harder-to-read fonts actually recalled 14% more.

They believe that presenting information in a way that is hard to digest means a person has to concentrate more, and this leads to "deeper processing" and then "better retrieval" afterwards.

It is an example of the positive effects of what scientists call "disfluency".

"Disfluency is just a subjective feeling of difficulty associated with any mental task," explained psychology Prof Daniel Oppenheimer, one of the co-authors of the study.

"So if something is hard to see or hear, it feels disfluent... We'd found that disfluency led people to think harder about things.

"When we found that in the lab, we were very excited, because it has obvious implications for the classroom."

Continued in article

Jensen Comment
I wonder if the same reasoning also applies to content itself in cases and problems. The illustrations in Appendices A and B of the original FAS 133 are notoriously difficult. These illustrations taught be more about accounting for derivative financial instruments and hedging activities more than any other source of my learning of how to account for these complex contracts. Sadly, these illustrations were left out of the FASB's Codification Database. I wonder if it was because they're deemed too difficult.

Truth Time: 
Actually the most valuable learning experience for me was in extending the ten toughest Appendix B examples ---
http://www.cs.trinity.edu/~rjensen/Calgary/CD/FAS133AppendixB/

Even more difficult are the cross currency and benchmark illustrations in the original FAS 138. For example, see the 138Bench folder at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/FAS133OtherExcelFiles/

It was most certainly extremely difficult for me to learn and extend these complicated illustrations. But if I had not studied and extended these difficult examples I would've never learned nearly as much about the wonders of FAS 133 and its extending amendments.

I'm not in favor of simplifying standards and textbooks on the theory that they're too difficult for students. And I'm certainly glad that watering down content is not the guiding principle in medical schools. The students that get left behind maybe should be left behind rather than make it easier to specialize.

You're more respected if you really, really understand very technical content. Learning from watered down sources diminishes this respect unless you one day move into the tough reading, cases, illustrations, and problems. You're respected even more if you can extend this tough material in meaningful ways.

Yahoo Education ranks "hot careers" through 2018 and beyond.
Accountants/audits get top billing, which is probably the first time we've ever been called "hot."
http://education.yahoo.net/articles/hot_careers_through_2018.htm .

Accounting Careers are Hot at Rank 2 According to College Board
"Hottest Careers for College Graduates:  Experts Predict Where the Jobs Will Be in 2018," College Board, December 30, 2010 ---
http://www.collegeboard.com/student/csearch/majors_careers/236.html

Government economists estimate which occupations will have the most job openings between 2008 and 2018. Openings occur because new jobs are created and because workers retire or leave the field for other reasons.

Check out these top 10 lists of occupations, sorted by the level of education typically required:

• Graduate degree
• Bachelor's degree
• Associate's degree or postsecondary vocational award

 

Occupations with the Most Job Openings: Graduate Degree

 

Occupation	Total Job Openings 2008–2018
Postsecondary teachers	553,000
Doctors and surgeons	261,000
Lawyers	240,000
Clergy	218,000
Pharmacists	106,000
Educational, vocational, and school counselors	94,000
Physical therapists	79,000
Medical scientists, except epidemiologists	66,000
Mental health and substance abuse social workers	61,000
Instructional coordinators	61,000

 

Occupations with the Most Job Openings: Bachelor's Degree

 

Occupation	Total Job Openings 2008–2018
Elementary school teachers, except special education	597,000
Accountants and auditors	498,000
Secondary school teachers, except special and vocational education	412,000
Middle school teachers, except special and vocational education	251,000
Computer systems analysts	223,000
Computer software engineers, applications	218,000
Network systems and data communications analysts	208,000
Computer software engineers, systems software	153,000
Construction managers	138,000
Market research analysts	137,000

 

Occupations with the Most Jobs Openings:  Associate's Degree or Postsecondary Vocational Award

 

Occupation	Total Job Openings 2008–2018
Registered nurses	1,039,000
Nursing aides, orderlies, and attendants	422,000
Licensed practical and licensed vocational nurses	391,000
Computer support specialists	235,000
Hairdressers, hairstylists, and cosmetologists	220,000
Automotive service technicians and mechanics	182,000
Preschool teachers, except special education	178,000
Insurance sales agents	153,000
Heating, air conditioning, and refrigeration technicians	136,000
Real estate sales agents	128,000

Source: U.S. Bureau of Labor Statistics

Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

A Must View
Video:  Authors@Google: Chris Chabris (including his book on the Invisible Gorilla and perceptual psychology) ---
http://www.youtube.com/watch?v=4rdUk52h-MY&feature=youtu.be

A Must View
Video:  Authors@Google: Chris Chabris (including his book on the Invisible Gorilla and perceptual psychology) ---
http://www.youtube.com/watch?v=4rdUk52h-MY&feature=youtu.be

Jensen Comment
This has some implication for financial statement analysis. We are conditioned to look for certain types of things like return on investment, net cash flow, and other things that are commonly looked at in financial statements. We may be warned ahead of time to look for a "gorilla" or a "woman carrying an umbrella passing by." But we have limited ability to perceive unexpected events.