New Bookmarks
Year 2012 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/.

Bob Jensen's Threads --- http://www.trinity.edu/rjensen/threads.htm

574 Shields Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Choose a Date Below for Additions to the Bookmarks File

2012

March 31

February 29

January 31

March 31, 2012

Bob Jensen's New Bookmarks March 1-31, 2012
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

Bob Jensen's Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

Hasselback Accounting Faculty Directory --- http://www.hasselback.org/

Blast from the Past With Hal and Rosie Wyman ---
http://www.cs.trinity.edu/~rjensen/temp/Wyman2011.htm

Bob Jensen's threads on business, finance, and accounting glossaries ---
http://www.trinity.edu/rjensen/Bookbus.htm

Upload Some of Your Best Photographs to for the Walls of the American Accounting Association's Building ---
http://commons.aaahq.org/hives/06a813aecb/summary

The AAA headquarters office recently underwent a complete renovation and now it’s time to decorate the walls. We invite you, our members, to participate in this project by submitting your favorite photos. From all of the submissions, the AAA Staff will select those to be displayed as art on our office walls. We look forward to seeing your entries and are eager to pick our favorites! We encourage you to tap into your creative side and get started by clicking on the "Enter a Photograph" button below. In our view, there is no better way to enhance our surroundings than with a meaningful connection to our members and their unique experiences captured through photos.

A few items to consider:

only submit photos taken by you, your family, friends, or students (no professional photographers please)

by submitting your photo, you grant permission to the AAA to reproduce, enlarge, crop or publicly display your entry as wall art or other promotional material

include a relevant description of the photo such as location, names, year or circumstance so photos can be identified

use at least a 3.5 mega pixel digital camera

minimum photo size should be 6" x 9" at 300 dpi resolution and uploaded as a JPG, PNG, TIF or BMP file

all photos submitted will also be used as part of a display at the 2012 AAA Annual Meeting in Washington, D.C.

submissions will close on June 30, 2012

Jensen Comment
I've uploaded a few of my own photographs to serve as illustrations of what I think the AAA is seeking. I'm looking forward to some of your best photographs under the above criteria.

More of Bob Jensen's Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

I submitted some pictures to the American Accounting Association's Picture Contest.
Now it's your turn to submit some of the favorite photographs that you've taken in life.
Help Us Decorate Our Office! --- http://commons.aaahq.org/hives/06a813aecb/summary

The AAA headquarters office recently underwent a complete renovation and now it’s time to decorate the walls. We invite you, our members, to participate in this project by submitting your favorite photos. From all of the submissions, the AAA Staff will select those to be displayed as art on our office walls. We look forward to seeing your entries and are eager to pick our favorites! We encourage you to tap into your creative side and get started by clicking on the "Enter a Photograph" button below. In our view, there is no better way to enhance our surroundings than with a meaningful connection to our members and their unique experiences captured through photos.

A few items to consider:

only submit photos taken by you, your family, friends, or students (no professional photographers please)

by submitting your photo, you grant permission to the AAA to reproduce, enlarge, crop or publicly display your entry as wall art or other promotional material

include a relevant description of the photo such as location, names, year or circumstance so photos can be identified using a small placard similar to those used in art galleries

use at least a 3.5 mega pixel digital camera

minimum photo size should be 6" x 9" at 300 dpi resolution and uploaded as a JPG, PNG, TIF or BMP file

all photos submitted will also be used as part of a display at the 2012 AAA Annual Meeting in Washington, D.C.

submissions will close on June 30, 2012

Note that I initially had text on my submission pictures. Judy later asked me to submit the pictures once again without text.

Put your favorite pictures on your computer and then click on the "Enter a Photograph" button at
http://commons.aaahq.org/hives/06a813aecb/summary

You can view all of Bob Jensen's submissions here ---
http://www.cs.trinity.edu/~rjensen/temp/00AAAPhotos/

National Center for Education Statistics --- http://nces.ed.gov/

Public.Resource.Org --- http://public.resource.org/

Jim Martin's listing of economic indicators on MAAW ---
http://maaw.info/EconomicIndicators.htm

Bob Jensen's threads on economic statistics ---
http://www.trinity.edu/rjensen/Bookbob1.htm#EconStatistics

"Notre Dame Tops List of Best (Undergraduate) College Business Programs," by Geoff Gloeckler, Bloomberg Business Week, March 20, 2012 ---
http://www.businessweek.com/articles/2012-03-20/notre-dame-tops-list-of-best-college-business-programs

The 2012 Rankings --- http://www.businessweek.com/interactive_reports/ugtable_3-20.html

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

Never assume that the elite, Ivy League departments are the highest-ranked or have the best placement rates. Some of the worst-prepared job candidates with whom I've worked have been from humanities departments at Yale, Harvard, and Princeton. Do not be dazzled by abstract institutional reputations. Ask steely-eyed questions about individual advisers and their actual (not illusory) placement rates in recent years.
Karen Kelsky (See article below)

Jensen Comment
I think the above quotation is more wishful thinking than fact. In my opinion the prestige of the overall university is still one of the most important factors to tenure track appointments except in disciplines have a few stars that are so respected that their doctoral students jump to the front of the placement line. More likely than not these stars are in prestigious universities even if they jumped from the Ivy League ship.

My advice is to enroll in the most prestigious university you can get into. In doctoral programs, at least in accounting, the programs are virtually free in most cases, although living costs in some locales may be problematic if the university does not provide reasonably-priced housing for doctoral students.

In accounting it's more important to match your aptitude to the doctoral program. For example, if you really want to focus on accounting history and avoid much of the advanced mathematics, two programs have accounting history tracks (Case Western and Ole Miss.). In most other AACSB-accredited universities having accounting doctoral programs be prepared for advanced mathematics, statistics, and econometrics ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

"Graduate School Is a Means to a Job," by Karen Kelsky, Chronicle of Higher Education, March 27, 2012 ---
http://chronicle.com/article/Graduate-School-Is-a-Means-to/131316/

One of the most common questions I hear from graduate students, whether they are in their first or their final year, is what they can do now to prepare for the academic job market.

Excellent question. As a graduate student, your fate is in your own hands, and every decision you make—including whether to go to graduate school at all, which program to go to, which adviser to choose, and how to conduct yourself while there—can and should be made with an eye to the job you wish to have at the end.

To do otherwise is pure madness. I have no patience whatsoever with the "love" narrative (we do what we do because we love it and money/jobs play no role) that prevails among some advisers, departments, and profoundly mystified graduate students. But for those graduate students and Ph.D.'s who actually want a paying tenure-track job and the things that go with it—health insurance, benefits, and financial security—here is my list of graduate-school rules, forged after years of working in academe as a former tenured professor and now running my own career-advising business for doctoral students.

Before Graduate School

Ask yourself what job you want and whether an advanced degree is actually necessary for it.

Choose your graduate program based both on its focus on your scholarly interests and its tenure-track placement rate. If it doesn't keep careful records of its placement rate, or does not have an impressive record of placing its Ph.D.'s in tenure-track positions, do not consider attending that program.

Choose your adviser the same way. Before committing to an adviser, find out how many Ph.D.'s that potential mentor has placed in tenure-track positions in recent years.

Go to the highest-ranked graduate department you can get into—so long as it funds you fully. That is not actually because of the "snob factor" of the name itself, but rather because of the ethos of the best departments. They typically are the best financed, which means they have more scholars with national reputations to serve as your mentors and letter writers, and they maintain lively brown-bag and seminar series that bring in major visiting scholars with whom you can network. The placement history of a top program tends to produce its own momentum, so that departments around the country with faculty members from that program will then look kindly on new applications from its latest Ph.D.'s. That, my friends, is how privilege reproduces itself. It may be distasteful, but you deny or ignore it at your peril.

Never assume that the elite, Ivy League departments are the highest-ranked or have the best placement rates. Some of the worst-prepared job candidates with whom I've worked have been from humanities departments at Yale, Harvard, and Princeton. Do not be dazzled by abstract institutional reputations. Ask steely-eyed questions about individual advisers and their actual (not illusory) placement rates in recent years.

Meet, or at least correspond, with your potential adviser ahead of time so that you understand whether he or she has a hands-on approach to professionalization training and will be personally invested in your success.

Do not attend graduate school unless you are fully supported by—at minimum—a multiyear teaching assistantship that provides a tuition waiver, a stipend, and health insurance that covers most of the years of your program. The stipend needs to be generous enough to support your actual living expenses for the location. Do not take out new debt to attend graduate school. Because the tenure-track job market is so bleak, graduate school in the humanities and social sciences is, in most cases, not worth going into debt for.

Apply to 6 to 10 graduate programs. If you are admitted with funding to more than one, negotiate to get the best possible package at your top choice.

Be entrepreneurial before even entering graduate school to locate and apply for multiple sources of financial support. Do not forget the law of increasing returns: Success breeds success and large follows small. A $500 book scholarship makes you more competitive for a $1,000 conference grant, which situates you for a $3,000 summer-research fellowship, which puts you in the running for a $10,000 fieldwork grant, which then makes you competitive for a $30,000 dissertation writing grant.

Early in Graduate School

Never forget this primary rule: Graduate school is not your job; graduate school is a means to the job you want. Do not settle in to your graduate department like a little hamster burrowing in the wood shavings. Stay alert with your eye always on a national stage, poised for the next opportunity, whatever it is: to present a paper, attend a conference, meet a scholar in your field, forge a connection, gain a professional skill.

In year one and every year thereafter, read the job ads in your field, and track the predominant and emerging emphases of the listed jobs. Ask yourself how you can incorporate those into your own project, directly or indirectly. You don't have to slavishly follow trends, but you have to be familiar with them and be prepared to relate your own work to them in some way.

Have a beautifully organized and professional CV starting in your first year and in every subsequent year. When I was a young assistant professor, a senior colleague told me that her philosophy was to add one line a month to her CV. Set that same goal for yourself. As a junior graduate student, you may or may not be able to maintain that pace, but keep it in the back of your mind, and keep your eye out for opportunities that add lines to your CV at a brisk pace.

Make strong connections with your adviser and other faculty members in your department, and in affiliated departments. Interact with them as a young professional, respectfully but confidently. Eschew excessive humility; it inspires contempt. Do not forget the letters of recommendation that you will one day need them to write.

Minimize your work as a TA. Your first year will be grueling, but learn the efficiency techniques of teaching as fast as you can, and make absolutely, categorically, sure that you do not volunteer your labor beyond the hours paid. Believe me, resisting will take vigilance. But do it. You are not a volunteer and the university is not a charity. You are paid for hours of work; do not exceed them. Teach well, but do not make teaching the core of your identity.

Continued in article

Jensen Comment
I also don't necessarily advise minimizing experience as a teaching assistant and/or a research assistant. These experiences can be crucial to your later quest for tenure. Firstly, there's the value of TA and RA experience in and of itself. Secondly, there's the importance of those all-important letters of recommendations from professors that you served under as a doctoral student.

"A Comparison of Forensic Accounting Corporations in the United States," by Wm. Dennis Huber, SSRN, March 27, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029729

Abstract:
To call entities that issue certifications in forensic accounting “organizations” camouflages their true nature and results in misunderstanding what they really are. They are corporations. Recognizing them as corporations enables forensic accountants who hold their certifications to assess more realistically the costs and benefits of their certifications. A survey reveals that a significant number of forensic accountants believe it is important for forensic accounting corporations to have qualified officers and directors. There are also a significant number who mistakenly believe that the forensic accounting corporations that issued their certifications have qualified officers and directors. However, several forensic accounting corporations do not have qualified officers and directors. Forensic accountants also believe forensic accounting corporations have a duty to disclose the qualifications of their officers and directors but several do not disclose the qualifications of their officers and directors which violates their Codes of Ethics. This paper presents for the first time an in-depth comparison of forensic accounting corporations, their corporate history and the qualifications of their corporate directors and officers. The paper concludes with a recommendation for an independent agency to be established to oversee and accredit forensic accounting corporations. As a matter of public policy regulators cannot let this situation continue unabated. If an independent agency cannot be established, then, as a matter of public policy, states should enact statutes or adopt regulations to regulate forensic accounting corporations.

title:

MAAW's new Forensic Accounting Journal Bibliographies

author-source:

Jim Martin recently added the following journal bibliographies to MAAW:

Journal of Forensic Accounting - http://maaw.info/JournalOfForensicAccounting.htm

and

Journal of Forensic & Investigative Accounting - http://maaw.info/JournalOfForensicAndInvestigativeAccounting.htm

The JFIA is an electronic journal and all of the papers are available on the LSU web site.

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

Bob Jensen's threads on professionalism in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Question
What do international standards (IFRS) and COSO’s New Internal-Control Guidance sadly have in common?

Answer
Lack of real world examples and varied-circumstance implementation guides

"What’s Missing from COSO’s New Internal-Control Guidance: The proposal lacks real-world examples. CFOs will need to fill in the blanks," by Kristine Brands, CFO.com, March 20, 2012 --- Click Here
http://www3.cfo.com/article/2012/3/risk-management_coso-internal-control-guidance?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cfo%2Fdaily_briefing+%28Latest+Articles+from+CFO.com%29

Although a lot (OK most) people disagree with me, I've been a long-time advocate of replacing the U.S. corporate income tax with a VAT tax

"US VAT Introduction versus the Proposed Changes of The ‘European Union’ VAT System," by Richard Cornelisse, Big Four Blog, March 24, 2012 ---
http://www.big4.com/ernst-young/us-vat-introduction-versus-the-proposed-changes-of-the-european-union-vat-system

Railroads: The Transformation of Capitalism --- http://www.library.hbs.edu/hc/railroads/

Transcontinental Railroad Pictures and Exhibits --- http://cprr.org/Museum/Exhibits.html

Union Pacific Railroad: History and Photos http://www.uprr.com/aboutup/history/index.shtml

Steam and Electric Locomotives of the New Haven Railroad --- http://railroads.uconn.edu/locomotives/index.html

The Erie Railroad Glass Plate Negative Collection
http://libwww.syr.edu/information/spcollections/digital/erierr/

Accounting History (Railroad)
"The Collapse of the Railway Mania & the Birth of Accounting," by Paul Kedrosky, Paul Kedrosky,com, · July 18, 2011 --- Click Here
http://paul.kedrosky.com/archives/2011/07/the-collapse-of-the-railway-mania-the-birth-of-accounting.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InfectiousGreed+%28Paul+Kedrosky%27s+Infectious+Greed%29

July 26, 2011 reply from Robert Bruce Walker

Another excellent effort – thanks. It did not take me long before I discovered a gem. This claim is of fundamental importance

The detachment of reporting from accounting began here it would seem.

There is just one thing I don’t understand. The text I found by following the link says the author is a man named Odlyzko. Presumably that was the second error?

September 20, 2010 message from Bob Jensen

Hi Denny,

Yes, I could access the PwC re-rebranding video directly without having to log in:
http://www.pwc.ch/en/video.html?objects.mid=362&navigationid=3856

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

In any case the home page of PwC does not require any login --- http://www.pwc.com/
The video is now on this home page.

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

Bob’s underlying assumption was that CPA firms could extend assurance services to non-traditional areas (where they were not experts but could hire new kinds of experts) by leveraging the public image of accountants as having high integrity and professional responsibility. That public image was destroyed by the many auditing scandals, notably Enron and the implosion of Andersen, that surfaced in the late 1990s and beyond ---
http://www.trinity.edu/rjensen/Fraud001.htm

This is a 1998 lecture given by Bob Eliott before his world (the lofty public perception of CPA firm integrity) collapsed ---
http://newman.baruch.cuny.edu/digital/saxe/saxe_1998/elliott_98.ht

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

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

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

Bob Jensen

title:

Columbia Historical Corporate Reports Online Collection

author-source:

Columbia Historical Corporate Reports Online Collection --- http://www.columbia.edu/cu/lweb/indiv/business/CorpReports.html

description:

Columbia Historical Corporate Reports Online Collection --- http://www.columbia.edu/cu/lweb/indiv/business/CorpReports.html

The Business and Economics Library at Columbia University has digitized 770 historic corporate annual reports from their very extensive print collection. The reports are from 36 companies, and they range in dates from the 1850s to the 1960s, and are mainly from "corporations that operated in and around New York City." Visitors can search for the reports through an "Alphabetical List" or "Subject List", or browse by clicking on "View the Full List (XLS)". The "Sample Images" that are featured in the lower right hand corner of the homepage are from "Edison Electric Illuminating" and "Hudson & Manhattan Railroad Company". Once visitors choose an image to view, they will be able to view all of the years' digitized reports for that corporation, by clicking on the "Table of Contents" dropdown box. Visitors shouldn't miss the greatly detailed illustration from 1911 of the "Hudson Terminal Buildings", which is one of the chosen "Sample Images".

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

link:

Columbia Historical Corporate Reports Online Collection

title:

Some Accounting History Sites and Links

author-source:

Jensen
http://www.trinity.edu/rjensen/theory01.htm

description:

Some Accounting History Sites

Bob Jensen's Accounting History in a Nutshell and Links ---
http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory

Accounting History Libraries at the University of Mississippi (Ole Miss) --- http://www.olemiss.edu/depts/accountancy/libraries.html
The above libraries include international accounting history.
The above libraries include film and video historical collections.

MAAW Knowledge Portal for Management and Accounting --- http://maaw.info/

Academy of Accounting Historians and the Accounting Historians Journal ---
http://www.accounting.rutgers.edu/raw/aah/

Sage Accounting History --- http://ach.sagepub.com/cgi/pdf_extract/11/3/269

A nice timeline on the development of U.S. standards and the evolution of thinking about the income statement versus the balance sheet is provided at:
"The Evolution of U.S. GAAP: The Political Forces Behind Professional Standards (1930-1973)," by Stephen A. Zeff, CPA Journal, January 2005 --- http://www.nysscpa.org/cpajournal/2005/105/infocus/p18.htm
Part II covering years 1974-2003 published in February 2005 --- http://www.nysscpa.org/cpajournal/2005/205/index.htm

A nice timeline of accounting history --- http://www.docstoc.com/docs/2187711/A-HISTORY-OF-ACCOUNTING

From Texas A&M University
Accounting History Outline --- http://acct.tamu.edu/giroux/history.html

Canadian Printer and Publisher (history of various trades and industries) --- http://link.library.utoronto.ca/cpp/
You can search for various industry terms such as accounting, cost, bookkeeping, etc.

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

Columbia Historical Corporate Reports Online Collection --- http://www.columbia.edu/cu/lweb/indiv/business/CorpReports.html

Bob Jensen's timeline of derivative financial instruments and hedge accounting ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

link:

Accounting History and Theory

"E&Y fined and reprimanded over audit work (in England)". by Kevin Reed, Accountancy Age, March 13, 2012 ---
http://www.accountancyage.com/aa/news/2159027/-fined-reprimanded-audit

"Audit Watchdog Fines Ernst & Young $2 Million (in the U.S.)," by Michael Rapoport , The Wall Street Journal, February 8, 2012 ---
http://online.wsj.com/article/SB10001424052970204136404577211384224280516.html

Ernst & Young LLP agreed to pay $2 million to settle allegations by the government's auditing regulator that the firm wasn't skeptical enough in assessing how a client, Medicis Pharmaceutical Corp., accounted for a reserve covering product returns.

The Public Company Accounting Oversight Board also sanctioned four current or former partners of the Big Four accounting firm, including two whom it barred from the public-accounting field. Ernst & Young and the four partners settled the allegations without admitting or denying the board's findings.

The $2 million fine is the largest monetary penalty imposed to date by the board, which inspects accounting firms and writes and enforces the rules governing the auditing of public companies.

The board said Ernst & Young and its partners didn't properly evaluate Medicis's sales-returns reserve for the years 2005 through 2007. The firm accepted the company's practice of imposing the reserve for product returns based on the cost of replacing the product, instead of at gross sales price, when the auditors knew or should have known that wasn't supported by the audit evidence, the board said.

Medicis later revised its accounting for the reserve and restated its financial statements as a result.

Continued in article

Jensen Comment
Sometimes E&Y's clients just don't get what they paid for
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

"Deloitte & Touche Sued in New York Over WG Trading Fraud," by Chris Dolmetsch and Bob Van Voris, Bloomberg, March 23, 2012 ---
http://www.bloomberg.com/news/2012-03-23/deloitte-touche-sued-in-new-york-over-wg-trading-fraud-1-.html

Bob Jensen's threads on the woes of Deloitte and Touche are at
http://www.trinity.edu/rjensen/Fraud001.htm

The AICPA's Model Tax Curriculum --- http://aaahq.org/facdev/teaching/ModelTaxCurriculum02_15_07.pdf

This is recommended as a celebration cocktail for the 49.5% of U.S. taxpayers who pay no income taxes:
"Next Time You're At the Bar, Order an Income Tax Cocktail," by Adrienne Gonzalez (Jr. Deputy Accountant), Going Concern, March 20, 2012 ---
http://goingconcern.com/post/next-time-youre-bar-order-income-tax-cocktail

"Why Some Multinationals Pay Such Low Taxes," by Justin Fox, Harvard Business Review Blog, March 26, 2012 --- Click Here
http://blogs.hbr.org/fox/2012/03/why-some-multinationals-pay-su.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

Ernst & Young
To the Point: PCAOB public meeting on auditor independence and audit firm rotation

More than 40 panelists participated in the PCAOB public meeting to discuss ways to enhance auditor independence, objectivity and professional skepticism, including mandatory audit firm rotation. Many of the panelists opposed mandatory audit firm rotation and suggested alternatives. The Board also reopened the comment period on its August 2011 concept release until 22 April 2012.

The attached To the Point provides highlights of the two-day meeting. It is also available online.

What you need to know

• Panelists expressed support for efforts to further improve audit quality and enhance auditor independence, objectivity and professional skepticism.

• There was consistent recognition that audit quality has improved since the implementation of the Sarbanes-Oxley Act of 2002 (the Act) and that the PCAOB should consider strengthening the existing structure created by the Act.

• Views were mixed on the costs and perceived benefits of mandatory audit firm rotation, but nearly all parties supported enhancing audit committees and improving transparency and communications between auditors, audit committees, the PCAOB and shareholders.

• The PCAOB reopened the comment period on its concept release on enhancing auditor independence, objectivity and professional skepticism until 22 April 2012.

Overview
More than 40 panelists participated in a public meeting hosted by the Public Company Accounting Oversight Board (PCAOB or Board) to discuss ways to enhance auditor independence, objectivity and professional skepticism, including mandatory audit firm rotation. The meeting followed a concept release the PCAOB issued in August 2011 (the Concept Release).

The panelists included institutional investors, former government officials, audit committee chairs of major corporations, senior executives of issuers, representatives from trade associations, academics and senior leaders of audit firms. Many of the panelists were among the more than 600 people who submitted comment letters on the Concept Release.

More than 90% of the letters opposed mandatory audit firm rotation.

For further information on related topics, see our AccountingLink site.

Bob Jensen's threads on professionalism and independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Jensen Comment
In my opinion audit firm rotation will turn auditors into nomads and destroy the auditing profession as the best students turn to other professions that do not require family living in motor homes and tents.

"How to Put More Distance Between Banks and Their Auditors," by Francine McKenna, Forbes, March 26, 2012 ---
http://www.americanbanker.com/bankthink/PCAOB-mandatory-auditor-rotation-1047814-1.html

Mandatory rotation of a company's external auditors is not a popular idea among the audit firms or their clients.

The Public Company Accounting Oversight Board, the audit industry regulator, sought input last week from investors, auditors, academics and former regulators on a controversial "concept release" on the idea. More than 45 speakers gave their opinions of various ways to put rotation into practice. All of the suggestions made were intended to improve auditor independence, professional skepticism and, hopefully, audit quality.

PCAOB Chairman Jim Doty opened the meetings this week with the admission that fixed term limits for auditor relationships "would significantly alter the status quo." That is an understatement. The PCAOB received more than 600 comment letters, almost all in opposition to mandatory rotation.

Audit committee members object to such mandates because of the perceived cost. They also accuse the PCAOB of trying to usurp the enhanced role and responsibilities delegated to audit committees by the Sarbanes-Oxley Act. Audit firm CEOs say mandatory rotation would distract them from audit quality assurance and force the partners to focus on responding to constant requests for proposals and marketing activities. The auditor firms would rather collect oligopolistic fees from a government-mandated franchise without having to compete or justify those fees.

Some company representatives claim they would have to spend too much time and money getting new auditors up to speed on company culture and complex customized systems. Academics and former regulators, politically sensitive when in doubt, are divided on the advantages and disadvantages of mandatory auditor swaps.

Data firm Audit Analytics says that about 175 companies in the S&P 500 have used the same auditor for 25 years or more. The average tenure for audit firms at the top 100 U.S. companies by market cap is 28 years and 20 of those companies used the same auditor for 50 years or more.

Inertia is in evidence among the largest banks. In 2010, Citigroup (or rather the U.S. Treasury, which still owned 27% of the bank’s stock at the time), reappointed KPMG to its 41st consecutive year as auditor. JP Morgan Chase and Bank of America have both been using PricewaterhouseCoopers for a while, since 1965 and 1958 respectively. KPMG has been working with Wells Fargo since 1931.

And cozy ties between auditor and audited have an inglorious history. Consider that Ernst & Young had audited Lehman Brothers since before it was spun off from American Express in 1994, right up until the investment bank failed in 2008. Three of four chief financial officers at Lehman Brothers since 2000 were Ernst & Young alumni, including David Goldfarb, a former senior partner of the audit firm, who as Lehman’s CFO concoted the infamous Repo 105 balance sheet window-dressing technique.

But I'm not in favor of mandatory auditor rotation, in particular for the big banks. That's not because it costs too much or disrupts the company. Good corporate governance costs money and that’s a cost of doing good business.

Upsetting the relationships between banks and their auditors is, unfortunately, very disruptive to audit firms because of independence requirements. Rotation may force an audit firm to move all accounts, lines of credit, and other funding facilities to another bank. SEC rules prevent auditors from doing business with the bank that holds partner and firm money.

Moreover, I oppose mandatory auditor rotation because it's too much like term limits for elected officials. Both allow abdication of the responsibility for booting bad actors. And it’s an exercise in futility. Companies would be forced to move their audit from one potentially corruptible audit firm to another.

One of the speakers at the PCAOB forum last week, James Alexander, the head of equity Research at M&G Investment Management (a division of the U.K. life and pensions company Prudential PLC), said the implied guarantee by sovereigns for the too-big-to-fail banks means investors already depend more on regulators than audits to reassure them banks are safe and sound. In essence, for some banks, "audits don’t matter."

Large banks went down the drain during the crisis with no warning or "going concern" qualification from the auditors prior to the failure, bailout, or nationalization. In the U.K., the CEOs of the four largest audit firms told the House of Lords that they held back on "going concern" qualifications for failing banks because the auditors were told the government would bail out the banks.

Continued in article

PCAOB Just Won't Give Up on the Idea of Audit Firm Rotation

In the first round of responses to the idea of rotating audit firms, over 94% of the 600 respondents wrote to the PCAOB that they did not think the idea of required audit firm rotation was a good answer to increasing audit firm independence. In fact a majority of the respondents declared that they thought it was an atrocious idea
Click Here
http://www.ey.com/Publication/vwLUAssets/TechnicalLine_BB2256_AuditFirmRotation_5January2012/$FILE/TechnicalLine_BB2256_AuditFirmRotation_5January2012.pdf

Now the PCAOB has decided that maybe these respondents were lying through their teeth. So now before the PCAOB drives an unpopular idea down our throats the PCAOB is going to run a coaching hearing with panelists trying persuade these respondents that audit firm rotation is a good idea coupled with another round where respondents have a chance to declare that they really lied through their teeth the first time around ---
http://pcaobus.org/News/Releases/Pages/03072012_PublicMeeting.aspx

Its a little like having a municipal development project that voters overwhelmingly turned down on the first year of voting. You can count on City Hall and developers to keep calling another vote until they wear down the voters and get their way in the end.

The real test case of City Hall strategy will come in Wichita when Wichita developers keep coming back and back again for tax abatements on a development project after voters won a referendum denying these abatements.

The PCAOB will just not listen on this one!

"When Agencies Go Nuclear: A Game Theoretic Approach to the Biggest Sticks in an Agency’s Arsenal," by Brigham Daniels, George Washington University, February 2012 ---
http://groups.law.gwu.edu/lr/ArticlePDF/80-2-Daniels.pdf

March 8, 2012 reply from Dennis Beresford

While I have my own view on this subject and wrote same in a comment letter to the PCAOB, I would like to add something to Bob’s comment on the hearings. This issue has been studied for many years and the Concept Release generated about 600 letters, as Bob noted. Thus, one might question what more the Board will learn at the hearings that hasn’t already been gleaned from years of research that was well summarized in the Concept Release as well as the 600 letters submitted.

One significant difference between the PCAOB process and that of the FASB is that for the latter, public hearings (and later roundtables) generally were/are open to all who submitted comment letters and wished to have the opportunity to expand on their views in face to face meetings with Board and staff members or respond to their questions. These discussions were often quite useful as the Board members and staff could analyze the letters in advance and be prepared to ask very specific questions and contrast positions with other commentators, etc.

For the PCAOB hearings, as I understand the situation, the Board hand-picked those who were asked to testify in order to get a “balance” of views even though at least some of those who will comment have not submitted a comment letter. I don’t know if those individuals will be asked to submit position outlines in advance, but I doubt it based on experience at other PCAOB meetings. Thus, the meeting will likely be a recitation of the Concept Release, in effect letting various parties say why they continue to support the position they do as has been well documented through the Release and through the comment letters. Of course, this will also allow the Board to demonstrate that there is “strong” support for mandatory audit firm rotation as there will be user, academic, and analyst panels that will offset the ones from accounting firms, corporate executives, audit committees, and others who were among the 94% that Bob mentioned.

I guess that when this many smart people get together in one room there’s always the possibility of new information or a different way of looking at the issue. But that looks fairly doubtful.

Denny Beresford

Question
What will be the major drawback of the Congressional proposal to ban audit firm rotation mandates?

Answer
Many jobs will be lost because tens of tens of thousands of auditors will not have to buy new motor homes for their families to live in.

From The Wall Street Journal Accounting Weekly Review on March 30, 2012

Auditor 'Rotation' Debate Heats Up
by: Michael Rapoport
Mar 28, 2012
Click here to view the full article on WSJ.com

TOPICS: Auditing, Auditing Services, Auditor Changes, Public Accounting

SUMMARY: "Congress is poised to wade into the debate over 'term limits' for audit firms, in a move that has some proponents worried that the business community may be throwing its weight around to block a significant overhaul." The draft of a bill will be discussed in a House subcommittee on Wednesday, March 28, 2012.

CLASSROOM APPLICATION: The article is useful to discuss ethics and public accounting business management as well as the Public Company Accounting Oversight Board (PCAOB), most likely in an auditing class.

QUESTIONS:
1. (Advanced) What is the Public Company Accounting Oversight Board (PCAOB)? What is its responsibility with respect to the auditing profession?

2. (Advanced) What has the PCAOB proposed in regards to auditor rotation?

3. (Introductory) As described in the article, what are the arguments in favor of the PCAOB's proposal?

4. (Introductory) What are the arguments against this proposal?

5. (Introductory) What course of action are some members of Congress considering in relation to audit partner rotation?

Reviewed By: Judy Beckman, University of Rhode Island

"Auditor 'Rotation' Debate Heats Up," by: Michael Rapoport, The Wall Street Journal, March 28, 2012 ---
https://mail.google.com/mail/?shva=1#inbox/13662348b23d75bf

Congress is poised to wade into the debate over "term limits" for audit firms, in a move that has some proponents worried that the business community may be throwing its weight around to block a significant overhaul.

A draft bill expected to be discussed at a House subcommittee hearing Wednesday would block regulators from requiring that companies change their outside auditors regularly. The move would be a pre-emptive strike against the Public Company Accounting Oversight Board, the government's audit-industry regulator, which is considering so-called rotation as a way of ensuring auditors don't get too cozy with their clients.

Some supporters of rotation believe prominent opponents, like the accounting industry and the U.S. Chamber of Commerce, have enlisted Congress to come to their aid. Some big accounting firms and the chamber have lobbied Congress on the issue or are major campaign contributors to the congressmen involved with the draft bill, according to trackers of campaign finance and lobbying reports.

"The business community has enormous resonance with this Congress," said former Securities and Exchange Commission Chairman Arthur Levitt, who supports rotation and spoken out in favor of it. Along with legislation easing corporate-governance rules for new public firms, blocking auditor rotation "would be a further erosion of investor protection," he said.

PricewaterhouseCoopers LLP, one of the Big Four accounting firms, says it hasn't asked Congress to weigh in even though the firm opposes rotation. But "we recognize that others may have different opinions about how best to engage the PCAOB," said Laura Cox Kaplan, the firm's leader for U.S. government and regulatory affairs.

The chamber, the board and the other Big Four firms—Ernst & Young LLP, KPMG LLP and Deloitte LLP—declined to comment or didn't provide comment.

In testimony prepared for Wednesday's hearing, however, chamber official Tom Quaadman supports a congressional ban, contending that rotation is "a matter of corporate governance outside of the PCAOB's realm."

A PCAOB spokeswoman said the Sarbanes-Oxley corporate-overhaul law gives the board authority over auditor-independence issues, subject to SEC approval.

The board is exploring whether companies should have to change audit firms every several years and doesn't expect to make a decision on the issue until next year. Last week it held a two-day meeting to hear views on the issue.

If enacted, rotation would break up auditor-client relationships that in some cases have lasted decades. Supporters say rotation would improve auditor independence and lead to more healthy skepticism among auditors in evaluating a company's books. Critics say it would raise audit costs and deprive a company of a long-tenured auditor's institutional knowledge.

The draft bill to be discussed Wednesday would prohibit the board from requiring the use of "different auditors on a rotating basis." The bill, sponsored by Rep. Michael Fitzpatrick (R., Pa.), hasn't yet been introduced. But a draft of the measure is featured on the web page announcing Wednesday's hearing by the House Financial Services Committee's capital-markets subcommittee, and the panel has invited witnesses at the hearing to comment on it.

According to data from the Center for Responsive Politics, which tracks campaign finance, Rep. Fitzpatrick has gotten major contributions from PricewaterhouseCoopers and Deloitte during the 2012 election cycle. PwC is his 10th-biggest contributor throughout his career in Congress, and the accounting industry has given him a total of $108,779 over his entire career.

Continued in article

"Auditor Rotation and Banks: If It Makes You Happy…," by Francine McKenna, re:TheAuditors, March 26, 2012 ---
http://retheauditors.com/2012/03/26/auditor-rotation-and-banks-if-it-makes-you-happy/

Bob Jensen's threads on audit firm rotation ---
http://www.trinity.edu/rjensen/Fraud001c.htm

It's about time!
When I suggested this in a meeting and later in an email message a couple of years ago a FASB board member gave me the brush off.

"FASB WILL TAKE ANOTHER LOOK AT REPO ACCOUNTING," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, March 22, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/585

The FASB announced yesterday that it will take a look at repo accounting. Again. As we don’t expect much improvement, we wonder why it bothers.

Michael Rapoport of The Wall Street Journal reports, “The Financial Accounting Standards Board agreed Wednesday to look at further revisions to how companies must account for their use of repurchase agreements, or ‘repos,’ a form of financing for securities-trading firms, following a previous revision last year. In particular, the board will look at ‘repos to maturity,’ a potentially risky variant that contributed to MF Global’s collapse last year.”

The Lehman Brothers collapse led to some small, insignificant changes in the repo rules. With the collapse of MF Global, the board thinks it desirable to consider some incremental but insignificant amendments. As last year’s revision was impotent, we expect more of the same from any revision this year.

What the board should have done a decade or two ago was to focus on the economic substance of the transaction, and the substance of a repurchase agreement is that it is a secured borrowing. Pure and simple. Thus, all repurchase agreements should be accounted for as secured borrowings.

The FASB’s statement yesterday says more about it than it does repo accounting. The board is incredibly slow and, with old age, is slowing down even further. The board is reactive instead of proactive; apparently, it cannot think about an issue unless there is some type of financial crisis. The board cannot think simple; instead, it seems to complexify whatever issue is at hand. Finally, the board seems beholden to banks and has been for some time. It appears to carry water for bankers, whether the topic is special purpose entities, derivatives, fair value accounting, or repurchase agreements.

Forget reforming repo accounting. Let’s reform FASB instead. (so say Catanach and Ketz)

Jensen Comment

Question
Where did the missing MF Global $1+ billion end up?

Hint:
The the word "repo" sound familiar?
http://en.wikipedia.org/wiki/Repurchase_agreement

"MF Global and the great Wall St re-hypothecation scandal," by Chrisopher Elias, Reuters, December 7, 2011 ---
http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/

The Examiner's Report is not at all kind to Ernst & Young
Lehman’s use of Repo 105 — hidden from the firm’s board but not its auditors at Ernst & Young — helped the investment bank look less indebted than it really was.
As quoted in
Volumes 1-9 of the Examiner's Report --- http://dealbook.blogs.nytimes.com/2010/03/11/lehman-directors-did-not-breach-duties-examiner-finds/#reports

The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

Behavioral Economics For Dummies [Paperback]
by Morris Altman (Author)
John Wiley & Sons Canada
2012

From the Back Cover

The guide to understanding why people really make economic and financial decisions
The field of behavioral economics sheds light on the many subtle and not-so-subtle factors that contribute to financial and purchasing choices. This friendly guide explores how socialand psychological factors, such as instinctual behavior patterns, social pressure, and mental framing, can dramatically affect our day-to-day decision making and financial choices. Based on psychology and sociology and rooted in real-world examples, Behavioral Economics For Dummies offers the sort of insights designed to help investors avoid impulsive mistakes, companies understand the mechanisms behind individual choices, and governments and nonprofits make public decisions.

Make realistic assumptions for economic analysis — investigate the assumptions conventional economics makes, and discover how behavioral economists introduce social, psychological, and cultural considerations

Explore the relationship between the brain and economics — understand how human behavior and surroundings affect economic phenomena

Examine the role of free choice in economic decision making — review the conditions that are necessary in order for people to make choices that reflect their true preferences, given the constraints they face

Get happy — recognize that factors other than wealth and money are critically important to a person's happiness, as defined by behavioral economics

Learn to:

Understand how social and psychological factors affect our economic and financial decisions

Grasp how governments and experts influence our choices

Avoid making impulsive and uninformed decisions

Appreciate why ethics are important to our choices

Open the book and find:

The many subtle factors that contribute to our financial and purchasing choices

Why people really make financial decisions

Real-world examples of how behavioral economics affects our lives

What social and psychological factors affect our decision making

How to use behavioral economics to be happier

Why government policies affect the economy

Helpful consumer tips

Go to Dummies.com for videos, step-by-step examples, how-to articles, or to shop!

About the Author

Morris Altman, PhD, is a professor of behavioral economics at Victoria University of Wellington in New Zealand and a professor of economics at the University of Saskatchewan in Canada. He is on the board of the Society for the Advancement of Behavioral Economics and is a former president of that organization. He also edited the Handbook of Contemporary Behavioral Economics.

Behavioral Issues and Culture in Accounting Bibliographies (thank you James Martin) ---
http://maaw.info/BehaveIssueMain.htm

Bob Jensen's threads on Behavioral and Cultural Economics ---
http://www.trinity.edu/rjensen/Theory01.htm#Behavioral

Robert Shiller --- http://en.wikipedia.org/wiki/Robert_Shiller

Walt Whitman --- http://en.wikipedia.org/wiki/Walt_Whitman

Myths of Economic Inequality
"Walt Whitman, First Artist of Finance (Part 1)," by Yale Economist Robert Shiller, Bloomberg, March 5, 2012 ---
http://www.bloomberg.com/news/2012-03-05/walt-whitman-first-artist-of-finance-part-1-robert-shiller.html

"Finance Isn’t as Amoral as It Seems (Part 2)," by Yale Economist Robert Shiller, Bloomberg, March 5, 2012 ---
http://www.bloomberg.com/news/2012-03-06/finance-isn-t-as-amoral-as-it-seems-part-2-commentary-by-robert-shiller.html
Don't forget to read the mostly negative comments.

"Don’t Resent the Rich; Fix the Tax Code (Part 3)," by Yale Economist Robert Shiller, Bloomberg, March 6, 2012 ---
http://www.bloomberg.com/news/2012-03-07/don-t-resent-the-rich-fix-the-tax-code-part-3-robert-shiller.html
Don't forget to read the mostly negative comments.

"Logic of Finance Can Banish Corruption (Part 4)," by Yale Economist Robert Shiller, Bloomberg, March 7, 2012 ---
http://www.bloomberg.com/news/2012-03-08/finance-logic-can-banish-corruption-part-4-commentary-by-robert-shiller.html
Don't forget to read the mostly negative comments.
Bob Jensen's threads on fraud and corruption --- http://www.trinity.edu/rjensen/Fraud.htm

The American Dream ---
http://www.cs.trinity.edu/~rjensen/SunsetHillHouse/SunsetHillHouse.htm

On the Myths of Income Inequality
Part 1 by Yale by Robert Shiller, Arthur M. Okun Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance

"Walt Whitman, First Artist of Finance (Part 1)," by Robert Shiller, Bloomberg, March 4, 2012 ---
http://www.bloomberg.com/news/2012-03-05/walt-whitman-first-artist-of-finance-part-1-robert-shiller.html

One of the myths surrounding economic inequality in our society is that high incomes are often the result of selfishness and narrow-mindedness, rather than idealism and humanity. We tend to think that those in careers other than our own are fundamentally different kinds of people.

Personality and character differences are, indeed, somewhat associated with occupation. But we tend to attribute the behavior of others to personality differences far more often than is warranted.

We tend to think of philosophers, artists or poets as the polar opposite of chief executive officers, bankers or businesspeople. But the idea that those involved in business have personalities fundamentally different from those in other walks of life is belied by the fact that many often combine or switch careers. Consider a few examples.

Continued in article

March 23. 2012 reply from Roger Collins

Two of seventeen comments on Robert Shiller's article...
////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
Peon2012 2 weeks ago

as far as I can tell all this article points out is that koons and hirst are much more financially successful than Whitman and Thoreau. 1) Hirst and Koons can't be considered artists, they are nothing better than con men. 2) during his time on Walden Pond Thoreau did everything he could to avoid transactions with outsiders. Taking one word, from one sentence of his and misconstruing it totally perverts his whole philosophy 3) why has an economics professor chosen a sample size of about 5? What about Tolstoy who sought to give his entire legacy to the people? Rembrant who died penniless? Kerouac, Orwell who endured poverty for their art, Lucian Freud who gambled his money away cos he found it an impediment to painting..

This article is a poorly research justification of the writers' existing beliefs.Written for an audience which wants to hear it.

Like
Reply

4 Likes

Frederic Mari in reply to Peon2012 2 weeks ago

I'd be slightly less ferocious and presume that Dr. Shiller's views are more innocent than you do. However, I think that this comment "What about Tolstoy who sought to give his entire legacy to the people? Rembrant who died penniless? Kerouac, Orwell who endured poverty for their art, Lucian Freud who gambled his money away cos he found it an impediment to painting..." is key.

Sure, everyone needs to make a living and I don't actually believe that many people believe "high incomes are often the result of selfishness and narrow-mindedness". High incomes are the result of being in the right place, at the right time with the right tools. And, if you become rich enough, then you can manipulate the marketplace and the laws to be sure that the time, the place and your tools remain connected, for your greater benefit...

Also: "People in the most spiritually minded professions -- those who work in the church, the arts or philanthropy, for example -- are routinely involved in managing financial resources and executing deals and contracts".

I wouldn't think anyone is in any doubt that the church, the arts and NGOs are ideal place for crooks wanting to make a quick buck. You can use the coat of virtue to cover all kinds of financial shenanigans... Not for nothing are successful churches so rich, on average...

///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////

It will be interesting to see Part 2 of this series.

Roger

The American Dream ---
http://www.cs.trinity.edu/~rjensen/SunsetHillHouse/SunsetHillHouse.htm

From IAS Plus --- http://www.iasplus.com/index.htm
23 March 2012: IAASB issues updated standard on use of internal auditors

The International Auditing and Assurance Standards Board (IAASB) has released a revised International Standard on Auditing (ISA) dealing with the use of internal auditors in external audits.

The revised ISA 610 Using the Work of Internal Auditors is the result of an exposure draft issued in July 2010 and is designed to enhance the performance of external auditors by enabling better consideration and leveraging, as appropriate, of the knowledge and findings of the internal audit function in making risk assessments, and strengthening the framework for the evaluation and, where appropriate, use of the work of internal auditors in obtaining audit evidence.

The revised pronouncement is effective for audits of financial statements for periods ending on or after 15 December 2013.

Click for IAASB press release (link to IFAC website).

Bob Jensen's threads on professionalism and independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Outcomes Assessment

March 10, 2012 message from Penny Hanes

Can anyone point me to some good information on course specific outcomes assessment in an accounting program?

Penny Hanes,
Associate Professor
Mercyhurst University

March 11. 2012 reply from Bob Jensen

Hi Penny,

Respondus has some testing software:

October 13, 2009 message from Richard Campbell [campbell@RIO.EDU]

For anyone teaching online, this software is a "must-have". They have released a new (4.0) version with improved integration of multimedia. Below are some videos (created in Camtasia) that demonstrate key features of the software.

http://www.respondus.com/

They have tightened up the integration with publisher test banks.
Richard J. Campbell
mailto:campbell@rio.edu

Bob Jensen's threads for online assessment are at
http://www.trinity.edu/rjensen/Assess.htm#Examinations

There are different levels that you can approach such a topic. Many are based on the mastery learning theory of Benjamin Bloom ---
http://en.wikipedia.org/wiki/Benjamin_Bloom

The best known accounting course assessment experiment using Bloom's Taxonomy, for an set of courses for an entire program, was funded by an Accounting Education Change Commission (AECC) grant to a very fine accounting program at Kansas State University. The results of this and the other AECC experiences are available from the AAA (ISBN 0-86539-085-1) ---
http://aaahq.org/AECC/changegrant/cover.htm
The KSU outcomes are reported in Chapter 3 ---
http://aaahq.org/AECC/changegrant/chap3.htm
I think Lynn Thomas at KSU was one of the principal investigators.

Michael Krause, Le Moyne College, has conducted some AAA programs on Bloom's Taxonomy assessment.
Susan A. Lynn, University of Baltimore, has done some of this assessment for intermediate accounting.
Susan Wolcott, Canada's Chartered Accountancy School of Business, has delved into critical thinking assessment in accounting courses

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

"Make Your Own E-Books with Pandoc," by Lincoln Mullen, Chronicle of Higher Education, March 20, 2012 ---
http://chronicle.com/blogs/profhacker/make-your-own-e-books-with-pandoc/39067?sid=wc&utm_source=wc&utm_medium=en

"2 New Platforms Offer Alternative to Apple’s Textbook-Authoring Software," by Nick DeSantis, Chronicle of Higher Education, February 17. 2012 ---
Click Here
http://chronicle.com/blogs/wiredcampus/2-new-platforms-offer-alternative-to-apples-textbook-authoring-software/35495?sid=wc&utm_source=wc&utm_medium=en

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

Bob Jensen's threads on E-Books are at
http://www.trinity.edu/rjensen/Ebooks.htm

Question
Does acceptance of racial cultural and religious diversity correlate with national "happiness?
How about gender diversity?
Scroll way down at
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

The American Dream ---
http://www.cs.trinity.edu/~rjensen/SunsetHillHouse/SunsetHillHouse.htm

American Dream --- http://en.wikipedia.org/wiki/American_Dream
Often the goal of an American Dream is not so much betterment of your own life but betterment of the lives of your children and grandchildren.
The Hendersons featured in this article have two of their own girls plus a girl and boy that they adopted in China.

Could it be that tax revisionists in Denmark are beginning to anticipate (by reducing tax rates)
value added from something like an American Dream being introduced in Denmark?

Does the American Dream add more good than harm?

A Message from Jim Peters on the AECM

A couple of years ago, 60 minutes interview a bunch of Danish citizens because the Danes had once again topped the international surveys as the happiest people on earth. Americans, as with most international measures, were somewhere in the middle of the pack. The Dane's advice to Americans was to dump the American Dream because it caused more harm than good. The core of the American Dream seems to be equating wealth to happiness and setting off on a constant quest for more wealth. The Danes advice was to focus more on non-economic sources of happiness and learn to appreciate what you have.

Obviously, all this is an anathema to Americans and some of the reaction to the Dane's comments included epithets like "losers" and "hippies." But, the fact is that they are happier than Americans.

Jim

Jensen Comment
I take issue with Jim's quoted phrase that the American Dream in America "caused more harm than good." In my opinion, most of what we have that is good in America was built in one way or another on somebody's American Dream, a somebody willing to take financial and even physical risks, work tirelessly to build or rebuild something (possibly making creative innovations along the way), and pass the fruits of entrepreneurial labor on so that other Americans can find jobs and other Americans can enjoy the goods and services provided by the American Dreams of others.

Continued with pictures at
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

The China Dream: Rise of the Billionaire Tiger Women from Poverty
"Tigress Tycoons," by Amy Chua, Newsweek Magazine Cover Story, March 12, 2012, pp. 30-39 ---
http://www.thedailybeast.com/newsweek/2012/03/04/amy-chua-profiles-four-female-tycoons-in-china.html

Like a relentless overachiever, China is eagerly collecting superlatives. It’s the world’s fastest-growing major economy. It boasts the world’s biggest hydropower plant, shopping mall, and crocodile farm (home to 100,000 snapping beasts). It’s building the world’s largest airport (the size of Bermuda). And it now has more self-made female billionaires than any other country in the world.

This is not only because China has more females than any other nation. Many of these extraordinary women rose from nothing, despite living in a traditionally patriarchal society. They are a beguiling advertisement for the New China—bold, entrepreneurial, and tradition-breaking.

Four standouts among China’s intriguing new superwomen are Zhang Xin, the factory worker turned glamorous real-estate billionaire, with 3 million followers on Weibo (China’s Twitter); talk-show mogul Yang Lan, a blend of Audrey Hepburn and Oprah Winfrey; restaurant tycoon Zhang Lan, who as a girl slept between a pigsty and a chicken coop; and Peggy Yu Yu, cofounder and CEO of one of China’s biggest online retailers. None of these women inherited her money, and unlike many of the richest Chinese who are reluctant to draw public scrutiny to their path to wealth, they are proud to tell their stories.

How did these women make it to the top in the wild, wild East? Did they pay a price, either in their family or their professional lives? What was it that distinguished them from their famously hardworking compatriots? As I set out to explore these questions, my interest was partly personal. All four of my subjects lived for extended periods in the West. As a Chinese-American, and now the infamous Tiger Mom, I was curious: how “Chinese” were these new Chinese tigresses?

It turns out that each of these women, in her own way, is a dynamic combination of East and West. Perhaps this is one secret to their breathtaking success.

Zhang Xin is a rags-to-riches tale right out of Dickens. She was born in Beijing in 1965. The next year Mao launched the Cultural Revolution, and millions, including intellectuals and party dissidents, were purged or forcibly relocated to primitive rural areas. Children were encouraged to turn in their parents and teachers as counterrevolutionaries. Returning to Beijing in 1972, Zhang remembers sleeping on office desks, using books for pillows. At 14 she left for Hong Kong with her mother, and for five years she worked in a factory by day, attending school at night.

“I was a miserable kid,” she told me. With her chic cropped leather jacket and infectious laughter, the cofounder of the $4.6 billion Soho China real-estate empire is today an odd combination of measured calculation and warm spontaneity. “My mother drove me in school so hard. That generation didn’t know how to express love.

“But it wasn’t just me. It was all of China. I don’t think anybody was happy. If you look at photos from those days, no one is smiling.” She mentioned the contemporary artist Zhang Xiaogang, who paints “cold, emotionless” faces. “That’s exactly how we all grew up.”

. . .

But the four women I interviewed are a new breed. Progressive, worldly, and open to the media, they are in many ways not representative of China, past or present. Perhaps they are merely the lucky winners of the 1990s free-for-all in China, a window that may already be closing. Or perhaps they are the forerunners of a China still to come, in which paths to success are far more open. Each has found a way to dynamically fuse East and West, to staggering commercial success. It may still be a long way off, but if China can achieve a similar alchemy—melding its tremendous economic potential and traditional values with Western innovation, the rule of law, and individual liberties—it would be a land of opportunity tough to beat.

"Asian Women Taking GMAT On the Rise," by Allison Damast, Business Week, February 29, 2012 ---
http://www.businessweek.com/articles/2012-02-29/asian-women-taking-gmat-on-the-rise

If slow and steady wins the race, female business school applicants are making their way closer and closer to the finish line. In the last testing year, a record 106,800 women took the exam, making up 41 percent of all test takers, up from 40 percent the year before, according to the Graduate Management Admission Council (GMAC), which offers the exam. This is the third consecutive year that more than 100,000 women have sat for the Graduate Management Admission Test (GMAT), with much of the increase continuing to be driven by East Asian women, says Michelle Sparkman-Renz, GMAC’s director of research communications.

“It’s quite significant,” Sparkman-Renz says. “When we first saw it happen in 2009, you wondered if it was a fluke or part of the recession. But we’ve continued to see a new generation of women in MBA and master’s programs, so it feels like it is here to stay.”

This year’s report is good news for business schools, at which women are still far from a majority on most campuses. Female enrollment at most top U.S. business schools still hovers at just over 30 percent, though many business schools are making more concerted efforts to attract women. This year, women make up 45 percent of the MBA class at the University of Pennsylvania’s Wharton School—the largest number in the school’s history—and female enrollment jumped by nearly 40 percent this year at several schools, including Harvard Business School.

About 70 percent of full-time MBA programs reported having made specialized outreach to women last year, up from 54 percent in 2010, GMAC says. Specialized master’s programs are also increasing their efforts in this area, with half of master’s of accounting programs and a quarter of master’s of finance programs reporting that they are trying to increase the proportion of women in their applicant pool. Business schools, especially those in the U.S., are trying to take advantage of surging interest from female applicants, says Elissa Ellis-Sangster, director of the Forté Foundation, a consortium of 39 business schools working to increase the number of women pursuing MBAs.

“A lot of these outreach-and-marketing efforts in master’s programs is directed towards reaching those younger women students,” she says. “Schools are reaching deeper into the pipeline than ever before.”

U.S. women still lead the way when it comes to testing volume among women worldwide, even though fewer overall took the exam last year. There were 45,735 U.S. women who took the GMAT in 2011, down from 50,053 in 2010—a nearly 8 percent decrease. GMAC attributes the decline to a strengthening U.S. economy, which typically results in a reduction in applications to MBA programs.

East Asian and Southeast Asian women are largely making up the difference. Of the 10 global regions that GMAC tracks, women in East and Southeast Asia accounted for the largest portion of test takers last year—58 percent, up from 54.6 percent in 2010—and are part of a rapidly growing younger female GMAT pipeline. Worldwide, women younger than 25 now make up more than half, or 54 percent, of female examinees, up from 45.5 percent in 2010, GMAC says.

Nowhere is this trend more evident than in China, where younger women are looking to burnish their resumes by getting master’s degrees from prestigious Western business schools, says Peter von Loesecke, chief executive officer and managing director of the MBA Tour, which organizes admissions events with leading business schools in major cities around the world. Women made up 64 percent of all GMAT test takers in China last year, up from 62 percent in 2010, GMAC said.

The proportion of women registering for MBA Tour events in Beijing and Shanghai jumped from 47 percent in 2006 to 56 percent in 2010, von Loesecke says. Increasingly, many of these women have limited or no work experience. In 2010, the vast majority of registrants without work experience were women; in 2011, so many female registrants fell into that category that for the first time the organization denied some younger women admission to the Beijing and Shanghai tours, von Loesecke says.

“Rather than wait several years in a less-valued job to get an MBA, more Chinese women than men are opting for a master’s to launch their careers sooner,” von Loesecke wrote in an e-mail.

Continued in article

The American Dream versus the China Dream versus the Danish Dream ---
http://www.cs.trinity.edu/~rjensen/SunsetHillHouse/SunsetHillHouse.htm

Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

A Carnegie-Mellon Professor says the widening gap between the top 1% and the remaining 99% is no proof that capitalism is unjust

"A Look at the Global One Percent: The remarkable similarity in income distribution across countries over the past century means domestic policy has less effect than many believe on who gets what," by Allan Meltzer, The Wall Street Journal, March 9, 2012 ---
http://online.wsj.com/article/SB10001424052970204653604577249852320654024.html?mod=djemEditorialPage_h

While the Occupy Wall Street movement may be waning, the perception of growing income inequality in America is not. For those on the left, the widening gap between the top 1% of earners and the remaining 99% is proof that American capitalism is unjust and should be traded in for an economic model more closely resembling the social democracies of Europe.

But an examination of changes in income distribution over nearly 100 years, not just in the United States but elsewhere in the developed world, does not bear this out. In a 2006 study titled "The Evolution of Top Incomes in an Egalitarian Society," Swedish economists Jesper Roine and Daniel Waldenström compared the income share of the top 1% of earners in seven countries from the early 1900s to 2004. Those countries—the U.S., Sweden, France, Australia, Britain, Canada and the Netherlands—all practice some type of democratic capitalism but also a fair amount of redistribution.

As the nearby chart from the Roine and Waldenström study shows, the share of income for the top 1% in these seven countries generally follows the same trend line. That means domestic policy can't be the principal reason for the current spread between high earners and others. Since the 1980s, that spread has increased in nearly all seven countries. The U.S. and Sweden, countries with very different systems of redistribution, along with the U.K. and Canada show the largest increase in the share of income for the top 1%.

The main reasons for these increases are not hard to find. Adding a few hundred million Chinese and Indians to the world's productive labor force after 1980 slowed the rise in income for workers all over the developed world. That's the most important factor at work. The top 1% gain relatively because they are less affected by the hordes of newly productive workers.

But the top 1% have another advantage. Many of them have unique skills that are difficult to replicate. Our top earners include entrepreneurs, rock stars, professional athletes, surgeons and lawyers. Also included are the managers of large international corporations and, yes, bankers and financiers. (Interestingly, the Occupy movement seldom criticizes athletes or rock stars.)

The most dramatic change shown in the chart is the decline in the top 1% of Swedish earners' share of total income to between 5%-10% in the 1960s from well over 25% in 1903. The Swedish authors explain that drop as mainly due to the decline in real interest rates that lowered incomes of rentiers who depended on interest and dividends. Capitalist development, not income redistribution, brought that change.

Income-redistribution programs that became widespread in the 1960s and 1970s had a much smaller influence than market forces. Between 1960 and 1980, the share going to the top 1% declined, but the decline is modest. The share of the top percentile had been reduced everywhere by 1960. Massive redistributive policies in Sweden did more than elsewhere to lower the top earners' share of total income. Still, the difference in 1980 between Sweden and the U.S. is only about four percentage points. As the chart shows, the top earners in both countries began to increase their share of income in 1980.

The big error made by those on the left is to believe that redistribution permits the 99% or 90% to gain at the expense of top earners. In much current political discussion, this is taken as an unchallenged truth. It should not be. The lasting opportunity for the poor is better jobs produced by investments, many of which are financed by those who earn high incomes. It makes little sense to applaud the contribution to all of us made by the late Steve Jobs while favoring policies that reduce incentives for innovators and investors.

Our system is democratic capitalism. In every national election, the public expresses its preference for taxation and redistribution. It is a democratic choice, not a plot controlled by one's most despised interest group. The much-maligned Congress is unable to pass a budget because it is elected by people who have conflicting ideas about taxes and redistribution. President Obama wants higher tax rates to pay for more redistribution now. The Republicans, recalling Ronald Reagan and Margaret Thatcher and much of the history of democratic capitalist countries, want lower tax rates and less regulation to bring higher growth and to help pay for some of the future health care and pensions promised to an aging population.

Regardless of one's economic philosophy, the public deserves an accurate presentation of the reasons for the change in income distribution. The change is occurring in all the developed countries. The chart shows that policies that redistribute wealth and income have at most a modest effect on income shares. As President John F. Kennedy often said, the better way is "a rising tide that lifts all boats."

Mr. Meltzer, a professor of public policy at the Tepper School, Carnegie Mellon University and a visiting scholar at Stanford University's Hoover Institution, is the author most recently of "Why Capitalism?" just published by Oxford University Press.

"Adam Smith vs. Crony Capitalism: The Scottish philosopher's suspicions about business people were well-founded," by Sheldon Richman, Reason Magazine, March 9, 2012 ---
http://reason.com/archives/2012/03/09/adam-smith-vs-crony-capitalism

I admit it: I like Adam Smith. His perceptiveness never fails to impress. True, he didn’t foresee the marginal revolution that Carl Menger would launch a century later (with, less significantly in my view, Jevons and Walras), but give the guy a break. The Wealth of Nations is a great piece of work.

One thing I find refreshing in Smith is his wariness of business people. This is something we ought to frequently remind market skeptics. Smith knew the difference between being sympathetic to the competitive economy—which he called the “system of natural liberty”—and being sympathetic to owners of capital (who might well have acquired it by less-than-kosher means, that is, through political privilege). He knew something about business lobbies.

This famous passage from book 1, chapter of Wealth is often quoted by opponents of the free market:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

The quote is used to justify antitrust law and other government intervention. But as has often been pointed out in response, Smith had no such policies in mind. We know this because he immediately follows with:

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

Prime Beneficiaries

Government should do nothing to encourage or enable attempts to limit competition. But of course government does that all the time at the behest of business and to the detriment of consumers and workers. Hampering competition raises prices for the former and weakens bargaining power—and therefore lowers wages—for the latter. Those groups would be the prime beneficiaries of freed markets.

That’s not the only time Smith expresses his anti-business sentiment. In the next chapter he discusses the division of income among landlords, workers, and owners of capital. Here Smith and the classicals suffered from their lack of marginal analysis, subjectivism, and thoroughgoing methodological individualism. As Professor Joseph Salerno has written,

Regarding the question concerning the determination of the incomes of the factors of production, the Classical analysis was almost completely worthless because, once again, it was conducted in terms of broad and homogeneous classes, such as “labor” “land” and “capital.” This diverted the Classical theorists from the important task of explaining the market value or actual prices of specific kinds of resources, instead favoring a chimerical search for the principles by which the aggregate income shares of the three classes of factor owners—laborers, landlords and capitalists—are governed. The Classical school’s theory of distribution was thus totally disconnected from its quasi-praxeological theory of price, and focused almost exclusively on the differing objective qualities of land, labor, and capital as the explanation for the division of aggregate income among them. Whereas the core of Classical price and production theory included a sophisticated theory of calculable action, Classical distribution theory crudely focused on the technical qualities of goods alone.

“Narrow the Competition”

Nevertheless, Smith’s chapter contains another perceptive skeptical reference to “those who live by profit.” He writes:

Merchants and master manufacturers are . . . the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. . . . The interest of the dealers . . . in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. [Emphasis added.]

Smith harbored no romanticism about those who have long seen rent-seeking as the path to wealth not available in the freed market. In case we didn’t quite get his point, Smith goes on:

"The proposal of any new law or regulation of commerce which comes from this order [that is, 'those who live by profit'], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it." [Emphasis added.]

Continued in article

The American Dream ---
http://www.cs.trinity.edu/~rjensen/SunsetHillHouse/SunsetHillHouse.htm

Every now and then the so-called "quants" in economics and finance make enormous mistakes. Probably the best known mistake, before the trillion-dollar CDO mistakes that came to light the collapse of the real estate market in 2007, was the 1993 "Trillion Dollar Bet" made by two Nobel Prize winning quants and their partners in Long-Term Capital Management (LTCM) that came within a hair of destroying most big banks and investment firms on Wall Street ---
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM

Whenever I get news of increased power of quants on Wall Street, I think back to "The Trillion Dollar Bet" (Nova on PBS Video) a bond trader, two Nobel Laureates, and their doctoral students who very nearly brought down all of Wall Street and the U.S. banking system in the crash of a hedge fund known as Long Term Capital Management where the biggest and most prestigious firms lost an unimaginable amount of money --- http://en.wikipedia.org/wiki/LTCM

The Trillion Dollar Bet transcripts are free --- http://www.pbs.org/wgbh/nova/transcripts/2704stockmarket.html
However, you really have to watch the graphics in the video to appreciate this educational video --- http://www.pbs.org/wgbh/nova/stockmarket/

Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster: The Formula That Killed Wall Street --- http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Link forwarded by Jim Mahar ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html

Some highlights:

"For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart." The article goes on to show that correlations are at the heart of the problem.

"The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are."

I would highly recommend reading the entire thing that gets much more involved with the actual formula etc.

The “math error” might truly be have been an error or it might have simply been a gamble with what was perceived as miniscule odds of total market failure. Something similar happened in the case of the trillion-dollar disastrous 1993 collapse of Long Term Capital Management formed by Nobel Prize winning economists and their doctoral students who took similar gambles that ignored the “miniscule odds” of world market collapse -- -
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM

The rhetorical question is whether the failure is ignorance in model building or risk taking using the model?

Also see
"In Plato's Cave: Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

Learning From Mistakes
"School for quants: Inside UCL’s Financial Computing Centre, the planet’s brightest quantitative analysts are now calculating our future," by Sam Knight, Financial Times Magazine, March 2, 2012 ---
http://www.ft.com/intl/cms/s/2/0664cd92-6277-11e1-872e-00144feabdc0.html#axzz1oEeYcqi8

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/2/0664cd92-6277-11e1-872e-00144feabdc0.html#ixzz1pxufR2kw

On a recent winter’s afternoon, nine computer science students were sitting around a conference table in the engineering faculty at University College London. The room was strip-lit, unadorned, and windowless. On the wall, a formerly white whiteboard was a dirty cloud, tormented by the weight of technical scribblings and rubbings-out upon it. A poster in the corner described the importance of having a heterogenous experimental network, or Hen.

Every now and again, though, the discussion became comprehensible. The students discussed annoyances – so much data about animals! – and possibilities. One of the PhD students, Ilya Zheludev, talked about “Wikipedia deltas” – records of deleted sections from the online encyclopaedia. Immediately, the students hit on the idea of tracking the Wikipedia entries of large companies and seeing what was deleted, and when.

The mood of the meeting was casual and exacting at the same time. Galas, who is from Gdansk and once had ambitions to be a hacker, is something of a giant at the Financial Computing Centre. One of the first students to enrol in 2009, he has a gift for writing extremely large computer programs. In order to carry out his own research, Galas has built an electronic trading platform that he estimates would satisfy the needs of a small bank. As a result, what he says goes. Galas closed the meeting by giving the undergraduates a hard time about the overall messiness of their programming. “I like beauty!” he declared, staring around the room.

The Financial Computing Centre at UCL, a collaboration with the London School of Economics, the London Business School and 20 leading financial institutions, claims to be the only institute of its kind in Europe. Each year since its establishment in late 2008, between 600 and 800 students have applied for its 12 fully funded PhD places, which each cost the taxpayer £30,000 per year. Dozens more applicants come from the financial industry, where employers are willing to subsidise up to five years of research at the tantalising intersection of computers, data and money.

As of this winter, the centre had about 60 PhD students, of whom 80 per cent were men. Virtually all hailed from such forbiddingly numerate subjects as electrical engineering, computational statistics, pure mathematics and artificial intelligence. These realms of knowledge contain concepts such as data mining, non-linear dynamics and chaos theory that make many of us nervous just to see written down. Philip Treleaven, the centre’s director, is delighted by this. “Bright buggers,” he calls his students. “They want to do great things.”

In one sense, the centre is the logical culmination of a relationship between the financial industry and the natural sciences that has been deepening for the past 40 years. The first postgraduate scientists began to crop up on trading floors in the early 1970s, when rising interest rates transformed the previously staid calculations of bond trading into a field of complex mathematics. The most successful financial equation of all time – the Black-Scholes model of options pricing – was published in 1973 (the authors were awarded a Nobel prize in 1997).

Continued in article

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

"The Year Solar Goes Bankrupt," by John Ransom, Townhall, March 2012 ---
http://finance.townhall.com/columnists/johnransom/2012/03/12/the_year_solar_goes_bankrupt

Get ready for a new round of green bankruptcies, as Europe trims back subsidies for solar companies and taxpayers lose their appetite for subsidizing green power.

“The mini-bubble resulting from the rush to cash in on solar subsidies in European and U.S. markets is ending, as feed-in tariffs drop in Europe while loan guarantee and tax credit programs tighten up in the U.S.,” says a new report from Bank of America Merrill Lynch according to CNBC.com.

Germany is dialing back subsidies for solar this month by 29 percent with subsequent decreases each month, according to Bloomberg.com.

Rasmussen has recently released a survey of voters that show a diminishing number of voters support subsidizing the production of the Chevy Volt.

Only 29 percent of likely voters agree with Obama’s latest proposal to include a $10,000 subsidy in the federal budget to support the purchase of every electric vehicle.

Continued in article

Jensen Comment
Many buyers of electric cars like the Chevy Volt often overlook is that if gasoline hit $10 a gallon the price of electricity used to charge a Chevy Volt will also soar, and states will commence to find ways to tax Volt owners for road repair (because of lost road taxes as gas pumps). There's no free lunch as far as electric cars are concerned.

The Chevy Volt is also a huge disappointment in many respects. It's so heavy that it gets lousy gas mileage when the batteries run down. And those batteries run down after after 25-50 miles depending upon such things as hills and temperature. It's battery range is even less than 25 miles during the winter where I live in these mountains. And it has a notoriously bad heater forcing passengers to wear their long johns in wintertime.

It's taken for granted that the Chevy Volt is not a cost-effective net energy saver at the present time. But what about the more popular Toyota Prius? ABC News just did a module on the payback of the added price to get the Prius hybrid option. On average, ABC reported it takes 17 years of driving to pay back the hybrid's additional price.

And those energy credits and deductions on houses and cars account for much of the reason that 49.5% of the U.S. taxpayers pay zero income taxes or demand net refunds.

February 24, 2012 reply from John Brozovsky

. . .

On a second note that has been carried in this thread. Two years ago I would have qualified as one of the people that paid no federal income tax. Plenty of other federal, state and local taxes due to a healthy accounting faculty salary but not federal income tax. I adjusted my behavior in a manner consistent with what the government ‘wanted’ to promote. I put in a geothermal system in my house which carried a 30% tax credit effectively wiping out my tax liability. While I do not think the government should be promoting social agenda with the tax code, I will certainly adjust to make use of it when it does.

Question
Can you lower income taxes for people who don't pay any income taxes?
Note that about half the taxpayers in the United States do not pay any income taxes.

Answer
Of course. You can increase their refunds that their already receiving before you "lower" their taxes.

"Can you cut taxes for people who don't pay taxes?" Des Moines Register, February 07, 2012 ---
http://www.rothcpa.com/archives/007655.php

The answer is yes if they pay not tax and collect refunds for things like energy credits.

Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

From The Wall Street Journal Accounting Weekly Review on March 30, 2012 ---

Tax Breaks Exceed $1 Trillion: Report
by: John D. McKinnon
Mar 24, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Tax Laws, Tax Reform, Taxation

SUMMARY: The article reports on a "...new report by the non-partisan Congressional Research Service [which] underscores how far-reaching..." are many of the most costly tax provisions in the U.S. tax code. As highlighted in the related video, these items are likely to become a focused issue in this election year. "House Republicans proposed in their new budget this week to reduce or eliminate an unspecified array of tax breaks in order to offset the costs of lowering top tax rates for both corporations and individuals to 25% from the current 35%." President Obama proposed reducing the top corporate tax rate only, from 35% to 28%, with corresponding proposals to eliminate certain corporate tax breaks, such as deductibility of the cost of corporate jets and tax treatment of foreign earnings.

CLASSROOM APPLICATION: The article is useful to summarize the types of items considered to be "tax breaks," and the current, election-year proposals to simplify the U.S. tax code.

QUESTIONS:
1. (Introductory) Who produced the report on which this article is based? How do you think the information was obtained?

2. (Introductory) Why is this report useful in considering ways to overhaul the U.S. tax code?

3. (Advanced) What kinds of items are characterized as "tax breaks" in the document on which this article reports?

4. (Advanced) Specifically describe the tax treatment of each of the items listed in the graphic entitled "Popular Provisions." Who benefits from each of these items?

5. (Advanced) Based on your answer to question 2, explain why "House Republicans dismissed the report's significance saying it only confirms that overhauling the tax code will be politically challenging."

Reviewed By: Judy Beckman, University of Rhode Island

"Tax Breaks Exceed $1 Trillion: Report," by: John D. McKinnon, The Wall Street Journal, March 24, 2012 ---
http://online.wsj.com/article/SB10001424052702303812904577299923495453562.html?mod=djem_jiewr_AC_domainid

A congressional report detailing the value of major tax breaks shows they amount to more than $1 trillion a year—roughly the size of the annual federal budget deficit—and benefit wide swaths of the population.

The figures could be useful to lawmakers of both parties and President Barack Obama, who are looking for ways to shrink future deficits and offset the anticipated cost of overhauling the much-criticized U.S. tax code, an effort likely to include tax-rate cuts. Both parties are looking to trim or eliminate tax breaks to achieve those goals.

Mr. Obama has suggested eliminating breaks for corporate jets and oil and gas companies to reduce deficits. He also has raised the possibility of reducing tax breaks for U.S. multinationals that ship jobs overseas, as a way to offset the cost of lowering the corporate tax rate to 28% from the current 35%. Research Report

House Republicans proposed in their new budget this week to reduce or eliminate an unspecified array of tax breaks in order to offset the costs of lowering top tax rates for both corporations and individuals to 25% from the current 35%.

The new report, by the nonpartisan Congressional Research Service, underscores how far-reaching many of the tax breaks are, which makes changing them a politically daunting task.

They include the exclusion from taxable income for employer-provided health insurance, the biggest break, at $164.2 billion a year in 2014; the exclusion for employer-provided pensions, the second-biggest, at $162.7 billion; and the exclusions for Medicare and Social Security benefits.

Other big breaks include the mortgage-interest deduction, third-largest; taxing capital-gains income at lower rates than other income; the earned-income credit for the working poor; and deductions for state and local taxes.

The report, citing political opposition, technical challenges and other reasons, said that "it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues" by eliminating tax breaks. That likely would leave little for reducing tax rates, perhaps only enough for one or two percentage points in the top individual rate, while maintaining the same level of revenue, the report said.

Continued in article

Jensen Comment
I'm suspicious that this greatly underestimates the so-called "tax breaks" by not mentioning exclusions from revenue. For example, hundreds of billions of interest revenue from municipal bonds are excluded from taxable revenue (federal). Many types of life insurance payments are tax exempt. Clerics get some generous exemptions for housing allowances. And there are capital gains exemptions in Roth IRAs and scores of other exclusions.

Case Studies in Gaming the Income Tax Laws
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

Effective Tax Rates Are Lower Than Most People Believe
"Measuring Effective Tax Rates," by Rachel Johnson Joseph Rosenberg Roberton Williams, Urban-Brookings Tax Policy Center, February 7, 2012 ---
http://www.taxpolicycenter.org/UploadedPDF/412497-ETR.pdf

The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it.

"America Is Europe," by David Brooks, The New York Times, February 23, 2012 ---
http://www.nytimes.com/2012/02/24/opinion/brooks-america-is-europe.html?_r=3&ref=opinion

We Americans cherish our myths. One myth is that there is more social mobility in the United States than in Europe. That’s false. Another myth is that the government is smaller here than in Europe. That’s largely false, too.

The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.

For example, in Europe, governments offer health care directly. In the U.S., we give employers a gigantic tax exemption to do the same thing. European governments offer public childcare. In the U.S., we have child tax credits. In Europe, governments subsidize favored industries. We do the same thing by providing special tax deductions and exemptions for everybody from ethanol producers to Nascar track owners.

These tax expenditures are hidden but huge. Budget experts Donald Marron and Eric Toder added up all the spending-like tax preferences and found that, in 2007, they amounted to $600 billion. If you had included those preferences as government spending, then the federal government would have actually been one-fifth larger than it appeared.

The Organization for Economic Cooperation and Development recently calculated how much each affluent country spends on social programs. When you include both direct spending and tax expenditures, the U.S. has one of the biggest welfare states in the world. We rank behind Sweden and ahead of Italy, Austria, the Netherlands, Denmark, Finland and Canada. Social spending in the U.S. is far above the organization’s average.

You might say that a tax break isn’t the same as a spending program. You would be wrong.

The late David Bradford, a Princeton economist, had the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion “weapons supply tax credit.” The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!

This is essentially what’s been happening in sphere after sphere. Government controls more and more of the economy. It just does it by getting people to do what it wants by manipulating the tax code. Politicians get to take credit for addressing problem after problem, but none of their efforts show up as unpopular spending.

Many of these individual tax expenditures are good for the country, like the charitable deduction and the earned income tax credit. But, as the economist Bruce Bartlett demonstrates in his impeccably fair-minded book, “The Benefit and the Burden,” the cumulative effect of these tax breaks is terrible. Like overgrown weeds, the tangle of tax breaks distorts behavior, clogs the economy and deprives the government of revenue.

And because they are hidden, many of the tax expenditures go to those who need them least, the well connected and established over the vulnerable and the entrepreneurial.

The good news is that change might finally be coming. The Obama administration has always theoretically supported a simpler tax code even while operationally it has often muddied it up. Nonetheless, this week, Treasury Secretary Timothy Geithner unveiled a modest but sensible plan to simplify the corporate tax code. The plan is not perfect. The Obama technocrats love tinkering and complexity. But Geithner’s plan moves us a small step in the right direction and provides a sensible foundation for the big tax negotiations to come.

Mitt Romney has a bigger proposal, which reduces individual rates across the board and closes some loopholes. It’s more comprehensive than the Geithner approach, but it suffers from two weaknesses. First, it’s politics as usual. Romney is specific about the candy — lower tax rates — but vague about the vegetables — what loopholes would have to be closed to pay for them.

Moreover, it’s unimaginative. Republicans are perpetually trying to do what Ronald Reagan did. But top tax rates today aren’t as onerous as they were in 1980, so lowering them won’t produce as many benefits. Imagine if Reagan ran for office promising to recreate the glory days of Thomas Dewey and you get a sense of how much G.O.P. thinking is stuck in the past.

Continued in article

Case Studies in Gaming the Income Tax Laws
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

Effective Tax Rates Are Lower Than Most People Believe
"Measuring Effective Tax Rates," by Rachel Johnson Joseph Rosenberg Roberton Williams, Urban-Brookings Tax Policy Center, February 7, 2012 ---
http://www.taxpolicycenter.org/UploadedPDF/412497-ETR.pdf

"Reimagining Capitalism." by Polly LaBarre, Harvard Business Review Blog, February 27, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/02/reimagining_capitalism.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

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

Bob Jensen's threads on such scandals:

Bob Jensen's threads on audit firm litigation and negligence ---
http://www.trinity.edu/rjensen/Fraud001.htm

Current and past editions of my newsletter called Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's fraud conclusions ---
http://www.trinity.edu/rjensen/FraudConclusion.htm

Bob Jensen's threads on auditor professionalism and independence are at
http://www.trinity.edu/rjensen/Fraud001c.htm

Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance

Free Textbooks: Advantages and Disadvantages

March 29, message from Ramesh Fernando

Prof. Jensen, I don't know if you have this link but it's a great site
http://globaltext.terry.uga.edu/home
Accounting Principles both Financial Accounting and Managerial Accounting
http://globaltext.terry.uga.edu/booklist?cat=Business

March 29, 2012 reply from Bob Jensen

Hi Ramesh,

Thank you Ramesh.
The Global Text Project seems to offer free alternatives for some textbooks that are no longer totally free on Freeload Press ---
http://www.textbookmedia.com/Products/BookList.aspx

For example the following textbook is free from the Global Text Project:
8th Edition of Accounting Principles: A Business Perspective (Managerial) by James Edwards, Roger Hermanson, Susan Ivancevich [puff] ---
http://dl.dropbox.com/u/31779972/Accounting Principles Vol. 2.pdf

The above textbook is 1995 on Freeload Press is $16.95 ---
http://www.textbookmedia.com/Products/ViewProduct.aspx?id=3168
However, lecture and study guides are also available for a fee from Freeload Press.

My worry about book and other free textbooks in general is how often they are completely updated. The Global Text download of the 8th edition was last revised in 2006, and this is 2012. In that period of time there have been some changes in managerial accounting such as Lean Accounting ---
http://maaw.info/LeanAccountingMain.htm
The Edwards, Hermanson, and Ivancevich book does not mention Lean Accounting to my knowledge.

Actually, I worry more about the updates for financial accounting textbooks than updates of managerial accounting textbooks, because the FASB and IASB are grinding out changes weekly with some things that need to be put into revised editions of financial accounting textbooks as soon as possible. Similar problems arise with auditing textbooks. It's virtually impossible to have a long-term tax textbook that's not updated at least annually is some way.

A huge problem with free or almost-free textbooks that pay no royalties to authors is that the authors have fewer incentives to slave over revisions vis-à-vis commercial textbooks that are paying tens of thousands of dollars to successful authors year after year after year.

A second huge problem is some popular supplements available from commercial publishers are not available from free or almost-free servers. These supplements include test banks, videos, and software.

Teachers who use their own handouts in place of a textbook have some of the same problems with updates. For example, think of all the financial accounting handouts (including problems and cases) that must be revised when the new joint standards ore issued on leases and revenue recognition. Professors buried in teaching duties and research for new knowledge really have to struggle to go back over 800 pages of student handouts to constantly update these handouts. My advice is to find a very current revised textbook and reduce the handouts to a more manageable 300 pages or less. Of course the "handouts" can now be digital.

There are course certain courses for which there are no good textbooks available for major modules of the course. I never found a good accounting theory textbook that I though was suitable for my accounting theory course. My students accordingly got 800 pages of my handouts ---
http://www.trinity.edu/rjensen/acct5341/acct5341.htm

But for my AIS course I had a great electronic textbook (Murthy and Groomer) such that I only needed 300 pages of my handouts ---
http://www.trinity.edu/rjensen/acct5342/acct5342.htm

Incidentally, most free textbooks were once high-priced commercial textbooks dropped by publishing companies that gave the copyrights back to the authors. These textbooks were dropped in the past two decades largely due to publishing company mergers and acquisitions. When Publisher A and Publisher B have competing textbooks that are virtually identical when A and B are merged a decision is usually made to drop one of the textbooks even though it has been somewhat profitable before the merger. I have a number of relatively close friends that experienced this type of copyright return including Phil Cooley who had his successful basic finance textbook copyright returned in one of these publishing house mergers

Respectfully,
Bob Jensen

Bob Jensen's threads on free textbooks are at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

Bob Jensen's threads on free courses, lectures, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Virtually every basic accounting course stresses the differences between property (e.g., cash) dividends versus stock dividends versus stock splits.

From The Wall Street Journal Accounting Weekly Review on March 23, 2012

Apple Pads Investor Wallets
by: Jessica E. Vascellaro
Mar 20, 2012
Click here to view the full article on WSJ.com

TOPICS: Dilution, Dividend, Tax Avoidance, Tax Laws, Taxation

SUMMARY: "Apple on Monday bowed to mounting pressure to return some of its roughly $100 billion in cash reserves to shareholders by saying it would issue a dividend and buy back stock....The last time Apple paid a dividend was in December 1995, a year before [Steve] Jobs returned....But following [Tim] Cook's appointment as CEO last August and the death of Mr. Jobs in October, Apple's approach changed...." The company will pay a $2.65 a share quarterly dividend beginning in July; "Apple's board also authorized a $10 billion share repurchase program to begin in the quarter starting Sept. 30...."

CLASSROOM APPLICATION: The main article is useful to introduce dividend policy and stock buyback decisions when introducing those topics in financial accounting classes covering stockholders' equity. The related article highlights tax issues in repatriating overseas cash faced by many U.S. corporations.

QUESTIONS:
1. (Introductory) Why is it so newsworthy that Apple will begin to pay dividends to its shareholders?

2. (Introductory) Based on the discussion in the article, what are Mr. Cook's reasons for paying a dividend? What were the late Mr. Jobs's reasons for not doing so?

3. (Advanced) How are stock repurchases similar to dividends?

4. (Advanced) According to the article, what is the specific purpose of starting a stock repurchase plan? In your answer, define the term "dilution."

5. (Advanced) Refer to the related article. Where is most of Apple's significant cash balance held?

6. (Advanced) Again refer to the related article. Why is Apple, as are many U.S. based international companies, facing "significant tax consequences" if it decides to "repatriate" bring back overseas cash balances? How is Apple balancing this concern with its need for cash to continue to grow?

7. (Advanced) How is Apple balancing its tax concern with its need for cash to continue to grow?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Apple's Move Puts Spotlight on Foreign Cash Holdings
by Maxwell Murphy
Mar 20, 2012
Page: A6

"Apple Pads Investor Wallets," by Jessica E. Vascellaro, The Wall Street Journal, March 20, 2012 ---
http://online.wsj.com/article/SB10001424052702304724404577291071289857802.html?mod=djem_jiewr_AC_domainid

Tim Cook is proving he's not simply the caretaker of Apple Inc. AAPL -0.53% and the unyielding strategies set forth by his predecessor, Steve Jobs.

Apple on Monday bowed to mounting pressure to return some of its roughly $100 billion in cash reserves to shareholders by saying it would issue a dividend and buy back stock, marking the technology company's biggest break yet from Mr. Jobs's philosophy.

The last time Apple paid a dividend was in December 1995, a year before Mr. Jobs returned to Apple. Mr. Jobs largely resisted returning cash to shareholders, whose clamoring for a cut of Apple's growing cash stockpile increased in recent years, according to people familiar with the matter.

Mr. Jobs had long argued that Apple's cash—which at $97.6 billion as of Dec. 31 is the greatest of any nonfinancial U.S. corporation—should be used to invest in areas such as Apple's supply chain, retail stores, research and the rare acquisition. He spent little time with shareholders and rarely discussed it at all.

Mr. Jobs was persuaded to do a buyback in the wake of the Sept. 11, 2001, terrorist attacks as the stock market fell, according to a person familiar with the matter. After that, several executives thought the company should continue to do buybacks because the stock price seemed very cheap, this person said. Journal Community

Apple hired bankers to study the impact of a buyback, according to this person, who said Mr. Jobs rejected the idea before it went anywhere. He felt the company could use the money to expand the business by more than the bump to per-share earnings a buyback would provide, this person said.

But following Mr. Cook's appointment as CEO last August and the death of Mr. Jobs in October, Apple's approach changed. At a company event honoring Mr. Jobs last Oct. 19, Mr. Cook recounted a conversation in which the co-founder told him to run Apple as he saw fit. "Just do what's right," Mr. Cook said he was told.

WSJ's Spencer Ante and Jennifer Valentino discuss Apple CEO Tim Cook's emphasis on innovation and future products as part of the company's announcement of a stock dividend and buyback.

Barron's associate editor Michael Santoli stops by Mean Street to discuss the impact of Apple's dividend and buyback announcement on the broader market. Photo: Reuters.

Mr. Cook grew more forthcoming publicly on the cash topic. In a rare appearance at an investor conference in February, Mr. Cook acknowledged that the Apple board was actively discussing what to do with the cash, since the company had more than it needed to run its business.

That led to Monday's conference call, in which the Cupertino, Calif., company announced it would pay a $2.65 a share quarterly dividend in its quarter beginning in July. That represents a 1.8% yield based on Apple's closing stock price before the news, roughly in line with the yield on the Standard & Poor's 500 index and in the middle of the pack of what some other dividend-issuing tech companies pay.

Apple's board also authorized a $10 billion share repurchase program to begin in the quarter starting Sept. 30, largely to offset dilution from issuing new restricted-stock units to employees. Apple said the dividend and buyback programs would cost the company $45 billion in the first three years and that it would continue to evaluate it.

"Even with these investments, we can maintain a war chest for strategic opportunities and have plenty of cash to run our business," Mr. Cook said Monday. "We have thought very deeply and very carefully about our cash balance."

The package marked the most significant move to date by Mr. Cook in putting his own imprint on Apple and reflects how he has been more forthcoming with shareholders, investors say.

While Mr. Jobs flouted usual business practices and outside influence, Mr. Cook's shift on cash removes Apple as one of the few dividend holdouts among large technology companies. Over the past decade, other tech behemoths such as Microsoft Corp., MSFT +0.27% Oracle Corp. ORCL -2.65% and Cisco Systems Inc. CSCO -0.59% had also begun payouts to shareholders as the companies matured.

But unlike those companies—which were experiencing slower growth rates and whose initiation of a dividend was regarded as a sign that some of their fastest growth was behind them—Apple is still expanding rapidly. In its last reported quarter, Apple more than doubled its profits and increased revenue 73%, largely on the strength of sales of its hit iPad and iPhone devices.

Some investors and analysts have said in interviews they wonder how long Apple's growth streak can last, particularly once the company has saturated some of its current growth engines, like smartphones. But Mr. Cook stressed Apple remains in a growth phase on Monday's call, saying "we don't see ceilings to our opportunities."

Apple's cash shift is unlikely to have major ripple effects on Wall Street, however. Trading volumes for Apple's stock could increase as funds that have been shut out from holding the shares because it didn't issue a dividend now can now buy it, potentially boosting its price. Still, analysts noted the stock is already widely held and others said expectations for a dividend have been factored into the current stock price.

Continued in article

Teaching Case on Preferred Stock Shares, Warrants, and Dividends

From The Wall Street Journal Accounting Weekly Review on April 28, 2011

Deal Journal: Warren Buffett's Profit on GE Investment: $1.2 Billion
by: Shira Ovide
Apr 22, 2011
Click here to view the full article on WSJ.com

TOPICS: Advanced Financial Accounting, Dividends, Financial Statement Analysis

SUMMARY: "In the financial crisis, Warren Buffett loaned out his halo of respectability to prop up sentiment about Goldman Sachs Group, Dow Chemical, General Electric and other blue-chip companies." He invested nearly $3 billion in GE in exchange for preferred stock and warrants issued together.

CLASSROOM APPLICATION: The article is useful to cover a live example of issuing preferred stock and warrants, typically covered in a second semester intermediate financial accounting course. Questions also ask students to access the GE financial statements (2010 Form 10-K on its investor relations web site) to examine the presentation of the stock and warrants in stockholders' equity and the preferred stock dividends deducted in calculating earnings available for common shareholders in the statement of earnings.

QUESTIONS:
1. (Introductory) According the news article, Warren Buffet's Berkshire Hathaway invested $3 billion in GE during the height of the financial crisies. What types of securities did GE issue to Berkshire Hathaway? What are the terms of that issuance?

2. (Advanced) Summarize the accounting for the combined issuance of preferred stock and warrants.

3. (Advanced) Access the GE 2010 annual report available through GE's investor relations web site at http://www.ge.com/investors/financial_reporting/index.html Click on Form 10-K 2010, locate the balance sheet and Note 15. Shareowners' Equity. Describe how the preferred stock and warrants issued to Berkshire Hathaway are presented in the GE financial statements.

4. (Introductory) Return to the Statement of Earnings (Income Statement) in the 10-K filing. How are the preferred dividends that are described in the article presented in this statement?

5. (Advanced) Based on the discussion in the article, do you think these dividends have been paid? Comment on the deduction of dividends to determine "Net earnings attributable to GE common shareowners" given your answer to question 3 above.

Reviewed By: Judy Beckman, University of Rhode Island

"Deal Journal: Warren Buffett's Profit on GE Investment: $1.2 Billion," by: Shira Ovide, The Wall Street Journal, April 22, 2011 ---
http://blogs.wsj.com/deals/2011/04/21/warren-buffetts-profit-on-ge-investment-1-2-billion/?mod=djem_jiewr_AC_domainid

In the financial crisis, Warren Buffett loaned out his halo of respectability to prop up sentiment about Goldman Sachs Group, Dow Chemical, General Electric and other blue-chip companies. Those bets came with some heavy costs for the companies, and produced handsome profits for the Oracle of Omaha.

GE reiterated today it plans to repay Buffett by October for his $3 billion investment in the conglomerate, an agreement struck in October 2008 when the financial world was coming apart at the seams.

As in other reputation-bolstering investments Buffett made during that stretch, GE agreed to pay the Oracle a 10% annual dividend, or $300 million a year in GE’s case.

The numbers-loving Buffett carried around a coin changer in his schoolboy days, and probably could tell you that his GE dividend amounts to $9.51 a second. (That buys about 41% of a sirloin dinner at Buffett hangout, Gorat’s Steak House.)

When GE pays Buffett back, they will owe him 10% more than he paid, or $300 million on top of his $3 billion payback. Plus, Buffett will have accumulated $900 million in cumulative dividends, assuming GE repays the preferred-stock investment in October. All told, Buffett’s $3 billion investment will generate a total profit of $1.2 billion. Not too shabby.

Now the bad news: Buffett’s investment also entitled him to buy 134.8 million shares of GE common stock at an exercise price of $22.25. With GE stock languishing below $20 a pop, those stock warrants are worthless — for now. But fear not. The warrants were good for five years, and GE shares can always move up and give Buffett an additional windfall (or move down and permanently deny Buffett the cherry atop his sundae of GE profit).

Buffett already has been repaid for other investments he made during the financial crisis, including his purchase of Swiss Reinsurance debt, and his $5 billion preferred investment in Goldman Sachs. And Buffett, with a net worth of $50 billion, has sounded downright downbeat about it.

“Goldman Sachs has the right to call our preferred on 30 days notice, but has been held back by the Federal Reserve (bless it!), which unfortunately will likely give Goldman the green light before long,” Buffett wrote in February, in his annual letter to Berkshire Hathaway investors.

Since then, Goldman has indeed repaid Buffett, who can count roughly $3.7 billion in profits on his investment, including the value of his in-the-money warrants on Goldman stock. His Swiss Re investment padded Buffett’s wallet by roughly $1 billion.

Continued in article

Bob Jensen's threads on Accounting Theory are at
http://www.trinity.edu/rjensen/Theory01.htm

Problems With Absorption Costing

"Lots of Trouble: U.S. automakers used a common accounting practice to justify huge run-ups in inventories, but the downside risks offer lessons for all manufacturers," by Marielle Segarra, CFO Magazine, March 2012, pp. 29-31 ---
http://www.cfo.com/article.cfm/14620031?f=search

It's no secret that in the years leading up to the Great Recession, the Big Three automakers were producing vehicles in excess of market demand, leading to large inventories on dealers' lots across the country. Now, some researchers say they know why the automakers acted as they did, and they are warning other manufacturers to avoid the same temptation.

By coupling excess production with absorption costing, managers at GM, Ford, and Chrysler were able to boost profits and meet short-term incentives, according to professors at Michigan State University and Maastricht University in the Netherlands. (Their study on the topic was recognized in January for its contribution to management accounting by the American Institute of Certified Public Accountants and other groups.) Ultimately, however, the practice hurt the automakers, in part by driving up advertising and inventory holding costs and possibly causing a decline in brand image, the researchers say.

From 2005 to 2006, long before GM and Chrysler filed for bankruptcy and appealed for federal aid, the automakers had abundant excess capacity. Then as now, they had enormous fixed costs, from factories and machinery to workers whose contracts protected them from layoffs when demand was low, says Karen Sedatole, associate professor of accounting at Michigan State and a co-author of the study.

To "absorb" those massive costs, the automakers churned out more cars while using absorption costing, a widely used system that calculates the cost of making a product by dividing total manufacturing costs, fixed and variable, by the number of products produced. The more vehicles they made, the lower the cost per vehicle, and the higher the profits on the income statement. In effect, the automakers shifted costs from the income statement to the balance sheet, in the form of inventory.

Under Statement of Financial Accounting Standards No. 151, companies can use absorption costing for "normal capacity" but must treat "abnormal" excess capacity as a period cost, according to Sedatole. But the standard doesn't clearly define what's normal, leaving room for companies to overproduce in order to lower unit cost. Companies that do so "are, in a way, managing earnings upward by trapping costs on the balance sheet as inventory, so they won't hit the income statement," she says.

Eroding Brand Image But business leaders should think twice before adopting this tactic, cautions Sedatole. Even though they can make their companies appear more profitable in the short term by concealing excess capacity costs on the balance sheet, holding so much excess inventory can exact a price.

"When [the dealers] couldn't sell the cars, they would sit on the lot," says Sedatole. "They'd have to go in and replace the tires, and there were costs associated with that." The companies also had to pay to advertise their cars, often at discounted prices. And by making their cars cheaper and more readily available, they may have turned off potential customers, she adds.

"If you see a $12,000 car in a TV ad is being auctioned off for $6,000 at your local dealer, that affects your image of that vehicle," says Sedatole. This effect on brand image is difficult to quantify, but the researchers correlated 1% of rebate with a 2% decline in appeal in the J.D. Power and Associates Automotive Performance Execution and Layout Index.

Some might argue that it's good strategy for a company already obligated to pay salaries to make products up to its capacity. "An economist would say as long as I could sell the car for more than its variable cost, I'm better off selling it," Sedatole says. But, she adds, "that's a very, very short-term way of thinking" because it neglects the costs that come with having a lot of excess inventory.

Lessons Learned Using absorption costing to monitor efficiency can lead companies to make poor production decisions, says Ranjani Krishnan, professor of accounting at Michigan State and a co-author of the study (along with Alexander Brüggen, an associate professor at Maastricht University). A company that does this could seem to be growing less efficient when demand decreases. If a factory makes fewer cars this year than last year, for instance, its cost per car will look higher, and it may then overproduce in order to present itself more favorably to shareholders, consumers, and analysts.

Instead, Krishnan suggests, companies should record the cost of excess capacity as an expense on their internal income statements, a practice that may help give them perspective.

Another way to avoid overproduction is to change the way executives are paid. Like many companies, the automakers put their managers under pressure to deliver in the short term by structuring compensation incentives around metrics like labor hours per vehicle, which the industry's Harbour Report uses to compare automaker productivity. With fixed labor hours, the only way to look more efficient under this measure is to produce more cars.

"A lot of this behavior was frankly driven by greed," says Krishnan. "If you look at the type of managerial incentives [the automakers] had during the time of our study, the executive-committee deliberations, it was all about meeting short-term quarterly traffic numbers or meeting analysts' forecasts so that they could get their bonuses."

Continued in article

Bob Jensen's threads on cost and managerial accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting

How to Buy a Car Using Game Theory --- Click Here
http://mindyourdecisions.com/blog/2012/02/29/video-how-to-buy-a-car-using-game-theory/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+mindyourdecisions+%28Mind+Your+Decisions%29&utm_content=Google+Reader
Video --- http://www.youtube.com/watch?v=LNrLfylgHE0

"When Agencies Go Nuclear: A Game Theoretic Approach to the Biggest Sticks in an Agency’s Arsenal," by Brigham Daniels, George Washington University, February 2012 ---
http://groups.law.gwu.edu/lr/ArticlePDF/80-2-Daniels.pdf

Over 45,000 lawyer jobs in the United States were lost since the 2008 economic meltdown
Should we break out the Champagne? (just kidding)

"Law Firm Recruiting Volumes Inch Up, Making Modest Gains After Recession-Era Declines," NALP, 2012 ---
http://www.nalp.org/uploads/PerspectivesonFall2011.pdf

Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

The Zimbabwe School of Economics: In effect printing $2 trillion
"The High Cost of the Fed's Cheap Money Encouraging consumption at the expense of saving inhibits long-term economic growth," by Andy Laperriere, The Wall Street Journal, March 5, 2012 ---
http://online.wsj.com/article/SB10001424052970203753704577255641618477730.html#mod=djemEditorialPage_t

During the past three years, the Federal Reserve has tripled the size of its balance sheet—in effect printing $2 trillion—something it had never done in its nearly 100-year history. The Fed has lowered short-term interest rates to zero and signaled that it will keep them at that level for years. Inflation-adjusted short-term rates, or real rates, have been in the minus 2% range during the past couple of years for the first time since the 1970s.

The unfortunate fact is, as Milton Friedman famously observed, there is no free lunch. After the Fed's loose monetary policy helped spur the boom-bust in

Artificially reducing Treasury yields provides a near-term benefit as federal borrowing costs are lower, but this unusually low cost of borrowing is enabling Congress and the president to run an unsustainable fiscal policy that could eventually lead to an economic calamity. Governments like Greece and Italy benefited from artificially low rates for years, and those low rates undoubtedly played a key role in those governments not confronting their serious fiscal imbalances.

Low rates have helped those who have been able to borrow or refinance their debts at lower rates, especially homeowners. But this has come at a high cost to savers. Zero rates are a major problem for any saver, but it is especially difficult for those in or near retirement. Government bonds are investments that now offer return-free risk.

The Fed is hoping the lack of return in certificates of deposit and bonds (or more accurately, negative returns, adjusted for inflation) will prompt investors to take on more risk by investing in stocks, high-yield corporate bonds and other investments. This is pushing people who have a low risk tolerance to take on more risk than may be advisable.

Moreover, QE and ZIRP are specifically designed to discourage saving and encourage people to consume more now to boost near-term gross domestic product. But saving is deferred consumption—people save to earn a return so that they may consume more in the future (say, for retirement or a major purchase). Scores of economists have testified before Congress for decades that Americans don't save enough and that this inhibits long-term economic growth. Prosperity does not come from spending; it comes from work, saving and investment.

Defenders of QE and ZIRP would say that rather than borrowing economic growth from the future, these policies merely smooth the economic cycle and reduce the economic dislocation associated with deep recessions or weak recoveries. Of course, that was the rationale for the exceptionally low rates during the 2002-2004 period, which, like today, were specifically aimed at depressing saving and encouraging consumption. Rather than smooth the economic cycle, that strategy helped create an historic boom-bust.

Some say we must encourage higher consumption because it accounts for more than 70% of GDP, and the recovery is too fragile to risk allowing a rise in the savings rate. But the recession was officially over two years ago. For at least the past decade, monetary policy has consistently punished prudent savers.

Worse, the Fed is promising to keep these policies in place for years to come. When do we ever get to the point where we allow interest rates to return to some kind of natural equilibrium and allow the economy to gradually rebalance in a way that would boost long-term economic growth?

There is no doubt the Fed is doing what it believes is best. But in addition to the risk of inflation inherent in QE and ZIRP, which Chairman Ben Bernanke has said he is 100% confident he can prevent, Fed officials are dismissive of the notion that there are significant costs or trade-offs associated with the policy they are pursuing.

This is disconcerting. Is there really no chance, zero chance, the Fed will be late to pick up signs of inflation? What accounts for such confidence—given that the Fed dismissed criticisms from 2002-2004 that its policies would distort economic decisions and cause hard-to-predict imbalances, that it was oblivious to the housing collapse well into 2007, and that to this day many Fed officials refuse to accept that monetary policy played any role in creating the housing bubble?

During the bubble, Fed officials argued they couldn't spot bubbles in advance, but that an aggressive monetary policy response could limit the downside impact if a bubble were to burst. As it turns out, the dislocation from the housing bust and the financial crisis have been far more costly than almost anyone imagined. Shouldn't that cause policy makers inside and outside of the Fed to ask hard questions as it pursues its unprecedented campaign of quantitative easing and zero rates?housing, it's remarkable how little attention has been devoted to exploring the costs of Fed policy.

A few critics of quantitative easing (QE) and the zero interest rate (ZIRP) have correctly pointed out that these policies weaken the dollar and thereby reduce the purchasing power of American paychecks. They increase the risk of future inflation, obscure the true cost of the unsustainable fiscal policy the federal government is running, and transfer wealth from savers to debtors.

But QE and ZIRP also reduce long-term economic growth by punishing savers, reducing saving and investment over the long run. They encourage the misallocation of resources that at a minimum is preventing the natural rebalancing of our economy and could sow the seeds of another painful boom-bust.

One intended effect of a loose monetary policy is a weaker dollar, which can help gross domestic product by boosting exports. But a weaker dollar also raises import prices (such as oil prices) for American consumers. For the average American family, this adverse impact has likely outweighed any positive impact from QE and ZIRP.

The cost of a weaker dollar for most people is not offset by temporarily higher stock prices for two reasons. First, most Americans don't own much stock. Second, stock prices are not going to be higher 10 years from now because of the Fed's policies, so the effect is to bring forward equity returns, not increase long-term returns.

Bob Jensen's threads on the pros and cons of the bailout as it evolved ---
http://www.trinity.edu/rjensen/2008Bailout.htm

IVSC = International Valuation Standards Council --- http://www.ivsc.org/

The IVSC is now addressing the very, very difficult problem of valuing certain types of derivative financial instruments ---
http://www.ivsc.org/news/nr/2012/nr120227.html
One of the major problems is that many derivatives instruments contracts are customized unique contracts that are not exchange traded, including forward contracts and most swaps contracts (portfolios of forward contracts).

Bob Jensen's threads on how to value interest rate swaps ---
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm

Note the book entitled PRICING DERIVATIVE SECURITIES, by T W Epps (University of Virginia, USA) The book is published by World Scientific --- http://www.worldscibooks.com/economics/4415.html

Contents:

Preliminaries:

Introduction and Overview

Mathematical Preparation

Tools for Continuous-Time Models

Pricing Theory:

Dynamics-Free Pricing

Pricing Under Bernoulli Dynamics

Black-Scholes Dynamics

American Options and 'Exotics'

Models with Uncertain Volatility

Discontinuous Processes

Interest-Rate Dynamics

Computational Methods:

Simulation

Solving PDEs Numerically

Programs

Computer Programs

Errata

Bob Jensen's threads on fair value accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue

AICPA SURVEY FINDS OPPORTUNITY EXISTS FOR CPAS TO BETTER LEVERAGE TECHNOLOGY
Source: AICPA
Country:
US Date: 15/03/2012
Contributor: Bob Schneider Web:
http://www.aicpa.org/Pages/Default.aspx

Summary from Accounting Education --- http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151926

The American Institute of CPAs (AICPA) has released its 2012 Top Technology Initiatives Survey. The Survey indicates that, like other business professionals, CPAs continue to wrestle with the best strategy to maximize the benefits of emerging technologies, such as mobile devices and cloud computing.

Survey takers said they are successfully meeting most of their technology priorities, from information protection and privacy to data management. A majority said their organization has appropriate policies in place to deal with data security concerns, and necessary steps have been taken to insulate IT networks and servers from cyberattack. At the same time, CPAs were less certain about avoiding a data breach due to the loss of a laptop, tablet or other mobile device.

“The ability to tap critical information on the go, virtually whenever you want, is changing the way CPAs do business,” said Anthony Pugliese, CPA, CGMA, CITP, the AICPA’s senior vice president of finance, operations and member value. “But it imposes new burdens, too. CPAs and the clients and companies they work for need to stay on top of technological shifts, make the right decisions on access, security and privacy, and map out new areas of growth. It’s clear we’re still working our way through these challenges.”

Most survey takers said their firms had the knowledge, financial wherewithal, and access to sufficient staff and training resources to adopt new technologies. Yet they were significantly less confident about developing new revenue streams from those innovations.

“CPAs by our DNA tend to be a pretty skeptical group,” said David Cieslak, a principal in the computer consulting firm Arxis Technology and a CPA who holds the Certified Information Technology Professional (CITP) credential. “We tend to be very cautious. We see the potential of new technologies, but we also want to be certain about their long-term viability and security.”

As in past years, the survey measures the anticipated impact of certain issues over the next 12 to 18 months for CPAs and their clients. Topping the 2012 list are (1) information security, (2) remote access and (3) control and use of mobile devices. All three have a bearing on the challenges that stem from the growing ubiquity and mobility of data, and represent a slight shift from last year.

The top three in 2011 were (1) control and use of mobile devices, (2) information security and (3) data retention policies/structure.

This year’s survey asked respondents to rate their organizational goals for technology in the coming year. The leading technology priorities for 2012, and survey takers’ assessment of how well their organizations are meeting them, are:

(1) Securing the IT environment (62 percent)*
(2) Managing and retaining data (61 percent)
(3) Managing risk and compliance (65 percent)
(4) Ensuring privacy (62 percent)
(5) Leveraging emerging technologies (34 percent)
(6) Managing system implementation (52 percent)
(7) Enabling decision support and managing performance (46 percent)
(8) Governing and managing IT investment/spending (56 percent)
(9) Preventing and responding to fraud (60 percent)
(10) Managing vendors and service providers (56 percent)

Continued in article

Exchange Traded Funds (ETF) --- http://en.wikipedia.org/wiki/Exchange-traded_fund
Tutorial Video on ETF Creation and Redemption--- http://www.youtube.com/watch?feature=player_embedded&v=2SCiO0Aivi0

R. Allen Stanford --- http://en.wikipedia.org/wiki/Allen_Stanford

"R. Allen Stanford Guilty in Ponzi Scheme," by Daniel Gilbert and Tom Fowler, The Wall Stre3et Journal, March 6, 2012 --- Click Here
http://online.wsj.com/article/SB10001424052970203458604577265490160937460.html?mod=WSJ_hp_LEFTWhatsNewsCollection

After a criminal case that dragged on for nearly three years, a jury of eight men and four women on Tuesday convicted Mr. Stanford on 13 of the 14 charges brought by prosecutors, including fraud, obstructing investigators and conspiracy to commit money laundering. The verdict is a victory for the U.S. government, which targeted the chairman of Stanford Financial Group as part of a crackdown on white-collar crime following the financial crisis.

He faces a maximum of 230 years in prison. Mr. Stanford's attorneys, while still under a court order to not discuss the case, told reporters they would appeal but didn't specify on what grounds. Prosecutors declined to comment.

Robert Khuzami, enforcement director of the Securities and Exchange Commission, said in a statement, "Today's guilty verdicts send a resounding message that those who violate the law and obstruct SEC investigations will be held accountable. We applaud the skill and tenacity of the prosecutors handling the case."

The verdict, coming on the fourth full day of deliberations after a monthlong trial, marks a remarkable downfall for Mr. Stanford, 61 years old, who rose from owning a gym in Texas to becoming a billionaire knighted in Antigua. As the verdict was read, Mr. Stanford, wearing a dark suit and open-necked shirt, turned to family members sitting in the courtroom and appeared to mouth the words, "It's OK." [stanford1] Reuters

2012: Stanford enters a Houston court Tuesday.

On Monday, the judge ordered jurors to continue deliberating after they said they couldn't reach a unanimous verdict on all 14 criminal counts.

Prosecutors estimated Mr. Stanford's $7.1 billion fraud was among the largest in history, but it was overshadowed by an even greater financial crime: the $17.3 billion Ponzi scheme orchestrated by financier Bernard Madoff, who pleaded guilty in 2009.

The end of Mr. Stanford's criminal case could allow investors to attempt to recover hundreds of millions of dollars from his accounts and the assets of Stanford Financial Group. A judge has placed on hold the civil suit brought against him by the SEC while the criminal case is pending. An appeal of the verdict, however, may delay investors' recovery efforts.

Cassie Wilkinson, a Stanford Financial investor, said she was "relieved, happy and sad," about the verdict. "I feel sorry for his family, for his mother," she said, referring to Sammie Stanford, the 81-year-old who has been in the courtroom every day since deliberations began. "It's a tragic loss for so many families, for tens of thousands of investors."

After the verdict, jurors began to hear the case on the Justice Department's efforts to seize funds in bank accounts controlled by Mr. Stanford, estimated to hold more than $300 million. The SEC, in a separate civil action, could ask a judge for permission to move forward with its case if it believes there are additional assets to recover.

Continued in article

Bob Jensen's threads on Ponzi fraud ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

"Online Calculator for SEC Filings: A Killer App for CFOs? Tool grabs grand prize as "most inventive and useful" application in national XBRL contest," by David Rosenbaum, CFO.com, March 1, 2012 ---
http://www.cfo.com/article.cfm/14621303?f=search
Thank you Glen Gray for the heads up.

Today at Baruch College of the City University in New York City, XBRL US, a nonprofit consortium for extensible business reporting language standards, awarded Calcbench, a Cambridge, Massachusetts-based, two-person start-up, its $20,000 grand prize for the "most inventive and useful application" using XBRL-formatted data from the Securities and Exchange Commission's EDGAR database. The app in question? A handy-dandy calculator.

The Calcbench application, which went live in December 2011 and has gone through several iterations since then, achieving its current level of functionality in late January, was designed and programmed by company founders Pranav Ghai and Alex Rapp. It is a browser-based, configurable calculator that enables users to click on any number in an XBRL-tagged SEC filing and automatically calculate changes in any category - cash and cash equivalents, inventory, accounts payable, whatever - over quarters or years, and also to compare those results between companies.

Today at Baruch College of the City University in New York City, XBRL US, a nonprofit consortium for extensible business reporting language standards, awarded Calcbench, a Cambridge, Massachusetts-based, two-person start-up, its $20,000 grand prize for the "most inventive and useful application" using XBRL-formatted data from the Securities and Exchange Commission's EDGAR database. The app in question? A handy-dandy calculator.

The Calcbench application, which went live in December 2011 and has gone through several iterations since then, achieving its current level of functionality in late January, was designed and programmed by company founders Pranav Ghai and Alex Rapp. It is a browser-based, configurable calculator that enables users to click on any number in an XBRL-tagged SEC filing and automatically calculate changes in any category - cash and cash equivalents, inventory, accounts payable, whatever - over quarters or years, and also to compare those results between companies.

Continued in article

CalcBench Home Page --- http://www.calcbench.com/

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

A Comparative Analysis of State Tax on Business, Tax Foundation, 2012 ---
http://www.taxfoundation.org/files/lm_2012_proof_08.pdf

. . .

Table 7 on Page 14

Overall Results

Mature Firms New Firms

Index Score Rank Index Score Rank

Alabama 86.0 13 86.4 19

Alaska                                    97.7.                23                            81.1             17

Arizona                                   86.2                 14                          114.9              31

Arkansas                               102.8                 30                            69.6               8

California                              105.8                 34                          133.8              45

Colorado                                105.4                33                          135.1               47

Connecticut                               93.9                21                          109.3               30

Delaware                                   98.1               24                             80.5               16

Florida                                       90.6               19                           122.8               36

Georgia                                      71.8                 3                            66.7                   6

Hawaii                                      142.6.              49.                         151.4                50

Idaho                                         111.7               38                          116.0                32

Illinois                                         126.4              45                            94.2                24

Indiana                                        122.7              43                            80.1                15

Iowa                                           116.5              40                          126.8                 41

Kansas                                        133.5               47                          141.6                 48

Kentucky                                        88.4              18                             69.4                   7

Louisiana                                       84.1              10                             52.8                   2

Maine                                            100.4              27                              87.3                 20

Maryland                                       82.4                8                          134.7                  46

Massachusetts                             123.6               44                         128.2                   43

Michigan                                            98.8               25                           96.6                   25

Minnesota                                         112.7              39                         119.6                   35

Mississippi                                         109.2              37                           89.3                   21

Missouri                                             108.8              36                           97.0                   26

Montana                                               93.1               20                           93.8                  23

Nebraska                                             82.5                 9                           31.7                    1

Nevada                                                 77.7                 4                          124.8                 38

New Hampshire                                     99.7                26                           91.0                  22

New Jersey                                         121.1                41                         104.9                 27

New Mexico                                            97.4               22                           80.0                  14

New York                                               121.1              42                         124.4                   37

North Carolina                                         80.8               7                           79.9                   13

North Dakota                                            87.0               15                          83.5                    18

Ohio                                                         78.1                 5                           58.7                      3

Oklahoma                                                 87.1               16                          65.3                      5

Oregon                                                     100.5               28                       106.3                     28

Pennsylvania                                           145.1               50                       145.9                     49

Rhode Island                                           129.1               46                       128.4                     44

South Carolina                                           103.8               32                       119.4                     34

South Dakota                                              56.0                 2                         77.7                      11

Tennessee                                                   101.3               29                       108.7                      29

Texas                                                           85.9              12                       127.7                      42

Utah                                                              80.2                 6                        76.7                     10

Vermont                                                       103.7                31                       79.2                       12

Virginia                                                           84.4                 11                     125.9                      39

Washington                                                     87.2                 17                     126.3                      40

West Virginia                                                140.2                 48                     118.5                       33

Wisconsin                                                   107.7                  35                       59.8                        4

Wyoming                                                       48.3                   1                       73.3                          9

Continued in article

Jensen Comment
Of course there are many other factors to consider when running a business in a given state. First there are markets to consider. For example Wisconsin and Ohio look attractive from a tax standpoint but these states are unattractive to labor intensive business firms because of union power within those states. Such firms may prefer moving into Alabama, Arkansas, or Mississippi in spite of having to pay higher taxes. Many firms have moved from New England to the south because of higher wages and taxes in New England. Taxes and wages have been a disaster for some states. For example, Hawaii was at one time a thriving grower of pineapples. Now most of the pineapple growers have moved elsewhere because of taxes and wages.

Another thing to consider are subsidies to business firms that offset taxes and wages. For example, when threatened with a huge movements of business firms out of Illinois (including huge firms like Caterpillar and Sears), Illinois commenced to offset its high business taxes and wages with business subsidies.

Bob Jensen's threads on taxation are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Questions
Where is there currently the least amount of grade inflation?

States Graded by Accountability
The Center for Public Integrity, March 2012
http://www.iwatchnews.org/2012/03/19/8423/grading-nation-how-accountable-your-state

Fraud Beat
"Contest for Funniest New Jersey Joke Has a Winner," by Jonathan Weil, Bloomberg, March 22, 2012 ---
http://www.bloomberg.com/news/2012-03-22/contest-for-funniest-new-jersey-joke-has-a-winner.html

Did you hear the latest joke about New Jersey? A group of investigative journalists this week released a report calling it the least corruptible state in the country. How did that happen?

Easy. We bribed them.

ll kidding aside, this is a state where in 2009 three mayors, two assemblymen and five rabbis were among 44 charged in a single money-laundering and bribery sting by the Federal Bureau of Investigation. One of those mayors, Peter Cammarano, was from Hoboken, where I live. He was sentenced to 24 months in prison. Five years before his arrest, another former Hoboken mayor, Anthony Russo, pleaded guilty to corruption charges. His son now sits on the city council.

In New Jersey, we expect corruption. It’s built into the system. We have 566 municipalities, the most per capita of any state. Local governments tax the citizenry dry, while preserving the opportunities for graft that flow from operating redundant public services. The state legislature likes it this way and always has. Whadayagonnado?

So it was quite a story this week when the Center for Public Integrity, a Washington-based nonprofit, ranked New Jersey as the state with the lowest corruption risk in the U.S. (Local corruption didn’t count, it said. Only “corruption risk” in state government did.) There’s a simple explanation for how the group reached its conclusion, too: Its methodology was awful. Answering Questions

Here’s how the center got the New Jersey data for its nationwide “State Integrity Investigation.” Last year, it hired Colleen O’Dea, a freelance journalist who worked for about 26 years at the Daily Record in Morris County, to answer a list of 330 questions about New Jersey state government. Each called for a numerical score. O’Dea, 49, said she interviewed 26 people for the assignment, five in person. The center paid her $5,000.

The center also hired a former local newspaper editor to review her work. From there, the center provided O’Dea’s responses to another Washington-based nonprofit called Global Integrity. That group fed the answers into an algorithm, said Randy Barrett, a Center for Public Integrity spokesman. The results from the algorithm were used to generate letter grades in 14 categories and an overall score for New Jersey of 87 percent, or a B+.

The center hired reporters for every other state, too, along with “peer reviewers” to read their responses. Each reporter got the same list of queries. The center called this investigative reporting. Really, though, it was just a bunch of people answering questionnaires.

For example, O’Dea gave New Jersey a top score of 100 percent when asked to evaluate this statement: “In practice, the state-run pension funds disclose information about their investment and financial activity in a transparent manner.”

How did she decide that? The questionnaire said to give a high score if such information was available online at little or no cost. Her notes, posted on the center’s website, say she asked someone at the New Jersey State League of Municipalities about this. “Very transparent,” her notes said. The center gave the state an “A” in the category of “state pension-fund management,” based partly on O’Dea’s answer to that question.

Now consider that, in August 2010, New Jersey became the only state ever sued for fraud by the Securities and Exchange Commission. The SEC said the state for years lied to municipal- bond investors about the underfunded condition of its two largest pension plans. New Jersey settled without admitting or denying the agency’s claims. Making a Difference

When I asked O’Dea in a telephone interview if she knew about the SEC lawsuit, she said she didn’t. Later, she e-mailed me to say that she had, in fact, been aware of it, and that “the state has since owned up to the issue.”

Either way, it’s hard to believe New Jersey deserves an A for how it manages its pension funds. Yet for all we know, this grade could have made the difference between finishing No. 1 in the rankings or not. The center ranked Connecticut No. 2 with an overall grade of B, or 86 percent, one point behind New Jersey.

Another example from the survey: “In practice, the state- run pension funds have sufficient staff and resources with which to fulfill their mandate.” O’Dea gave another top score. This time she listed a second source, in addition to the fellow from the league of municipalities: a spokesman at the New Jersey Department of the Treasury. He told her the answer was yes.

And so forth. The center gave New Jersey’s insurance department a B+. One of the inputs was the 100 percent score O’Dea awarded in response to this statement: “In practice, the state insurance commission has a professional, full-time staff.”

Her notes listed two sources: Someone from the Independent Insurance Agents and Brokers of New Jersey, and a spokesman for the New Jersey Department of Banking and Insurance. Both said the statement was true. (Imagine that.) O’Dea said the sources she chose “seemed to logically have knowledge of the question.”

Continued in article

Jensen Comment
All jokes aside, President Obama's home town is still the most corrupt city in the United States

"Chicago Called Most Corrupt City In Nation," CBS Chicago TV, February 14, 2012 ---
http://chicago.cbslocal.com/2012/02/14/chicago-called-most-corrupt-city-in-nation/

A former Chicago alderman turned political science professor/corruption fighter has found that Chicago is the most corrupt city in the country.

He cites data from the U.S. Department of Justice to prove his case. And, he says, Illinois is third-most corrupt state in the country.

University of Illinois professor Dick Simpson estimates the cost of corruption at $500 million.

It’s essentially a corruption tax on citizens who bear the cost of bad behavior (police brutality, bogus contracts, bribes, theft and ghost pay-rolling to name a few) and the costs needed to prosecute it.

“We first of all, we have a long history,” Simpson said. “The first corruption trial was in 1869 when alderman and county commissioners were convicted of rigging a contract to literally whitewash City Hall.”

Corruption, he said, is intertwined with city politics

“We have had machine politics since the Great Chicago Fire of 1871,” he said. “Machine politics breeds corruption inevitably.”

Simpson says Hong Kong and Sydney were two similarly corrupt cities that managed to change their ways. He says Chicago can too, but it will take decades.

He’ll be presenting his work before the new Chicago Ethics Task Force meeting tomorrow at City Hall.

University of Illinois at Chicago Report on Massive Political Corruption in Chicago
"Chicago Is a 'Dark Pool Of Political Corruption'," Judicial Watch, February 22, 2010 ---
http://www.judicialwatch.org/blog/2010/feb/dark-pool-political-corruption-chicago

A major U.S. city long known as a hotbed of pay-to-play politics infested with clout and patronage has seen nearly 150 employees, politicians and contractors get convicted of corruption in the last five decades.

Chicago has long been distinguished for its pandemic of public corruption, but actual cumulative figures have never been offered like this. The astounding information is featured in a lengthy report published by one of Illinois’s biggest public universities.

Cook County, the nation’s second largest, has been a “dark pool of political corruption” for more than a century, according to the informative study conducted by the University of Illinois at Chicago, the city’s largest public college. The report offers a detailed history of corruption in the Windy City beginning in 1869 when county commissioners were imprisoned for rigging a contract to paint City Hall.

It’s downhill from there, with a plethora of political scandals that include 31 Chicago alderman convicted of crimes in the last 36 years and more than 140 convicted since 1970. The scams involve bribes, payoffs, padded contracts, ghost employees and whole sale subversion of the judicial system, according to the report.

Elected officials at the highest levels of city, county and state government—including prominent judges—were the perpetrators and they worked in various government locales, including the assessor’s office, the county sheriff, treasurer and the President’s Office of Employment and Training. The last to fall was renowned political bully Isaac Carothers, who just a few weeks ago pleaded guilty to federal bribery and tax charges.

In the last few years alone several dozen officials have been convicted and more than 30 indicted for taking bribes, shaking down companies for political contributions and rigging hiring. Among the convictions were fraud, violating court orders against using politics as a basis for hiring city workers and the disappearance of 840 truckloads of asphalt earmarked for city jobs.

A few months ago the city’s largest newspaper revealed that Chicago aldermen keep a secret, taxpayer-funded pot of cash (about $1.3 million) to pay family members, campaign workers and political allies for a variety of questionable jobs. The covert account has been utilized for decades by Chicago lawmakers but has escaped public scrutiny because it’s kept under wraps.

Judicial Watch has extensively investigated Chicago corruption, most recently the conflicted ties of top White House officials to the city, including Barack and Michelle Obama as well as top administration officials like Chief of Staff Rahm Emanual and Senior Advisor David Axelrod. In November Judicial Watch sued Chicago Mayor Richard Daley's office to obtain records related to the president’s failed bid to bring the Olympics to the city.

title:

Best and Worst Run States in America — An Analysis Of All 50 (Debt, Government, Governmental, Entitlements, States, California, Massachusetts, Wyoming, Minnesota)

citation:

From the AICPA CPA Letter Daily on December 7, 2011
For the second year, 24/7 Wall St. ranked the 50 states according to how well they are run. Factors included the state's financial health, standard of living, education system, employment rate, crime rate and how efficiently the state uses its resources to provide government services. 24/7 Wall St. determined that Wyoming is the best-run state and California is the worst run. 24/7 Wall St.
http://247wallst.com/2011/11/28/best-and-worst-run-states-in-america-an-analysis-of-all-50/

brief description:

Jensen Comment
The best-run state is Wyoming. The worst-run state is California Most of the Top Ten best-run states have relatively low populations. Small seems to be better in terms of state government efficiency, although social programs and cold weather in those states tend to repel welfare and Medicaid recipients from around the nation. It's difficult to draw liberal versus conservative explanations for best-run states since liberal states of Vermont and Minnesota are mixed in the Top Ten along with the conservative states of Wyoming, Utah, and the two Dakota states.

Minnesota has the least debt per capita, but the union-run state of Massachusetts has the most debt per capita. This is somewhat interesting because both Minnesota and Massachusetts are viewed as liberal states (more so in the days of Hubert Humphrey and Walter Mondale). The relatively conservative southern states tend to be below the median on state debt per capita. The western states are more variable. I accuse Taxachusetts of being union-run in part because Boston refuses to allow Wal-Mart stores until Wal-Mart becomes unionized.

When it comes to debt per capita there is less denominator effect than I suspected beforehand, although small populations become a huge factor behind the high debt loads per capita in Alaska, Rhode Island, and Delaware. Alaska can also afford a higher debt load because of vast untapped natural resources.

I watched two very liberal commentators from Boston on television last night arguing that more debt load in Taxachusetts to support increased spending for social programs was a good investment of that state's economy. This seems to be questionable given where Taxachusetts already stands in relation to debt per capita.

Bob Jensen's threads on state taxation are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
You have to scroll down to find the state tax comparisons.

Bob Jensen's threads on the sad state of governmental accounting are at
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

Bob Jensen's threads on political corruption are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

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

With all the media focus on Governor Walker's recall challenge (funded my labor unions across the nation) in Wisconsin, less attention is given to states where there's somewhat more harmony with unions and voters.

Sometimes what it takes is Democratic Party leaders to achieve fiscal sanity (California excepted) because labor unions are tied so close to the Democratic Party.

"The Democrat Who Took on the Unions: Rhode Island's treasurer Gina Raimondo talks about how she persuaded the voting public, labor rank-and-file and a liberal legislature to pass the most far-reaching pension reform in decades," by Allysia Finley, The Wall Street Journal, March 23, 2012 ---
http://online.wsj.com/article/SB10001424052970204136404577207433215374066.html?mod=djemEditorialPage_t

So this is Gina Raimondo? The state treasurer who single-handedly overhauled Rhode Island's pension system and has unions screaming bloody murder? I had imagined her a bit, well, bigger. If not larger than life like New Jersey Gov. Chris Christie, then at least life-size. Ms. Raimondo couldn't be much taller than five feet, which may have caused some to underestimate her. That isn't the only thing that may have surprised people.

The former venture capitalist is a Democrat, which means that she believes in government as a force for good. But "a government that doesn't work is in no one's interest," she says. "Budgets that don't balance, public programs that aren't funded, pension funds that are running out of money, schools that aren't funded—How does that help anyone? I don't really care if you're a Republican or Democrat or you want to fight about the size of government. How about a government that just works? Put your tax dollar in and get a return out the other end."

Yes, that would be nice. Unfortunately, public pensions all over the country are gobbling up more and more taxpayer money and producing nothing in return but huge deficits. It's not even certain whether employees in their 20s and 30s will retire with a pension, since many state and municipal pension systems are projected to run dry in the next two to three decades.

That included Rhode Island's system until last year, when Ms. Raimondo drove perhaps the boldest pension reform of the last decade through the state's Democratic-controlled General Assembly. The new law shifts all workers from defined-benefit pensions into hybrid plans, which include a modest annuity and a defined-contribution component. It also increases the retirement age to 67 from 62 for all workers and suspends cost-of-living adjustments for retirees until the pension system, which is only about 50% funded, reaches a more healthy state.

Several states have increased the retirement age or created a new tier of benefits for future workers, but reforms that only affect not-yet-hired employees don't save much money. A lot of "people say we've done pension reform when all they've done is tweaked something," Ms. Raimondo points out. "This problem will not go away, and I don't know what people are thinking. By the nature of the problem, it gets bigger and harder the longer you wait."

The problem was particularly acute in Rhode Island since there are more retirees collecting pensions than workers paying into the system. Plus, as Ms. Raimondo says, "it's a small state with not a lot of growth, an expensive cost structure in government, and it's not a good combination." Making the state even more expensive by raising taxes would have caused many Rhode Islanders to leave. When the now-bankrupt town of Central Falls raised property taxes to finance worker pensions, many residents fled, sending the city into a tailspin.

Because there has been little legislative or public support for raising taxes, the Ocean State has been cutting public services to pay its pension bills. A few years ago Ms. Raimondo read "an article in the paper about libraries closing and public bus service being cut nights, weekends and holidays, and I just thought it doesn't have to be this way." The story made her consider a bid for treasurer.

In the last 15 years, Ms. Raimondo, who is 40 and the mother of two children, has helped found two venture-capital firms, Village Ventures and Point Judith Capital. She was a Rhodes Scholar at Oxford and has a bachelor's in economics from Harvard and law degree from Yale. Still, serving as treasurer of the smallest state in the country probably wouldn't be the next career step for someone with such impressive credentials and ambition.

Continued in article

The public unions are still pushing their burdens on taxpayers
"Public Unions Send Medical Bills to Taxpayers," by Jason Polan, Bloomberg, March 15, 2012 ---
http://www.bloomberg.com/news/2012-03-15/unions-send-doctor-bills-to-taxpayers-steven-greenhut.html

The U.S. public pension mess, with its $2 trillion to $3 trillion in unfunded liabilities, is such a volcano of gloom that it takes a potentially bigger problem to turn our eyes away from it.

Turn your attention instead to the size of the taxpayer- backed health-care obligations for public employees.

“Frankly, if you want to look at a truly scary set of unfunded liabilities, health care for retirees is a better choice than pensions,” said California Treasurer Bill Lockyer in an October speech meant to play down the pension crisis.

Not that Lockyer or his Democratic and union allies want to reduce any benefits that are at the heart of the problem. In their view, the real scourge is “pension envy” or perhaps “health-care envy” -- the failure of the private sector to keep up with government-benefit levels.

States and localities make their own decisions on how to finance these health-care policies. Far more government employees than private workers receive health and dental care -- and those plans cost more, require lower employee contributions and provide more comprehensive coverage.

Such generosity comes at a cost to taxpayers and municipal budgets, especially given the “promise now, pay later” approach of officials. As a recent Bloomberg News article noted, while most public pension plans are 75 percent funded, the figure for health-care plans is only 4 percent nationwide. So unlike pensions, governments are setting aside little money in advance to pay for their future obligations. Courts Back Unions

Public-sector unions and their allies have foiled even modest efforts to scale back pensions, and the courts have done the rest. Now the unions are gearing up to fight changes in health-care plans, as well -- an issue that has reared its head after Stockton, California, announced that it was possibly headed toward a Chapter 9 bankruptcy driven by $417 million in liabilities caused by an absurdly generous lifetime medical plan.

The unions’ job is considerably easier thanks to a California Supreme Court decision in November that will make it as hard to change health-care benefits as it is to deal with pensions.

It’s not that leaders in California, which is in the deepest public-employee-related fiscal hole, don’t understand the scope of the problem. Controller John Chiang released a report in February that acknowledges a $62.1 billion unfunded health-care liability.

“California should pay $4.7 billion in 2011-12 to pay for present and future retiree health benefits,” according to Chiang’s office. “In the 2011-12 budget act, the state provided $1.71 billion to only cover current retirees’ health and dental benefits.”

With pensions, government employers and employees contribute a percentage of income into retirement funds. The liabilities depend on how well the funds perform, with higher estimated rates of return leading to a lower predicted debt and vice versa. But as Bloomberg News reported, “States haven’t financed almost 96 percent of the $627.4 billion they were projected to owe for future retiree benefits in 2010.” They try to pay these health-care costs as they go.

Few governments have the excess cash available to prepay these already promised benefits. But often there are straightforward ways to solve the problem. In 2006, Orange County cut its $1.4 billion health-care liability, in a model effort touted not just by the Republican board of supervisors but by the union representing county workers. The union said the deal demonstrated its willingness to help fix the system. Reforms Overturned

Retirees had been placed in the same medical pool as current workers. Because retirees are older, their health-care costs are higher, so the county was subsidizing the rates for retirees. The county separated the pool, raised the monthly contributions paid by retirees and reduced the unfunded liability by $815 million. But the retirees’ group sued the county and took the case to the state Supreme Court, which ruled in a way that has made it far easier to challenge cutbacks of these benefits.

Continued in article

U.S. Government Still Pays Two Civil War Pensions (boy are these guys old)---
http://blog.eogn.com/eastmans_online_genealogy/2012/02/us-government-still-pays-two-civil-war-pensions.html
Thank you Bruce Gunning for the heads up.

Bob Jensen's threads on the sad state of pension accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Pensions

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

"Four Numbers Add Up to an American Debt Disaster," by Caroline Baum, Bloomberg, March 28, 2012 ---
http://www.bloomberg.com/news/2012-03-28/four-numbers-add-up-to-an-american-debt-disaster.html

Consider the following numbers: 2.2, 62.8, 454, 5.9. Drawing a blank? Not to worry. They don’t mean much on their own.

Now consider them in context:

1) 2.2 percent is the average interest rate on the U.S. Treasury’s marketable and non-marketable debt (February data).

2) 62.8 months is the average maturity of the Treasury’s marketable debt (fourth quarter 2011).

3) $454 billion is the interest expense on publicly held debt in fiscal 2011, which ended Sept. 30.

4) $5.9 trillion is the amount of debt coming due in the next five years.

For the moment, Nos. 1 and 2 are helping No. 3 and creating a big problem for No. 4. Unless Treasury does something about No. 2, Nos. 1 and 3 will become liabilities while No. 4 has the potential to provoke a crisis.

In plain English, the Treasury’s reliance on short-term financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nation’s structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the U.S. in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years -- probably at higher interest rates. First Among Equals

And that’s a problem. The U.S. is more dependent on short- term funding than many of Europe’s highly indebted countries, including Greece, Spain and Portugal, according to Lawrence Goodman, president of the Center for Financial Stability, a non- partisan New York think tank focusing on financial markets.

The U.S. may have had a lot more debt in relation to the size of its economy following World War II, but the structure was much more favorable, with 41 percent maturing in less than five years, 31 percent in five-to-10 years and 21 percent in 10 years or more, according to CFS data. Today, only 10 percent of the public debt matures outside of a decade.

Based on the current structure, a one percentage-point increase in the average interest rate will add $88 billion to the Treasury’s interest payments this year alone, Goodman says. If market interest rates were to return to more normal levels, well, you do the math.

Some economists have cited the Treasury’s ability to borrow all it wants at 2 percent as an argument for more fiscal stimulus. Why not, as long as it’s cheap?

Goodman says the size of the deficit (8.2 percent of gross domestic product) or the debt (67.7 percent of GDP) is only part of the problem. The bigger threat is rollover risk: “the same thing that got countries from Portugal to Argentina to Greece into trouble,” he says. “It’s the repayment of principal that often provides the catalyst for a market event or a crisis.”

The U.S. is unlikely to go from all-you-want-at-2-percent to basket-case overnight. That said, policy makers would be wise to view recent market volatility as a taste of things to come.

Talking to Goodman, I was reminded of the Treasury’s standard sales pitch before quarterly refunding operations during periods of rising yields. Some undersecretary for domestic finance would be dispatched to tell us that Treasury expected to have no trouble selling its debt.

I had an equally standard response: At what price?

That seems particularly relevant today. The Federal Reserve purchased 61 percent of the net Treasury issuance last year, according to the bank’s quarterly flow-of-funds report. That’s masking the decline in demand from everyone else, including banks, mutual funds, corporations and individuals, Goodman says.

Of course, Fed Chairman Ben Bernanke might look at the same numbers and see them as a sign of success. His stated goal in buying bonds is to lower Treasury yields and push investors into riskier assets.

Free to Borrow

Then there’s the distortion in the relative value of stocks versus bonds to worry about. Using the 10-year cyclically adjusted price-earnings ratio and the inverse of the 10-year Treasury yield, Goodman says the relationship hasn’t been this out of whack since 1962.

Continued in article

Video on the History of Debt
"Debt: The First 5,000 Years," by Paul Kedrosky , Kedrosky.com, September 10, 2011 --- Click Here
http://paul.kedrosky.com/archives/2011/09/debt-the-first-5000-years.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InfectiousGreed+%28Paul+Kedrosky%27s+Infectious+Greed%29

Bob Jensen's threads on entitlements and debt ---
http://www.trinity.edu/rjensen/Entitlements.htm

Question
How does Sears price its onsite extended warranties and how it accounts for them in the financial statements?

"Consumer Reports is Wrong about Extended Warranties," by Rafi Mohammed, Harvard Business Review Blog, March 23, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/03/why_consumer_reports_is_wrong.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Jensen Comment
I think on some on-site warranties a lot depends upon where you live or work. I live and work in the boondocks of the White Mountains. Virtually all our appliances are Sears on-site warranties because we live over 100 miles from the closest Sears warranty repair center and most other warranty service centers of vendors that compete with Sears.

I would certainly hate to have had to haul my large snow thrower to a service center the 12+ times Sears came to my home to fix this machine before Sears engineers finally got smart enough to solve what was an engineering problem with the chute cables in cold weather.

I consider the Sears onsite extended warranty price to be reasonably priced for people like me who live in remote parts of the country.

My problem is that on-site extended warranties, even from Sears, do not cover all products. For example, no onsite extended warranty was available for Erika's new sewing machine that we purchased from Sears in St. Johnsbury, Vermont. However, rather than have to take it 100 miles to a Sears service center in Manchester, NH we only have to take it 25 miles to the St. J store, and that Sears store will handle all shipping free of charge to a service center.

I think it would make an interesting case study for accounting students to investigate how it Sears both prices its onsite extended warranties and how it accounts for them in the financial statements.

title:

How do we account for "lifetime" warranties?

author-source:

Jensen
http://www.trinity.edu/rjensen/theory01.htm

description:

How do we account for “lifetime warranties” that are not backed by the Federal government?

How do we account for “lifetime warranties” that are backed by the Federal government?

Actually if we assume “going concern” accounting, the accountants and auditors can probably ignore the government backing of warranties as defined at
http://wheels.blogs.nytimes.com/2009/03/30/understanding-obamas-auto-warranty-plan/

But there’s still a question of how to estimate warranty reserves for “lifetime warranties?” Do auditors now have to factor in actuarial life expectancies of buyers of new Chrysler vehicles?

July 9, 2009 message from XXXXX

Bob,

One issue that was brought up earlier was the risk of not being able to collect on a warranty for a new car purchased from GM or Chrysler. I'm looking at new cars. Do you have any idea whether GM will deliver on warranty repairs for a car purchased now?

July 9, 2009 reply from Bob Jensen

Hi XXXXX,

The thing to do is read the fine print in the Federal government's so-called guarantee to make good on Chrysler and GM warranties if the companies default.

First take a look at
http://wheels.blogs.nytimes.com/2009/03/30/understanding-obamas-auto-warranty-plan/

Then you should read the fine print of the warranty on any GM or Chrysler car you purchase.

One risk is that if GM or Chrysler should fail, parts will become harder and harder to find for cars, especially models that may only have been available for a short time so that there are very few used cars to cannibalize for parts. If both your Chrysler company and your Chrysler transmission (with that dubious "life-time" Chrysler power train warranty) should fail, what happens if there are no longer any needed transmission parts? Ask the dealer to explain this scenario before you buy a Chrysler or a GM car!

It's also not clear whether the Government's warranty backup plan will cover Fiats when Chrysler begins to sell Fiats. Wouldn't that be a kick in the butt when our Federal government backs up Italian car warranties but not Ford Motor Company warranties?

Bob Jensen

A15. Lifetime means lifetime
This is put in writing by Chrysler at http://www.chrysler.com/en/lifetime_powertrain_warranty/faq.html
Jensen Comment
I'm not certain President Obama really understands that he is now backing up each new Chrylser's powertrain for a "lifetime" which attorneys can claim provides coverage until the buyer dies. Do you want to buy each of your newborns a new Chrysler? What a bummer if this also includes Fiats.

How anxiously are you awaiting a FIAT with a Chrysler boilerplate?
When FIAT entered the U.S. market and failed in the 1970s it was called "Fix It Again, Tony"
Why does the Second Italian Navy use glass bottom boats? To look for the first Italian Navy.
Who put the seven bullets into Benito Mussolini? Three hundred Italian marksmen.

Among the 38 automobile models tested for reliability in 2008 ---
http://www.which.co.uk/reviews/cars-and-motoring/index.jsp
Honda and Toyota at the top of the 2008 reliability list, followed closely by Daihatsu, Lexus, Mazda, and Subaru. This largely mirrors the latest Consumer Reports predicted reliability ranking, though there Scion was at the top and Mazda placed 12th with Consumer Reports due to a different model line-up. Fiat ranked 35th (out of 38), followed by Renault, Land Rover, and Chrysler/Dodge. Jeep is the highest-rated brand from Chrysler, with its 29th place just barely keeping it in the “Poor” category. Fiat, Chrysler, and Dodge are categorized as “Very poor.” In total, Fiat, Chrysler, and Dodge provide similar reliability, and it isn’t good.
Consumer Reports, May 5, 2009 ---
http://blogs.consumerreports.org/cars/2009/05/chrysler-and-fiat-reliability-merger-of-equals.html
Consumer Reports online subscribers can see how brands compare.--- Click Here
Jensen Comment
My 1989 Cadillac is ten times more reliable than my 1999 Jeep Cherokee. I don't plan to shift gears into a FIAT. My next car up in these mountains will probably be a Subaru station wagon (with all-wheel drive).

Tips on Personal Finance --- http://twitter.com/EverydayFinance

Bob Jensen's threads on personal finance --- http://www.trinity.edu/rjensen/bookbob1.htm#InvestmentHelpers

The SEC is getting soft in its old age. We suggest that it get grumpy instead.
"JCOM: WHEN WILL THE SEC CALL AN ERROR AN ERROR?," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, March 8, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/557

The business enterprise j2 Global Communications (JCOM) in its first quarter 2011 filing made an accounting change and called it a change in estimate. As several observers have noted, what the Company called a change in estimate is really an accounting error. What we would like to know is when will the SEC take JCOM’s managers to the woodshed and call an error an error.

Gradient Analytics may have been the first to report this anomaly. In its November 21, 2011 report, it gave JCOM an earnings quality grade of “F” (boy, were they grumpy or what?). In part, this failing grade was due to the Company’s mislabeling an error as a change in estimate. Basically, JCOM through transparency right out the window.

Sam Antar pointed out this discrepancy in his blog “White Collar Fraud.” Tracy Coenen likewise raised questions about this sleight of hand in her post “[JCOM] …Trying to Hide Accounting Errors.” Both of them referred to the research by Gradient Analytics, and both of them agreed that this change was an accounting error.

Here are the details. In footnote 1 of the 10-Q (Q1 2011), JCOM writes:

In the first quarter of 2011, the Company made a change in estimate regarding the remaining service obligations to its annual eFax® subscribers. As a result of system upgrades, the Company is now basing the estimate on the actual remaining service obligations to these customers. As a result of this change, the Company recorded a one-time, non-cash increase to deferred revenues of $10.3 million with an equal offset to revenues. This change in estimate reduced net income by approximately $7.6 million, net of tax, and reduced basic and diluted earnings per share for the three months ended March 31, 2011 by $0.17 and $0.16, respectively.

This description is baffling. Estimates are for unobservables, generally items that are future-oriented. For example, depreciation requires an estimate of the remaining life of the asset and an estimate of its salvage value at some unknown future date. As time goes by, managers may be in a better position to assess these unknowns, and any revisions will be changes in estimates. Similar statements can be made about depletion, amortization, bad debts, sales returns, and a variety of items. In every case, the estimates are for future items, be they the asset’s life, the amount of future cash collections from customers, the amount of future returns, etc.

It seems natural to base revenue estimates on the “actual remaining service obligations to these customers,” after all, the last time we checked, revenue has to be earned. So, what was JCOM basing it on beforehand?

Of course, it is possible that the previous accounting information system was inadequate for the job. In that case, the auditor SingerLewak LLP should not have blessed the internal control system in the 10-K. An accounting information system that cannot produce accurate data for such a basic process does not deserve an unqualified opinion. Such a system is pathetic.

The SEC sent a letter to JCOM on December 19, 2011. The SEC asked managers to explain why the actual remaining service obligations were not previously known. The firm responded on January 3, 2012 (intertwined with our thoughts):

Continued in article

"EBITDA: WARTS AND ALL," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, March 5, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/542

With the earnings season upon us, discussions in recent weeks sometimes have focused on pro forma numbers, especially with respect to several IPOs. Some pro forma numbers are better than others. Most, however, are inferior to GAAP (generally accepted accounting principles) numbers.

What these pro forma constructs have in common is that they are non-GAAP numbers, which means that their definition and measurement are not standardized by any agency, and more importantly that corporate disclosures about them are not audited. By itself, this does not disqualify them from use, but should alert the user to apply caution.

One particularly good pro forma number is free cash flow. The variable is supported by economic theory, and its components (cash generated by operating activities and capital expenditures) are found in GAAP financial statements, which means they are audited numbers.

Continued (with links) in article

Up Up and Away in My Beautiful Pro Forma
"Creative Accounting Leads to Fuzzy Earns," SmartPros, December 27, 2005 --- http://accounting.smartpros.com/x51147.xml

Bob Jensen's threads on pro forma statements ---
http://www.trinity.edu/rjensen/Theory02.htm#ProForma

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

Question
How honest and forthcoming should you be when advising students regarding opportunities in academe for a new PhD graduate?

"Enlightening Advisees," by Henry Adams, Chronicle of Higher Education, March 1, 2012 ---
http://chronicle.com/article/Enlightening-Advisees/130948/?sid=at&utm_source=at&utm_medium=en

Some Things to Ponder When Choosing Between an Accounting Versus History PhD ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#HistoryVsAccountancy

Jensen Comment
Law schools are now pondering the same ethics issues regarding advising applicants about careers in law ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#OverstuffedLawSchools

From The Wall Street Journal Accounting Weekly Review on March 9, 2012

Companies' Pension Plea
by: Kristina Peterson
Mar 06, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Advanced Financial Accounting, Interest Rates, Pension Accounting

SUMMARY: This is the first of three articles this week on pension plan issues. The one covers required funding of defined benefit pension plans according to U.S. law. "Business groups are urging Congress to let employers put less money into their pension funds....A provision attached to the Senate highway bill would change the formula many large companies...must use to calculate how much to add to their pension funds, potentially shrinking their combined contributions by billions of dollars a year."

CLASSROOM APPLICATION: The article is useful to discuss laws governing required funding of pension plans when introducing accounting for defined benefit pension plans. A graphic in the article clearly shows numbers of workers covered by defined benefit versus defined contribution plans in certain industries and in the U.S. as a whole.

QUESTIONS:
1. (Advanced) What is the difference between defined benefit and defined contribution pension plans?

2. (Introductory) According to the article, what portion of U.S. workers is covered by each of these types of plans?

3. (Advanced) Summarize the process to account for defined benefit pension plans.

4. (Advanced) Cite the authoritative accounting literature that establishes the accounting and reporting requirements for pension obligations by companies offering the plans.

5. (Introductory) Based on your reading of the article, how are the requirements for companies to fund their pension plans established in the U.S.? What factors are included in the formula for this requirement?

6. (Advanced) What interest and discount rates influence pension calculations? In your answer, consider both accounting requirements and funding requirements.

7. (Introductory) How are today's interest rates influencing the amount that companies are required to fund for their pension plans? How are companies trying to change that influence?

Reviewed By: Judy Beckman, University of Rhode Island

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

"Companies' Pension Plea," by: Kristina Peterson, March 6, 2012 ---
http://online.wsj.com/article/SB10001424052970204276304577261383973978306.html?mod=djem_jiewr_AC_domainid

Business groups are urging Congress to let employers put less money into their pension funds, saying that exceptionally low interest rates are forcing them to set aside too much cash.

A provision attached to the Senate highway bill would change the formula many large companies, including General Electric Co., Boeing Co. and Lockheed Martin Corp., must use to calculate how much to add to their pension funds, potentially shrinking their combined contributions by billions of dollars a year.

Though its chances of becoming law aren't clear, the measure holds appeal in Congress because it would increase the government's near-term revenues, offsetting some of the costs of the highway bill. Setting aside less for pensions would leave companies with smaller tax deductions, requiring them to pay about $7.1 billion more in taxes over 10 years than under current law, according to Congress's Joint Committee on Taxation. [PENSIONS]

The proposed change would apply to private-sector defined-benefit pension plans, which promise a specified amount of retirement pay. Though millions of Americans are covered by such plans, their prevalence has declined in past decades as companies have shifted to 401(k)s and other retirement plans that don't guarantee payouts.

Labor unions are open to changing the contribution formula, but say that Congress shouldn't allow companies to underfund their pension plans, as has happened already in some cases.

Companies with defined-benefit plans are required to use a "discount rate," based on a specific mix of corporate bond yields over the past two years, to help determine how much to contribute to their plans each year to meet their obligations. The rate varies by company.

Since companies use the discount rate to calculate the present value of benefits it owes retired workers in the future, the lower the rate, the more the company must contribute to its plans. GE said in its annual report that its 2011 pension expenses rose by about $7.4 billion because its discount rate dropped to 4.2% at the end of 2011 from 5.3% at the end of 2010.

GE didn't comment beyond the annual report.

Business groups argue that the two-year window used in the current discount-rate formula is too narrow, leaving companies vulnerable to short-term swings in interest rates.

The provision in the highway bill would extend the window, keeping the discount rate within 15% of an average of corporate bond rates over the preceding 10 years. A coalition including the U.S. Chamber of Commerce, National Association of Manufacturers, American Benefits Council and the ERISA Industry Committee is pushing to calculate the discount rate over a longer time period, keeping it within 10% of a 25-year average.

Continued in article

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

Question
What do American Airlines pensions have to do with funding of the Iraq war?

Answer
Plenty, but who knows why?

A pension measure tucked into last month’s Iraq war spending bill is causing some leading members of Congress to complain that American Airlines got a break worth almost $2 billion without proper scrutiny. The measure will allow American to greatly reduce its payments into its pension fund over the next 10 years. At the end of 2006, the fund had assets of $8.5 billion and needed an additional $2.5 billion to cover all its obligations. The new provision will allow American to recalculate those numbers, so that the shortfall disappears and the plan looks fully funded. Continental, along with a small number of regional airlines and a caterer, will also be able to take advantage of the provision. But American, the nation’s largest airline, is by far the biggest beneficiary, according to government calculations. Some lawmakers who would normally be involved in tax and pension measures say they were shut out of the process.
Mary Williams Walsh, "Pension Relief for Airlines Faulted by Some Legislators," The New York Times, June 21, 2007 --- http://www.nytimes.com/2007/06/21/business/21pension.html?ref=business

Jensen Comment
This was not enough to save AMR. American Airlines eventually declared bankruptcy in 2011.

From The Wall Street Journal Accounting Weekly Review on March 9, 2012

AMR Retreats on Terminating Pension Plans
by: Susan Carey
Mar 07, 2012
Click here to view the full article on WSJ.com

TOPICS: Advanced Financial Accounting, Bankruptcy, Pension Accounting

SUMMARY: This is the third in a series of articles this week on pension plans. "AMR Corp., which told employees at its American Airlines unit five weeks ago that it intended to terminate their four underfunded pension plans, reversed course Wednesday and said it has found a solution that would allow it to pursue a freeze of three of the plans." The article describes the unfunded status of the plans and the Pension Benefit Guaranty Corp. reaction to the company's plans.

CLASSROOM APPLICATION: This article covers AMR Corp.'s unfunded pension plans and the company's planned action as it proceeds through bankruptcy court, again useful in covering pension accounting and reporting.

QUESTIONS:
1. (Advanced) What is AMR Corp.? What event is this company currently going through?

2. (Introductory) What is the funded status of AMR Corp.'s pension plans? Summarize this answer numerically, based on information in the article.

3. (Introductory) How many pension plans does AMR Corp. have? What difference among these plans is leading the company to treat them differently?

4. (Advanced) What is the Pension Benefit Guaranty Corp. (PBGC)?

Reviewed By: Judy Beckman, University of Rhode Island

"AMR Retreats on Terminating Pension Plans," by: Susan Carey, The Wall Street Journal, March 7, 2012 ---
http://online.wsj.com/article/SB10001424052970204781804577267453176169244.html?mod=djem_jiewr_AC_domainid

AMR Corp., which last month told employees at its American Airlines unit that it intended to terminate their four underfunded pension plans, reversed course Wednesday, saying it had found a solution that would let workers covered by three of the plans keep the benefits they have accrued so far.

The company's decision to freeze, rather than terminate, the three plans could help the carrier win cost-saving concessions in negotiations with its unions, but it also will require AMR to seek an unspecified amount of new capital during its bankruptcy proceedings.

The fourth pension plan, which covers American's pilots, is more problematic, the company said in letters to employees Wednesday. But AMR said it is committed to working with the pilots union, the Pension Benefit Guaranty Corp. and other creditors to find alternatives to terminating it.

AMR filed for bankruptcy protection in late November and has identified $2 billion in annual cost-savings it says it must achieve as part of its reorganization. Of that sum, it is targeting $1.25 billion from employees. The new tack on pensions doesn't mean it will raise its employee cost-savings target, AMR said, but it adds to the urgency of winning those savings. without delay

Jeff Brundage, American's senior vice president of human resources, said freezing the three plans would require AMR to seek out new capital, as part of its plan of reorganization, to cover the cost of funding the frozen plans and help reduce the pension liabilities it will continue to have on its balance sheet. Freezing the plans means management and nonunion employees, flight attendants and mechanics and ramp workers would retain the full value of the benefits they accrued before the freeze date.

Enlarge Image AMR AMR Bloomberg News

American's Jeff Brundage says the company's plan calls for new capital.

Those defined-benefit plans, which promise a set level of payments, would then been succeeded by 401(k) plans, with employees managing their own investments and without guaranteed payouts.

The pilots pension plan poses a thornier problem for the company because it allows pilots to elect a lump-sum pension payment when they retire.

AMR is concerned that when it emerges from court restructuring, a potential mass exodus of pilots seeking to receive lump sums from a frozen plan would have "a severe, detrimental impact on our operations, and (that) is a risk the company simply cannot afford to take," Mr. Brundage said.

More than half the carrier's 10,000 pilots are currently eligible to retire. "Unless we are able to address the lump-sum issue, a freeze scenario cannot even be considered." But the company will continue to look for options that would allow it to freeze the pilot's plan as well, he said.

The PBGC, a government insurer of private-sector pension plans, has been urging AMR for the past three months to find a way to retain its pension plans and not dump them on the agency, leaving some workers and retirees to receive less than they would otherwise.

On Wednesday, Josh Gotbaum, the PBGC's director, called American's new approach "great progress and good news." Bankruptcy forces tough choices, he said, "but that doesn't mean pensions must be sacrificed for companies to succeed." More

Air France Faces Turbulent Turnaround

The Middle Seat: The Cost of Leaving Devices on

American's four plans cover 130,000 workers and retirees. The PBGC estimates the plans have assets of $8.3 billion to cover about $18.5 billion in benefits. If AMR terminated the plans with the assent of the bankruptcy judge, the PBGC would assume their assets and most of their liabilities and be responsible for paying benefits to American retirees. But the PBGC already has a record $26 billion deficit.

American is hoping to get concessions in new labor contracts with its unions to achieve the targeted cost savings. Among the givebacks the company is seeking are an end to retiree medical benefits, the elimination of 13,000 jobs, closure of a maintenance base and increased productivity from its workers through more hours flown per month and other measures. The negotiations haven't gone well, leading to finger pointing on both sides.

The Fort Worth, Texas, company has criticized its unions for dawdling, and the unions have complained that the company isn't negotiating in good faith. If they can't agree, American has said it will make a case in bankruptcy court that its current labor agreements be abrogated so the company can impose the new terms on its unionized workers.

Mr. Brundage said Wednesday that the change in the pension strategy "would remove a major obstacle to reaching consensual agreements and help to spark needed urgency at the bargaining table." He said the company and the Transport Workers Union, which faces the potential for 9,000 job cuts, already have reached tentative agreement on a pension freeze. The executive said AMR hopes for a similar outcome with flight attendants.

The TWU "drew a line in the sand" and said a pension termination was "totally unacceptable," said James C. Little, international president of the union. The TWU proposed a pension freeze instead, and AMR agreed to drop its demand for an additional $600 million to $800 million in concessions, he said, which the company claimed was the cost of a pension-plan freeze.

Continued in article

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

From The Wall Street Journal Accounting Weekly Review on March 9, 2012

Next Pension Clash: Law Firms
by: Jennifer Smith
Mar 05, 2012
Click here to view the full article on WSJ.com

TOPICS: Advanced Financial Accounting, Pension Accounting

SUMMARY: "At some of the country's top [law] firms, younger lawyers will foot the bill for deluxe pension plans that could drag down their own earnings for years to come....Partners at some elite firms are often entitled to between 20% to 30% of their peak pay after retirement-in many cases, for life, according to partners and law firm consultants." These defined benefit pension plans are usually unfunded, "instead, most law firms with such plans pay the benefits as they go, using a portion of their current profits." Yet "...the corporate legal industry is finding it harder than ever to boost earnings....[and] firms are under mounting pressure to lower their billing rates."

CLASSROOM APPLICATION: The article is useful to encourage students to think about pension plan obligations when those benefits are not funded, leading into a useful discussion about presentation of a plan with a funded status.

QUESTIONS:
1. (Advanced) As stated in the article, the issues facing prestigious law firms "mirror the similar problems across the U.S." What has happened to pension plans at many U.S. companies?

2. (Advanced) What does it mean to fund a pension plan and, in contrast, to "pay as you go"?

3. (Introductory) "According to one estimate by law firm consultant Peter Giuliani, the current pension liability at a typical large New York firm with an unfunded plan could amount to $200 million, if the firm had to make the total payout today." How is such an amount calculated?

4. (Advanced) Refer again to the estimate for law firms' obligation to pay future pension benefits. If you could view these law firms' financial statements, would this amount be included? If so, where? Explain your reasoning.

Reviewed By: Judy Beckman, University of Rhode Island

"Next Pension Clash: Law Firms," by: Jennifer Smith, The Wall Street Journal, March 5, 2012 ---
http://online.wsj.com/article/SB10001424052970204571404577258082978298056.html?mod=djem_jiewr_AC_domainid

Retirement should be a happy time for a generation of baby boom-era lawyers near the end of their working lives. Less joy may await the partners they'll leave behind.

At some of the country's top firms, younger lawyers will foot the bill for deluxe pension plans that could drag down their own earnings for years to come.

These pensions are largely unfunded: there is no money saved to pay retirees. Instead, most law firms with such plans pay the benefits as they go, using a portion of their current profits.

Partners at some elite firms are often entitled to between 20% to 30% of their peak pay after retirement—in many cases, for life, according to partners and law firm consultants. For the most profitable firms, that could mean payments of $400,000 to $600,000 a year per retired lawyer.

Many law firms have moved to phase out unfunded pension plans. But those that haven't must pay them at a time when the corporate legal industry is finding it harder than ever to boost earnings. While law-firm profits are slowly improving after the recession, earnings have lagged behind previous years. Firms are under mounting pressure to lower their billing rates.

Given those conditions, "it creates a significant burden on the younger partners," says Dan DiPietro, chairman of Citi Private Bank's law-firm group.

The pension plans were devised decades earlier when life expectancy was lower and firms had fewer partners. That was before tax law changes in the 1980s made other retirement options more attractive for lawyers and law firms. But these pensions are still offered by a core slice of the most profitable law firms in the country, such as Gibson Dunn & Crutcher LLP and Davis Polk & Wardwell LLP.

Few attorneys will complain as long as profits keep up. The trouble starts if payments to retirees grow faster than profits.

"It's a real problem in this environment for a law firm to pay 10 or 15 cents out of every dollar of revenue to partners who have retired from the law firm," says a senior partner at one firm with a generous pension plan.

Some managing partners at elite firms that still offer generous pensions say that such plans help build loyalty and retain top talent. "Partners take comfort in the fact that it is there. I think it's an important part of our culture," said Kenneth Doran, managing partner at Gibson Dunn & Crutcher.

The pensions often come on top of other retirement programs, such as 401Ks, in which participants save for their retirement by putting away a portion of their earnings on a tax-deferred basis (often with a company match). Some firms also have profit-sharing plans.

In its own way, the future liabilities for some top law firms mirror similar problems across the U.S. Benefits promised in more stable economic times seem increasingly unsustainable today. From General Motors Co. and AT&T Inc. to cash-strapped local governments employing public workers, pension liability is becoming a growing concern as the retiree pool swells.

"It's the same thing you had with pensions in the private sector, where it was all defined benefits and companies were going bankrupt," says James Jones, a former managing partner at Arnold & Porter LLP who is now a senior fellow at Georgetown University's Center for the Study of the Legal Profession.

Among law firms, hefty pension obligations also can jettison potential mergers or compound financial woes. For instance, some blamed the 2009 collapse of the Philadelphia firm Wolf, Block, Schorr & Solis-Cohen LLP—which followed a failed merger attempt in 2008—in part on its leadership's refusal to scale back their unfunded pension plan.

At Gibson Dunn, partners who serve there for 20 years get a retirement benefit at age 60 that pays out 20% of their top compensation. At current profits, that could amount to $500,000 a year for eight years or life—whichever is longer. Surviving spouses would get the remaining benefit should a partner die before the eight years are up.

Gibson Dunn reported record earnings in 2011, with gross revenue of $1.7 billion and average profit per partner at $2.47 million. Mr. Doran says his firm guards against burdening active partners with "runaway obligations" by capping pension payments at 6% of the firm's net income.

Just how large such obligations loom is difficult to determine. U.S. law firms don't disclose financial details. Few lawyers feel comfortable discussing the subject of partner retirement benefits.

Top firms with unfunded pensions include Cleary Gottlieb Steen & Hamilton LLP; Cravath, Swaine & Moore LLP; Debevoise & Plimpton LLP; Fried, Frank, Harris, Shriver & Jacobson LLP; and Milbank, Tweed, Hadley & McCloy LLP, according to data compiled by the American Lawyer magazine. Those firms declined to comment.

According to one estimate by law firm consultant Peter Giuliani, the current pension liability at a typical large New York firm with an unfunded plan could amount to $200 million—if the firm had to make the total payout today.

His calculations are based on a firm of 175 partners with an equity stake and average annual earnings of $2 million per partner, with about 20% of the partners near retirement age. The pension would pay out over two decades. That liability could be much higher at the most profitable firms, according to several people with knowledge of finances at some top law firms.

Continued in article

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

"Tax planning for parents of college students: Help clients form a strategy from the Code's array of options," by Joseph D. Beams andJohn W. Briggs," Journal of Accountancy, March 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Mar/20114558.htm

As parents plan for their children’s higher education, they may choose from an array of tax-favored savings vehicles and deductions and credits. Options include education savings plans, education credits, deduction of educational expenses, education savings bonds, education loans and other alternatives. No single option works best for everyone, but by reviewing the pros and cons of each alternative, families can choose a strategy that best meets their needs.

Since planning for college education should start when children are young, CPA tax practitioners should offer these services to new parents as well as those with children currently in college. Yearly tax organizers should include questions about tax planning for college. When conducting yearend tax planning for parents of college students, CPAs should discuss related issues, including the dependency exemption on parents’ returns during their children’s college years.

As the need for a college degree has increased, the cost of going to college has also increased. According to The College Board, for the 2011–2012 academic year, the average annual in-state tuition and fees at a public four-year college are $8,244, and the average total out-of-state tuition and fees are $20,770. The average annual tuition and fees at private nonprofit colleges are $28,500 (tinyurl.com/45joe2). These costs do not include room and board, books or supplies. According to The Project on Student Debt, the average college senior graduating in 2010 owed $25,250 in student loans (tinyurl.com/4yv5t7z). Families therefore have good reason to start saving toward these costs while their children are young. Savings vehicles include Sec. 529 plans, education savings bonds and Coverdell education savings accounts (Coverdell ESAs). All of these plans have their merits. (See the SEC’s overview of Sec. 529 plans at tinyurl.com/d8ojwwg.) Families without savings can still take advantage of the following tax incentives once their children are in college.

Continued in article

Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Department of Labor (DOL) --- http://en.wikipedia.org/wiki/United_States_Department_of_Labor

"EBSA Cracks Down on Retirement Plan Advisors: Advisors take heed: The DOL arm that rides herd over retirement plans is ramping up its enforcement efforts," by Melanie Waddell, AdvisorOne, March 26, 2012 ---
http://www.advisorone.com/2012/03/26/ebsa-cracks-down-on-retirement-plan-advisors?t=legal-compliance

Prominent retirement planning officials are warning advisors to make sure that the retirement plans they advise are compliant with Department of Labor rules, as the DOL’s regulatory arm responsible for policing these plans is cracking down.

So far this year, the DOL’s Employee Benefits Security Administration (EBSA) has significantly raised its enforcement efforts in what Andy Larson, director of the Retirement Learning Center, says should serve as a wake-up call to advisors who advise retirement plans and plan sponsors.

In 2011, EBSA said it had closed 3,472 civil cases and obtained monetary results of nearly $1.39 billion. EBSA also closed 302 criminal cases that resulted in 129 individuals being indicted and 75 cases being closed with guilty pleas or convictions. DOL also wants to increase the number of its enforcement personnel from 913 to 1,003 this year.

Larson says those EBSA enforcement numbers are “astonishing” and warns that many advisors are surprisingly still unaware that the DOL has jurisdiction over them.

What’s the biggest area EBSA is zeroing in on? Fiduciary negligence. EBSA is “seeing very high levels of non-compliance with fiduciary” duties. When the EBSA releases its reproposed fiduciary rule in the first half of this year, the rule “will affect advisors and their fiduciary role,” not plan sponsors, Larson says.

In light of this, Larson said, advisors should ensure they have a “strong documentable fiduciary process.”

As Larson notes, since the Employee Retirement Income Security Act (ERISA) was put into place, DOL and the Internal Revenue Service’s Employee Plans Unit have had joint authority “to ride herd” over retirement plans. But service providers have gotten accustomed to the IRS taking the lead in enforcement actions, and have failed to notice over the last two years that the EBSA “is showing up through the unlocked back door and finding problems,” Larson says.

Because the IRS has been the primary enforcer of ERISA rules, “service providers have developed their models to include mechanisms with IRS requirements,” but may have failed to include “DOL-type protections in their service models,” Larson says.

Continued in article

Bob Jensen's helpers (not advice) for personal finance ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

A Teaching Case Featuring an Article by NYU Accounting Professor Baruch Lev

From The Wall Street Journal Accounting Weekly Review on March 2, 2012

The Case for Guidance
by: Baruch Lev
Feb 27, 2012
Click here to view the full article on WSJ.com

TOPICS: Earnings Forecasts, Earnings Management

SUMMARY: This is the first of three articles in the WSJ's Section on Leadership in Corporate Finance published on Monday, February 27, 2012. Baruch Lev, the Philip Bardes Professor of Accounting and Finance at NYU's Stern School of Business offers arguments in favor of publicly traded companies' managements issuing earnings guidance. He has recently published a book entitled "Winning Investors Over."

CLASSROOM APPLICATION: The article is useful for any financial reporting class to introduce the notions of management earnings guidance, analyst earnings forecasts, and the arguments for and against this information dissemination process. It is as well useful to highlight the usefulness of academic research in finance and accounting.

QUESTIONS:
1. (Introductory) What is management guidance? To whom is it directed?

2. (Introductory) What is the trend regarding the number of publicly traded U.S. firms providing management guidance?

3. (Advanced) What is the difference between annual guidance and quarterly guidance? What are the trends in regarding the numbers of companies providing each of these?

4. (Introductory) What are the arguments often presented against companies providing annual earnings guidance?

5. (Introductory) What are the author's counterarguments to those points?

6. (Introductory) What does Dr. Lev say about management's need for the information that is used to develop and present management earnings guidance?

7. (Advanced) Who is Dr. Baruch Lev?

8. (Introductory) What is the source for Dr. Lev's information in writing this article for The Wall Street Journal?

Reviewed By: Judy Beckman, University of Rhode Island

"The Case for Guidance," by Baruch Lev, The Wall Street Journal, February 7, 2012 ---
http://online.wsj.com/article/SB10001424052970203391104577124243623258110.html?mod=djem_jiewr_AC_domainid

Alot of prominent people don't like the idea of giving the market an early heads-up.

Critics, who include Warren Buffett, Al Gore and groups like the Chamber of Commerce, have blasted the practice of issuing "guidance"—advance notices about earnings and other matters. They argue that it wastes managers' time and encourages short-term thinking, and may even drive companies to seek capital overseas instead of in the U.S.

But a host of research—mine and others'—shows that those arguments don't hold up. Guidance benefits investors, companies and managers in a number of ways, such as cutting down shareholder lawsuits and giving the market better data to work with. Indeed, research recently published in the Journal of Accounting and Economics documents a significant stock-price drop for companies that announced they were stopping guidance. Far from a waste of time, guidance is a crucial part of an executive's job.

That said, companies should do it smartly. For one thing, they should issue guidance only when they can predict performance better than analysts—and they should make it part of a broader practice of disclosure that gives investors insight into the company's plans and progress. A Vital Component

Let's start with the most basic argument against guidance: It takes too much time. Critics say executives must set up elaborate and costly forecasting processes, and then answer endless rounds of questions about the numbers they issue. And that prevents them from undertaking other productive activities.

ut guidance requires a negligible investment of time. A CEO who doesn't readily have short- and medium-term performance forecasts shouldn't guide, and shouldn't manage. Guidance also increases the circle of analysts following the firm, since guidance data makes it much easier to do their job. And having lots of analysts on board comes in handy in stock issues and proxy contests.

More broadly, managers gain credibility when they have a track record of issuing accurate guidance. There's also evidence that guidance helps keep management honest. A study from University of Georgia researchers finds that companies that issue guidance are less likely to put out dishonest earnings reports than companies that don't guide.

Critics also say that guidance encourages a futile short-term earnings game. Companies, the argument goes, slash R&D or other long-term initiatives to meet earnings estimates—sacrificing future growth.

But the argument misses a crucial point: Most guidance isn't short-term. It forecasts several quarters ahead, giving companies a chance to fill in details that wouldn't show up in regular financial reports.

For instance, reported earnings don't reflect the progress of the product-development process of innovative companies, such as in biotech. They also ignore recent business initiatives and new contracts signed or canceled, as well as the impact of economic developments—like the European recession—on future performance.

In fact, I further argue that critics are wrong even when companies are providing short-term guidance. For one thing, the game of trying to beat expectations plays out with or without guidance. Doesn't Google, the famous nonguider, aim to beat the consensus? Reducing Uncertainty

More broadly, getting more information out helps everyone involved—shareholders, analysts and companies. By sharing information with the market, companies reduce investor uncertainty and prevent stock prices from swinging wildly upon unexpected bad news. My research shows that managers' quarterly earnings guidance is more accurate than the current analysts' consensus forecast in 70% of cases. Analysts know this and are quick to revise their forecasts upon the release of guidance.

But warning investors about potential disappointments doesn't just help protect them from losses—it helps protects companies, too. Guidance released prior to weak earnings is considered a mitigating factor in shareholder lawsuits, and was shown in a study published in 1997 to reduce settlement figures. (Most shareholder lawsuits are settled.)

There's one more argument the critics often make against guidance: It puts so much pressure on companies that they abandon the U.S. equities market and seek out private equity or foreign listings. But I haven't found a single example of a company taken private or listed abroad whose managers claimed that the "pressure to guide" was a major reason. Besides, isn't it easier just to abstain from guidance? Two-thirds of public companies do just that.

All that said, there are right and wrong ways to do guidance. Here's a look at some basic principles companies should follow.

• Guide when you are a better prognosticator than analysts. For the past three to five years, compare your internal quarterly earnings forecasts with analysts' public forecasts, relative to the subsequently released earnings. If you beat analysts, chalk one up for guidance. If not, how come outsiders know more about your company's future than you do?

• If most of your industry peers release guidance regularly, you don't want to stand out as a refusenik. Investors will suspect that you have something to hide or that you aren't on top of things.

Continued in article

Jensen Comment
Baruch has done a considerable amount of previous accountics research on how to measure and report intangibles and contingency items. I'm sorry to say that over the years I've been mostly critical of that research ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

"The Baloney Detection Kit: A 10-Point Checklist for Science Literacy," by Maria Popova, Brain Pickings, March 16, 2012 --- Click Here
http://www.brainpickings.org/index.php/2012/03/16/baloney-detection-kit/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+brainpickings%2Frss+%28Brain+Pickings%29&utm_content=Google+Reader

Video Not Included Here

The above sentiment in particular echoes this beautiful definition of science as “systematic wonder” driven by an osmosis of empirical rigor and imaginative whimsy.

The complete checklist:

How reliable is the source of the claim?

Does the source make similar claims?

Have the claims been verified by somebody else?

Does this fit with the way the world works?

Has anyone tried to disprove the claim?

Where does the preponderance of evidence point?

Is the claimant playing by the rules of science?

Is the claimant providing positive evidence?

Does the new theory account for as many phenomena as the old theory?

Are personal beliefs driving the claim?

The charming animation comes from UK studio Pew 36. The Richard Dawkins Foundation has a free iTunes podcast, covering topics as diverse as theory of mind, insurance policy, and Socrates’ “unconsidered life.”

In the field of accountics science, accounting researchers seldom ask Questions 3, 5, 7, and 10 above ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Hi Tom,

The study you posted to the AECM was conducted by Harvard Business School accountics scientists. Contemporaneously, similar studies were being conducted elsewhere, notably at the University of Texas. This inspired me to note the following editorial by Steve Kachelmeier.

Former Accounting Review Editor Steve Kachelmeier at various times has argued that although there is an extreme shortage of scientific replications of exacting replications of accountics science research, opportunities arise for simultaneous studies to be taking place that lend some added validity to findings. This is particularly the case in capital markets research were certain events transpire that trigger studies by different teams of researchers.

"Editorial," by Steven J.Kachelmeier, The Accounting Review, Vol. 86, July 2011 ---
http://aaajournals.org/doi/full/10.2308/accr-10046

One of the more surprising things I have learned from my experience as Senior Editor of The Accounting Review is just how often a “hot topic” generates multiple submissions that pursue similar research objectives. Though one might view such situations as enhancing the credibility of research findings through the independent efforts of multiple research teams, they often result in unfavorable reactions from reviewers who question the incremental contribution of a subsequent study that does not materially advance the findings already documented in a previous study, even if the two (or more) efforts were initiated independently and pursued more or less concurrently. I understand the reason for a high incremental contribution standard in a top-tier journal that faces capacity constraints and deals with about 500 new submissions per year. Nevertheless, I must admit that I sometimes feel bad writing a rejection letter on a good study, just because some other research team beat the authors to press with similar conclusions documented a few months earlier. Research, it seems, operates in a highly competitive arena.
Fortunately, from time to time, we receive related but still distinct submissions that, in combination, capture synergies (and reviewer support) by viewing a broad research question from different perspectives. The two articles comprising this issue's forum are a classic case in point. Though both studies reach the same basic conclusion that material weaknesses in internal controls over financial reporting result in negative repercussions for the cost of debt financing, Dhaliwal et al. (2011) do so by examining the public market for corporate debt instruments, whereas Kim et al. (2011) examine private debt contracting with financial institutions. These different perspectives enable the two research teams to pursue different secondary analyses, such as Dhaliwal et al.'s examination of the sensitivity of the reported findings to bank monitoring and Kim et al.'s examination of debt covenants.

Both studies also overlap with yet a third recent effort in this arena, recently published in the Journal of Accounting Research by Costello and Wittenberg-Moerman (2011). Although the overall “punch line” is similar in all three studies (material internal control weaknesses result in a higher cost of debt), I am intrigued by a “mini-debate” of sorts on the different conclusions reached by Costello and Wittenberg-Moerman (2011) and by Kim et al. (2011) for the effect of material weaknesses on debt covenants. Specifically, Costello and Wittenberg-Moerman (2011, 116) find that “serious, fraud-related weaknesses result in a significant decrease in financial covenants,” presumably because banks substitute more direct protections in such instances, whereas Kim et al. (2011) assert from their cross-sectional design that company-level material weaknesses are associated with more financial covenants in debt contracting.

In reconciling these conflicting findings, Costello and Wittenberg-Moerman (2011, 116) attribute the Kim et al. (2011) result to underlying “differences in more fundamental firm characteristics, such as riskiness and information opacity,” given that, cross-sectionally, material weakness firms have a greater number of financial covenants than do non-material weakness firms even before the disclosure of the material weakness in internal controls. Kim et al. (2011) counter that they control for risk and opacity characteristics, and that advance leakage of internal control problems could still result in a debt covenant effect due to internal controls rather than underlying firm characteristics. Kim et al. (2011) also report from a supplemental change analysis that, comparing the pre- and post-SOX 404 periods, the number of debt covenants falls for companies both with and without material weaknesses in internal controls, raising the question of whether the Costello and Wittenberg-Moerman (2011) finding reflects a reaction to the disclosures or simply a more general trend of a declining number of debt covenants affecting all firms around that time period. I urge readers to take a look at both articles, along with Dhaliwal et al. (2011), and draw their own conclusions. Indeed, I believe that these sorts of debates are healthy for the discipline. A little tension and disagreement helps us to advance.

We do not often get a chance to publish concurrent related studies, but I agree with the reviewers of both Dhaliwal et al. (2011) and Kim et al. (2011) that these studies (and I would include Costello and Wittenberg-Moerman [2011] in the set as well) capture useful synergies that justify the publication of all three in top-tier journals. I trust that our readers will share the same reaction.

This type of "validation" goes on much more commonly in capital markets even studies than in other types of accountics science research. The reason is usually because more than one team of researchers note capital markets events worthy of empirical study. This type of thing also happens in real science such as research in physics, chemistry, and medicine. Competition for early publication often makes real scientists rush to be the first researchers to publish findings.

The big difference between accountics science and real science comes after the results are published. Real scientists generally conduct formal replication studies after findings are published. In accountics science such exacting replication research is rare.

See Bob Jensen's Replication Commentaries at
http://www.trinity.edu/rjensen/TheoryTAR.htm#Replication

Here is another example of accountics science styled contemporaneous research that Steve talked about.

"On Enhancing Shareholder Control: A (Dodd-) Frank Assessment of Proxy Access," by Jonathan B. Cohny, Stuart L. Gillan, and Jay C. Hartzell, University of Pennsylvania Law School, July 11, 2011 ---
http://www.law.upenn.edu/academics/institutes/ile/PNYUPapers/2012/Cohn etal_On Enhancing Shareholder Control.pdf

Abstract
The SEC passed a proxy access" rule in 2010 that would permit shareholders to nominate representatives to corporate boards using the company's proxy materials, thereby lowering the cost of exercising shareholder control. We use a series of events in the development of the Dodd-Frank Wall Street Reform and Consumer Protection Act affecting the details of this rule as natural experiments to study the valuation effects of exogenous changes in the degree of shareholder control. We nd that announcement returns associated with events increasing (decreasing) the hurdles to gaining access to a rm's proxy statement are negatively (positively) related to the presence of institutional investors likely to use proxy access to nominate directors. We reach similar conclusions analyzing the consequences of a last-second change to the proxy access rule ultimately adopted by the SEC. Similar effects are not observed for firms that were likely to be unaffected by these events. We also find weak evidence that the increased access to the proxy has a negative effect on the value of firms with shareholders who might have interests other than shareholder value maximization.

"Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge," by Bo Becker, Daniel Bergstresser, and Guhan Subramanian, SSRN, January 19, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1695666
Thank you Tom Selling for the heads up

Abstract:
We use the Business Roundtable’s challenge to the SEC’s 2010 proxy access rule as a natural experiment to measure the value of shareholder proxy access. We find that firms that would have been most vulnerable to proxy access, as measured by institutional ownership and activist institutional ownership in particular, lost value on October 4, 2010, when the SEC unexpectedly announced that it would delay implementation of the Rule in response to the Business Roundtable challenge. We also examine intra-day returns and find that the value loss occurred just after the SEC’s announcement on October 4. We find similar results on July 22, 2011, when the D.C. Circuit ruled in favor of the Business Roundtable. These findings are consistent with the view that financial markets placed a positive value on shareholder access, as implemented in the SEC’s 2010 Rule.

. . .

In a contemporaneous paper, Becker, Bergstresser, and Subramanian (2010) examine announcement returns on October 4, 2010, when the SEC announced that it was delaying implementation of proxy access. They nd that announcement returns surrounding this event date are negatively related to the fraction of a rm's shares held by institutional investors and to the presence of investors identi ed as \activist" using the measure of Greenwood and Schor (2009).10 Thus, their results for a single separate event are directionally consistent with ours.

Bob Jensen's threads on replication in accountics science ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

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

Teaching Case in Advanced Accounting and Financial Statement Analysis

From The Wall Street Journal Accounting Weekly Review on March 2, 2012

What Your Employees Don't Know Will Hurt You
by: Karen Berman and Joe Knight
Feb 27, 2012
Click here to view the full article on WSJ.com

TOPICS: Consolidated Financial Statements, Consulting, Financial Analysis, Financial Literacy, Financial Reporting, Financial Statement Analysis, Interim Financial Statements, Segment Analysis, Segment Margin

SUMMARY: This is the section of three articles in the WSJ's Section on Leadership in Corporate Finance published on Monday, February 27, 2012. The authors are "co-owners of the business Literacy Institute, a Los Angeles-based company that provides financial training, and co-authors..." of a book for managers on understanding financial information. They describe cases in which they have been brought in as consultants by companies to train line managers in financial fundamentals but were not allowed to use the companies' divisional data. The authors argue that employees should at least be given two types of financial information: (1) top line consolidated data, perhaps in meeting for discussion just after quarterly filings for publicly-traded companies; (2) ratio data for metrics pertinent to that portion of the business operation.

CLASSROOM APPLICATION: The article is useful to impart to accounting students just how sensitive and important is the accounting information that they are learning to prepare. It as well may be used in an MBA class to highlight to students the importance of accounting to their studies.

QUESTIONS:
1. (Introductory) What is the occupation of the authors of this article?

2. (Introductory) How commonly have they seen top executive corporate management concerned about sharing financial data? What are their concerns?

3. (Advanced) What are the authors' arguments for sharing financial information with non-executive employees?

4. (Advanced) In what forms do the authors think that financial information should be shared with non-executive employees?

SMALL GROUP ASSIGNMENT:
The authors state that, in their experience, executives' fears about sharing financial data with non-executive employees "are misplaced." Based on the description in the article, describe a possible research study that could assess whether the authors' experience are generalizable to other companies. That is, design a study to assess the outcomes for companies that do and do not share financial information with employees below the executive level.

Reviewed By: Judy Beckman, University of Rhode Island

"What Your Employees Don't Know Will Hurt You," by Karen Berman and Joe Knight, The Wall Street Journal, February 27, 2012 ---
http://online.wsj.com/article/SB10001424052970204740904577193220446383072.html?mod=djem_jiewr_AC_domainid

How reluctant are companies to let their employees see corporate financial information? Consider this:

We were once teaching a financial-fundamentals class to managers of a division of a Fortune 100 company. Since we like to use real data, we asked the company to share with us the division's current revenue, costs and other figures for classroom use.

The company politely declined, saying it didn't want the managers to see the divisional statements—even though those very same numbers would soon appear publicly in the company's annual 10-K report.

Talk about shooting yourself in the foot. And yet this company is hardly alone in its myopia. Our experience is that many, if not most, companies refuse to share much financial data with any employee other than top executives. The unfortunate message this sends to anyone outside the loop: We'll tell you what you need to know. Period. Operating in the Dark

Yet when managers and employees don't see financial data, they don't know critical facts. Is the company's profit healthy or declining? How is our unit doing? Is cash abundant or tight? Are our gross margins bigger or smaller than those of our competitors?

Without such information, people can't make good decisions in their daily work. Sales reps may be tempted to offer hefty discounts just when the company needs to boost gross margin. Engineers may keep proposing additional bells and whistles for the company's latest products even though cash is tight. Plant managers, kept in the dark about warranty expense, may cut corners on quality in hopes of meeting production cost targets.

What's more, sharing the numbers tells employees you think they're an important part of the business. Studies indicate that commitment grows and turnover declines.

The whole idea of sharing financial data gives a lot of old-school managers the willies. And understand, we aren't advocating sharing such sensitive information as salaries. But there are two sets of data that companies can easily share.

The first relates to the big picture. Every public company files consolidated financial statements with the Securities and Exchange Commission once a quarter. Every three months, in other words, the company has a great opportunity to help every manager understand the financial threats and opportunities the business is facing right now.

A well-known videogame company, for example, holds a conference call for all employees after every quarterly earnings call. During the conference call, executives tell associates about the company's results for the quarter; how profit compares with that of last quarter and last year; and what the company's investment figures indicate about management's commitment to the future. Know Your Ratios

A second set of easily shareable numbers relates to business units and jobs. This kind of information isn't usually made public. But a unit's sales force needs to know not only its sales target but also its profit target. And each department needs to monitor its operating-expense ratios to be able to deliver good value.

Professionals in practice groups, too, can benefit. A nonprofit medical practice with nearly 30 facilities in eastern Massachusetts, for example, is sharing profit-and-loss data with staff at each location. The doctors especially are expected to follow the financial information and to help manage each branch's results.

Many top executives worry that managers who see sensitive financial data will somehow abuse it. A few are concerned, for example, that if people see in detail what a company's costs are, they will see that the company makes "big profits" and hence expect raises. Or worse, they might try to sell the data to a competitor.

But in our experience, these fears are misplaced. People who are trusted with sensitive data nearly always respect the trust that is put in them. And even if there are a few bad apples, they are likely to find that the information they see will generate little interest outside the company.

Once a company has decided to share information, the natural follow-up question is a basic one: Who gets to see it? Many companies share their financials only with the managerial or professional ranks. But if managers work better and smarter when they see the numbers, the same probably holds true for other employees, too.

Small companies and units have an advantage here, because the more direct the line of sight from an employee's job to financial results, the more likely it is that people will get interested and begin changing how they do their work. An engineering and manufacturing company in Utah, for example, holds weekly meetings for all staff in which managers discuss the financial performance of every continuing project and the company as a whole. Drive-Through Data

Similarly, we know of a fast-food outlet whose managers taught their young employees to understand a simplified income statement, and then posted each week's revenue, costs and gross profit in the break room. It wasn't long before the workers were doing all they could to boost the gross profit line—particularly since the managers paid modest bonuses based on profitability.

Of course, there are obstacles to financial transparency. Publicly traded corporations can't disseminate consolidated financial data before it is released to the public. Owners of closely held companies may be leery of allowing employees to see profit ratios and other usually confidential numbers.

But many companies find ways around these concerns. A public company can usually share key financial indicators for individual plants, products, or branches. Some closely held companies provide employees with indexed ratios of the company's performance without revealing the actual figures.

Continued in article

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

"Can we talk about lessee accounting...again?" by PwC, March 2, 2012 --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=KOCL-8RZTS7&SecNavCode=MSRA-84YH44&ContentType=Content

Summary:
The February 28-29 joint FASB/IASB board meetings on leases focused on the continued objections from constituents to the 2010 exposure draft's proposed "front-loaded" lessee expense recognition pattern. The boards discussed two possible paths forward, but were unable to reach any tentative decisions and requested that the staff perform further outreach. Read our In brief article for an overview of the two approaches discussed at the meeting.

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

Ernst & Young
Technical Line: Changes in reporting comprehensive income

Many companies will have to change how they present comprehensive income under Accounting Standards Updates 2011-05 and 2011-12. The new guidance is effective for public companies for fiscal years, and interim periods within those years, beginning after 15 December 2011. This means the first quarter of 2012 for calendar year-end public companies. For nonpublic companies, the amendments are effective for fiscal years ending after 15 December 2012 and interim and annual periods thereafter. Retrospective application is required. Early adoption is permitted. Our Technical Line publication describes the new requirements. ---
http://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_BB2310_ComprehensiveIncome_8March2012/$FILE/TechnicalLine_BB2310_ComprehensiveIncome_8March2012.pdf

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

A Teaching Case About Treasury Stock

From The Wall Street Journal Accounting Weekly Review on March 2, 2012

The Pros and Cons of Stock Buybacks
by: Maxwell Murphy
Feb 27, 2012
Click here to view the full article on WSJ.com

TOPICS: Earnings Management, Earnings Per Share, Financial Accounting, Stock Price Effects

SUMMARY: This is the third of three articles in the WSJ's Section on Leadership in Corporate Finance published on Monday, February 27, 2012. This article is useful to introduce the economic reasoning behind treasury stock purchases prior to presenting the accounting for these transactions.

CLASSROOM APPLICATION: The article may be used in any financial accounting class covering treasury stock purchases.

QUESTIONS:
1. (Advanced) What is a stock buyback? What term do we use in accounting for this transaction?

2. (Advanced) Summarize the accounting for stock buybacks.

3. (Introductory) What reason does Mr. Milano give for his opinion that "buybacks are...often a bad idea"?

4. (Introductory) What evidence does Mr. Milano give to support his view?

5. (Advanced) One of the reasons Mr. Tilson acknowledges that buybacks are often poorly considered by the managements who conduct them is that they focus on "propping up share price." Mr. Milano notes that stock buybacks increase earnings per share. How do stock buybacks have these effects? Do the share price effects stem from increasing earnings per share? Support your answer.

6. (Advanced) List the other two of Mr. Tilson three examples of "the wrong reasons" to conduct a stock buyback and explain how buybacks produce these two effects.

Reviewed By: Judy Beckman, University of Rhode Island

"The Pros and Cons of Stock Buybacks," by Maxwell Murphy, The Wall Street Journal, February 27, 2012 ---
http://online.wsj.com/article/SB10001424052970203824904577213891035614390.html?mod=djem_jiewr_AC_domainid

As share buybacks climb toward record, prerecession levels, the debate over the tactic is heating up.

Companies sitting on piles of cash are under increasing pressure to return that value to shareholders, but are buybacks the best way to do that? Or should companies raise dividends, use the money for acquisitions or invest it in their business instead?

We invited two Wall Street personalities with strong views on the issue to participate in an email discussion of the merits and drawbacks of stock buybacks.

Whitney R. Tilson is the founder and managing partner of T2 Partners LLC, a New York hedge fund, and an outspoken proponent of share repurchases.

Gregory V. Milano is the co-founder and chief executive of Fortuna Advisors LLC, a corporate-finance consulting firm based in New York, who rarely encounters a buyback he considers the best use of a company's cash.

Here are edited excerpts of their discussion. Crowding Out

WSJ: Mr. Milano, why you do think buybacks are so often a bad idea?

MR. MILANO: Though some are successful with share repurchases, the evidence overwhelmingly shows that heavy buyback companies usually create less value for shareholders over time.

Many managements have become so infatuated with how buybacks increase earnings per share that these distributions are crowding out sound business investments that create more value over time.

In one study, those that reinvested a higher percentage of their cash generation into capital expenditures, research and development, cash acquisitions and working capital delivered substantially higher total shareholder return than those that reinvested less.

The problem with buybacks is considerably compounded by poor timing: the propensity to buy when the price is high and not when it's low. A measure called buyback effectiveness compares the buyback return on investment to total shareholder return, and indicates whether the company buys low or high relative to the share price trend. From 2008 through mid 2011, nearly two out of three companies in the S&P 500 had negative buyback effectiveness.

Most academic research shows that share prices typically increase when buybacks are announced, which benefits short-term owners. For those interested in long-term value creation, which should be the focus of managements and boards, the evidence convincingly shows that buybacks usually do not help.

WSJ: Mr. Tilson, what makes buybacks work for investors, rather than against them?

MR. TILSON: I agree with Greg that most companies do not think or act sensibly regarding share repurchases and therefore end up destroying value.

It never ceases to amaze me—and, when a company we own does the wrong thing, infuriate me—how few companies think sensibly about this topic and thus buy back stock for all the wrong reasons: to prop up the price, signal "confidence," offset options dilution, etc.

But the same could be said of acquisitions, and does anyone believe that all acquisitions are bad? Share repurchases, like acquisitions, can create enormous long-term shareholder value if done properly.

Warren Buffett, in his 1999 letter to Berkshire Hathaway shareholders, perfectly captures the key elements of a smart share repurchase program:

"There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds—cash plus sensible borrowing capacity—beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated."

In other words, once a business has a strong balance sheet, then it should first take its excess cash/cash flow and reinvest in its own business—if (and only if) it can generate high rates of return on such investment.

Then, if it still has cash/cash flow left over, it should return it to shareholders, who are, after all, the owners of the business—it's their cash. But this raises the question of whether cash should be returned via dividends or share repurchases.

That depends on the price of the stock versus its intrinsic value.

My rule of thumb is that if the stock is trading within 20% of fair value, then the company should use dividends; if it's trading at greater than a 20% discount, buybacks. If it's trading at a big premium to fair value, then the company should issue stock, via compensation to employees, a secondary offering and/or as an acquisition currency. Getting It Wrong

MR. MILANO: I agree with the Warren Buffett quote completely, and Whitney's view on how often managements get it wrong is really one of my main principles.

As an investment banker at Credit Suisse in 2007 I visited scores of companies to explain that their share prices were so high that the expectations they needed to achieve just to justify their price, let alone grow it, were unrealistic in a world where we experience the ups and downs of business cycles. I suggested they use convertible-debt financing to fund their growth.

Continued in article

Treasury Stock --- http://en.wikipedia.org/wiki/Treasury_stock

"PCAOB Faults BDO USA for Audit Failures." by Michael Cohn, Accounting Today, March 5, 2012 ---
http://www.accountingtoday.com/news/PCAOB-Faults-BDO-USA-Audit-Failures-61932-1.html

The Public Company Accounting Oversight Board has issued its latest inspection report on BDO USA and found several audit failures and deficiencies.

The PCAOB reviewed 31 audits and found significant deficiencies with audits of eight companies in the board’s 2010 inspection of the firm.

“The inspection team identified matters that it considered to be deficiencies in the performance of the audit work it reviewed,” said the PCAOB report. “Those deficiencies included failures by the firm to identify, or to address appropriately, financial statement misstatements, including failures to comply with disclosure requirements, as well as failures by the firm to perform, or to perform sufficiently, certain necessary audit procedures. In some cases, the conclusion that the firm failed to perform a procedure was based on the absence of documentation and the absence of persuasive other evidence, even if the firm claimed to have performed the procedure.”

Continued in article

This is not the first time BDO has been in trouble with the PCAOB.
Bob Jensen's threads on BDO are at
http://www.trinity.edu/rjensen/Fraud001.htm

Phony Education and Training Search Sites

These phony education search programs sponsored by for-profit universities are getting a bit more sophisticated by salting a very few not-for-profit programs to make you think they are legitimate education and training search programs. But in reality they are still phony for-profit university search sites.

For example, I read in my old zip code 78212 into the search site http://lpntobsnonline.org/

Sure enough, up pops the University of Phoenix and other for-profit university alternatives. No mention is made of San Antonio's massive University of Texas Health Science Nursing Alternative and other non-for-profit nursing education alternatives in the area.

Boo/poo on this http://lpntobsnonline.org/ site!

Sometimes there's useful information on phony distance education promotion sites for for-profit universities
The supposed 100 Best Blogs for Economics Students ---
http://www.onlineuniversities-weblog.com/50226711/100-best-blogs-for-econ-students.php

For-profit universities provide some free Website services in an effort to lure people into signing up for for-profit programs without ever mentioning that in most instances the students would be better off in more prestigious non-profit universities such as state-supported universities with great online programs and extension services.

I'm bombarded with messages like the following one from ---
http://www.paralegal.net/

Then go to the orange box at http://www.paralegal.net/more/
If you feed in the data that you're interested in a bachelor's degree in business with an accounting concentration, the only choices given are for-profit universities. No mention is made of better programs at the Universities of Wisconsin, Maryland, Connecticut, Massachusetts, etc.

I've stopped linking to the many for-profit university promotional sites because they are so misleading.
My threads on distance education alternatives are at
http://www.trinity.edu/rjensen/Crossborder.htm

One way for these so-called distance education search engines to become more legitimate would be to add top not-for-profit distance education programs to their search engine databases.

"'U.S. News' Sizes Up Online-Degree Programs, Without Specifying Which Is No. 1," by Nick DeSantis, Chronicle of Higher Education, January 10, 2012 ---
http://chronicle.com/article/US-News-Sizes-Up/130274/?sid=wc&utm_source=wc&utm_medium=en

U.S. News & World Report has published its first-ever guide to online degree programs—but distance-education leaders looking to trumpet their high rankings may find it more difficult to brag about how they placed than do their colleagues at residential institutions.

Unlike the magazine's annual rankings of residential colleges, which cause consternation among many administrators for reducing the value of each program into a single headline-friendly number, the new guide does not provide lists based on overall program quality; no university can claim it hosts the top online bachelor's or online master's program. Instead, U.S. News produced "honor rolls" highlighting colleges that consistently performed well across the ranking criteria.

Eric Brooks, a U.S. News data research analyst, said the breakdown of the rankings into several categories was intentional; his team chose its categories based on areas with enough responses to make fair comparisons.

"We're only ranking things that we felt the response rates justified ranking this year," he said.

The rankings, which will be published today, represent a new chapter in the 28-year history of the U.S. News guide. The expansion was brought on by the rapid growth of online learning. More than six million students are now taking at least one course online, according to a recent survey of more than 2,500 academic leaders by the Babson Survey Research Group and the College Board.

U.S. News ranked colleges with bachelor's programs according to their performance in three categories: student services, student engagement, and faculty credentials. For programs at the master's level, U.S. News added a fourth category, admissions selectivity, to produce rankings of five different disciplines: business, nursing, education, engineering, and computer information technology.

To ensure that the inaugural rankings were reliable, Mr. Brooks said, U.S. News developed its ranking methodology after the survey data was collected. Doing so, he said, allowed researchers to be fair to institutions that interpreted questions differently.

Some distance-learning experts criticized that technique, however, arguing that the methodology should have been established before surveys were distributed.

Russell Poulin, deputy director of research and analysis for the WICHE Cooperative for Educational Technologies, which promotes online education as part of the Western Interstate Commission for Higher Education, said that approach allowed U.S. News to ask the wrong questions, resulting in an incomplete picture of distance-learning programs.

"It sort of makes me feel like I don't know who won the baseball game, but I'll give you the batting average and the number of steals and I'll tell you who won," he said. Mr. Poulin and other critics said any useful rankings of online programs should include information on outcomes like retention rates, employment prospects, and debt load—statistics, Mr. Brooks said, that few universities provided for this first edition of the U.S. News rankings. He noted that the surveys will evolve in future years as U.S. News learns to better tailor its questions to the unique characteristics of online programs.

W. Andrew McCollough, associate provost for information technology, e-learning, and distance education at the University of Florida, said he was "delighted" to discover that his institution's bachelor's program was among the four chosen for honor-roll inclusion. He noted that U.S. News would have to customize its questions in the future, since he found some of them didn't apply to online programs. He attributed that mismatch to the wide age distribution and other diverse demographic characteristics of the online student body.

The homogeneity that exists in many residential programs "just doesn't exist in the distance-learning environment," he said. Despite the survey's flaws, Mr. McCollough said, the effort to add to the body of information about online programs is helpful for prospective students.

Turnout for the surveys varied, from a 50 percent response rate among nursing programs to a 75 percent response rate among engineering programs. At for-profit institutions—which sometimes have a reputation for guarding their data closely—cooperation was mixed, said Mr. Brooks. Some, like the American Public University System, chose to participate. But Kaplan University, one of the largest providers of online education, decided to wait until the first rankings were published before deciding whether to join in, a spokesperson for the institution said.

Though this year's rankings do not make definitive statements about program quality, Mr. Brooks said the research team was cautious for a reason and hopes the new guide can help students make informed decisions about the quality of online degrees.

"We'd rather not produce something in its first year that's headline-grabbing for the wrong reasons," he said.

'Honor Roll' From 'U.S. News' of Online Graduate Programs in Business

Institution Teaching Practices and Student Engagement Student Services and Technology Faculty Credentials and Training Admissions Selectivity

Arizona State U., W.P. Carey School of Business 24 32 37 11

Arkansas State U. 9 21 1 36

Brandman U. (Part of the Chapman U. system) 40 24 29 n/a

Central Michigan U. 11 3 56 9

Clarkson U. 4 24 2 23

Florida Institute of Technology 43 16 23 n/a

Gardner-Webb U. 27 1 15 n/a

George Washington U. 20 9 7 n/a

Indiana U. at Bloomington, Kelley School of Business 29 19 40 3

Marist College 67 23 6 5

Quinnipiac U. 6 4 13 16

Temple U., Fox School of Business 39 8 17 34

U. of Houston-Clear Lake 8 21 18 n/a

U. of Mississippi 37 44 20 n/a

Source: U.S. News & World Report

Institution	Teaching Practices and Student Engagement	Student Services and Technology	Faculty Credentials and Training	Admissions Selectivity
Arizona State U., W.P. Carey School of Business	24	32	37	11
Arkansas State U.	9	21	1	36
Brandman U. (Part of the Chapman U. system)	40	24	29	n/a
Central Michigan U.	11	3	56	9
Clarkson U.	4	24	2	23
Florida Institute of Technology	43	16	23	n/a
Gardner-Webb U.	27	1	15	n/a
George Washington U.	20	9	7	n/a
Indiana U. at Bloomington, Kelley School of Business	29	19	40	3
Marist College	67	23	6	5
Quinnipiac U.	6	4	13	16
Temple U., Fox School of Business	39	8	17	34
U. of Houston-Clear Lake	8	21	18	n/a
U. of Mississippi	37	44	20	n/a

Jensen Comment
I don't know why the largest for-profit universities that generally provide more online degrees than the above universities combined are not included in the final outcomes. For example, the University of Phoenix alone as has over 600,000 students, most of whom are taking some or all online courses.

My guess is that most for-profit universities are not forthcoming with the data requested by US News analysts. Note that the US News condition that the set of online programs to be considered be regionally accredited does not exclude many for-profit universities. For example, enter in such for-profit names as "University of Phoenix" or "Capella University" in the "College Search" box at
http://colleges.usnews.rankingsandreviews.com/best-colleges/university-of-phoenix-20988
These universities are included in the set of eligible regionally accredited online degree programs to be evaluated. They just did not do well in the above "Honor Roll" of outcomes for online degree programs.

For-profit universities may have shot themselves in the foot by not providing the evaluation data to US News for online degree program evaluation. But there may b e reasons for this. For example, one of the big failings of most for-profit online degree programs is in undergraduate "Admissions Selectivity."

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

Bob Jensen's threads on for-profit universities operating in the gray zone of fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

Question
Have traditional universities been lax about adopting some of the better (needed) innovations of for-profit universities?

"For-Profit Lessons for All," by Ben Wildavsky, Inside Higher Ed, March 1, 2012 ---
http://www.insidehighered.com/views/2012/03/01/essay-what-nonprofit-higher-ed-can-learn-profit-sector

Jensen Comment
Perhaps the above article overlooked some traditional universities that have innovated along such lines.

Humor Between March 1-31, 2012

No.1 hit: Obama, The Musical (Gilbert & Sullivan Obama Spoof) --- http://www.247comedy.com/obama-musical

Monty Python’s Away From it All: A Twisted Travelogue with John Cleese --- Click Here
http://www.openculture.com/2012/03/monty_pythons_iaway_from_it_alli_a_twisted_travelogue_with_john_cleese.html

Forwarded by Auntie Bev

APHORISM - A short, pointed sentence that expresses a wise or clever observation or a corny, but cute general truth.

1. The nicest thing about the future is . . . that it always starts tomorrow.

2. Money will buy a fine dog, but only kindness will make him wag his tail.

3. If you don't have a sense of humor, you probably don't have any sense at all.

4. Seat belts are not as confining as wheelchairs.

5. A good time to keep your mouth shut is when you're in deep water.

6. How come it takes so little time for a child who is afraid of the dark to become a teenager who wants to stay out all night?

7. Business conventions are important. . .because they demonstrate how many people a company can operate without.

8. Why is it that at class reunions you feel younger than everyone else looks?

9. Scratch a cat . . . and you will have a permanent job.

10. No one has more driving ambition than the teenage boy who wants to buy a car.

11. There are no new sins; the old ones just get more publicity.

12. There are worse things than getting a call for a wrong number at 4 a.m. - like, it could be the right number.

13. No one ever says "It's only a game" when their team is winning.

14. I've reached the age where 'happy hour' is a nap.

15. Be careful about reading the fine print. . . . there's no way you're going to like it.

16. The trouble with bucket seats is that not everybody has the same size bucket.

17. Do you realize that, in about 40 years, we'll have thousands of old ladies running around with tattoos?

(And rap music will be the Golden Oldies!)

18. Money can't buy happiness -- but somehow it's more comfortable to cry in a Cadillac than in a Yugo.

19. After 60, if you don't wake up aching in every joint, you're probably dead.

20. Always be yourself because the people that matter don't mind . . . and the ones that mind don't matter.

21. Life isn't tied with a bow . . . . . . . .. but it's still a gift.

and REMEMBER...."POLITICIANS AND DIAPERS SHOULD BE CHANGED OFTEN AND FOR THE SAME REASON".

Forwarded by Jim

'Whatever you give a woman, she will make greater. If you give her sperm, she'll give you a baby If you give her a house, she'll give you a home. If you give her groceries, she'll give you a meal. If you give her a smile, she'll give you her heart.

She multiplies and enlarges what is given to her. So, if you give her any crap, be ready to receive a ton of shit.'

Forwarded by Jim

This letter was sent to the Principals office after the school had sponsored a luncheon for the elderly. An elderly lady received a new radio at the lunch as a door prize and was writing to say thank you. This story is a credit to all humankind. Forward to anyone you know who might need a lift today..

Dear Kean Elementary:

God bless you for the beautiful radio I won at your recent senior citizens luncheon. I am 84 years old and live at the Sprenger Home for the Aged. All of my family has passed away. I am all alone now and it's nice to know that someone is thinking of me. God bless you for your kindness to an old forgotten lady. My roommate is 95 and has always had her own radio, she would never let me listen to hers, even when she was napping.

The other day her radio fell off the night stand and broke into a lot of pieces. It was awful and she was in tears. Her distress over the broken radio touched me and I knew winning this radio was God's way of answering my prayers. She asked if she could listen to mine, and I told her to kiss my ass.

Thank you for that opportunity.
Sincerely,
Agnes Baker

Forwarded by Auntie Bev

Grins and Snickers

I was in the six item express lane at the store quietly fuming.

Completely ignoring the sign, the woman ahead of me had slipped into the check-out line pushing a cart piled high with groceries. Imagine my delight when the cashier beckoned the woman to come forward looked into the cart and asked sweetly, "So which six items would you like to buy?"

Wouldn't it be great if that happened more often?
------------------------------------------------------------

Because they had no reservations at a busy restaurant, my elderly neighbor and his wife were told there would be a 45-minute wait for a table.

"Young man, we're both 90 years old," the husband said. "We may not have 45 minutes."

They were seated immediately.
------------------------------------------------------------

The reason Politicians try so hard to get re-elected is that they would "hate" to have to make a living under the laws they've passed.

------------------------------------------------------------

All eyes were on the radiant bride as her father escorted her down the aisle. They reached the altar and the waiting groom, the bride kissed her father and placed something in his hand.

The guests in the front pews responded with ripples of laughter. Even the priest smiled broadly.

As her father gave her away in marriage, the bride gave him back his credit card.

------------------------------------------------------------

Women and cats will do as they please, and men and dogs should relax and get used to the idea.

------------------------------------------------------------

Three friends from the local congregation were asked, "When you're in your casket, and friends and congregation members are mourning over you, what would you like them to say?"

Artie said, "I would like them to say I was a wonderful husband, a fine spiritual leader, and a great family man."

Eugene commented, "I would like them to say I was a wonderful teacher and servant of God who made a huge difference in people's lives.."

Al said, "I'd like them to say, 'Look, he's moving!'"

------------------------------------------------------------

Smith climbs to the top of Mt. Sinai to get close enough to talk to God.

Looking up, he asks the Lord. "God, what does a million years mean to you?"

The Lord replies, "A minute."

Smith asks, "And what does a million dollars mean to you?"

The Lord replies, "A penny."

Smith asks, "Can I have a penny?"

The Lord replies, "In a minute."

-------------------------------------------------

A man goes to a shrink and says, "Doctor, my wife is unfaithful to me. Every evening, she goes to Larry's bar and picks up men. In fact, she sleeps with anybody who asks her! I'm going crazy. What do you think I should do?"

"Relax," says the Doctor, "take a deep breath and calm down. Now, tell me, exactly where is Larry's bar?"

-------------------------------------------------

John was on his deathbed and gasped pitifully, "Give me one last request, dear," he said.

"Of course, John," his wife said softly.

"Six months after I die," he said, "I want you to marry Bob."

"But I thought you hated Bob," she said..

With his last breath John said, "I do!"

--------------------------------------

A man goes to see the Rabbi. '

"Rabbi, something terrible is happening and I have to talk to you about it."

The Rabbi asked, "What's wrong?"

The man replied, "My wife is poisoning me.

The Rabbi, very surprised by this, asks, "How can that be?"

The man then pleads, "I'm telling you, I'm certain she's poisoning me, what should I do?"

The Rabbi then offers, "Tell you what. Let me talk to her, I'll see what I can find out and I'll let you know."

A week later the Rabbi calls the man and says, "I spoke to her on the phone for three hours. You want my advice?

The man said, "Yes" and the Rabbi replied, "Take the poison."

Duck in a Truck --- http://biggeekdad.com/2010/03/duck-in-a-truck/

1943 Donald Duck video promoting paying our income taxes ---
http://www.youtube.com/watch?v=gJ69X1qt4sQ
Thank you Barry Rice for the heads up.

Forwarded by Paula

Howz'it goin'? What'cha doin'?

There I was sitting at the bar staring at my drink when a large, trouble-making biker steps up next to me, grabs my drink and gulps it down in one swig.

"Well, whatcha' gonna do about it?" he says, menacingly, as I burst into tears.

"Come on, man," the biker says, "I didn't think you'd CRY. I can't stand to see a man crying."

"This is the worst day of my life," I say. "I'm a complete failure. I was late to a meeting and my boss fired me. When I went to the parking lot, I found my car had been stolen and I don't have any insurance. I left my wallet in the cab I took home. I found my wife with another man... and then my dog bit me."

"So I came to this bar to work up the courage to put an end to it all, I buy a drink, I drop a capsule in and sit here watching the poison dissolve; and then you show up and drink the whole darn thing! But, heck, enough about me, how are you feeling ?"

Forwarded by Paula

50th HS reunion

He was a widower and she a widow. They had known each other for a number of years being high school classmates and having attended class reunions in the last 20 years without fail.

This 50th anniversary of their class, the widower and the widow made a foursome with two other singles.

They had a wonderful evening, their spirits high. The widower throwing admiring glances across the table. The widow smiling coyly back at him.

Finally, he picked up courage to ask her, "Will you marry me?"

After about six seconds of careful consideration, she answered, "Yes, yes I will!"

The evening ended on a happy note for the widower. But the next morning he was troubled.

Did she say “Yes” or did she say “No?” He couldn't remember. Try as he would, he just could not recall. He went over the conversation of the previous evening, but his mind was blank.

He remembered asking the question but for the life of him could not recall her response. With fear and trepidation he picked up the phone and called her.

First, he explained that he couldn't remember as well as he used to. Then he reviewed the past evening. As he gained a little more courage he then inquired of her. "When I asked if you would marry me, did you say “Yes” or did you say “No?”

"Why you silly man!" I said, ‘Yes. Yes I will.’ And I meant it with all my heart."

The widower was delighted. He felt his heart skip a beat.

Then she continued. "And I am so glad you called because I couldn't remember who asked me!”

These are classified ads, which were actually placed in U.K. Newspapers: FREE YORKSHIRE TERRIER. 8 years old, Hateful little bastard. Bites!

FREE PUPPIES 1/2 Cocker Spaniel, 1/2 sneaky neighbor’s dog.

FREE PUPPIES. Mother is a Kennel Club registered German Shepherd. Father is a Super Dog, able to leap tall fences in a single bound.

COWS, CALVES: NEVER BRED. Also 1 gay bull for sale.

JOINING NUDIST COLONY! Must sell washer and dryer £100.

WEDDING DRESS FOR SALE . Worn once by mistake. Call Stephanie.

**** And the WINNER is... ****

FOR SALE BY OWNER. Complete set of Encyclopedia Britannica, 45 volumes. Excellent condition, £200 or best offer. No longer needed, got married, wife knows everything.

Children Are Quick
____________________________________

TEACHER: Why are you late? STUDENT: Class started before I got here.
____________________________________
TEACHER: John, why are you doing your math multiplication on the floor? JOHN: You told me to do it without using tables. __________________________________________
TEACHER: Glenn, how do you spell 'crocodile?' GLENN: K-R-O-K-O-D-I-A-L'
TEACHER: No, that's wrong GLENN: Maybe it is wrong, but you asked me how I spell it. (I Love this child) ____________________________________________
TEACHER: Donald, what is the chemical formula for water? DONALD: H I J K L M N O. TEACHER: What are you talking about? DONALD: Yesterday you said it's H to O.
__________________________________
TEACHER: Winnie, name one important thing we have today that we didn't have ten years ago. WINNIE: Me! __________________________________________
TEACHER: Glen, why do you always get so dirty? GLEN: Well, I'm a lot closer to the ground than you are. _______________________________________
TEACHER: Millie, give me a sentence starting with ' I. ' MILLIE: I is..
TEACHER: No, Millie..... Always say, 'I am.' MILLIE: All right... 'I am the ninth letter of the alphabet.' (Love this one! bbb) ________________________________
TEACHER: George Washington not only chopped down his father's cherry tree, but also admitted it. Now, Louie, do you know why his father didn't punish him? LOUIS: Because George still had the axe in his hand.....
______________________________________
TEACHER: Now, Simon , tell me frankly, do you say prayers before eating? SIMON: No sir, I don't have to, my Mom is a good cook. ______________________________
TEACHER: Clyde , your composition on 'My Dog' is exactly the same as your brother's.. Did you copy his? CLYDE : No, sir. It's the same dog.

(I want to adopt this kid!!!)
___________________________________
TEACHER: Harold, what do you call a person who keeps on talking when people are no longer interested? HAROLD: A teacher __________________________________
Due to current economic conditions the light at the end of the tunnel has been turned off!

Fact Checking Bill Murray: A Short, Comic Film from Sundance 2008 --- Click Here
http://www.openculture.com/2012/03/fact_checking_bill_murray_a_short_comic_film_from_sundance_2008.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Health Message from Maxine (forwarded by Maureen)

As I was lying in bed pondering the problems of the world, I rapidly realized that I don't really give a rat's ass.

It's the tortoise life for me!

1. If walking/cycling is good for your health, the postman would be immortal.

2. A whale swims all day, only eats fish, drinks water, and is fat.

3. A rabbit runs and hops and only lives 15 years.

4. A tortoise doesn't run and does nothing, yet it lives for 450 years.

And you tell me to exercise?? I don't think so. I'm a senior. Go around me!

Forwarded by Gene and Joan

Cancel your credit card before you die.

Be sure and cancel your credit cards before you die! This is so priceless, and so easy to see happening, customer service being what it is today. A lady died this past January, and Citibank billed her for February and March for their annual service charges on her credit card, and added late fees and interest on the monthly charge. The balance had been $0.00 when she died, but now somewhere around $60.00. A family member placed a call to Citibank. Here is the exchange : Family Member: 'I am calling to tell you she died back in January.'

Citibank: 'The account was never closed and the late fees and charges still apply.'

Family Member: 'Maybe you should turn it over to collections.'

Citibank: 'Since it is two months past due, it already has been.'

Family Member: ‘So, what will they do when they find out she is dead?'

Citibank: 'Either report her account to frauds division or report her to the credit bureau, maybe both!'

Family Member: 'Do you think God will be mad at her?'

Citibank: 'Excuse me?' Family Member : 'Did you just get what I was telling you - the part about her being dead?'

Citibank: 'Sir, you'll have to speak to my supervisor.'

Supervisor gets on the phone:

Family Member: 'I'm calling to tell you, she died back in January with a $0 balance.'

Citibank: 'The account was never closed and late fees and charges still apply.'

Family Member: 'You mean you want to collect from her estate?'

Citibank: (Stammer) 'Are you her lawyer?'

Family Member: 'No, I'm her great nephew.' (Lawyer info was given)

Citibank: 'Could you fax us a certificate of death?'

Family Member: 'Sure.' (Fax number was given)

After they get the fax :

Citibank: 'Our system just isn't setup for death. I don't know what more I can do to help.'

Family Member: 'Well, if you figure it out, great! If not, you could just keep billing her. She won't care.'

Citibank: 'Well, the late fees and charges will still apply.'

(What is wrong with these people?!?)

Family Member: 'Would you like her new billing address?'

Citibank: 'That might help....'

Family Member: ' Odessa Memorial Cemetery , Highway 129, Plot Number 69.'

Citibank: 'Sir, that's a cemetery!'

Family Member: 'And what do you do with dead people on your planet???'

Forwarded by Auntie Bev

A man came to visit his grandparents, and he noticed his grandfather sitting on the porch in the rocking chair wearing only a shirt, with nothing on from the waist down.

'Grandpa what are you doing? Your weenie is out in the wind for everyone to see!' he exclaimed.

The old man looked off in the distance without answering.

'Grandpa, what are you doing sitting out here with nothing on below the waist?' he asked again.

The old man slowly looked at him and said,

'Well....last week I sat out here with no shirt on and I got a stiff neck. This is your grandma's idea.'

Senior Moments Video by Golf Brooks --- http://www.youtube.com/embed/9nndS22Qda0?rel=0

Humorous iPad Demo --- http://biggeekdad.com/2012/02/ipad-magic-demonstration/
Amazing things you never thought of trying with your iPad.

Humor Between March 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor033112

Humor Between February 1-29, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor022912

Humor Between January 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor013112

Humor Between December 1-31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor123111

Humor Between November 1 and November 30, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor113011

Humor Between October 1 and October 31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor103111

Humor Between September 1 and September 30, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor093011

Humor Between August 1 and August 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor083111

Humor Between July 1 and July 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor073111

Humor Between May 1 and June 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor063011

Humor Between April 1 and April 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor043011

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, 2012 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/

**For an elaboration on the reasons you should join a ListServ (usually for free) go to http://www.trinity.edu/rjensen/ListServRoles.htm**
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which started out as an accounting education technology Listserv. It has mushroomed into the largest global Listserv of accounting education topics of all types, including accounting theory, learning, assessment, cheating, and education topics in general. At the same time it provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
~~CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/~~ (closed down) CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.
Yahoo (Practitioners) http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the activities of the AICPA. This can be anything from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld http://accountantsworld.com/forums/default.asp?scope=1 This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.
Business Valuation Group BusValGroup-subscribe@topica.com This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM]

Concerns That Academic Accounting Research is Out of Touch With Reality

I think leading academic researchers avoid applied research for the profession because making seminal and creative discoveries that practitioners have not already discovered is enormously difficult. Accounting academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic)
From http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

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

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

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

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

What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings
http://www.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated
http://www.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling
http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://www.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying

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 Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

February 29, 2012

Bob Jensen's New Bookmarks February 1-29, 2012
Bob Jensen at Trinity University

Bob Jensen's Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

Hasselback Accounting Faculty Directory --- http://www.hasselback.org/

Blast from the Past With Hal and Rosie Wyman ---
http://www.cs.trinity.edu/~rjensen/temp/Wyman2011.htm

Bob Jensen's threads on business, finance, and accounting glossaries ---
http://www.trinity.edu/rjensen/Bookbus.htm

Upload Some of Your Best Photographs to for the Walls of the American Accounting Association's Building ---
http://commons.aaahq.org/hives/06a813aecb/summary

The AAA headquarters office recently underwent a complete renovation and now it’s time to decorate the walls. We invite you, our members, to participate in this project by submitting your favorite photos. From all of the submissions, the AAA Staff will select those to be displayed as art on our office walls. We look forward to seeing your entries and are eager to pick our favorites! We encourage you to tap into your creative side and get started by clicking on the "Enter a Photograph" button below. In our view, there is no better way to enhance our surroundings than with a meaningful connection to our members and their unique experiences captured through photos.

A few items to consider:

only submit photos taken by you, your family, friends, or students (no professional photographers please)

by submitting your photo, you grant permission to the AAA to reproduce, enlarge, crop or publicly display your entry as wall art or other promotional material

include a relevant description of the photo such as location, names, year or circumstance so photos can be identified

use at least a 3.5 mega pixel digital camera

minimum photo size should be 6" x 9" at 300 dpi resolution and uploaded as a JPG, PNG, TIF or BMP file

all photos submitted will also be used as part of a display at the 2012 AAA Annual Meeting in Washington, D.C.

submissions will close on June 30, 2012

Jensen Comment
I've uploaded a few of my own photographs to serve as illustrations of what I think the AAA is seeking. I'm looking forward to some of your best photographs under the above criteria.

More of Bob Jensen's Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

The AAA headquarters office recently underwent a complete renovation and now it’s time to decorate the walls. We invite you, our members, to participate in this project by submitting your favorite photos. From all of the submissions, the AAA Staff will select those to be displayed as art on our office walls. We look forward to seeing your entries and are eager to pick our favorites! We encourage you to tap into your creative side and get started by clicking on the "Enter a Photograph" button below. In our view, there is no better way to enhance our surroundings than with a meaningful connection to our members and their unique experiences captured through photos.

A few items to consider:

only submit photos taken by you, your family, friends, or students (no professional photographers please)

by submitting your photo, you grant permission to the AAA to reproduce, enlarge, crop or publicly display your entry as wall art or other promotional material

include a relevant description of the photo such as location, names, year or circumstance so photos can be identified using a small placard similar to those used in art galleries

use at least a 3.5 mega pixel digital camera

minimum photo size should be 6" x 9" at 300 dpi resolution and uploaded as a JPG, PNG, TIF or BMP file

all photos submitted will also be used as part of a display at the 2012 AAA Annual Meeting in Washington, D.C.

submissions will close on June 30, 2012

Note that I initially had text on my submission pictures. Judy later asked me to submit the pictures once again without text.

Put your favorite pictures on your computer and then click on the "Enter a Photograph" button at
http://commons.aaahq.org/hives/06a813aecb/summary

You can view all of Bob Jensen's submissions here ---
http://www.cs.trinity.edu/~rjensen/temp/00AAAPhotos/

Question
What United States president was the first president to successfully enact the income tax?

Answer
"Brief History of the Income Tax," by Paul Caron, Tax Prof Blog, February 28, 2012 ---
http://taxprof.typepad.com/

Income Tax in the United States --- http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

Case Studies in Gaming the Income Tax Laws
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

Effective Tax Rates Are Lower Than Most People Believe
"Measuring Effective Tax Rates," by Rachel Johnson Joseph Rosenberg Roberton Williams, Urban-Brookings Tax Policy Center, February 7, 2012 ---
http://www.taxpolicycenter.org/UploadedPDF/412497-ETR.pdf

To help explain what is really going on with mortgage refinancings and foreclosures I wrote a teaching case:
A Teaching Case: Professor Tall vs. Professor Short vs. Freddie Mac
http://www.trinity.edu/rjensen/TallVerusShort.htm

Is anecdotal evidence irrelevant?

A subscriber to the AECM that we hear from quite often asked me to elaborate on the nature of anecdotal evidence. My reply may be of interest to other subscribers to the AECM.

Hi XXXXX,

Statistical inference --- http://en.wikipedia.org/wiki/Statistical_inference

Anecdotal Evidence --- http://en.wikipedia.org/wiki/Anecdotal_evidence

Humanities research is nearly always anecdotal. History research, for example, delves through original correspondence (letters, memos, and now email messages) of great people in history to discover more about causes of events in history. This, however, is anecdotal research, and there are greatly varying degrees of the quality of such historical anecdotal evidence.

Legal research is generally anecdotal, although court cases often use statistical inference studies as part, but not all, of the total evidence packages in the court cases.

Scientific research is both inferential and anecdotal. Anecdotal evidence often provides the creative ideas for hypotheses that are later put to more rigorous tests.

National Center for Case Study Teaching in Science ---
http://sciencecases.lib.buffalo.edu/cs/

But between the anecdote and the truly random sample is evidence that is neither totally anecdotal nor rigorously scientific. For example, it's literally impossible to identify the population of tax cheaters in the underground cash-only economy. Hence, from a strictly inferential standpoint it's impossible to conduct truly random samples on such unknown populations.

Nevertheless, the IRS and other researchers do conduct various types of "anecdotal investigations" of how people cheat on their taxes, including cheating in the underground cash-only economy. One approach is the IRS policy of conducting a samplings (not random) of full audits designed not so much to collect revenue or punish wrong doers as to discover how people comply with tax rules and devise legal or illegal ploys for avoiding or deferring taxes. This is anecdotal research.

In both instances of mine that you refer to I provided only anecdotal evidence that I called "cases." In fact, virtually all case studies are anecdotal in the sense that the statistical inference tests are not generally feasible ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases

However, it is common knowledge that there's a vast underground cash-only economy. And the court records are clogged with cases of persons who got caught cheating on welfare, cheating on taxes, receiving phony disability insurance settlements and Social Security payments, etc. But these court cases are probably only the tip of the icebergs in terms of the millions more who get away with cheating in the cash-only underground economy.

The problem with accountics research published in TAR, JAR, and JAE is that it requires statistical inference or analytics based upon assumed (usually unrealistic or unproven) assumptions. The net result has been very sophisticated research findings that are of little interest to the profession because the research methodology and unrealistic assumptions limit accountics research to mostly uninteresting problems. Analytical accountics research problems are sometimes interesting problems but these accountics research findings are usually no better than or even worse than anecdotal evidence due to unrealistic and unproven assumptions ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

It is obvious that accountics researchers have limited themselves to mostly uninteresting problems. In real science, scientists demand that interesting research findings be replicated. Since accountics scientists almost never demand or even encourage (by publishing replications) that their studies be replicated this is prima facie evidence of the lack of relevance of accountics research findings since accountics researchers themselves do not demand replications.

AAA leaders are now having retreats focused on how to make accountics research more relevant to the academic world (read that accounting teachers) and professional world ---
http://aaahq.org/pubs/AEN/2012/AEN_Winter12_WEB.pdf

Anecdotal research in accounting generally focuses on the more interesting problems than accountics research. But anecdotal findings are not easily extrapolated to general conclusions. Anecdotal evidence often builds up to where it becomes more and more convincing. For example, it did not take long in the early 1990s to discover that companies were entering into hundreds of billions and then trillions in interest rate swaps because there were no domestic or international accounting rules for even disclosing interest rate swaps let alone booking them. In many instances companies were entering into such swaps for off-balance sheet financing (OBSF).

As the anecdotal evidence on swap OBSF mounted like grains of sand, the Director of the SEC told the Chairman of the FASB that the three major problems to be addressed by the FASB were to be "derivatives, derivatives, and derivatives." And the leading problems of derivatives was that forward contracts and swaps (portfolios of forward contracts) were not even disclosed let alone booked.

Without having a single accountics study of interest rate swaps amongst the mountain of anecdotal evidence of OBSF cheating with interest rate swaps we soon had FAS 133 that required the booking of interest rate swaps and at least quarterly resets of the carrying values of these swaps to fair market value --- that is the power of anecdotal evidence rather than accountics evidence.

In a similar manner, the IRS is making inroads on reducing tax cheating in the underground economy using evidence piled up from anecdotal rather than strictly scientific research. For example, a huge step was made when the IRS commenced to require and code 1099 information into IRS computers. Before then, for example, most professors who received small consulting fees and honoraria forgot about such fees when they filed their taxes. Now they're reminded after December 31 when they receive their copies of the 1099 forms files with the IRS.

But I can assure you based upon my anecdotal evidence, that the underground economy still is alive and thriving in San Antonio when it comes to the type of "cash only" labor that I list at
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

And I can assure you of this without knowing about a single accountics study of the underground cash-only economy that this economy is alive and thriving. Mountains of anecdotal evidence reveal that the underground economy greatly inhibits the prevention of cheating on taxes, welfare, disability claims, Medicaid, etc.

Interestingly, however, the underground cash-only economy often makes it easier to for poor people to attain the American Dream.

Case Studies in Gaming the Income Tax Laws
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

Question
What would be the best way to reduce cheating on taxes, welfare, Medicaid, etc.?

Answer
Go to a cashless society that is now technically feasible but politically impossible since members of Congress themselves thrive on cheating in the underground cash-only economy.

Respectfully,
Bob Jensen

Accounting News Links ---
http://www.trinity.edu/rjensen/AccountingNews.htm

The new AAA Digital Library ---
http://aaajournals.org/

Issues and Resources from the AAA (Some New and Important Stuff) ---
http://aaahq.org/resources.cfm

AAA Newsroom ---
http://aaahq.org/newsroom.cfm

AAA Commons ---
http://commons.aaahq.org/pages/home

AAA Faculty Development ---
http://aaahq.org/facdev.cfm

AAA FAQs ---
http://aaahq.org/about/faq.htm

Listservs, Blogs, and Social Media ---
http://www.trinity.edu/rjensen/ListservRoles.htm

Accounting Career Helpers and Links ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

Bob Jensen's Helpers for Accounting Educators ---
http://www.trinity.edu/rjensen/Default3.htm

Free online courses, lectures, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Education Technology Links ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm

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

Bob Jensen's Threads (with many links to resources for educators) ---
http://www.trinity.edu/rjensen/threads.htm

U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/

Tax Foundation Facts & Figures (Free) ---
http://taxfoundation.org/files/ff2012.pdf

Some Interesting State Comparisons on State& Local Taxation, Business Climate, and Debt Per Capita
http://www.cs.trinity.edu/~rjensen/temp/StateComparisons2012.htm

FTC Identity Theft Center --- http://www.ftc.gov/bcp/edu/microsites/idtheft/

Identity Theft Resource Center --- http://www.idtheftcenter.org/
Note the tab for State and Local Resources

IRS Identity Protection Specialized Unit at 800-908-4490

"IRS Warns on ‘Dirty Dozen’ Tax Scams for 2012," by Laura Saunders, The Wall Street Journal, February 12, 2012 ---
http://blogs.wsj.com/totalreturn/2012/02/17/irs-warns-on-dirty-dozen-tax-scams-for-2012/?mod=google_news_blog

Every year during tax season the Internal Revenue Service releases a list of its least-favorite tax scams. “Scam artists will tempt people in-person, on-line and by email with misleading promises about lost refunds and free money. Don’t be fooled by these,” warns Commissioner Douglas Stives.

The list changes from year to year. Here’s what the IRS is warning about for this tax season. For more information, click here, or watch a video here.

1. Identity theft

“An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name may be the first tipoff the individual receives that he or she has been victimized.”

2. Phishing

“If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System, report it by sending it to phishing@irs.gov.”

3. Tax-preparer fraud

“In 2012 every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.”

4. Hiding income offshore

“Since 2009, 30,000 individuals have come forward voluntarily to disclose [undeclared] foreign financial accounts. . . With new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.”

5. ‘Free money’ from the IRS and tax scams involving Social Security

“Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing at community churches around the country.”

6. False/inflated income and expenses

“Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions…. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.”

7. False Form 1099 refund claims

“In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.”

8. Frivolous arguments

“Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid.”

9. Falsely claiming zero wages

“Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a ‘corrected’ Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. ”

10. Abuse of charitable organizations and deductions

“The IRS is investigating schemes that involve the donation of non-cash assets – including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor.”

11. Disguised corporate ownership

“Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business…. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.”

12. Misuse of trusts

“IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.”

FTC Identity Theft Center --- http://www.ftc.gov/bcp/edu/microsites/idtheft/

Identity Theft Resource Center --- http://www.idtheftcenter.org/
Note the tab for State and Local Resources

IRS Identity Protection Specialized Unit at 800-908-4490

How Income Taxes Work (including history) --- http://money.howstuffworks.com/income-tax.htm

Why not start with the IRS? (The best government agency web site on the Internet) http://www.irs.gov/

IRS Site Map --- http://www.irs.gov/sitemap/index.html

FAQs and answers --- http://www.irs.gov/faqs/index.html

Taxpayer Advocate Service --- http://www.irs.gov/advocate/index.html

Forms and Publications, click on Forms and Publications

IRS Free File Options for Taxpayers Having Less Than $57,000 Adjusted Gross Income (AGI) ---
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=104

Free File Fillable Forms FAQs ---
http://www.irs.gov/efile/article/0,,id=226829,00.html

Visualizing Economics
Comparing Income, Corporate, Capital Gains Tax Rates: 1916-2011 and Other Graphics --- Click Here
http://visualizingeconomics.com/2012/01/24/comparing-tax-rates/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+VisualizingEconomics+%28Visualizing+Economics%29&utm_content=Google+Reader

Bob Jensen's tax filing helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

January 24, 2012 heads up from Barry Rice

Video 1
TurboTax SnapTax Mobile App - File Taxes on Your Android and iPhone!
http://www.youtube.com/watch?v=M-VyLXLAipg

Video 2
SnapTax From TurboTax Will Let You File Your Taxes From Your iPhone ---
http://www.youtube.com/watch?v=4jQ2xLQvbio

Jensen Advice
I instead recommend:

IRS Free File Options for Taxpayers Having Less Than $57,000 Adjusted Gross Income (AGI) ---
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=104

Free File Fillable Forms FAQs ---
http://www.irs.gov/efile/article/0,,id=226829,00.html

Tax Foundation Facts & Figures (Free) ---
http://taxfoundation.org/files/ff2012.pdf

Even if you're only one of a dozen coauthors on a submission, a referee may be deciding on your tenure, promotions of seven of your coauthors, and a career annuity of $2,000+ per year across the entire career of each of the 12 authors. It's no time for a referee to think of reasons to not accept this paper. If Editor X does so his constituency may think he's (shudder) a budget-obsessed Republican.

Brian Rathbun is an associate professor of International Relations at the University of Southern California
"Dear Reviewers, a Word?" by Brian C. Rathbun, Inside Higher Ed, February 28, 2012 ---
http://www.insidehighered.com/views/2012/02/28/essay-offers-guide-those-who-review-journal-submissions

Everyone gets rejected. And it never stops being painful not matter how successful or how long you have been in the business. Some of this is inevitable; not everyone is above average. But some of it isn't. I thought that I would offer some dos and don’ts for reviewers out there to improve the process and save some hurt feelings, when possible. Some are drawn from personal experience; others, more vicariously. I have done some of the "don’ts" myself, but I feel bad about it. Learn from my mistakes.

First, and I can’t stress this enough, READ THE F*CKING PAPER. It is considered impolite by authors to reject a paper by falsely accusing it of doing THE EXACT OPPOSITE of what it does. Granted, some people have less of a way with words than others and are not exactly clear in their argumentation. But if you are illiterate, you owe it to the author to tell the editors when they solicit your review. It is O.K. – there are very successful remedial programs they can recommend. Don’t be ashamed.

Second, and related to the first, remember the stakes for the author. Let us consider this hypothetical scenario. In a safe estimate, an article in a really top journal will probably merit a 2-3 percent raise for the author. Say that is somewhere around $2,000. Given that salaries (except in the University of California System) tend to either stay the same or increase, for an author who has, say, 20 years left in his/her career, getting that article accepted is worth about $40,000 dollars. And that is conservative. So you owe it more than a quick scan while you are on the can. It might not be good, but make sure. Do your job or don’t accept the assignment in the first place. (Sorry, I don’t usually like scatological humor but I think this is literally the case sometimes.)

Third, the author gets to choose what he/she writes about. Not you. He/she is a big boy/girl. Do not reject papers because they should have been on a different topic, in your estimation. Find fault with the paper actually under review to justify your rejection.

Fourth, don’t be a b*tch. Articles should be rejected based on faulty theory or fatally flawed empirics, not a collection of little cuts. Bitchy grounds include but are not limited to – not citing you, using methods you do not understand but do not bother to learn, lack of generalizability when theory and empirics are otherwise sound. The bitchiness of reviews should be inversely related to the audacity and originality of the manuscript. People trying to do big, new things should be given more leeway to make their case than those reinventing the wheel.

Fifth, don’t be an a**hole. Keep your sarcasm to yourself. Someone worked very hard on this paper, even if he/she might not be very bright. Writing “What a surprise!”, facetiously, is a dick move. Rejections are painful enough. You don’t have to pour salt on the wound. Show some respect.

Sixth, remember that to say anything remotely interesting in 12,000 words is ALMOST IMPOSSIBLE. Therefore the reviewer needs to be sympathetic that the author might be able to fix certain problems when he/she is given more space to do so. Not including a counterargument from your 1986 journal article might not be a fatal oversight; it might have just been an economic decision. If you have other things that you would need to see to accept an otherwise interesting paper, the proper decision is an R&R, not a reject. Save these complaints for your reviews of full-length book manuscripts where they are more justifiable.
Seventh, you are not a film critic. Rejections must be accompanied by something with more intellectual merit than "the paper did not grab me" or "I do not consider this to be of sufficient importance to merit publication in a journal of this quality." This must be JUSTIFIED. You should explain your judgment, even if it is something to the effect of, "Micronesia is an extremely small place and its military reforms are not of much consequence to the fate of world politics." Even if it is that obvious, and it never is, you owe an explanation.

Jensen Comment
In some cases it's lucky to be a coauthor of a paper that's been rejected by six journals in succession. At that point stop submitting the paper for publication. Instead you and your coauthors should submit the paper various phony international conferences that accept virtually anything that's submitted because what the organizers really want is the $1,000 registration fee from from you and each of your coauthors. Chances are your coauthors will be the only ones attending your presentation session, and afterwards you can all travel about together as tourists. Each summer you can choose a different country such as Germany, New Zealand, Sweden, England, China, and on and on milking that useless cow you milk every year for another expense-paid vacation (your employer pays).

You laugh, but I have a close friend (an economics professor) who does this by submitting the same paper to a different conference every summer. He chooses the conference primarily on the basis of geography. His favorite country to visit is Germany every time he wants a new Mercedes. It really is cheaper to buy a new Mercedes in Germany than in the U.S.

You laugh, but I have an acquaintance who, with his wife, organizes such conferences because he makes a very comfortable living from the conference registration fees and gets wonderful free travel to romantic places every year. Some of you on the AECM may even recognize who I'm talking about.

But it's necessary to publish and well as go on junkets. What Professor Rathbun fails to mention that academics have protected themselves with a succession of journals of last resort that will publish any paper that the dog has not eaten. In some cases they charge by the page for publishing a paper, but in most cases a paper in this low hurdles race does not have top go to that extreme.

"A Plague of Journals," by Philip G. Altbach , Inside Higher Ed, January 15, 2012 ---
http://www.insidehighered.com/blogs/plague-journals

Clever people have figured out that there is a growing demand for outlets for scholarly work, that there are too few journals or other channels to accommodate all the articles written, that new technology has created confusion as well as opportunities, and (finally) and somewhat concerning is that there is money to be made in the knowledge communication business. As a result, there has been a proliferation of new publishers offering new journals in every imaginable field. The established for-profit publishers have also been purchasing journals and creating new ones so that they “bundle” them and offer them at high prices to libraries through electronic subscriptions.

Scholars and scientists worldwide find themselves under increasing pressure to publish more, especially in English-language “internationally circulated” journals that are included in globally respected indices such as the Science Citation Index. As a result, journals that are part of these networks have been inundated by submissions and many journals accept as few as 10%.

Universities increasingly demand more publications as conditions for promotion, salary increases, or even job security. As a result, the large majority of submissions must seek alternative publication outlets. After all, being published somewhere is better than not be published at all. Many universities are satisfied with counting numbers of articles without regard to quality or impact, while others, mostly top-ranking, are obsessed with impact—creating increased stress for professors.

A variety of new providers have come into this new marketplace. Some scholarly organizations and universities have created new “open access” electronic journals that have decent peer-reviewing systems and the backing of respected scholars and scientists. Some of these publications have achieved a level of respectability and acceptance, while others are struggling.

Continued in article

Added Jensen Comment
Professors who are stuck at the associate professor level year-after-year just have not learned how to game the academic publishing racket.

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

Our Under Achieving Colleges ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Bok

February 28, 2012 reply from Linda Kidwell

Bob,

Some of your follow-on comments have merit, but I have to say the Rathbun commentary rings true to many of us in this profession. I've certainly been the recipient of every type of reviewer misbehavior cited and then some. While professors certainly do some shopping around for a home for their papers, that doesn't negate the unprofessional behavior on the part of some reviewers. I've seen comments that have no relation to the paper I've submitted, and I've had juvenile commentary by others. Perhaps part of the blame lies with editors. If they see a review like those desribed in the commentary, perhaps they should find another reviewer prepared to referee with a modicum of maturity. I've had a paper returned with a desk rejection after 18 months at TAR with a simple sentence, "Not of sufficient interest for our readership." That took 18 months?! I had another rejection that I can only call "Reject and Resubmit," where the comments were all manageable revisions, yet the paper was rejected with the encouragement to try again as a new submission. I considered that unethical on one of two fronts: either the new editor was trying to lower the acceptance rate or he wanted to increase submission fees.

On the other hand, I've also been blessed to have some great reviewers and editors read some of my papers and give me the kind of insight that helped me write a dramatically improved version. Similarly, I currently have a paper under review at a high quality journal where the editor had trouble finding the right reviewers but made a real effort to get it reviewed properly.

Linda

February 29, 2012 reply from Steve Kachelmeir

As a former TAR senior editor and a firm believer in the value of TAR, I always feel compelled to respond to these kinds of complaints. I am inferring (or at least hoping) that the anecdotes Linda shares are dated. I cannot imagine a submission sitting on the editor's desk for 18 months, followed by a desk rejection without even being sent out for review. Desk rejections in my experience took less than 18 days, certainly not 18 months. Indeed, the 2011 TAR Annual Report indicates that, for the period from 6/1/08 to 5/31/11, the very longest time from submission to decision was almost exactly five months. That was for a revision for which we could not locate a key reviewer for several weeks. After we eventually did (the reviewer was on extended leave during the summer), the report leaned favorable and I accepted the manuscript for publication. I do not know and cannot meaningfully comment on the turnaround statistics after 6/1/11 -- that will be in Harry Evans' first annual report to be published (most likely) in November 2012.

I happen to agree with LInda on the "Reject and Resubmit" (also known as "Reject/Revise") decision category that TAR used several years ago, which is why I discontinued that category back in 2008. Instead, starting in 2008, TAR started using an "uncertain" category when an editor wished to give an author an opportunity to respond and revise, but, at the same time, did not see any clear path to publication. We treated such cases as we would any revision invitation, but with the full disclosure of more outcome uncertainty than would be typical of an invitation to revise and resubmit. To be sure, on occasion we would get a submission on an interesting research question with good motivation, but with what appeared to be a fatal design flaw. Sometimes those cases resulted in the rare letter that rejected the manuscript under consideration due to the design flaw, while also encouraging the author to continue working in the area and considering TAR as a possible outlet for future efforts not subject to that flaw. We tried to restrict such letters to genuine cases of rejection with encouragement to undertake a new study, as opposed to a more ambiguous letter that half suggested rejection and half suggested revisoin. As stated, I think the old wording on former "reject-revise" letter was too ambiguous.

Thanks for raising your concerns. I will close by inviting Linda and all others interested in TAR to read and consider the comments and statistics in TAR's annual reports, published in the November issue of each TAR volume, starting in 2008. These reports offer much greater accountability, which I hope will help to address concerns such as those in Linda's anecdotes.

Best,

Steve Kachelmeier

Here's an opportunity for you to be creative as a liberal or conservative, get a prestigious publication, and win a prize from Harvard.

"Reimagining Capitalism." by Polly LaBarre, Harvard Business Review Blog, February 27, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/02/reimagining_capitalism.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Jensen Comment
The comments following this article range across the entire spectrum of reactions we've seen for years about social responsibility accounting for business. Milton Friedman, of course, argued that the only responsibility of business is to obey the letter and spirit of the law without losing sight of the main goal of profit maximization. Friedman argued that it's not the responsibility of business firms to make externality resource allocation decisions best left to government. This is reflected in the comment of Kozarms.

The concepts herein are very disturbing. This strikes me as socialism, and a socialist mentality. "How do we build the consideration of social return into every conversation and every decision at every level in the organization?" That's easy - see any communist country, and ask yourself if those are great societies full of innovation despite their professions of acting for the common good. Who decides what is a good social return - everyone all at once? The government? And: "inspire sacrifice, stimulate innovation" - why would an innovator also being willing to contribute his/her work as a sacrifice to the masses? The problems attributed in this article to capitalism are problems are not related to capitalism at all, but are problems of the mixed up ideaology of this mixed economy. We need to return to the correct ideas about what capitalism really means, not an ideaology where the true innovators/leaders first ask permission from the masses.

Ian Ford-Terry replies:

Have you talked to Howard Bloom at all? His "Genius of the Beast: A Radical Revision of Capitalism" laid out some very similar concepts in 2009...

Jensen Added Comment
The supposed refutation of Friedman rests mainly on the idea of long-term versus short-term profitability. This refutation proceeds along the lines that short-term profit maximization may become self-defeating if constrains or destroys the long-term profitability. For example, a company that strips the tops off mountains in West Virginia to get at cheap coal (which is now technically feasible and a controversial proposal) might maximize short-term profits but destroy long-term profitability as such monumental degradation of the earth triggers massive lawsuits for the destruction of human health (e.g. leaching of heavy metals into water supplies), destruction of tourism, and the putting off of research for alternative energy alternatives.

However, the long-term versus short-term "refutation" of Friedman is not legitimate since, in my viewpoint, Friedman was more interested in the long-term profitability and is falsely accused of being too short-term minded. I don't really think Milton Friedman would've advocated mountain top removal mining for the sake of short-term profits and then declaring bankruptcy before the environmental lawsuits commence.

Mountain Top Removal Mining --- http://en.wikipedia.org/wiki/Mountaintop_removal_mining

Critics contend that MTR is a destructive and unsustainable practice that benefits a small number of corporations at the expense of local communities and the environment. Though the main issue has been over the physical alteration of the landscape, opponents to the practice have also criticized MTR for the damage done to the environment by massive transport trucks, and the environmental damage done by the burning of coal for power. Blasting at MTR sites also expels dust and fly-rock into the air, which can disturb or settle onto private property nearby. This dust may contain sulfur compounds, which corrodes structures and is a health hazard.

A January 2010 report in the journal Science reviews current peer-reviewed studies and water quality data and explores the consequences of mountaintop mining. It concludes that mountaintop mining has serious environmental impacts that mitigation practices cannot successfully address.^[7] For example, the extensive tracts of deciduous forests destroyed by mountaintop mining support several endangered species and some of the highest biodiversity in North America. There is a particular problem with burial of headwater streams by valley fills which causes permanent loss of ecosystems that play critical roles in ecological processes. In addition, increases in metal ions, pH, electrical conductivity, total dissolved solids due to elevated concentrations of sulfate are closely linked to the extent of mining in West Virginia watersheds.^[7] Declines in stream biodiversity have been linked to the level of mining disturbance in West Virginia watersheds.

Published studies also show a high potential for human health impacts. These may result from contact with streams or exposure to airborne toxins and dust. Adult hospitalization for chronic pulmonary disorders and hypertension are elevated as a result of county-level coal production. Rates of mortality, lung cancer, as well as chronic heart, lung and kidney disease are also increased.^[7] A 2011 study found that counties in and near mountaintop mining areas had higher rates of birth defects for five out of six types of birth defects, including circulatory/respiratory, musculoskeletal, central nervous system, gastrointestinal, and urogenital defects. These defect rates were more pronounced in the most recent period studied, suggesting the health effects of mountaintop mining-related air and water contamination may be cumulative.^[37] Another 2011 study found "the odds for reporting cancer were twice as high in the mountaintop mining environment compared to the non mining environment in ways not explained by age, sex, smoking, occupational exposure, or family cancer history.”

A United States Environmental Protection Agency (EPA) environmental impact statement finds that streams near some valley fills from mountaintop removal contain higher levels of minerals in the water and decreased aquatic biodiversity.The statement also estimates that 724 miles (1,165 km) of Appalachian streams were buried by valley fills between 1985 to 2001.^[5] On September 28, 2010, the U.S. Environmental Protection Agency’s (EPA) independent Science Advisory Board (SAB) released their first draft review of EPA’s research into the water quality impacts of valley fills associated with mountaintop mining, agreeing with EPA’s conclusion that valley fills are associated with increased levels of conductivity threatening aquatic life in surface waters.

Although U.S. mountaintop removal sites by law must be reclaimed after mining is complete, reclamation has traditionally focused on stabilizing rock formations and controlling for erosion, and not on the reforestation of the affected area. Fast-growing, non-native flora such as Lespedeza cuneata, planted to quickly provide vegetation on a site, compete with tree seedlings, and trees have difficulty establishing root systems in compacted backfill. Consequently, biodiversity suffers in a region of the United States with numerous endemic species.^[41] In addition, reintroduced elk (Cervus canadensis) on mountaintop removal sites in Kentucky are eating tree seedlings.

Advocates of MTR claim that once the areas are reclaimed as mandated by law, the area can provide flat land suitable for many uses in a region where flat land is at a premium. They also maintain that the new growth on reclaimed mountaintop mined areas is better suited to support populations of game animals.

Continued in article

Jim Martin's MAAW threads on social responsibility accounting ---
http://maaw.info/SocialAccountingMain.htm

Bob Jensen's threads Triple-Bottom (Social, Environmental, Human Resource) Reporting --- "
http://www.trinity.edu/rjensen/Theory02.htm#TripleBottom

An accounting professor privately asked me about publishing a case-novel about accounting for mergers and acquisitions.

My reply may be of general interest to the AECM

Hi XXXXX,
Your question falls into two tracks. One track is where you serve as your own marketing company. The other track is where you outsource to a marketing company.

If you outsource the marketing there are three alternatives. One is to try to get a major publisher like Wiley or Pearson take on the case. The second is where you outsource to a case publishing outfit like ECCH (not much money in this alternative) ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
The third is where you develop a CEP course marketed by Chartered Accountants in Canada and the AICPA in the U.S.

The second track of doing your own marketing has a low probability of success. I have an acquaintance named Pete Mazany in New Zealand who put a major part of his life into writing and marketing his business strategy case (actually a sophisticated simulation) called Mike's Bikes that also had a bit of superficial accounting in the case as well. He was not successful marketing the case on his own. He had more success with McGraw-Hill ---
http://mcgraw-hill.com.au/html/9780072504477.html

But having "more success" does not equate to having "great success." You might contact Pete at the University of Auckland for his expert advice in these matters. Pete is a really competent guy --- PhD under Martin Shubik at Yale.

Pete did make a little money when the Australian CPA Society included his CEP course on this case in their sponsored CEP courses. You might pursue your marketing options with the Chartered Accountants in Canada and the AICPA in the U.S.

If you're chosen to deliver a CEP course on this topic for the AICPA, the AICPA will then publish your materials and try to market them online.

Off hand, I suspect your case is too advanced to have much of a market. It will be hard to get a publisher to pick it up, although the publisher may buy it from you for peanuts as a supplement for an advanced textbook.

I do have two friends who made a lot of money with two economics education mystery novels. I really don't think their books were very good, but they did get a positive testimonial from Milton Friedman (who was a close friend of Bill Breit) that I think was more out of friendship than honesty. The key to the the success of the Breit and Elzinga mystery novels was hitting the high school book market. Scroll down to my tribute to Breit and Elzinga at
http://www.trinity.edu/rjensen/acct5341/speakers/muppets.htm
Actually, I was not totally honest when writing up this tribute. I could've been a lot more critical of their mystery novels even though both of them are class acts as teachers and researchers. Bill died last year.

I hate to be pessimistic, but if you want to make money think about writing elementary stuff. If you want respect, pursue your dream on this one but don't expect to make much return for your hours of time.

One thing you might add to your works on mergers is a set of links to the many great articles in the archives of the NYT's Dealbook ---
http://dealbook.nytimes.com/
One service of great interest to me would be to set up a classification system on types of mergers written up in Dealbook.

You might also contact the truly great Andrew Ross Sorkin who maintains the Dealbook site ---
http://en.wikipedia.org/wiki/Andrew_Ross_Sorkin

Hope this helps,
Bob

RFID Chip Fraud Risk Video
WTHR_The Risk inside your credit card ---
http://www.youtube.com/watch?v=lLAFhTjsQHw&sns=em

"How CEO Pay Became a Massive Bubble," An interview with Mihir Desai Harvard Business School, Harvard Business Review Blog, February 23, 2012 ---
Click Here
http://blogs.hbr.org/ideacast/2012/02/how-ceo-pay-became-a-massive-b.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Bob Jensen's threads on outrageous executive compensation and golden parachutes ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Some Things to Ponder When Choosing Between an Accounting Versus History PhD

From The Chronicle of Higher Education, February 12, 2012 ---
http://chronicle.com/article/Where-Recent-History-PhDs/130720/

Warning:
It's often misleading to look at percentages of small numbers. For example, 25% of Brown University history PhD graduates are reported as being employed in tenure-track jobs, but this is only two of the eight graduates in 2010.

Where Recent History Ph.D.'s Are Working

History departments are facing increased pressure to track where their Ph.D. recipients end up. Here are employment data for students who received Ph.D.'s in 2010 from 17 of the top-20 history programs, as ranked by U.S. News & World Report. Officials at history departments at Cornell and Stanford Universities and at the University of California at Berkeley said they could not provide data because they were too busy.

University Total No. of Ph.D.'s Percent in tenure-track jobs Percent in postdocs Percent lecturers, sdjuncts, or visiting professors Percent in nonteaching academic jobs Percent high-school teachers Percent in nonacademic jobs Percent independent scholars Percent unemployed/unknown

Brown U. 8 25% 13% 25% 38%

Columbia U. 21 28% 19% 14% 10% 5% 10% 14%

Duke U. 2 50% 50%

Harvard U. 13 46% 31% 15% 8%

Johns Hopkins U. 7 43% 28% 14% 14%

New York U. 18 56% 22% 6% 6% 11%

Northwestern U. 9 33% 22% 11% 11% 22%

Princeton U. 20 55% 15% 5% 25%

Rutgers U. 7 43% 29% 29%

U. of California at Los Angeles* 21 38% 5% 33% 5% 14%

U. of Chicago 25 18% 14% 55% 5% 6%

U. of Michigan 20 40% 25% 20% 10% 5%

U. of North Carolina at Chapel Hill 15 40% 7% 20% 7% 27%

U. of Pennsylvania 10 30% 10% 50% 10%

U. of Texas at Austin 10 60% 30% 10%

U. of Wisconsin at Madison 15 30% 10% 20% 10%

Yale U. 20 55% 5% 25% 15%

*Total includes 1 student who passed away.
Note: Some percentages do not add to 100% due to rounding.

Source: Chronicle reporting

Correction, 2/14/12 at 2:57 p.m.: Numbers for the University of Wisconsin at Madison have been corrected. The program had 15 Ph.D. graduates, not 10, and the proportion of Madison's Ph.D.'s who were lecturers, adjuncts, or visiting professors was 20 percent, not 50 percent.

University	Total No. of Ph.D.'s	Percent in tenure-track jobs	Percent in postdocs	Percent lecturers, sdjuncts, or visiting professors	Percent in nonteaching academic jobs	Percent high-school teachers	Percent in nonacademic jobs	Percent independent scholars	Percent unemployed/unknown
Brown U.	8	25%	13%	25%					38%
Columbia U.	21	28%	19%	14%	10%	5%	10%		14%
Duke U.	2	50%		50%
Harvard U.	13	46%	31%				15%		8%
Johns Hopkins U.	7	43%	28%	14%			14%
New York U.	18	56%	22%	6%	6%				11%
Northwestern U.	9	33%		22%		11%	11%		22%
Princeton U.	20	55%	15%	5%					25%
Rutgers U.	7	43%	29%					29%
U. of California at Los Angeles*	21	38%	5%	33%			5%		14%
U. of Chicago	25	18%	14%	55%			5%		6%
U. of Michigan	20	40%	25%	20%	10%				5%
U. of North Carolina at Chapel Hill	15	40%	7%	20%	7%				27%
U. of Pennsylvania	10	30%	10%	50%					10%
U. of Texas at Austin	10	60%			30%		10%
U. of Wisconsin at Madison	15	30%	10%	20%					10%
Yale U.	20	55%	5%	25%					15%

In accountancy there are generally fewer PhD graduates than history PhD graduates in any of the above universities. The large accountancy PhD accounting mills decades ago, such as the University of Illinois and the University of Texas, that each produced 10-20 accounting PhD graduates per year have shrunk down to producing 1-5 graduates per year. Reasons for this are complicated, but I don't hesitate to give my alleged reasons at
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

For comparative purposes compare the above table for History PhD graduates in 2010 with the 2010 column in the table of Accountancy PhD graduates table at ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms
The largest numbers of accountancy PhD graduates from a single university were the five graduates at Virginia Tech in 2010. But this may be a 2010 anomaly year for Virginia Tech that normally produces two or fewer accounting PhD graduates per year.

It takes a bit of work, but the employment status of 2010 Accountancy PhD graduates can be determined from the table at
http://www.jrhasselback.com/AtgDoct/XSchDoct.pdf
Most 2010 accounting PhD graduates had multiple high-paying tenure track offers (well over $100,000 for nine-month contracts) and are now in the tenure-track positions of their first choices in 2010. Many in R1 research universities, however, will move to tenure track positions in other universities after a few years on the job. More often than not the first-time moves to other universities is not due to tenure rejections per se. Sometimes new PhD graduates want to start out at major R1 research universities to build research publications into their resumes. But many of these graduates never intended to spend the rest of their careers in R1 universities that highly pressure faculty year-after-year to conduct research and publish in top research journals.

Unlike in engineering where most PhD graduates track into private sector industries, most accounting PhD graduates settle into careers in tenure track in academe. There are generally no comparative advantages of having a PhD for job applicants in accounting firms, government, or business corporations. Hence it's not surprising that most accountancy PhD graduates are in the Academy.

Closing Comment
Of course there are many other things to consider such as the fact that most accountancy PhD programs admit only students with prior professional experience in accounting. Accounting PhD programs may also take twice as long to complete and are replete with courses in mathematics, statistics, econometrics, psychometrics, and technical data mining. On the other hand, most accountancy PhD programs offer free tuition and relatively handsome living allowances in return for some teaching and research assistance. Usually at least one year is also covered with a full-ride fellowship in an accountancy PhD program.

The KPMG Foundation is now providing great supplemental financial and other support for minority students interested in accountancy PhD programs. This has been a very successful program considering how difficult it is to lure minority students back to the campus when they're successfully employed as CPAs, Treasury Agents, and other accounting professionals with young families to support ---
http://www.kpmgfoundation.org/foundinit.asp

NEW CENTER FOR AUDIT QUALITY VIDEO DESCRIBES THE FINANCIAL STATEMENT AUDIT ---
February 13, 2012 ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151875

"Are Auditors Reporting Fraud And Illegal Acts? The SEC Knows But Isn’t Telling," by Francine McKenna, re:TheAuditors, February 22, 2012 ---
Click Here
http://retheauditors.com/2012/02/22/are-auditors-reporting-fraud-and-illegal-acts-the-sec-knows-but-isnt-telling/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ReTheAuditors+%28re%3A+The+Auditors%29

"THE AUDITOR’S EXPECTATIONS GAP…NOT AGAIN! EXCUSES, EXCUSES, EXCUSES!" Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, February 13, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/498

John Cassidy --- http://en.wikipedia.org/wiki/John_Cassidy_%28journalist%29

Deception Using Statistics Can Become Very Subtle and Complicated
One man's politically biased analysis is another man's scholarly bipartisan analysis --- so much depends upon the biased eyes of the beholder!
Lying with statistics can be as much a fault of the reader as the writer.

Before reading the February 6 article linked below it might be interesting to read one of the comments that follow the article:

This is a much more in-depth examination of the numbers than is available at most any other news outlet. So, thanks for that. Furthermore, you make a good argument with raw numbers to back the argument up. All of that being said, the real point as far as I am concerned is the media's handling of this issue. It's really quite hard to envision the same type of cheerleading and lack of investigation if Mitt Romney were president right now. To the contrary, your piece would probably be one of the more lightweight pieces on the subject as every mainstream news outlet struggled to dig into the numbers to show how the lower rate was either not Romney's fault or was not actually good just because it was lower. Yes, the G.O.P. is making hay out of what they can but it is clear that the media is doing the same in reverse. Again this piece is one of the only in-depth pieces I have read on this matter.
Posted 2/7/2012, 5:53:01am by gudmundsdottir

"The Jobs Report and the 'Missing 1.2 Million'," by John Cassidy, The New Yorker, February 6, 2012 ---
http://www.newyorker.com/online/blogs/johncassidy/2012/02/the-jobs-report-and-the-missing-12-million.html

Jensen Comment
I cannot imagine the liberally-biased New Yorker even publishing such an article if Mitt Romney were president. But I could be mistaken.

However, the same author (John Cassidy) in 2010 published an article in The New Yorker that was critical of ObamaCare numbers.

Fuzzy CBO Accounting Tricks
"ObamaCare by the Numbers: Part 2," by John Cassidy, The New Yorker, March 2010 ---
http://www.newyorker.com/online/blogs/johncassidy/2010/03/obamacare-by-the-numbers-part-2.html

. . .

The C.B.O.’s analysis can’t be dismissed out of hand, but it is surely a best-case scenario. Again, I come back to where I started: the scale of the subsidies on offer for low and moderately priced workers. If economics has anything to say as a subject, it is that you can’t offer people or firms large financial rewards for doing something—in this case, dropping their group coverage—and not expect them to do it in large numbers. On this issue, I find myself in agreement with Tyler Cowen and other conservative economists. Over time, the “firewall” between the existing system of employer-provided group insurance and taxpayer-subsidized individual insurance is likely to break down, with more and more workers being shunted over to the public teat.

At that point, if it comes, politicians of both parties will be back close to where they began: searching for health-care reform that provides adequate coverage for all at a cost the country can afford. What would such a system look like? That is a topic for another post, but I don’t think it would look much like Romney-ObamaCare.

Read more: http://www.newyorker.com/online/blogs/johncassidy/2010/03/obamacare-by-the-numbers-part-2.html#ixzz0jrFSFK3j

Closing Comment
As an academic, I respect John Cassidy for being a liberal economist and statistician who is honorable enough to present both sides of issues when his analysis does not support his politics. Bravo to John Cassidy! You would never catch Paul Krugman being "in agreement with Tyler Cowen and other conservative economists" except maybe when he was sending his consulting-fee bills to Enron.

Paul Krugman's liberal colleague at Princeton is worse.

How to lie with statistics:
"Four Deficit Myths and a Frightening Fact: We don't have a generalized overspending problem. We have a humongous health-care problem," by Alan S. Binder, The Wall Street Journal, January 19, 2012 ---
http://online.wsj.com/article/SB10001424052970204468004577164820504397092.html?mod=djemEditorialPage_t

Here's the clinker in Binder's liberal economics analysis:

According to the CBO, if nothing is done, the primary deficit will bottom out at 2.6% of GDP in 2018 and then rise to 7.4% of GDP by 2040. Where will the additional 4.8% of GDP come from? Remarkably, every penny will come from health-care spending, which balloons from 6.6% of GDP to 11.4% in the projections, or 4.8% more of GDP. This exact match is just a coincidence, of course. If we use 2050 as the endpoint instead of 2040, the projected primary deficit increases by 6% of GDP, of which health-care spending accounts for 6.6 percentage points. Yes, you read that right: Apart from increased health-care costs, the rest of the primary deficit actually falls relative to GDP.

The CBO projects federal spending on all purposes other than health care and interest to be roughly stable as a share of GDP from 2015 to 2035, and then to drift lower. So no, America, we don't have a generalized overspending problem for the long run. We have a humongous health-care problem.

The clinker is that health care and interest on the National Debt will soon become the overwhelming, really overwhelming, components of federal spending. What will the deficit's share of GDP be after factoring in health care and interest be Professor Binder? Liberal economists like Princeton's Binder and Krugman conveniently factor out the big clinkers in their rosy deficit scenrios.

This is analogous to saying that household pending on all purposes other than food, rent, utilities, and transportation to be roughly stable as a share of GDP from 2015 to 2035, and then to drift lower.

Our Pentagon is now in the process of shifting military from other parts of the world to the vicinity of China.
Did you hear about the scenario that says the only way we can go to war with China is to borrow the money from China?

I think I'm going to be sick!

References for Comparisons of IFRS versus U.S. GAAP

US GAAP versus IFRS: The basics
2011 Edition, 56 Pages
Free from Ernst & Young
http://www.ey.com/Publication/vwLUAssetsAL/IFRSBasics_BB2280_December2011/$FILE/IFRSBasics_BB2280_December2011.pdf

IFRS and US GAAP: Similarities and Differences
2011 Edition, 238 Pages
From PwC
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!

From Deloitte
Comparisons of IFRS With Local GAAPS
http://www.iasplus.com/dttpubs/pubs.htm#compare1109
IFRS and US GAAP
July 2008 Edition, 76 Pages
http://www.iasplus.com/dttpubs/0809ifrsusgaap.pdf

Jensen Comment
At the moment I prefer the PwC reference
My favorite comparison topics (Derivatives and Hedging) begin on Page 158 in the PwC reference
The booklet does a good job listing differences but, in my opinion, overly downplays the importance of these differences. It may well be that IFRS is more restrictive in some areas and less restrictive in other areas to a fault. This is one topical area where IFRS becomes much too subjective such that comparisons of derivatives and hedging activities under IFRS can defeat the main purpose of "standards." The main purpose of an "accounting standard" is to lead to greater comparability of inter-company financial statements. Boo on IFRS in this topical area, especially when it comes to testing hedge effectiveness!

One key quotation is on Page 165

IFRS does not specifically discuss the methodology of applying a critical-terms match in the level of detail included within U.S. GAAP.
Then it goes yatta, yatta, yatta.

Jensen Comment
This is so typical of when IFRS fails to present the "same level of detail" and more importantly fails to provide "implementation guidance" comparable with the FASB's DIG implementation topics and illustrations.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

"How to Raise $1 Trillion Without a VAT or a Rate Hike," by Calvin H. Johnson, University of Texas Law School, 2010 ---
http://www.utexas.edu/law/faculty/calvinjohnson/How_to_Raise 1_Trillion.pdf

Details are provided in the lengthy Table 1 of the article.
The most controversial item in my opinion is the repeal of the tax exemption for tax-free bonds used by towns, counties, states, and school districts. At the moment investors are willing to put their money in tax-exempt bonds having lower returns than corporate bonds and in most instances higher default risks. Of course comparisons are highly dependent upon what bond issues are being compared.
See http://seattletimes.nwsource.com/html/opinion/2016792850_guest18mcintire.html

What makes repeal of tax-free bonds is the enormous rise in interest rates that must be paid by towns, counties, states, and school districts if investors do not get a tax break. Of course, the Federal Government could subsidize those jurisdictions, but this seems to be self-defeating in terms raising revenues to reduce the Federal deficit.

And unless we elect Hugo Chavez as President of the United States, the Federal Government probably cannot make present municipal bondholders eat the tremendous loss in bond values. Calvin Johnson suggests that the Federal government would have to make up these losses to present bondholders. The cost of doing this would be tremendous.

President Obama has proposed capping the exemptions ---
http://www.reuters.com/article/2012/02/13/us-usa-budget-municipals-idUSTRE81C1AZ20120213
But he does not want to discuss the impact of this proposal on financing of owns, counties, states, and school districts. His proposal is also inconsistent with his desire to increase the quality and quantity of public schools. Personally, I think he proposed this as a bargaining chip with no real intent to pull the rug out from under towns, counties, states, and school districts.

And he must consider what his proposal will do to property taxes now used primarily to fund education, county hospitals, etc. In my opinion it would send property taxes (and according rents) through the roof. And the middle class and poor bear a huge portion of these property taxes. This in turn would hit the already-sick real estate market like a pandemic.

Teaching Case on How IFRS Resistance Was Futile All Along: A Revenue Bonanza for CPA Firms, the AICPA, and Other Training Providers

From The Wall Street Journal Accounting Weekly Review in February 24, 2012

U.S. Nears Accounting Shift
by: Michael Rapoport
Feb 21, 2012
Click here to view the full article on WSJ.com

TOPICS: FASB, Financial Accounting Standards Board, Financial Reporting, International Accounting Standards, International Accounting Standards Board, SEC, Securities and Exchange Commission

SUMMARY: James Kroeker of the SEC spoke at an IFRS advisory panel in London on Monday, February 20, 2012. He discussed the SEC's current thinking on adoption of IFRS and the role of the FASB in that system. According to the article, his comments were made "in terms that hinted that he and his staff were gravitating toward a middle-ground 'endorsement' proposal, under which IFRS would be incorporated into U.S. rules and U.S. rule makers would retain the authority to evaluate future global rules for U.S. use."

CLASSROOM APPLICATION: The article is useful to bring to students' attention the current status of a U.S. shift to global financial reporting standards (IFRS) established by the IASB with review and endorsement by the FASB.

QUESTIONS:
1. (Advanced) Who establishes International Financial Reporting Standards (IFRS)?

2. (Advanced) Summarize the status of use of IFRS from comments in this article, augmented by information on the web located at http://www.ifrs.org/Use+around+the+world/Use+around+the+world.htm.

3. (Introductory) According to the article, why are "international authorities...pushing the [U.S. Securities and Exchange Commission] to move U.S. companies to use the global rules"? Why do accounting firms and large multinational corporations also support this view?

4. (Advanced) What is principles-based standard setting? How is this different from the approach generally taken under U.S. Generally Accepted Accounting Principles (U.S. GAAP)?

5. (Introductory) According to the article, as the U.S. moves to using IFRS, what will become the role of the Financial Accounting Standards Board (FASB)?

SMALL GROUP ASSIGNMENT:
Access the SEC web site at www.sec.gov. Search for the term "condorsement" through the Search field in the upper right hand. Locate the speech by Deputy Chief Accountant Paul A. Beswick on December 6, 2010, to the AICPA National Conference on Current SEC and PCAOB Developments. Answer the following two questions: What does this coined term "condorsement" mean? What role does this approach imply for the FASB?

Reviewed By: Judy Beckman, University of Rhode Island

"U.S. Nears Accounting Shift," by Michael Rapoport, The Wall Street Journal, February 21, 2012 ---
http://online.wsj.com/article/SB10001424052970204131004577235480168228286.html?mod=djem_jiewr_AC_domainid

Regulators are edging closer to switching U.S. companies to global accounting rules, as the Securities and Exchange Commission's top accountant suggested Monday he was moving toward recommending a long-discussed compromise approach.

International authorities are pushing the SEC to move U.S. companies to use the global rules, known as International Financial Reporting Standards, to unify companies world-wide under the same accounting system. American corporations are watching intently for a recommendation from the SEC's staff about whether the commission should do so. Big accounting firms and multinational companies say a move would simplify their accounting and make it easier for them to raise capital around the world, while skeptics say it would be too costly and burdensome.

Most companies world-wide now use IFRS, but the U.S. still uses its own set of rules, known as generally accepted accounting principles. IFRS allows companies more flexibility and judgment than GAAP. The global system is centered on applying guiding principles of accounting rather than following GAAP's set of detailed rules.

The SEC's staff hasn't made a recommendation yet. But on Monday, SEC Chief Accountant James Kroeker discussed the matter in terms that hinted that he and his staff were gravitating toward a middle-ground "endorsement" proposal, under which IFRS would be incorporated into U.S. rules and U.S. rule makers would retain the authority to evaluate future global rules for U.S. use.

Speaking to an IFRS advisory panel in London, Mr. Kroeker said that the rules to be used globally "would be the standards of the IASB"—the International Accounting Standards Board, which created IFRS—and that the Financial Accounting Standards Board, the U.S. rule maker, would play "an endorsing role."

Joel Osnoss, Deloitte Touche Tohmatsu Ltd.'s global leader for IFRS, said Mr. Kroeker's remarks "clearly confirm" that he and his staff are heading toward a recommendation that the SEC use IFRS for American companies.

Continued in article

Jensen Comment
ASC = Always Codification Stupidity
Kiss the FASB's Codification Database goodbye. It was probably a waste of millions of dollars all along.

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

The Jr. Deputy Accountant finally got around to Texas:
"Don't Worry, We Didn't Forget Those Texas College CPA Exam Results," Adrienne Gonzalez, Going Concern, February 15, 2012 ---
http://goingconcern.com/post/dont-worry-we-didnt-forget-those-texas-college-cpa-exam-results

Jensen Comment
Even though I'm proud of the performance of Trinity University in 2011, once again I remind readers that there is much more variability among small universities like Trinity University that have so few CPA exam takers each year. The University of Texas at Austin is consistently at or near the top in Texas with low variability because it has a relatively large number of CPA exam candidates each year, and UT has relatively very high admission standards for the masters of accounting program. Trinity, on the other hand, is more likely to have good years and bad years due to small sample effects and loss of some of the best graduates (see below).

Because of Trinity has much higher tuition for an accounting masters degree than the state universities, there is some attrition of Trinity's four-year accounting graduates to the state universities, especially to the University of Texas at Austin. It was always sad to lose some of our best graduates to UT, but we knew UT would take good care of them.

Texas CPA examination performances are heavily impacted by SAT/ACT/GMAT exam scores of accountancy graduates. This is consistent with virtually all the other 50 states in the United States. Schools with the highest admission standards will have the higher performing graduates on average.

I don't attribute high CPA exam scores to curricula focused more heavily on teaching toward the CPA examination. When I left Trinity University, Trinity was experimenting with a CPA exam review course at the very strong request of accounting students in the masters program. I did not teach that course, but when I retired in 2006 the professor (Katherine Lopez) teaching the CPA review course was re-assigned to teach my Accounting Theory course. The CPA review course was dropped from the curriculum without having any adverse impacts on CPA exam performance of Trinity's graduates. I might add that when I taught Accounting Theory my students complained that the course really did not help them on the CPA examination. The topics covered (like accounting for derivative financial instruments, portfolio theory, risk metrics, financial structures, and securitization) are considered too complicated for the CPA examination ---
http://www.trinity.edu/rjensen/acct5341/acct5341.htm

We should not give too much credit to accounting faculty when their top students do well on the CPA examination. Because those students also are top performers in terms of SAT/ACT/GMAT exam scores, those students have more intellectual ability and motivation to get the most out of commercial CPA examination review courses like Becker, Bisk, Gleim, etc. ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

Stanford Business asked a random selection of faculty, students, and alumni about their latest enjoyable non-required reading. Here are some selections that demonstrate the diversity of the GSB community ---
http://www.gsb.stanford.edu/news/bmag/sbsm1201/nw_reading.html?utm_source=Knowledgebase&utm_medium=email&utm_campaign=February-12

"Why Companies Fail: GM’s stock price has sunk by a third since its IPO. Why is corporate turnaround so difficult and rare? The answer is often culture—the hardest thing of all to change," by Megan McArdle, The Atlantic, March 2012 ---
http://www.theatlantic.com/magazine/archive/2012/03/why-companies-fail/8887/

Jensen Comment
There are some enormous causes not given enough credit in this article. For example, GM failed largely because it signed off on commitments that doomed it to failure such as underfunding of pensions by billions of dollars and agreeing to union wages that could not be sustained due to labor competition both inside the United States (e.g., from southern right-to-work states preferred by foreign automakers building assembly plants in the U.S,) and outside the U.S. such as in Mexico. Then there were the causes focused on in this article such as failure to adapt to changed competition building higher quality vehicles with newer technology.

While I was reading this article I kept wondering how much of it could be extrapolated to the auditing industry that has and still is resisting change. The number one ingredient of audit firm success is its integrity. That ingredient seems to be crumbling with weekly headlines about one audit failure after another. How long can this go on? Fortunately, the courts and the SEC have given the U.S. audit industry new life by failing to punish it harshly for shoddy audits in the subprime banking scandals. But such leniency may not continue into the future, especially outside the U.S. where we're hearing rumblings about anti-trust breakups of the large auditing firms.

Bob Jensen's threads on audit firm professionalism are at
http://www.trinity.edu/rjensen/Fraud001c.htm

Joe Hoyle advises students on how to improve their test scored in Intermediate II ---
http://joehoyle-teaching.blogspot.com/2012/02/how-can-you-get-better.html

AAA PUBLISHES STUDY ON DISCLOSURE TONE AND SHAREHOLDER LAWSUITS ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151874

In the U.S. there are both state and federal jurisdictions. And there can be individual or class action lawsuits brought by plaintiffs. One of the better sources for federal securities class action lawsuits is the Stanford University Law School Federal Class Action Clearinghouse ---
http://securities.stanford.edu/
But this by no means covers most of the lawsuits against large auditing firms. In fact, the database has surprisingly few hits for Big Four firms. Many of the SEC lawsuits are not in this database.

For lawsuits dealing with derivative financial instruments I also have a tidbit timeline at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Of course the lawyers are going to use their very expensive legal research databases. A list of sources in the U.S. is provided in
http://en.wikipedia.org/wiki/Legal_Research

Bob Jensen's threads on shareholder lawsuits ---
http://www.trinity.edu/rjensen/Fraud001.htm

US CHAMBER OF COMMERCE ISSUES REPORT FOR IMPROVING SEC OPERATIONS ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151862

Unitek IT Training from Cisco --- http://www.unitek.com/training/

Bob Jensen's threads on online training alternatives ---
http://www.trinity.edu/rjensen/Crossborder.htm#Training

Possibly the Worst Academic Scandal in Past 100 Years: Deception at Duke
The Loose Ethics of Co-authorship of Research in Academe

In general we don't allow faculty to have publications ghost written for tenure and performance evaluations. However, the rules are very loose regarding co-author division of duties. A faculty member can do all of the research but pass along all the writing to a co-author except when co-authoring is not allowed such as in the writing of dissertations.

In my opinion the rules are too loose regarding co-authorship. Probably the most common abuse in the current "publish or perish" environment in academe is the partnering of two or more researchers to share co-authorships when their actual participation rate in the research and writing of most the manuscripts is very small, maybe less than 10%. The typical partnering arrangement is for an author to take the lead on one research project while playing only a small role in the other research projects
Gaming for Tenure as an Accounting Professor ---
http://www.trinity.edu/rjensen/TheoryTenure.htm
(with a reply about tenure publication point systems from Linda Kidwell)

Another common abuse, in my opinion, is where a senior faculty member with a stellar reputation lends his/her name to an article written and researched almost entirely by a lesser-known colleague or graduate student. The main author may agree to this "co-authorship" when the senior co-author's name on the paper improves the chances for publication in a prestigious book or journal.

This is what happened in a sense in what is becoming the most notorious academic fraud in the history of the world. At Duke University a famous cancer researcher co-authored research that was published in the most prestigious science and medicine journals in the world. The senior faculty member of high repute is now apologizing to the world for being a part of a fraud where his colleague fabricated a significant portion of the data to make it "come out right" instead of the way it actually turned out.

What is interesting is to learn about how super-knowledgeable researchers at the Anderson Cancer Center in Houston detected this fraud and notified the Duke University science researchers of their questions about the data. Duke appears to have resisted coming out with the truth way to long by science ethics standards and even continued to promise miraculous cures to 100 Stage Four cancer patients who underwent the miraculous "Duke University" cancer cures that turned out to not be miraculous at all. Now Duke University is exposed to quack medicine lawsuit filed by families of the deceased cancer patients who were promised phone 80% cure rates.

The above Duke University scandal was the headline module in the February 12, 2012 edition of CBS Sixty Minutes. What an eye-opening show about science research standards and frauds ---
Deception at Duke (Sixty Minutes Video) --- http://www.cbsnews.com/8301-18560_162-57376073/deception-at-duke/

Next comes the question of whether college administrators operate under different publishing and speaking ethics vis-à-vis their faculty
"Faking It for the Dean," by Carl Elliott, Chronicle of Higher Education, February 7, 2012 ---
http://chronicle.com/blogs/brainstorm/says-who/43843?sid=cr&utm_source=cr&utm_medium=en

Added Jensen Comment
I've no objection to "ghost writing" of interview remarks as long as the ghost writer is given full credit for doing the writing itself.

I also think there is a difference between speeches versus publications with respect to citations. How awkward it would be if every commencement speaker had to read the reference citation for each remark in the speech. On the other hand, I think the speaker should announce at the beginning and end that some of the points made in the speech originated from other sources and that references will be provided in writing upon request.

Bob Jensen's threads on professors who let students cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#RebeccaHoward

Bob Jensen's threads on professors who cheat
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize

"E.U. Commission & U.S. DOJ Approve Google's Acquisition of Motorola," by Dan Rowinski, ReadWriteWeb, February 13, 2012 ---
http://www.readwriteweb.com/archives/european_commission_approves_googles_acquisition_o.php

. . .

Ostensibly, Google is buying Motorola Mobility for its 17,000 patents. Unlike Taiwanese smartphone maker HTC, Motorola has faired well in the patent wars, winning battles against Apple in courts around the world in recent weeks. Motorola lost the most recent battle over "3G" technology in Germany but overall has faired better than other Android device makers like Samsung.

Continued in article

Jensen Comment
This make for an interesting accounting problem when most of the fair value of company is in intangibles.

Does this make the booked assets on the balance sheet seem irrelevant for valuation purposes?

Megabanks Backing Away From Mark-to-Market Accounting
"Change In Loan-Tallying Method," by Liz Rappaport, The Wall Street Journal, February 17, 2012 ---
http://online.wsj.com/article/SB10001424052970204059804577227602059483034.html?mod=dist_smartbrief

Goldman Sachs Group Inc. and Morgan Stanley have reduced their use of "mark-to-market" accounting, shielding them from swings in the value of some loans made to companies.

After several months of internal discussion, the two companies are making an accounting change affecting a portion of corporate loans that have a combined value of more than $100 billion. The change will value that portion using so-called historical-cost accounting, according to financial filings and people familiar with the matter.

Under that accounting method, assets generally are held at their original value or purchase price. Goldman and Morgan Stanley could set aside reserves against possible losses on the loans and hedge them in other ways.

The banks are making the change in part because, as a result of regulators' rules, securities firms using historical-cost accounting won't have to hold much-larger amounts of capital against the assets if their values go down. There also will be less fluctuation in Goldman and Morgan Stanley's earnings, because marking the loans to market creates immediate gains or losses for the companies as the values of the loans fluctuate.

Goldman reported a loss of $450 million in the fourth quarter on the New York company's overall portfolio of corporate loans, including losses or gains on hedges. At the end of the third quarter, its portfolio of loan commitments was $34 billion. Goldman hasn't disclosed the size of its portfolio in the fourth quarter. It also hasn't disclosed how much of its loan portfolio it plans change the accounting for.

Morgan Stanley is likely to change over a portion of its $82 billion loan portfolio, said a person familiar with the matter. As of the end of the year, Morgan Stanley had already moved $9.7 billion of its loan portfolio to historical-cost accounting. The firms may use this accounting method for new loans and commitments.

Morgan Stanley didn't disclose a gain or loss on its loan portfolio in the fourth quarter of 2011. In the third quarter, it took a loss of about $400 million on its portfolio of corporate loans.

Goldman and Morgan Stanley became bank-holding companies in 2008, giving them access to emergency funds from the Federal Reserve's discount window. But both companies now are subject to Fed stress-test guidelines, which include weighing the financial impact of economic and market shocks.

Under the stress tests and international capital rules, Goldman and Morgan Stanley would be required to set aside more than twice as much capital against the loans if they were marked down in value.

Using the new accounting treatment, Goldman and Morgan Stanley must hold no capital against those loans. Instead, they set aside reserves to cushion against possible losses.

"The focus on capital by the Fed and global regulators is driving Goldman and other dealers to re-evaluate their businesses and even accounting methodologies to improve their capital metrics," said Roger Freeman, an analyst at Barclays Capital.

Goldman's Chief Financial Officer David Viniar said in a conference call in January that Goldman's contemplating the change was "driven by the more-onerous capital treatment."

Goldman executives including its Chairman and Chief Executive Lloyd C. Blankfein have defended mark-to-market accounting, saying wider use of the method might have forced financial firms to reckon with their problems sooner during the crisis.

Continued in article

Pulling the New IFRS 13 Onto the Tarmac
"Are you ready for the new fair value accounting?" by Francisco Roque A. Lumbres, Business World, January 23, 2012 ---
http://www.bworldonline.com/content.php?section=Economy&title=Are-you-ready-for-the-new-fair-value-accounting?&id=45461

Fair value accounting, often referred to as mark-to-market accounting, has been the subject of much discussion and controversy, and the fact that various ways of measuring fair value were spread among different International Financial Reporting Standards (IFRS) has contributed to many questions regarding fair value accounting.

To create a uniform framework for fair value measurements that consolidates into one single standard the various ways of measuring fair value, the International Accounting Standards Board (IASB) issued IFRS 13, Fair Value Measurements to reduce complexity and improve consistency in the application of fair value measurements. IFRS 13 also aims to enhance fair value disclosures to help users assess the valuation techniques and inputs used to measure fair value. IFRS 13 was published last May 12, 2011 and will become effective by January 1, 2013. It is applied prospectively, and early adoption is allowed.

IFRS 13 clarifies how to measure fair value when it is required or permitted in IFRS. It does not change when an entity is required to use fair value. Furthermore, IFRS 13 covers both financial and non-financial assets and liabilities.

Key principles of IFRS 13

IFRS 13 applies when another IFRS standard requires or permits fair value measurements or disclosures. It does not, however, apply to transactions within the scope of:

• International Accounting Standards (IAS) 17, Leases;

• IFRS 2 Share-Based Payments; and,

• Certain other measurements that are similar but are not fair value, that are required by other standards, such as value in use in IAS 36, Impairment of Assets and net realizable value in IAS 2, Inventories.

Fair value defined

IFRS 13 now defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Therefore, the focus now is on exit price as against entry price.

Market participant assumptions

When measuring fair value, IFRS 13 requires an entity to consider the characteristics of the asset or liability as market participants would. Hence, fair value is not an entity-specific measurement; it is market-based.

Principal or most advantageous market

A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place in the “principal market” for the asset or liability or, in the absence of a principal market, in the “most advantageous market” for the asset or liability.

The principal market is the market with the greatest volume and level of activity for the asset or liability to which the entity has access to. On the other hand, the most advantageous market is the market that maximizes the amount that would be received for the sale of the asset or minimizes the cost to transfer the liability, after considering transaction and transport costs.

Highest and best use

The concept of “highest and best use” applies to non-financial assets only. Fair value considers a market participant’s ability to generate economic benefits by using the asset in its highest and best use. Highest and best use is always considered when measuring fair value, even if the entity intends a different use of the asset.

Fair value hierarchy

Fair value measurements are classified into three levels which prioritize the observable inputs to the valuation techniques used and minimize the use of unobservable data.

• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

• Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

• Level 3: Unobservable inputs for the asset or liability.

Valuation techniques and inputs

IFRS 13 describes the valuation approaches to be used to measure fair value: the market approach, income approach and cost approach. IFRS 13 does not specify a valuation technique in any particular circumstance; it is up to the entity to determine the most appropriate valuation technique.

• Market approach: Uses prices and other relevant information from market transactions involving identical or similar assets or liabilities. A commonly-used technique is the use of market multiples derived from “comparables.”

• Income approach: Converts future amounts (e.g., cash flows or income and expenses) to a single current (discounted) amount. Valuation techniques may include a discounted cash flows approach, option-pricing models, or other present-value techniques.

• Cost approach: Reflects the amount currently needed to replace the service capacity of an asset (also known as the current replacement cost)

Disclosure requirements

IFRS 13 expanded required disclosures to help the users understand the valuation techniques and inputs used to measure fair value and the impact of fair value measurements on profit and loss. The required disclosures include:

• Information about the level of fair value hierarchy;

• Transfers between levels 1 and 2;

• Methods and inputs to the fair value measurements and changes in valuation techniques; and

For level 3 disclosures, quantitative information about the significant unobservable inputs and assumptions used, and qualitative information about the sensitivity of recurring level 3 measurements.

Business impact and next steps

Practically all entities using fair value measurements will be subject to IFRS 13, which will require certain fair value principles and disclosures that will significantly impact application and practice. Therefore, management should:

• Begin to assess the effect of IFRS 13 on valuation policies and procedures;

• Have competent knowledge when making judgments in fair value measurements;

• Consider whether it has appropriate expertise, processes, controls and systems to meet the new requirements in determining fair value and disclosures;

• Revisit loan covenants, compensation plans, shareholder communications and analyst expectations;

• Have discussions with systems vendors, appraisers, investment advisors and/or investment custodians; and,

• Be able to demonstrate to regulators and its external auditors that it understands the requirements of IFRS 13. This will greatly assist both regulators and external auditors in their annual examination and audit.

The mandatory implementation of this new standard is less than a year away. The clock is ticking; the time to act is now.

Fair Value Accounting for Liabilities
"VISA’s LITIGATION ESCROW FUND," by Anthony H. Catanach, Jr. and J. Edward Ketz, Grumpy Old Accountants, January 2, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/470

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

"Using Google Docs to Check In On Students’ Reading," by Brian Croxall, Chronicle of Higher Education, February 8 ,2012 ---
http://chronicle.com/blogs/profhacker/using-google-docs-to-check-in-on-students-reading/38405?sid=wc&utm_source=wc&utm_medium=en

Last semester I taught my favorite book, Mark Z. Danielewski’s House of Leaves. With nightly reading assignments that take three to four hours, I expect students to fall behind. So I wasn’t surprised when, a few days in, I asked if everyone had done all the reading and the majority of the class avoided looking at me. Such are the occupational hazards of teaching.

We’re only a few weeks into the semester, but experience shows that it’s never too early for students to get behind in their reading—even if you’re not teaching amazing post-print fiction. While students clearly have the right to choose what they will and will not read, when a significant portion of the class falls behind it can make it very difficult to lead a class discussion.

Last semester, I heard a strategy from my friend and colleague Alyssa Stalsberg-Canelli for dealing with exactly this problem: have the students write down the page number they’ve reached in their reading on a scrap of paper and pass it up to the front. Students can then tell you, more or less anonymously, how far they’ve come in their reading. Taking the class’s temperature in this manner allows you to adjust your strategy for leading the class and saves you from asking questions that no one will be able to answer, resulting in the not-so-golden silence.

For just one more turn of the screw, I decided to forego the pieces of paper and instead used Google Docs. (You want posts about Google Docs? We got ‘em!) First, I created a spreadsheet. As I’ve said before, I use spreadsheets for everything! Then I clicked the “Share” button in the upper right corner.

Continued in article

"Google Docs Can Now Be Exported Through Takeout," by Jon Mitchell, ReadWriteWeb, January 24, 2012 ---
http://www.readwriteweb.com/archives/google_docs_data_can_now_be_exported_through_takeo.php

Bob Jensen's threads on Google Docs are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#GoogleApps

Graphic: How Much People Pay for Health Care Around the World ---
http://visual.ly/how-much-people-pay-health-care-around-world

"5% of patients account for half of health care spending," by Kelly Kennedy, USA Today, January 20, 2012 ---
http://www.usatoday.com/news/washington/story/2012-01-11/health-care-costs-11/52505562/1

Some Interesting State Comparisons on State& Local Taxation, Business Climate, and Debt Per Capita
http://www.cs.trinity.edu/~rjensen/temp/StateComparisons2012.htm

"IRS: Identity Theft Crackdown Sweeps Across the Nation: More than 200 Actions Taken In Past Week in 23 States," SmartPros, February 1, 2012 ---
http://accounting.smartpros.com/x73338.xml

. . .

To help taxpayers, the IRS earlier this month created a new, special section on IRS.gov dedicated to identity theft matters, including YouTube videos, tips for taxpayers and a special guide to assistance. The information includes how to contact the IRS Identity Protection Specialized Unit and tips to protect against “phishing” schemes that can lead to identity theft.

Identity theft occurs when someone uses another’s personal information without their permission to commit fraud or other crimes using the victim’s name, Social Security number or other identifying information. When it comes to federal taxes, taxpayers may not be aware they have become victims of identity theft until they receive a letter from the IRS stating more than one tax return was filed with their information or that IRS records show wages from an employer the taxpayer has not worked for in the past.

If a taxpayer receives a notice from the IRS indicating identity theft, they should follow the instructions in that notice. A taxpayer who believes they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. The taxpayer should contact the IRS Identity Protection Specialized Unit at 800-908-4490. The taxpayer will be asked to complete the IRS Identity Theft Affidavit, Form 14039, and follow the instructions on the back of the form based on their situation.

Taxpayers looking for additional information can consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on the IRS website.

Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

"IRS Defangs Credit Card Reporting Rule: The Internal Revenue Service responds to business concerns by eliminating a requirement from its new pay card reporting rule," by Marielle Segarra, CFO.com, February 14, 2012 ---
http://www3.cfo.com/article/2012/2/accounting-tax_irs-strikes-reconciliation-from-6050w-1099k-reporting-

Responding to an outcry from small-business concerns, the Internal Revenue Service has taken some of the teeth out of a tax reporting regulation that the National Federation of Independent Business has called an “onerous and unnecessary” step for companies filing tax returns to comply with laws governing credit and debit cards.

The rule, part of the Housing and Economic Recovery Act of 2008, requires companies to explain any disparities between their own records of receipts for payment card transactions with numbers that their payment card processors must now report to the IRS.

It also requires payment processors – often banks and online businesses like PayPal that keep track of payment card receipts – to report the sum of transactions for each of their merchants in monthly increments on 1099-K forms.

Starting next year, the IRS would have asked companies to explain the differences between those numbers and their own internal records on their tax returns. This new process was an attempt “to increase voluntary tax compliance, improve collections and assessments within IRS, and thereby reduce the tax gap,” the IRS wrote on its website.

But after meeting with the NFIB and other industry groups, the IRS has agreed to strike the requirement that companies reconcile the two numbers. The IRS has no intention of requiring reconciliation in future years, IRS Deputy Commissioner Steven T. Miller said in a Feb. 9 letter to the NFIB.

Business groups like the International Franchise Association and the NFIB had protested the rule, saying it would increase the administrative burden on businesses. A company’s internal record of gross receipts would rarely match the amount its payment processors would report on 1099-K forms, they contended.

The 1099-K figure would include cash refunds, sales tax, tips, and other fees that merchants would not consider part of gross receipts, says Chris Walters, senior manager of legislative affairs at the NFIB. Businesses that sell lottery tickets get only a small part of a ticket's sale price, for instance, but the complete revenue from the ticket appears up as a charge on a credit card statement, Walters adds.

At the same time, businesses will usually refrain from including the government portion of the sale in their gross receipts on their internal records. With this almost-guaranteed disparity between the amount reported on the 1099-K and a company’s internal record of receipts, reconciling the sums would require small businesses to invest time and capital in more-sophisticated accounting systems, Walters says.

But IRS has scotched the reconciliation requirement. Now, when it comes to reporting gross receipts and sales, company tax returns will revert to what they looked like in 2010. Still, since payment processors will continue to submit 1099-K forms, companies may have to change the way they keep their records, says Lewis Taub, tax director at McGladrey and Pullen LLP.

Continued in article

Keep in mind that nearly half of all U.S. "taxpayers" pay zero or negative income taxes!

"Working All Day For the I.R.S.," by James B. Steward, The New York Times, February 17, 2012 --- Click Here
http://www.nytimes.com/2012/02/18/business/working-all-day-for-the-irs-common-sense.html?_r=2&adxnnl=1&ref=business&adxnnlx=1329653387-Qk2jd7VEcw0/dRTE1VBETw

Mitt Romney is not alone. I thought Mr. Romney’s 13.9 percent federal tax rate would be hard to beat. But among the 400 Americans with the highest adjusted gross incomes in 2008, 30 of them paid less than 10 percent and another 101 paid less than 15 percent. And these people earned, on average, more than 10 times Mr. Romney’s $21.7 million — an average of $270.5 million each.

¶ After I disclosed a few weeks ago that I pay 37 percent of my adjusted gross income and 74 percent of my taxable income in combined federal, state and local income and payroll taxes, I asked the Internal Revenue Service how that compares with other taxpayers. I never got a simple answer (and an I.R.S. spokesman said the agency could not discuss individual returns).

¶ But this week, the I.R.S. sent me reams of data, including analyses of returns from taxpayers reporting adjusted gross income of more than $200,000 and returns from the top 400 taxpayers. Some data were from 2009, but most went back to 2008. (The agency offered no explanation as to why it takes so many years to compile.) But the data helps explain why many people are so angry about the tax code.

¶ Relatively few taxpayers pay an enormous percentage of the total federal income tax, and most of them are people who work for a living and have adjusted gross incomes of $100,000 to $500,000, which is the sweet spot for tax revenue. They account for 20.2 percent of total returns but pay a whopping 44.9 percent of total tax. The average tax rate for this group ranges from 11.9 percent for those with less than $200,000 in adjusted gross income to 19.6 percent for those with $200,000 to $500,000. Above those income levels, the rate rises to close to 25 percent and then declines to 22.6 percent for taxpayers earning more than $10 million.

¶ The I.R.S. doesn’t break down the data for incomes above $10 million, but the results for the top 400 returns suggest that the rate continues to decline as incomes rise. The top 400 paid an average of $49 million, or 18.1 percent of their adjusted gross income, in federal tax — lower than taxpayers in the $200,000 to $500,000 bracket. They reported an average $14.1 million in state and local taxes, bringing their total income tax level to about 23 percent of adjusted gross income, far below my rate. And not one of them paid more than 35 percent of their adjusted gross income in federal tax.

¶ I spoke this week to the investigative reporters Don Barlett and Jim Steele, who are working on a sequel to their best-selling book “America: What Went Wrong,” first published in 1992. They said that tax inequities had gotten worse since 1994, when they published “America: Who Really Pays the Taxes,” and described the tax system as “out of control.”

¶ Now, “The tax code has been so skewed against most people, with remarkable tax cuts for folks at the top, that the whole concept of fairness has gone out the window,” Mr. Steele said. Mr. Barlett, pointing to disparate rates even among people in the same income brackets, added: “There’s enormous horizontal inequity, enormous.”

¶ The budget that President Obama unveiled this week included some hot-button tax measures aimed at some of these inequities: capping deductions and raising taxes on people earning more than $1 million (the so-called Buffett Rule), scrapping the alternative minimum tax and raising the tax on dividend income and carried interest. The liberal Economic Policy Institute noted, “No budget is perfect,” but applauded the president’s stab at tax reform. “The need for the Buffett Rule,” it said, “is largely driven by the preferential tax treatment of investment income over work income.”

The I.R.S. data makes clear that the differing treatment of earned and unearned income accounts for most of the disparity between tax rates for the ultrawealthy and those who make much less. Salaries and wages accounted for only 8.8 percent of adjusted gross income for the top 400 taxpayers. Interest and dividends made up 16 percent and net capital gains accounted for nearly 57 percent. So on average, 73 percent of their income was unearned and taxed at favorable rates.

For people with incomes of more than $200,000, salaries and wages make up nearly 50 percent of their adjusted gross income. Interest income accounted for 4 percent and dividends were just under 5 percent. Capital gains were 17.3 percent. “The people who pay all the taxes are the same people who are working,” Mr. Barlett said. “If you’re paying a huge amount of tax, then you’re working.”

While proponents of lower rates for capital gains have argued that they stimulate capital investment, thereby generating jobs and economic growth (while others dispute these claims), many people wrote me to complain that by the same logic, higher rates on earned income discourage people from working.

Teresa Allen-Piccolo told me that she and her husband ran a small business in California that manufactured electronic monitoring systems for the environment. “We represent what almost every politician purports to love — self-made, no loans, no government assistance, just hard work,” she wrote. “After decades of hard, virtually unpaid work, in 2009 and 2010 the business finally picked up. Our total taxes went from $17,000 to $106,000 in 2010 — about half of our taxable income! What can one say? Were it not that we are committed to environmental protection and giving employment, we would be much better off shutting down the business and just doing some consulting work on the side.”

Jeff Hoopes noted that as a low-paid Ph.D. candidate in accounting at the University of Michigan, his average tax rate was low, but his marginal rate reached 35 percent because his earned-income credit was reduced when he made extra money from “house-sitting, selling books and tutoring.” He went on: “For providing incentives to work, the marginal rate is what counts. So while my average rate suggests that I am lightly taxed (perhaps unfair to others who pay more), my marginal rate suggests I have lesser incentives to work, as I take home less than 65 percent of what I earn. It is the worst of both worlds.”

Mr. Obama’s proposal to raise taxes on dividends attacks just one aspect of the disparity between the ultrarich and others, but it is significant. The top 400 taxpayers reported average dividend income of $25 million in 2008, which accounted for 4.55 percent of total dividend income.

That such a tiny sliver of the population would account for nearly one-twentieth of total dividend income “drives me crazy,” Mr. Steele said. “Although roughly 50 percent of Americans own stocks or mutual funds, dividends go overwhelmingly to the top 2 percent of the taxpayers. Those are the people who rake in the dividends. Why should that money be taxed at a lower rate?”

Like many defenders of the lower rate, Curtis Dubay, senior policy analyst at the conservative Heritage Foundation, argues that “the dividends tax is a double tax, since the corporate income that dividends come from are already taxed 35 percent at the business level.” The effective rate on dividends, Mr. Dubay maintained, “would stand at more than 63 percent if President Obama’s misguided policy became law. This would significantly curtail investment and slow economic growth.”

Continued in article

Jensen Comment
For taxpayers that owe long-term capital gains taxes, the tax code will never be fair until long-term capital gains are indexed for inflation ---
http://en.wikipedia.org/wiki/Inflation
See the graphs at
http://worldoftak.ning.com/forum/topics/the-long-goodbye-the-declining
http://www.global-rates.com/economic-indicators/inflation/consumer-prices/cpi/united-states.aspx

One thing President Obama never mentions in his quest to raise the taxation of capital gains is that long-term gains should really be indexed for inflation. The purchasing power of dollars invested in years earlier is being paid back in current dollars that will buy a whole lot less. The injustice is that it's possible to have a purchasing power loss on long term capital gains that nevertheless gets taxed. Special capital gains rates are intended to give some relief from this type of injustice and its disincentives to hold long-term investments.

For example, the purchasing power of a 1913 dollar declined from 24 cents in 1971 to 4.6 cents in 2009. Most if not all the so-called gain of a 1971 long-term investment may well be a purchasing power loss. For example, an Iowa farm purchased in 1950 may sell for over $1 million gain today that might well be a purchasing power loss if the farm was purchased or inherited just after World War 2.

Source: http://worldoftak.ning.com/forum/topics/the-long-goodbye-the-declining

The American Dream: A Free Ride
Nearly Half of All Americans Don’t Pay Income Taxes
http://blog.heritage.org/2012/02/19/chart-of-the-week-nearly-half-of-all-americans-dont-pay-income-taxes/

Freshman Research Initiative (at the University of Texas) --- http://fri.cns.utexas.edu/

Undergraduate Research Ethics Cases ---
http://www.udel.edu/chem/white/HHMI3/EthicsCases.html

Council on Undergraduate Research on the Web --- http://www.cur.org/quarterly/webedition.html

JURF: The Journal of Undergraduate Research in Finance ---
http://www.openculture.com/2011/01/disneys_oscar-winning_adventures_in_music.html

To my knowledge there is no equivalent journal for undergraduate accounting research. However, accountants can and do on occasion participate in the National Conferences of Undergraduate Research ---
http://www.ncur.org/

Nearly 20 years ago Trinity University hosted the annual NCUR conference. There were no accounting student submissions to be refereed that year and in most years. We were told that accounting students rarely contribute submissions. So I wrote a paper about this with the two Trinity University faculty members who coordinated the NCUR presentations on Trinity's campus that year.

"Undergraduate Student Research Programs: Are They as Viable for Accounting as They are in Science, Humanities, and Other Business Disciplines?" by Robert E. Jensen, Peter A. French and Kim R. Robertson, Critical Perspectives on Accounting , Volume 3, 1992, 337-357.

James Irving's Working Paper entitled "Integrating Academic Research into an Undergraduate Accounting Course"
College of William and Mary, January 2010

ABSTRACT:
This paper describes my experience incorporating academic research into the curriculum of an undergraduate accounting course. This research-focused curriculum was developed in response to a series of reports published earlier in the decade which expressed significant concern over the expected future shortage of doctoral faculty in accounting. It was also motivated by prior research studies which find that students engaging in undergraduate research are more likely to pursue graduate study and to achieve graduate school success. The research-focused curriculum is divided into two complementary phases. First, throughout the semester, students read and critique excerpts from accounting journal articles related to the course topics. Second, students acquire and use specific research skills to complete a formal academic paper and present their results in a setting intended to simulate a research workshop. Results from a survey created to assess the research experience show that 96 percent of students responded that it substantially improved their level of knowledge, skill, and abilities related to conducting research. Individual cases of students who follow this initial research opportunity with a deeper research experience are also discussed. Finally, I supply instructional tools for faculty who might desire to implement a similar program.

January 17, 2010 message (two messages combined) from Irving, James [James.Irving@mason.wm.edu]

Hi Bob,

I recently completed the first draft of a paper which describes my experience integrating research into an undergraduate accounting course. Given your prolific and insightful contributions to accounting scholarship, education, etc. -- I am a loyal follower of your website and your commentary within the AAA Commons -- I am wondering if you might have an interest in reading it (I also cite a 1992 paper published in Critical Perspectives in Accounting for which you were a coauthor).

The paper is attached with this note. Any thoughts you have about it would be greatly appreciated.

I posted the paper to my SSRN page and it is available at the following link: http://ssrn.com/abstract=1537682 . I appreciate your willingness to read and think about the paper.

Jim

January 18, 2010 reply from Bob Jensen

Hi Jim,

I’ve given your paper a cursory overview and have a few comments that might be of interest.

You’ve overcome much of the negativism about why accounting students tend not to participate in the National Conferences on Undergraduate Research (NCUR). Thank you for citing our old paper.
French, P., R. Jensen, and K. Robertson. 1992. Undergraduate student research programs:re they as viable for accounting as they are in science and humanities?" Critical Perspectives on Accounting 3 (December): 337-357. --- Click Here

Abstract
This paper reviews a recent thrust in academia to stimulate more undergraduate research in the USA, including a rapidly growing annual conference. The paper also describes programs in which significant foundation grants have been received to fund undergraduate research projects in the sciences and humanities. In particular, selected humanities students working in teams in a new “Philosophy Lab” are allowed to embark on long-term research projects of their own choosing. Several completed projects are briefly reviewed in this paper.

In April 1989, Trinity University hosted the Third National Conference on Undergraduate Research (NCUR) and purposely expanded the scope of the conference to include a broad range of disciplines. At this conference, 632 papers and posters were presented representing the research activities of 873 undergraduate students from 163 institutions. About 40% of the papers were outside the natural sciences and included research in music and literature. Only 13 of those papers were in the area of business administration; none were even submitted by accounting students. In 1990 at Union College, 791 papers were presented; none were submitted by accountants. In 1991 at Cal Tech, the first accounting paper appeared as one of 853 papers presented.

This paper suggests a number of obstacles to stimulating and encouraging accounting undergraduates to embark on research endeavours. These impediments are somewhat unique to accounting, and it appears that accounting education programs are lagging in what is being done to break down obstacles in science, pre-med, engineering, humanities, etc. This paper proposes how to overcome these obstacles in accounting. One of the anticipated benefits of accounting student research, apart from the educational and creative value, is the attraction of more and better students seeking creativity opportunities in addition to rote learning of CPA exam requirements. This, in part, might help to counter industry complaints that top students are being turned away from accounting careers nationwide.

In particular you seem to have picked up on our suggestions in the third paragraph above and seemed to be breaking new ground in undergraduate accounting education.

I am truly amazed by you're having success when forcing undergraduate students to actually conduct research in new knowledge.

Please keep up the good work and maintain your enthusiasm.

1
Firstly, I would suggest that you focus on the topic of replication as well when you have your students write commentaries on published academic accounting research --- http://www.trinity.edu/rjensen/TheoryTAR.htm

I certainly would not expect intermediate accounting students to attempt a replication effort. But it should be very worthwhile to introduce them to the problem of lack of replication and authentication of accountancy analytic and empirical research.

2
Secondly, the two papers you focus on are very old and were never replicated.. Challenges to both papers are private and in some cases failed replication attempts, but those challenges were not published and came to me only by word of mouth. It is very difficult to find replications of empirical research in accounting, but I suggest that you at least focus on some papers that have some controversy and are extended in some way.

For example, consider the controversial paper:
"Costs of Equity and Earnings Attributes," by Jennifer Francis, Ryan LaFond, Per M. Olsson and Katherine Schipper ,The Accounting Review, Vol. 79, No. 4 2004 pp. 967–1010.
Also see http://www.entrepreneur.com/tradejournals/article/179269527.html
Then consider
"Is Accruals Quality a Priced Risk Factor?" by John E. Core, Wayne R. Guay, and Rodrigo S. Verdi, SSRN, December 2007 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=911587
This paper was also published in JAE in 2007 or 2008.
Thanks to Steve Kachelmeier for pointing this controversy (on whether information quality (measured as the noise in accounting accruals) is priced in the cost of equity capital) out to me.

It might be better for your students to see how accounting researchers should attempt replications as illustrated above than to merely accepted published accounting research papers as truth unchallenged.

3.
Have your students attempt critical thinking with regards to mathematical analytics in "Plato's Cave" ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics
This is a great exercise that attempts to make them focus on underlying assumptions.

4.
In Exhibit 1 I recommend adding a section on critical thinking about underlying assumptions in the study. In particular, have your students focus on internal versus external validity --- http://www.trinity.edu/rjensen/TheoryTAR.htm#SocialScience .

You might look into some of the research ideas for students listed at http://www.trinity.edu/rjensen/theory01.htm#ResearchVersusProfession

5.
I suggest that you set up a hive at the AAA Commons for Undergraduate Research Projects and Commentaries. Then post your own items in this hive and repeatedly invite professors and students from around the world to add to this hive.

link:

Integrating Academic Research Into Undergraduate Accounting Courses

keywords:

Accounting Research, Analytics, Empirical Research, Undergraduate Research

From Bryn Mawr College
Serendip [Often makes use of Flash Player] --- http://serendip.brynmawr.edu/exchange/

Bob Jensen's threads on general education tutorials are at
http://www.trinity.edu/rjensen/Bookbob2.htm#EducationResearch

Most Cited Articles in Accounting, Organizations and Society ---
http://www.journals.elsevier.com/accounting-organizations-and-society/most-cited-articles/

Most Downloaded Articles in Accounting, Organizations and Society ---
http://www.journals.elsevier.com/accounting-organizations-and-society/most-read-articles/

Most Cited Articles in Critical Perspectives On Accounting ---
http://www.journals.elsevier.com/critical-perspectives-on-accounting/most-cited-articles/

Most Downloaded Articles in Critical Perspectives On Accounting ---
http://www.journals.elsevier.com/critical-perspectives-on-accounting/most-read-articles/

Jensen Comment
Note that there is a bit of timing bias in such lists. Current articles have not yet had much a chance to be the most cited or the most downloaded.

Question
Can you lower income taxes for people who don't pay any income taxes?
Note that about half the taxpayers in the United States do not pay any income taxes.

Answer
Of course. You can increase their refunds that their already receiving before you "lower" their taxes.

"Can you cut taxes for people who don't pay taxes?" Des Moines Register, February 07, 2012 ---
http://www.rothcpa.com/archives/007655.php

Jensen Comment
It was conservative economist and Nobel Prize winner Milton Friedman who advocated simplifying the welfare system by introducing a negative income tax. We seem to have a negative income tax in place without giving Professor Friedman enough credit .

"Losing Is for Losers: It’s Easier Than Ever to Back Up Your Work," by Carol Saller, Chronicle of Higher Education, February 3, 2012 --- Click Here
http://chronicle.com/blogs/linguafranca/2012/02/03/losing-is-for-losers-it%E2%80%99s-easier-than-ever-to-back-up-your-work/?sid=wc&utm_source=wc&utm_medium=en

Dropbox file synchronization and storage ---
http://en.wikipedia.org/wiki/Dropbox_(storage_provider)

"Windows 7's Built-in Backup," Lincoln Spector, PC World via The Washington Post, January 20, 2010 ---
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/18/AR2010011802423.html?wpisrc=nl_tech

Robert wants to know if Windows 7's built-in backup program is worth using.

Microsoft has a history of bundling really bad backup programs with their operating systems. The company has been accused of a lot of monopolistic behavior, but their backup programs often seemed designed to not threaten the market for third-party competitors.

So I wasn't prepared to like Windows 7's Backup and Restore. But much to my amazement, I kind of do. It does image backups for system protection and file backups for regular data protection--and does both for the Home Premium as well as the Business and Ultimate editions. For file backups, it defaults to backing up exactly what you should be backing up (libraries, appdata, and a few other important folders), and lets you tell it to back up any other folders you want to protect.

Backup and Restore can backup files incrementally, saving only those created and changed since the last backup. And it does versioning--if several versions of a file have been backed up, you can pick which you want to restore. It defaults to restoring the most recent backup, and generally avoids the confusion that versioning causes in some people.

And it's all very easy and direct.

Not that it's perfect. Backup and Restore allows you to pick which drive you wish to backup to, but won't let you pick a folder in that drive. It can be pretty picky about restoring an image, to the point where I wouldn't use it for image backup. You can save to a network, but not over the Internet. If you're looking for something better, see 7 Backup Strategies for Your Data, Multimedia, and System Files.

PC World Senior Editor Robert Strohmeyer (full disclosure: He's my editor) created a video showing how to set up a scheduled, automatic backup with Backup and Restore. But since I don't believe in automatic backups--at least not to local media like an external hard drive--I'll tell you how to back it up manually.

(What do I have against automatic backups? For them to work, the backup media must always be available. This is fine if you're backing up over a network or the Internet, but an external drive that's connected to your PC 24/7 is vulnerable to the same disasters that could destroy the data on your internal hard drive. It's best to connect a backup drive only when you need to.)

To launch the program, simply click Start, type , and select Backup and Restore. Plug in your external hard drive and click Set up backup. Make your own decisions in the setup wizard, but when you get to the last page, click Change schedule. Uncheck Run backup on a schedule (recommended), and click OK. You're set up.

To back up your data (and you should do this every day), plug in the external drive, launch Backup and Restore as described above, and click Back up now.

You can continue working as you back up.

Bob Jensen's threads on storage alternatives ---
http://www.trinity.edu/rjensen/Bookbob4.htm#archiving

Darn you Caleb Newquist for depressing us with yet another example of how Big Four accounting firm leaders think, not to mention how little they regard the investing public! In discussing ways to improve audit quality in the wake of his firm’s atrocious inspection report by the Public Company Accounting Oversight Board (PCAOB), Deloitte’s CEO, Joe Echevarria stated:

There is an “expectations gap” between what auditors do and what the public expects, but auditors do have an obligation to detect and report material (emphasis added) fraud.

These two Grumpy Old Accountants simply can’t believe that today’s global accounting firms continue to rely on an almost 40 year-old excuse to justify their shoddy audit work. Yes, we know this because we were accounting undergraduates when this feeble defense was rolled out for the first time. While the “expectations gap” reasoning may have been believable in our youth, today it is nothing but a meaningless excuse. After all, independent audits now are dramatically improved over days gone by (or so we are told), and the Big Four have had four decades (two generations of investors) to re-educate the investing public on what an independent audit really represents.

So what does this term “expectations gap” mean anyway? Well it depends on whom you ask, and when you ask them? According to Lee et al. (2009), the term appears to have been coined in 1974 by C.D. Liggio who defined it as the difference between the levels of expected performance “as envisioned by the independent accountant and by the user of financial statements.” Interestingly enough, in 1978, the American Institute of CPA’s Cohen Commission, which was appointed to investigate the existence of the “expectation gap,” concluded that it did in fact exist, and that users of financial statements were NOT principally responsible for its existence. Of course this finding preceded the AICPA becoming the lapdog of big accounting firms.

However, once academia got involved, the definition became more Big Four friendly…there’s a surprise given who funds most auditing research. Monroe and Woodliff (1993) defined the audit expectations gap as the difference in beliefs between auditors and the public about the duties and responsibilities assumed by auditors and the messages conveyed by audit reports. And, ten years later, at a forum convened by the U.S. Government Accounting Office, participants agreed that “an ‘expectation gap’ of what an audit is and what users expect continues to exist, especially with the auditor’s responsibility for fraud detection.” So, it took almost 20 years for the big accounting firms to move the “expectation gap” argument from “what performance is expected of an auditor,” to “what an auditor’s responsibilities are.” A subtle, but important change, especially if you are trying to avoid billions in legal liabilities for bad audits.

And this “expectation gap” is not solely a U.S. phenomenon. Lee et al. (2009) in their literature review, report evidence of such a gap globally. They note that the issue has been investigated in numerous countries including the United Kingdom, Australia, New Zealand, China, Singapore, Malaysia, and the Middle East. Whatever the country, the results are the same: the audit “expectation gap” still exists.

So how can the “expectations gap” be narrowed or eliminated? One proposed solution has been to establish an independent oversight authority for auditors to enhance independence, regulate audit fees, and clarify auditor responsibilities to detect fraud. Yet, despite the creation of the PCAOB in the U.S. and the Professional Oversight Board in the U.K., the gap continues.

Another suggestion is that the audit report be expanded to better convey what an audit does and implies. In fact, the 1978 Cohen Commission report noted that “evidence abounds that communication between the auditor and users of his work –especially through the auditor’s standard report – is unsatisfactory.” Almost 35 years later, the profession has finally gotten around to this potential remedy with the PCAOB’s release in June 2011 of a concept release with suggestions on modifying the auditor’s report. Not surprisingly, the big accounting firms through their lobbying mouthpiece, the Center for Audit Quality, have voiced their usual concerns to changing the audit status quo in a September 2011 statement.

It also has been suggested that the “expectation gap” can be narrowed by auditors’ increasing their use of decision aids. Such aids include standard checklists, forms, or computer programs that assist auditors in making audit decisions which ensure that they consider all relevant information, and also assist them in weighting and combining information to make a decision. As one might expect, this proposal is not very popular as it changes the status quo, admits the possibility that the audit process might actually be flawed, and potentially increases audit costs. More significantly, despite the past decade’s dramatic changes in audit technologies, the expectation gap remains.

Last, but not least is the solution most favored by the Big Four: the educating the public approach. Why? Because these big accounting firms don’t have to substantively change the way they do business, and it makes the expectation gap the public’s problem, not theirs. As Lee et al. (2009) point out, however, education is not a practical approach because the majority of the public is not university educated, and of the few that have been, even fewer have taken auditing courses. More importantly, there is simply no public interest in the work of auditors per se.

So, after almost 40 years, Deloitte’s Joe Echevarria treats us to yet another dose of the “expectation gap.” But a question remains…could the Big Four meet the public’s expectation if they really wanted to? The answer seems to be yes. In fact, participants at the December 2002 GAO forum (see page 19) on governance and accountability suggested that a “forensic-type” audit might improve the likelihood that auditors will detect fraudulent financial reporting. A similar call was voiced over 10 years ago in August 2000 by the Public Oversight Board’s Panel on Audit Effectiveness (page x) to “create a ‘forensic-type’ fieldwork phase on all audits.”

And the Big Four clearly have consulting practice lines to do forensic auditing: Deloitte (Forensic Audit Assistance), E&Y (Fraud Investigation & Dispute Services), KPMG (KPMG Forensic), and PricewaterhouseCoopers (Forensic Services). So why can’t they (or won’t they) tap these skills to close the expectation gap by giving the investing public what they want? We know the answer: money! As long as regulators are willing to accept poor quality audits as adequate oversight, the Big Four have no incentive to increase their service delivery costs to improve audit quality. Instead, the Big Four have clear incentives to continue reducing their audit efforts (and costs) just as far as the regulators will tolerate. And don’t forget, the regulators also now protect them from substandard products via the “too few to fail” doctrine.

Continued in article

Bob Jensen's threads on audit firm professionalism ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Hi Dennis,

You may want to look at Carla Carnagha's slide show entitled
"Strategies for Teaching the Accounting Theory Course:
Curriculum, Pedagogy and Resources"
http://commons.aaahq.org/files/8ba2111d71/AAA_Presentation_final.ppt

Bob Jensen's continuously updated two volumes on accounting theory ---
http://www.trinity.edu/rjensen/Theory01.htm

In particular, note the module entitled:
Purpose of Theory: Prediction Versus Explanation
http://www.trinity.edu/rjensen/Theory01.htm#Purpose

Hi Dennis,

I think there's a fundamental choice to make regarding whether to focus on accounting theory in history versus contemporary accounting theory.

Contemporary accounting theory builds on contemporary theory and contracting in finance and economics, including such topics as those listed below:

Financial Accounting Theory Extensions of the Following Topics:
Structured Finance --- http://en.wikipedia.org/wiki/Structured_finance
Securitization --- http://en.wikipedia.org/wiki/Securitization
Portfolio Theory (including the CAPM and Options Pricing) --- http://en.wikipedia.org/wiki/Portfolio_theory
M&M Theory --- http://en.wikipedia.org/wiki/Modigliani-Miller_theorem
Financial Instruments --- http://en.wikipedia.org/wiki/Financial_instruments
Derivative Financial Instruments --- http://en.wikipedia.org/wiki/Derivative_%28finance%29
Other topics listed at
http://www.trinity.edu/rjensen/Theory01.htm

The last time I taught a contemporary accounting theory course, the 2006 syllabus was the one at
http://www.trinity.edu/rjensen/acct5341/acct5341.htm

Managerial and Organizational Accounting Theory Extensions could build on the following: ---

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

Great Minds in Sociology ---
http://www.sociosite.net/topics/sociologists.php
Also see Also see http://www.sociologyprofessor.com/

Accounting history builds on content of accounting theory articles in the published leading academic accounting journals such as TAR between the Years 1925 and 1990. After 1990, I think many accounting theory professors shifted more toward contemporary accounting theory topics. As a result, most previous accounting theory textbooks became history.

The older style accounting theory courses were often rooted more in philosophy. For example, you could cherry pick topics from Harry Wolk's 2009 four-volume set. If course this set is both too extensive and too expensive to serve as a textbook for a single course.

Capsule Commentary Book Review, The Accounting Review, January 2012, pp. 356-357 ---
http://aaajournals.org/doi/full/10.2308/accr-10189

CAPSULE COMMENTARY

Stephen A. Zeff, Editor

HARRY I. WOLK (editor), Accounting Theory (London, U.K.: Sage Publications Ltd., 2009, ISBN 978-1-84787-609-6, pp. xlv, 1,518 in four volumes) ---
http://www.uk.sagepub.com/books/Book233127?siteId=sage-uk&prodTypes=any&q=Accounting+Theory&fs=1

Harry I. Wolk, the compiler of this collection of 74 previously published articles and other essays, died in October 2009 at age 79. In 1984, he was assisted by two colleagues in writing a thoughtful, wide-ranging textbook on accounting theory, which is now in its seventh edition. He has, thus, been a close student of the accounting theory literature for many years.

Wolk's valedictory contribution is this anthology, which is divided into ten sections: philosophical background, accounting concepts, conceptual frameworks, accounting for changing prices, standard setting, applications of accounting theory to five measurement areas, agency theory, principles versus rules, international accounting standards, and accounting issues in East and Southeast Asia. Because he provides only a two-and-a-half-page general introduction, we cannot know the criteria he used to make these selections. The earliest of the articles dates from 1958, and one infers that this collection represents the body of work that, over his long career, mostly at Drake University, he found to be influential writings.

Among the major contributors to the theory literature represented in the collection are Devine, Mattessich, Davidson, Solomons, Sterling, Thomas, Bell, Shillinglaw, Bedford, Ijiri, and Stamp. Conspicuous omissions are Chambers, Baxter, Staubus, Moonitz, Sorter, and Vatter. Although many of the earlier pieces have stood the test of time, a number of the more recent selections would, inevitably, be open to second-guessing. To be sure, most of these articles can be accessed electronically, yet it is instructive to know the works that Harry Wolk believed were worth remembering, and it is handy to have them all in one collection.

The price tag of £600/$1,050 for the four-volume set will, unfortunately, deter all but the most enthusiastic purchasers.

Jensen Comment
And to think my constantly-updated accounting theory book (in two volumes) has a price tag of $0 (Sigh!)---
http://www.trinity.edu/rjensen/Theory01.htm

But I do thank Harry for providing me with an accounting illustration that I turned into the most popular Excel illustration that I ever authored (i.e., popular in the eyes of my students over the years) ---
www.cs.trinity.edu/~rjensen/Excel/wtdcase2a.xls

Table of Contents ---
http://www.uk.sagepub.com/books/Book233127?siteId=sage-uk&prodTypes=any&q=Accounting+Theory&fs=1#tabview=toc

SECTION I: PHILOSOPHICAL BACKGROUND Accounting - A System of Measurement Rules Devine, Carl Radical Developments in Accounting Thought Chua, Wai Fong Accounting as a Discipline for Study and Practice Bell, Philip W. Why Can Accounting Not Become a Science Like Physics? Stamp, Edward Social Reality and the Measurement of Its Phenomena Mattessich, Richard Toward a Science of Accounting Sterling, Robert R. Methodological Problems and Preconditions of a General Theory of Accounting Mattessich, Richard

SECTION II: INFORMALLY DEVELOPED ACCOUNTING CONCEPTS A. Realization and Recognition The Critical Event and Recognition of Net Profit Myers, John Recognition Requirements - Income Earned and Realized Devine, Carl The Realization Concept Davidson, Sidney B. Matching Cash Movements and Periodic Income Determination Storey, Reed Some Impossibilities - Including Allocations Devine, Carl The FASB and the Allocation Fallacy Thomas, Arthur Conservatism Conservatism in Accounting, Part I: Explanation and Implications Watts, Ross Conservatism in Accounting, Part II: Evidence and Research Opportunities Watts, Ross The Changing Time-Series Properties ofEarnings, Cash Flows, and Accruals: Has Financial Accounting Become Mor Conservative? Givoly, Dan and Carla Hayn D. Disclosure Information Disclosure Strategy Lev, Baruch Corporate Reporting and the Accounting Profession: An Interpretive Paradigm Ogan, Pekin and David Ziebart Financial Reporting in India: Changes in Disclosure over the Period 1982-1990 Marston, C. L. and P. Robson Corporate Mandatory Disclosure Practices in Bangladesh M. Akhtaruddin Corporate Governance and Voluntary Disclosure L.L. Eng and Y.T. Mak Ownership Structure and Voluntary Disclosure in Hong Kong and Singapore Chau, Gerald and Sidney Gray E. Uniformity Uniformity Versus Flexibility: A Review of the Rhetoric Keller, Thomas Differences in Circumstances!: Fact or Fancy Cadenhead, Gary Toward the Harmonization of Accounting Standards: An Analytical Framework Wolk, Harry and Patrick Heaston

SECTION III: CONCEPTUAL FRAMEWORKS FASB's Statements on Objectives and Elements of Financial Accounting: A Review Dopuch, Nicholas and Shyam Sunder The FASB's Conceptual Framework: An Evaluation Solomons, David The Evolution of the Conceptual Framework for Business Enterprises in the United States Zeff, Stephen Criteria for Choosing an Accounting Model Solomons, David Objectives of Financial Reporting Walker, R.G. Reliability and Objectivity of Accounting Methods Ijiri, Yuji and Robert Jaedicke

SECTION IV: ACCOUNTING FOR CHANGING PRICES Replacement Cost: Member of the Family, Welcome Guest, or Intruder? Zeff, Stephen Costs (Historical versus Current) versus Exit Values Sterling, Robert R. A Defense for Historical Cost Accounting Ijiri, Yuji The Case for Financial Capital Maintenance Carsberg, Bryan Income and Value Determination and Changing Price Levels: An Essay Towards a Theory Stamp, Edward

SECTION V: ACCOUNTING STANDARDS AND FINANCIAL STATEMENTS Get it off the Balance Sheet! Dieter, Richard and Arthur Wyatt Political Lobbying on Proposed Standards: A Challenge to the IASB Zeff, Stephen A Review of the Earnings Management Literature and Its Implications for Standard Setting Healy, Paul and James Wahlen Relationships among Income Measurements Bedford, Norton Some Basic Concepts of Accounting and Their Implications Lorig, Arthur Economic Impact of Accounting Standards - Implications for the FASB Rappaport, Alfred An Analysis of Factors Affecting the Adoption of International Accounting Standards by Developing Countries Zeghal, Daniel and Kerim Mhedhbi The Relevance of IFRS to a Developing Country: Evidence from Kazakhstan Tyrrall, David, David Woodward and A. Rakhumbekova Political Influence and Coexistence of a Uniform Accounting System and Accounting Standards: Recent Developments in China Xiao, Jason, Pauline Weetman and Manli Sun

SECTION VI: APPLIED ACCOUNTING THEORY A. Income Tax Allocation Comprehensive Tax Allocation: Let's Stop Taking Some Misconceptions for Granted Milburn, Alex Acccelerated Depreciation and the Allocation of Income Taxes Davidson, Sidney Discounting Deferred Tax Liabilities pp. 655-665 Nurnberg, Hugo B. Leases Lease Capitalization and the Transaction Concept Rappaport, Alfred Leasing and Financial Statements Shillinglaw, Gordon Accounting for Leases - A New Framework McGregor, Warren C. Pensions and Other Postretirement Liabilities Alternative Accounting Treatments for Pensions Schipper, Katherine and Roman Weil A Conceptual Framework Analysis of Pension and Other Postretirement Benefit Accounting Wolk, Harry and Terri Vaughan OPEB: Improved Reporting or the Last Straw Thomas, Paula and Larry Farmer D. Consolidations An Examination of Financial Reporting Alternatives for Associated Enterprises King, Thomas and Valdean Lembke Valuation for Financial Reporting: Intangible Assets, Goodwill, and Impairment Analysis and SFAS 141 and 142 Mard, Michael, James Hitchner, Steven Hyden and Mark Zyla Proportionate Consolidation and Financial Analysis Bierman, Harold The Evolution of Consolidated Financial Reporting in Australia Whittred, Greg Foreign Currency Translation Research: Review and Synthesis Houston, Carol The Implementation of SFAS Number 52: Did the Functional Currency Approach Prevail? Kirsch, Robert and Thomas Evans Financial Accounting Developments in the European Union: Past Events and Future Prospects Haller, Axel E. Intangibles Accounting for Research and Development Costs Bierman, Harold and Roland Dukes The Boundaries of Financial Accounting and How to Extend Them Lev, Baruch and Paul Zarowin The Capitalization, Amortization, and Value Added Relevance of R & D Lev, Baruch and Theodore Sougiannis Accounting for Brands in France and Germany Compared With IAS 38 (Intangible Assets: An Illustration of the Difficulty of International Harmonization) Stolowy, Herve, Axel Haller and Volker Klockhaus Accounting for Intangible Assets in Scandinavia, the U.K., and U.S. and the IASB: Challenges and a Solution Hoeg-Krohn, Niels and Kjell Knivsfla

SECTION VII: POSITIVE ACCOUNTING THEORY The Methodology of Positive Accounting Christenson, Charles Positive Accounting Theory: A Ten Year Perspective Watts, Ross and Jerrold Zimmerman Positive Accounting Theory and the PA Cult Chambers, Raymond Accounting and Policy Choice and Firm Characteristics in the Asia-Pacific Region: an International Empirical Test of Costly Contracting Theory Astami, Emita and Greg Tower

SECTION VIII: THE TRUE AND FAIR VIEW AND PRINCIPLES VERSUS RULES-BASED STANDARDS Principles Versus Rules-Based Accounting Standards: The FASB's Standard Setting Strategy Benston, George, Michael Bromwich and Alfred Wagenhofer The True and Fair View in British Accounting Walton, Peter A European True and Fair View Alexander, David Rules, Principles, and Judgments in Accounting Standards Bennett, Bruce, Helen Prangell and Michael Bradbury

SECTION IX: INTERNATIONAL ACCOUNTING AND CONVERGENCE The Introduction of International Accounting Standards in Europe: Implications for International Convergence Schipper, Katherine The Adoption of International Accounting Standards in the European Union pp. 127-153 Whittington, Geoffrey Trends in Research on International Accounting Harmonization pp. 272-304 Baker, C. Richard and Elena Barbou The Quest for International Accounting Harmonization: A Review of the Standard- Setting Agendas of the IASC, US, UK, Canada and Australia, 1973-1997 Street, Donna and Kimberly Shaughnessy From National to Global Accounting and Reporting Standards McKee, David, Don Garner and Yosra AbuAmara McKee A Statistical Model of International Accounting Harmonization pp. 1-29 Archer, Simon, Pascal, Delvaille and Stuart McLeay

SECTION X: OTHER NATIONAL AND REGIONAL ACCOUNTING STUDIES The Institutional Environment of Financial Reporting Regulation in ASEAN Countries Saudogaran, Sharokh and J. Diga Corporate Financial Reporting and Regulation in Japan Benston, George, Michael Bromwich, Robert Litan and Alfred Wagenhofer Accounting Theory in the Political Economy of China Shuie, Fujing and Joseph Hilmy Ownership Structure and Earnings Informativeness: Evidence from Korea Jung, Kooyul and Kwon Soo Young Accounting Developments in Pakistan Ashraf, Junaid and WaQar Ghani Accounting Theory in the Political Economy of China Shuie, Fujing and Joseph Hilmy Ownership Structure and Earnings Informativeness: Evidence from Korea Jung, Kooyul and Kwon Soo Young Corporate Ownership and Governments in Russia Krivogorsky, Victoria Accounting Developments in Pakistan

Jensen Comment
I have not yet read this book, although it is on order. The table of contents is certainly very comprehensive. When I get the book I anticipate some major strenghts (e.g., history) and some major weaknesses such as superficial coverage of XBRL and financial instruments accounting, particularly derivative financial instruments and hedging activities.

One problem with this book is bad timing. It has copyright date of 2009, but most of the modules were written much earlier before major happenings in accounting standard setting such as new standards and interpretations (domestic and international) on leases, revenue recognition, consolidations, fair value accounting, and hedging.

I think the book will also be weak in the following critical areas of my own free accounting theory online book ---
http://www.trinity.edu/rjensen/Theory01.htm

Respectfully,
Bob Jensen

Because of the six-month time limits these are not like eBooks that you can purchase for a lifetime
Harvard Business Review's Online Self-Paced Learning Programs in Accounting --- Click Here
http://hbr.org/product/financial-accounting-online-course-introductory-se/an/4001HB-HTM-ENG?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

The Harvard Business School has not been as generous as MIT's Sloan School in open sharing free learning materials ---
http://ocw.mit.edu/courses/#sloan-school-of-management

MIT's Open Sharing Courses in General ---
http://ocw.mit.edu/index.htm

Bringing Low Cost Education and Training to the Masses

Jensen Comment
Perhaps a better analogy than a Volkswagen versus a Porsche would be where a MIT jumbo jet takes off in the evening from Differential Equations in the USA bound for Bessel Functions, Germany. Passengers in First Class get live MIT professors and one-on-one help in preparation for landing. Passengers in the economy section are only given videos of the MIT professors and the MITx free course handout materials. Beyond that the economy class passengers are on their own.

MIT professors keep first class passengers attentive whenever there's a hint of a passenger falling asleep or day dreaming. They also require interactive feedback. Back in the economy section 95% of the passengers grow bored and doze off around midnight. But the others are even more driven than the first class passengers to pass through customs at Bessel Functions.

Upon arrival each passenger is given a competency examination in Bessel functions. Passage rates are 80% (24 passengers) for first class passengers and 5% (50 passengers) for economy class passengers. Those that fail must return to the USA.

The point is that, in spite of having much higher failure rates, there are many more MITx graduates passing through Bessel Functions competency examinations than MIT graduates who paid for luxuries of live lectures and interactive communications with their instructors.

The problem with MITx low cost (economy class) fares is that students that are not highly motivated fail the competency examinations. Those students needed first class live classes or online interactive inspirations and prodding to learn.

The enormous problem with Professor Obama's drive to bring low cost education to the masses is that there is such a high proportion of students who want top grades without the scholastic blood, sweat, and tears it takes to attain scholastic competency . These are the couch potatoes and the hard workers dragged down by other duties (such as tending to two toddlers at their feet and a baby in their arms) who are driven to learn but just have other duties and priorities.

MIT is doing wonders with its MITx certificate program for intelligent and highly motivated students. But MIT has not yet offered help to those students not even motivated to bleed, perspire, and cry over college algebra, spelling, and grammar.

Bob Jensen's threads on competency based assessment are at
http://www.trinity.edu/rjensen/Assess.htm#ComputerBasedAssessment

Bob Jensen's threads on the MITx certificate program are at
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

"Will MITx Disrupt Higher Education?" by Robert Talbert, Chronicle of Higher Education, December 20, 2011 ---
http://chronicle.com/blognetwork/castingoutnines/2011/12/20/will-mitx-disrupt-higher-education/?sid=wc&utm_source=wc&utm_medium=en

MIT has been doing online access to education a lot longer than most people, largely due to their invaluable OpenCourseWare project. (Here’s an interview MIT did with me last year on how OCW strongly influenced my inverted-classroom MATLAB course.) Now they are poised to go to the next level by launching an online system called MITx in Spring 2012 that provides credentialing as well as content:

Mr. Reif and Anant Agarwal, director of the Computer Science and Artificial Intelligence Lab, said M.I.T.x would start this spring — perhaps with just one course — but would expand to include many more courses, as OpenCourseWare has done. [...]

The M.I.T.x classes, he said, will have online discussions and forums where students can ask questions and, often, have them answered by others in the class.

While access to the software will be free, there will most likely be an “affordable” charge, not yet determined, for a credential.

“I think for someone to feel they’re earning something, they ought to pay something, but the point is to make it extremely affordable,” Mr. Reif said. “The most important thing is that it’ll be a certificate that will clearly state that a body sanctioned by M.I.T. says you have gained mastery.”

The official FAQ reveals a couple of additional points. First, the content of MITx courses will be free — which seems to imply that MITx course content will be different than OCW course content, and not just a certification layer on top of existing resources — and you’ll only pay money for the certificate. Second, there will be no admissions process. If you want a course, you just take it and then pay for the credentialing if you feel like you’re up to it.

I think this last point about having no admissions process may be the most significant piece of MITx. It seems to represent a complete shift from the traditional way of providing access to higher education. As far as I can tell, there will not even be a system of checking prerequisites for MITx courses. If that’s so, then if you feel you can step into, say, an Algorithms class and keep up with the material and demonstrate your mastery, then nobody at MIT will care if you haven’t had the right courses in basic programming, data structures, discrete math, or whatever. MIT is basically saying, we won’t be picky about who we let take these courses — if you can afford it and live up to our standards, we’re happy to credential you.

Of course there are a lot of questions about MITx that are yet to be answered. What is the “modest fee” they plan to charge, and is it really affordable? How exactly will the credentialing process work? (It’s interesting that the certification will be handled by a non-profit organization to be formed within MIT. Is this a kind of outsourcing of grading?) How will one “demonstrate mastery” and what will MITx define as “mastery” in courses that are not strictly skills-based? Will there eventually be a full enough slate of courses offered to make the whole system compelling for learners? And perhaps most importantly, what will employers, graduate schools, and even undergraduate institutions make of applicants who come in with some of these MITx certifications? Without external buy-in, MITx will likely be just another continuing education program like hundreds of others.

We’ll hear a lot more about this in the future, but for now this seems to have the potential to be genuinely disruptive in higher education. What do you think?

"MIT Expands 'Open' Courses, Adds Completion Certificates," Inside Higher Ed, December 19, 2011 ---
http://www.insidehighered.com/quicktakes/2011/12/19/mit-expands-open-courses-adds-completion-certificates

The Massachusetts Institute of Technology -- which pioneered the idea of making course materials free online -- today announced a major expansion of the idea, with the creation of MITx, which will provide for interaction among students, assessment and the awarding of certificates of completion to students who have no connection to MIT.

MIT is also starting a major initiative -- led by Provost L. Rafael Reif -- to study online teaching and learning.

The first course through MITx is expected this spring. While the institute will not charge for the courses, it will charge what it calls "a modest fee" for the assessment that would lead to a credential. The credential will be awarded by MITx and will not constitute MIT credit. The university also plans to continue MIT OpenCourseWare, the program through which it makes course materials available online.

An FAQ from MIT offers more details on the new program.

While MIT has been widely praised for OpenCourseWare, much of the attention in the last year from the "open" educational movement has shifted to programs like the Khan Academy (through which there is direct instruction provided, if not yet assessment) and an initiative at Stanford University that makes courses available -- courses for which some German universities are providing academic credit. The new initiative would appear to provide some of the features (instruction such as offered by Khan, and certification that some are creating for the Stanford courses) that have been lacking in OpenCourseWare.

"A Policy Wonk Brings Data on College Costs to the Table," by Goldie Blumenstyk, Chronicle of Higher Education, February 5, 2012 ---
http://chronicle.com/article/A-College-Cost-Policy-Wonk/130662/

The dozen higher-education leaders summoned to the White House in December to talk about college affordability included 10 prominent college presidents and the head of one of the nation's most visible education foundations.

And the 12th person, the person seated right across from the president to open and frame the discussion? A self-made number cruncher named Jane Wellman, whose outspoken devotion to the power of data has helped raise some uncomfortable questions about the way states and colleges spend their higher-education dollars.

That Roosevelt Room meeting helped shape some of the college-cost-control proposals Mr. Obama announced last month. It also provided a notable reminder of the national influence Ms. Wellman and her Delta Cost Project now wield.

With sophisticated analyses and an often-sardonic delivery, Ms. Wellman has been a pull-no-punches critic of fiscal policies that starve the institutions educating the biggest proportion of students—"public universities are getting screwed, and the community colleges in particular are getting screwed," she says.

She is just as dismissive of the "trophy-building exercises" of public and private institutions that elevate their research profiles by hiring professors who never teach or that dole out merit aid to enhance their admissions pedigrees. And don't even get her started on the climbing-wall craze or colleges whose swimming pools "have those fake rivers for people to raft on."

But most of all, through the Delta Project and other consulting work, she's been an advocate for using financial information and other data to highlight spending patterns and bring into greater relief the true costs of academic and administrative decisions. In higher education, she says, policy makers and administrators too often present "an analytically correct road to complete ground fog."

Her antidote, created in 2006, was the Delta Project on Postsecondary Costs, Productivity, and Accountability, an independent, grant-backed organization that produces the annual "Trends in College Spending" and other reports. Over the past several years, the Delta Project's reports have highlighted the spending shift from instruction to administration, the rising cost of employee benefits, and how community colleges have been disproportionately hurt by public disinvestment.

Notably, the reports are formatted to reflect the diversity of institutions—the comparisons are organized by sector, so community colleges aren't compared with research universities—and to reflect several categories of spending, not simply revenues and expenses. Ms. Wellman says that's deliberate. Too many of the generalizations about higher-education costs are "based on one part of the elephant," she says. "I wanted to neutralize that."

She has also been eager to bust open some of the rationalizations that college leaders trot out, such as that higher education's rising costs are justified because of uniquely high personnel expenditures. "Everybody spends 80 percent on payroll, unless you're a lumber mill," she says.

That mix of bluntness and evidence is what's brought the Delta Project, and her, credibility and fans.

"It's the only place in higher ed that's really laser-focused on the question 'How much do you get for how much you put in?'" says Travis Reindl, program director for the education division of the National Governors Association. "She has made the cost issue more approachable than anybody else I can think of, especially for people who don't eat, sleep, and breathe this stuff."

A Background in Policy

But after five years, Ms. Wellman and the Delta Project are undergoing a transition. Under an arrangement Ms. Wellman masterminded, the organization last month merged its database of financial information into the National Center for Education Statistics and moved the policy-analysis side of its work to the American Institutes for Research, where it will continue to produce reports as the Delta Cost Project AIR.

Ms. Wellman, 62, will remain an adviser to the project, but will also devote more time to her role as executive director of the National Association of System Heads, a group for presidents and chancellors of public university and community-college systems. She says the new role will give her a different kind of platform to articulate "the moral imperative" of financing the institutions attended by a majority of students—including those who are the neediest.

It's a natural step for her, says Charles B. Reed, chancellor of the California State University system: "Jane has a vision, and I think it's because of the work she's created in the Delta Project."

Ms. Wellman's interest in higher education began largely by accident. She dropped out of the University of California at Berkeley in the late 1960s to get a job and establish residency as an in-state student. As she tells it, she "ended up typing for David Breneman," who was then finishing his dissertation before going on to become a nationally known scholar on the economics of higher education. The subject matter "resonated with my political interest," says Ms. Wellman.

She stayed at Berkeley for a master's in higher education and then began working as policy analyst, first for the University of California system and later as staff director for the Ways and Means Committee in the California State Assembly. (The man who would become her husband was working there, too, for a committee on prisons.) She was frustrated by a lot of what she saw, both in Sacramento and when she moved to Washington, in the early 1990s, and worked for two and a half years as a lobbyist for the National Association of Independent Colleges and Universities. Her higher-education colleagues would say things like "Complexity is our friend" when preparing to talk budgets to legislators—and to bury them with numbers.

By the mid-2000s, after about a decade of consulting for the Cal State system and working on government and association commissions on college costs—and seeing all of them "go to naught"—she decided it was time "to create the data set and the methodology that I knew was possible" to bring more clarity to the issues of spending.

"We were hugely helped by the recession," she says. "At any other time, I would have gotten much more pushback from the institutions."

Data for Everybody

Richard Staisloff, a consultant on college finance who teaches with Ms. Wellman at an executive doctoral program in education at the University of Pennsylvania, says her contribution comes in "myth busting." Often, he says, she makes it clear that where students are is not where money is being spent. "It's hard to run from the data," says Mr. Staisloff.

Mr. Reindl remembers getting together for coffee with Ms. Wellman here in Washington and listening as "she sketched out on a Starbucks napkin" her plans for the Delta Project (she chose the name since it's the mathematical symbol for "change"). Those ideas have taken root, he says. When people like Jay Nixon, the governor of Missouri and a Democrat, talk about state spending and degrees per dollar spent, "that's really out of Delta, and that's a governor talking," he says. "She has made it not only OK to talk about outcomes and resources in the same sentence, she's made it necessary."

At least one critic of rising college costs, however, questions whether she's too much of an "establishment figure" to be an effective reformer. Richard Vedder, a professor of economics at Ohio University (and a blogger for The Chronicle), says her data are good, but "Jane doesn't tell us what to do about it." He says he wishes she'd do more to tie her information to data on what students are learning. "Where does Academically Adrift fit into the picture?" he asks.

Continued in article

Jensen Comment
Having taught managerial and cost accounting for over 40 years, it seems to me that Jane Wellman is overlooking some systemic problems of cost accounting, cost allocations, and cost aggregations that can make her numbers very misleading ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

Systemic Problem: Aggregation Issues With Vegetable Nutrition

Systemic Problem: All Aggregations Are Arbitrary

Systemic Problem: All Aggregations Combine Different Measurements With Varying Accuracies

Systemic Problem: All Aggregations Leave Out Important Components

Systemic Problem: All Aggregations Ignore Complex & Synergistic Interactions of Value and Risk

Systemic Problem: Disaggregating of Value or Cost is Generally Arbitrary

Systemic Problem: Systems Are Too Fragile

Systemic Problem: More Rules Do Not Necessarily Make Accounting for Performance More Transparent

Systemic Problem: Economies of Scale vs. Consulting Red Herrings in Auditing

Systemic Problem: Intangibles Are Intractable

Bob Jensen's threads on on other questionable attempts to derive and compare costs of alternative degree tracks in colleges and universities and the "worth" of professors ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#CostAccounting ---

Bob Jensen's threads on open source video and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

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

THE COLLEGE OF 2020: STUDENTS ---
https://www.chronicle-store.com/Store/ProductDetails.aspx?CO=CQ&ID=76319&PK=N1S1009

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

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

"Treating Higher Ed's 'Cost Disease' With Supersize Online Courses," by Marc Parry, Chronicle of Higher Education, February 26, 2012 ---
http://chronicle.com/article/Treating-Higher-Eds-Cost/130934/?sid=wc&utm_source=wc&utm_medium=en

Oh my God, she's trying to replace me with a computer.

That's what some professors think when they hear Candace Thille pitch the online education experiment she directs, the Open Learning Initiative at Carnegie Mellon University.

They're wrong. But what her project does replace is the traditional system of building and delivering introductory college courses.

Professors should move away from designing foundational courses in statistics, biology, or other core subjects on the basis of "intuition," she argues. Instead, she wants faculty to work with her team to put out the education equivalent of Super Bowl ads: expensively built online course materials, cheaply available to the masses.

"We're seeing failure rates in these large introductory courses that are not acceptable to anybody," Ms. Thille says. "There has to be a better way to get more students—irrespective of where they start—to be able to successfully complete."

Her approach brings together faculty subject experts, learning researchers, and software engineers to build open online courses grounded in the science of how people learn. The resulting systems provide immediate feedback to students and tailor content to their skills. As students work through online modules outside class, the software builds profiles on them, just as Netflix does for customers. Faculty consult that data to figure out how to spend in-person class time.

When Ms. Thille began this work, in 2002, the idea was to design free online courses that would give independent novices a shot at mastering what students learn in traditional classes. But two things changed. One, her studies found that the online system benefits on-campus students, allowing them to learn better and faster than their peers when the digital environment is combined with some face-to-face instruction.

And two, colleges sank into "fiscal famine," as one chancellor put it. Technological solutions like Ms. Thille's promise one treatment for higher education's "cost disease"—the notion, articulated by William G. Bowen and William J. Baumol, that the expense of labor-heavy endeavors like classroom teaching inevitably rises faster than inflation.

For years, educational-technology innovations led to more costs per student, says Mr. Bowen, president emeritus of Princeton University. But today we may have reached a point at which interactive online systems could "change that equation," he argues, by enabling students to learn just as much with less "capital and labor."

"What you've got right now is a powerful intersection between technological change and economics," Mr. Bowen tells The Chronicle.

Ms. Thille is, he adds, "a real evangelist in the best sense of the word."

Nowadays rival universities want to hire her. Venture capitalists want to market her courses. The Obama administration wants her advice. And so many foundations want to support her work that she must turn away some would-be backers.

But the big question is this: Can Ms. Thille get a critical mass of people to buy in to her idea? Can she expand the Online Learning Initiative from a tiny darling of ed-tech evangelists to something that truly changes education? A Background in Business

Ms. Thille brings an unusual biography to the task. The 53-year-old Californian spent 18 years in the private sector, culminating in a plum job as a partner in a management-consulting company in San Francisco. She earned a master's degree but not a doctorate, a gap she's now plugging by studying toward a Ph.D. at the University of Pennsylvania.

She has never taught a college course.

Ms. Thille wasn't even sure she'd make it through her own bachelor's program, so precarious were her finances at the time. Her family had plunged from upper middle class to struggling after her father quit his job at the Lockheed Missiles and Space Company because of his opposition to the Vietnam War. But with jobs and scholarships, she managed to earn a degree in sociology from Berkeley.

After college, Ms. Thille followed her fiancé to Pittsburgh. The engagement didn't last, but her connection to the city did. She worked as education coordinator for a rape-crisis center, training police and hospital employees.

She eventually wound up back in California at the consultancy, training executives and helping businesses run meetings effectively. There she took on her first online-learning project: building a hybrid course to teach executives how to mentor subordinates.

Ms. Thille doesn't play up this corporate-heavy résumé as she travels the country making the case for why professors should change how they teach. On a recent Tuesday morning, The Chronicle tagged along as that mission brought Ms. Thille to the University of Illinois at Chicago, where she was meeting with folks from the university and two nearby community colleges to prepare for the development of a new pre-calculus course.

It's one piece of a quiet but sweeping push to develop, deploy, and test Open Learning Initiative courses at public institutions around the country, led by an alphabet soup of education groups.

The failure rate in such precalculus courses can be so bad that as many as 50 percent of students need to take the class a second time. Ms. Thille and her colleagues hope to improve on that record while developing materials of such quality that they're used by perhaps 100,000 students each year. Facing Skepticism

But first the collaborators must learn how to build a course as a team. As Ms. Thille fires up her PowerPoint, she faces a dozen or so administrators and professors in Chicago. The faculty members segregate themselves into clusters—community-college people mostly in one group, university folks mostly in another. Some professors are learning about the initiative in detail for the first time. There is little visible excitement as they plunge into the project, eating muffins at uncomfortable desks in a classroom on the sixth floor of the Soviet-looking science-and-engineering building.

By contrast, Ms. Thille whirls with enthusiasm. She describes Online Learning Initiative features like software that mimics human tutors: making comments when students go awry, keeping quiet when they perform well, and answering questions about what to do next. She discusses the "dashboard" that tells professors how well students grasp each learning objective. Throughout, she gives an impression of hyper-competence, like a pupil who sits in the front row and knows the answer to every question.

But her remarks can sometimes veer into a disorienting brew of jargon, giving the impression that she is talking about lab subjects rather than college kids. Once she mentions "dosing" students with a learning activity. And early on in the workshop, she faces a feisty challenge from Chad Taylor, an assistant professor at Harper College. He worries about what happens when students must face free-form questions, which the computer doesn't baby them through.

"I will self-disclose myself as a skeptic of these programs," he says. Software is "very good at prompting the students to go step by step, and 'do this' and 'do that,' and all these bells and whistles with hints. But the problem is, in my classroom they're not prompted step by step."

Around the country, there's more skepticism where that came from, Ms. Thille confides over a dinner of tuna tacos later that day. One chief obstacle is the "not-invented-here problem." Professors are wary of adopting courses they did not create. The Online Learning Initiative's team-based model represents a cultural shift for a professoriate that derives status, and pride, from individual contributions.

Then there's privacy. The beauty of OLI is that developers can improve classes by studying data from thousands of students. But some academics worry that colleges could use that same data to evaluate professors—and fire those whose students fail to measure up.

Ms. Thille tells a personal story that illustrates who could benefit if she prevails. Years ago she adopted a teenager, Cece. The daughter of a drug user who died of AIDS, Cece was 28 days' truant from high school when she went to live with Ms. Thille. She was so undereducated, even the simple fractions of measuring cups eluded her. Her math teacher told Ms. Thille that with 40 kids in class, she needed to focus on the ones who were going to "make it."

Continued in article

Jensen Comment
In a way we already have something like this operating in colleges and universities that adopt the Brigham Young University variable speed video disks designed for learning the two basic accounting courses without meeting in classrooms or having the usual online instruction. Applications vary of course, and some colleges may have recitation sections where students meet to get help and take examinations ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo

Although BYU uses this no-class video pedagogy, it must be recognized that most of the BYU students learning accounting on their own in this manner are both exceptionally motivated and exceptionally intelligent. For schools that adopt the pedagogies of Me. Thile or BYU, the students must be like BYU accounting students or the pedagogy must be modified for more hand holding and kick-butt features that could be done in various ways online or onsite.

Perhaps Ms. Thille is being somewhat naive about turf wars in universities. Certain disciplines are able to afford a core faculty for research and advanced-course teaching with miniscule classes because teaching large base courses in the general education core justifies not having to shrink those departments with almost no majors.

Where Ms. Thille's pedagogy might be more useful is in specialty courses where its expensive to hire faculty to teach one or two courses. For example, it's almost always difficult for accounting departments to hire top faculty for governmental accounting courses and the super-technical ERP courses in AIS.

Bob Jensen's threads on courses without instructors ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#NoInstructors
Of course Ms. Thille is not exactly advocating a pedagogy without instructors. There are instructors in her proposed model.

Bob Jensen's threads on competency-based learning and assessment ---
http://www.trinity.edu/rjensen/Assess.htm#ECA

Watch the Video of Bradley Wheeler, CIO at Indiana University
"A Business Professor Turned CIO Practices What He Teaches," by Jeffrey R. Young, Chronicle of Higher Education, February 26, 2012 ---
http://chronicle.com/article/A-Business-Professor-Turned/130913/?sid=wc&utm_source=wc&utm_medium=en

Apple is revered in business circles for its tough bargaining with suppliers to keep down production costs on its popular iPhones and computers. Colleges should emulate that aggressive stance when buying their technology, argues Bradley C. Wheeler, chief information officer at Indiana University at Bloomington.

Mr. Wheeler has spent most of his career as a business professor, and he is applying the same lessons he teaches his executive-MBA students to managing the university's technology.

Lately, that has meant getting involved in a subject not usually handled by CIO's: textbooks.

The administrator has led a pilot effort at Indiana to broker a deal with publishers that greatly lowers the per-book cost in exchange for a guarantee that every student will buy the e-textbooks they are assigned (by instituting a course-materials fee). Other universities are following Indiana's lead.

In recent talks, he compares managing college technology to a chess match, with colleges on one side and tech companies on the other. "It is very collective," he says, and colleges need to work together and look ahead several moves to try to picture what tomorrow's technology and needs might be.

Collaboration has been his game plan for years. He has led or participated in several efforts by colleges to build their own open-source alternatives to commercial education software. The largest are Sakai for virtual classrooms and Kuali for administrative functions.

The 47-year-old was raised on a farm in a "one-flashing-light, peanut town" of 1,200 people in Oklahoma. His family also owned a local car dealership, and he learned to help out in all areas of the business.

In that small-town environment, he says he learned that "no one's disposable—you have to make the relationships work over time."

"Some people say I'm anticorporate, but nothing can be further from the truth," he adds. "I just believe the buyer side has to be organized and work as well as the seller side."

Continued in article
Watch the Video

Issues in Computing a College's Cost of Degrees Awarded and "Worth" of Professors ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm

"Professor Wants a New Job?" by David Albrecht, The Summa, February 23, 2012 ---
http://profalbrecht.wordpress.com/2012/02/23/professor-want-a-new-job/

"SpiderOak Step by Step," by Natalie Houston, Chronicle of Higher Education, February 28, 2012 ---
http://chronicle.com/blogs/profhacker/spideroak-step-by-step/38776?sid=wc&utm_source=wc&utm_medium=en

At ProfHacker, we write a lot about backing up your files, because it’s one of the simplest things you can do to make some future day easier (and possibly prevent months or years of work from being lost). With cloud-based backup solutions, backups are easy to set up and automate. Six or seven years ago, whenever I heard a story about someone experiencing a hard drive crash, it was a tale of stress and woe. It seems telling to me that within the last month, I’ve spoken to two people who had hard drives fail but who were completely untroubled (except for the expense or time lost in replacing the drive), because they had automated cloud backups in place and knew that all of their files were safe.

I’ve been using SpiderOak as my primary cloud based backup solution for over a year and am very pleased with the level of security that they offer, as well as the many options built into their service. SpiderOak not only gives me automated, nearly-instantaneous backups of my files, but also lets me synchronize files and folders across multiple computers. I routinely work on three different computers, with some general differences as to the type of work I do on each. For instance, I write teaching notes almost exclusively at my desktop computer at the university. But I might work on some projects on multiple machines. With SpiderOak’s file synchronization, for example, when I’m writing a conference paper, I know that I’ll be looking at same set of notes on both my laptop and my desktop computers. No matter where I am, even on someone else’s computer, I can access any of my files that have been backed up and download them from the SpiderOak service.

In explaining SpiderOak to friends and colleagues over the past year, I’ve realized that
if you’re new to online backup, some of the terms and options available can be a bit confusing. So the following guide is meant to help you get started using SpiderOak, should you be interested in giving it a try. Of course, SpiderOak’s website also offers video tutorials and answers to frequently asked questions.

Getting Started

First, you create an account at SpiderOak’s website. The most important thing to realize here is that: you and only you will have knowledge of the account password you create. SpiderOak does not keep a record of it, which is known as a zero-knowledge policy. A basic free account will store 2 GB of data. Users who sign up with an email address in an .edu domain can receive a discount on paid plans.

Download the SpiderOak software for your operating system (Windows, Mac, or Linux). Once installed, it will ask you to log in with your account credentials.

Select What to Backup

From the Back Up tab in the software, you can select which folders you want to have SpiderOak back up. You can either select specific folders from the directory tree in the right-hand pane, or just choose types of files (documents, photographs, etc) from the left-hand pane.

Continue for step-by-step instructions

Bob Jensen's threads on archiving and backup ---
http://www.trinity.edu/rjensen/Bookbob4.htm#archiving

Federal Reserve Bank of San Francisco: Teacher Resources Index ---
http://www.frbsf.org/education/teachers/index.html

Apple does not have a corner on the market for innovations in textbook authoring
"2 New Platforms Offer Alternative to Apple’s Textbook-Authoring Software," by Nick DeSantis, Chronicle of Higher Education, February 17. 2012 ---
Click Here
http://chronicle.com/blogs/wiredcampus/2-new-platforms-offer-alternative-to-apples-textbook-authoring-software/35495?sid=wc&utm_source=wc&utm_medium=en

Apple’s recent release of free software to build e-textbooks has brought attention to custom publishing of academic materials. But Apple’s software, called iBooks Author, lacks easy tools for multiple authors to collaborate on a joint textbook project. Since most books aren’t written in isolation, two new publishing platforms seek to make that group collaboration easier.

The first, Booktype, is free and open-source. Once the platform is installed on a Web server, teams of authors can work together in their browsers to write sections of books and chat with each other in real time about revisions. Entire chapters can be imported and moved around by dragging and dropping. The finished product can be published in minutes on e-readers and tablets, or exported for on-demand printing. Booktype also comes with community features that let authors create profiles, join groups, and track books through editing.

Inkling Habitat, the other new offering, appears to have even greater ambitions. Where iBooks Author is designed mostly for would-be amateur publishers, Inkling Habitat creates a cloud-based platform for the professional market. Matthew MacInnis, Inkling’s chief executive, said the company’s tool is designed to give the global teams who work on professionally published textbooks a single outlet to publish interactive material for the iPad and the Web. Mr. MacInnis said hundreds of users can access the same textbook content at once, and the software will keep track of each step in the editing process.

Inkling Habitat also automates some of the editing process that is unique to e-textbooks, like checking for broken links between special terms and their definitions in a glossary. Those automatic functions, Mr. MacInnis said, will allow e-textbook publishing to get easier without requiring additional staff. “You can’t build the industry up around digital content if you’re going to throw people at every problem,” he said.

Hi Richard,

Are iBooks superior to ToolBooks that will run on the other 99% of the market?
You don't seem to mention your ToolBooks anymore.
Have you stopped writing ToolBooks?
http://www.sumtotalsystems.com/products/content-creation/toolbook_overview.html

I did not know that iBooks were superior to all eBooks (including ToolBooks) on the market.
Is that what you're trying to tell us?

Does this justify having to pay Apple a huge royalty on every iBook an author sells?

I'm sorry, but I despise eBook vendors that do not support open standards. Apple shot itself in the 1980s with the Mac operating system. Now it's shooting itself in the other foot by trying to be an iBook hardware monopoly. The tech world resists vendors that do not support open standards. Excellent authors trying to make money on iBooks will pay a price!

Windows still has about 92% of the PC Market. Add to this the other alternatives that won't run iBooks like Linux. The last time I looked Kindle still had the overwhelming share of the eBook reader market. Seems like an aspiring author should consider market share.

Personally, at think at this stage of technology, a textbook author should still focus on eBook and hardcopy open standard alternatives and provide multimedia supplements. Eventually, hard copy books will have something like a USB port to a multimedia chip embedded in the binding.

Respectfully,
Bob Jensen

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

Another Way to Keep Unemployment Statistics Low
Unemployment benefits have time limits that vary be state. Social Security disability payments continued until the day you die, and in some instances, after you die. Furthermore, being declared disabled by a phony doctor allows Medicare to kick in at any age without having to be 65 years old like other people on Social Security who have not gamed the system.

"Millions of jobless file for disability when unemployment benefits run out," New York Post via Fox News, February 19, 2012 ---
http://www.foxnews.com/politics/2012/02/19/report-millions-jobless-file-for-disability-when-unemployment-benefits-run-out/

Being unemployed for too long reportedly is driving people mad and costing taxpayers billions of dollars in mental illness and other disability claims.

The New York Post reported Sunday that as unemployment checks run out, many jobless are trying to gain government benefits by declaring themselves unhealthy.

More than 10.5 million people -- about 5.3 percent of the population aged 25 and 64 -- received disability checks in January from the federal government, the Post wrote, a 18 percent jump from before the recession.

Among those claiming disability, 43 percent are asking for benefits because of mental illness, the Post wrote. A growing number of those people are older, former white-collar workers.

Disability claims come from the Social Security Trust Fund, which is set to go broke in 2018. Congress last week agreed to dip into the revenue stream to give a 2-percentage point tax break to working Americans.

The Post noted that the more people file for disability claims, the better for the unemployment picture since those people are removed from the jobless rolls.

"The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently) retire with disability benefits (before age 65)," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t

The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

"I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.

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

Bob Jensen's threads on the entitlements disaster are at
http://www.trinity.edu/rjensen/Entitlements.htm

David Albrecht wrote a 2012 Valentines Day poem ---
http://profalbrecht.wordpress.com/2012/02/14/an-accountants-valentine-2012/

Yeah, it's pretty bad, but it's from the heart.

IPSASB publishes consultation paper on the fourth phase of its conceptual framework project for public sector entities

From IAS Plus, February 1, 2012 --- http://www.iasplus.com/index.htm

The International Public Sector Accounting Standards Board (IPSASB) has released for comment an Consultation Paper, Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Presentation in General Purpose Financial Reports. The paper arises from the fourth and final phase of the IPSASB's conceptual framework project.

The paper explores concepts applicable to the presentation of information in the general purpose financial reports of public sector entities and considers presentation from the broader perspective of financial reporting rather than adopting a narrow focus just on the financial statements.

Although many of the concepts of International Public Sector Accounting Standards (IPSASs) are based on International Financial Reporting Standards (IFRSs), the IPSASB's conceptual framework project is not an IFRS convergence project, and its purpose is not to interpret the application of the IASB Framework to the public sector.

Comments on the Consultation Paper close on 31 May 2012.

Click for the IPSASB announcement (link to IFAC website).

Bob Jensen's threads on the sad state of public sector financial reporting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

"Implications of Different Bases for a VAT," by Eric Toder, Jim Nunns, and Joseph Rosenberg, Urban Institute and Brookings Institution, February 2012 ---
http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Fiscal_and_Budget_Policy/Implications of Different Bases for a VAT.pdf
Thank you Paul Caron for the heads up.

. . .

A VAT would be a new tax in the United States that, while likely significantly less complex than the current income tax, would nonetheless be quite complex and would affect businesses as well as nonprofits and governments. Unlike the income tax, however, a VAT would place low administrative costs on individuals, which would primarily be related to claiming a rebate.

A VAT would require the IRS, or a new agency, to establish a new administrative apparatus, with its own forms, instructions, regulatory guidance, processing, taxpayer service, and collection and enforcement activities. This would require a significant appropriation in advance of the VAT’s startup to establish the VAT apparatus and for initial taxpayer education programs, and annual appropriations thereafter.

Parallel to the federal government’s administrative apparatus, businesses and other entities would have to establish the internal systems needed to learn about and comply with the VAT. Small businesses would likely be allowed to exempt themselves from the VAT, but even businesses that choose exemption would have some compliance costs to learn about the VAT and determine whether exemption is in their best interests. Large businesses would all be directly involved in collecting and remitting VAT, or, if not subject to VAT, at a minimum in determining their eligibility for VAT refunds and filing refund claims. The commercial activities of nonprofits and governments would be subject to VAT, entailing compliance costs similar to those of any other business subject to VAT. Further, the excluded activities of governments and nonprofits would entail compliance costs similar to those of VAT-exempt businesses.

Administrative costs for the IRS and compliance costs for businesses and other entities would likely increase with exclusions from the base and other special provisions. Compliance rates, the fraction of tax liabilities voluntarily paid when due, would also likely be lower, since exclusions and other special provisions provide additional avenues for evading tax.

A national VAT could provide a template to help reform state and local retail sales taxes. It could be used to extend sales tax bases to apply to services purchased by households, to remove the cascading of tax that occurs from taxing sales between businesses, and to resolve the taxation of Internet and other remote sellers. These reforms would most easily be achieved if state and local sales taxes piggybacked on the national VAT. Combining administration of a national VAT and piggybacked state and local sales taxes would reduce compliance costs for businesses and total administrative costs for governments.

Nobel Laureate Gary Becker and Judge Richard Posner disagree over prospects of a VAT tax ---
Becker: http://uchicagolaw.typepad.com/beckerposner/2010/04/should-the-us-introduce-a-value-added-tax-becker.html

Posner: http://uchicagolaw.typepad.com/beckerposner/2010/04/should-the-united-states-institute-a-federal-valueadded-tax-posner.html

Jensen Comment
I'm with Posner on this!

Teaching Case: Bribery by Avon in China?

From The Wall Street Journal Accounting Weekly Review on February 17, 2012

Foreign Bribe Case at Avon Presented to Grand Jury
by: Joe Palazzolo and Emily Glazer
Feb 13, 2012
Click here to view the full article on WSJ.com

TOPICS: Foreign Corrupt Practices Act, Foreign Subsidiaries, Internal Auditing, Internal Controls

SUMMARY: "Federal prosecutors investigating whether U.S. executives at Avon Products, Inc., broke foreign-bribery laws have presented evidence in the probe to a grand jury...Authorities are focused on a 2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials in violation of the Foreign Corrupt Practices Act [FCPA]...."

CLASSROOM APPLICATION: Questions ask students to consider what audit steps they would undertake to investigate the issues identified in the article. The article is useful in an auditing class to discuss internal audit functions.

QUESTIONS:
1. (Introductory) Describe how Avon sells its products.

2. (Advanced) What is the Foreign Corrupt Practices Act (FCPA)? How do the law's requirement, and general ethics, make it imperative to prevent illegal payments or other corrupt acts?

3. (Advanced) How might Avon's business model make it difficult to establish internal controls over items such as possible illegal payments to foreign officials?

4. (Advanced) Define the internal audit function and compare it to the audits done by external auditors.

5. (Introductory) How was the Avon Products, Inc. internal audit function used in connection with the company's Chinese operations? What evidence did the internal auditors apparently find in 2005?

6. (Advanced) Suppose you are a member of the Avon internal audit team asked to investigate payments made out of Chinese operations. What steps would you plan to investigate the propriety of the payments?

Reviewed By: Judy Beckman, University of Rhode Island

"Foreign Bribe Case at Avon Presented to Grand Jury," by: Joe Palazzolo and Emily Glazer, The Wall Street Journal, February 13, 2012 ---
http://online.wsj.com/article/SB10001424052970203315804577209443264460570.html?mod=djem_jiewr_AC_domainid

Federal prosecutors investigating whether U.S. executives at Avon Products Inc. broke foreign-bribery laws have presented evidence in the probe to a grand jury, people familiar with the matter said.

Authorities are focused on a 2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials in violation of the Foreign Corrupt Practices Act, according to three people familiar with the matter. Avon had earlier said it first learned of bribery allegations in 2008.

The audit found several hundred thousand dollars in questionable payments to Chinese officials and third-party consultants in 2005, one of these people said. It came as Avon was pursuing a license to conduct door-to-door sales in China. Some of the payments were recorded on invoices as gifts for government officials, the person said. Avon secured China's first such license to a foreign company in 2006.

The Federal Bureau of Investigation and U.S. prosecutors in New York and Washington are trying to determine whether current or former executives ignored the audit's findings or actively took steps to conceal the problems, both potential offenses, two people familiar with the matter said.

Executives at Avon headquarters in New York who saw the audit report at the time didn't disclose its findings to the board's audit committee, finance committee or the full board, according to people familiar with the investigation. Board members didn't learn of the audit report until after Avon launched its own internal investigation of overseas bribery allegations in 2008, say the people familiar with the situation.

Legal experts say executives can be liable in overseas bribery cases even if they didn't authorize illegal payments or try to hide evidence of bribes. Under a legal concept known as willful blindness, a person can also be found guilty of taking steps to avoid learning of wrongdoing, they said, but prosecutors face a higher legal bar.

"We're not aware that a federal grand jury is investigating this," said an Avon spokeswoman. She declined to confirm whether there had been an audit in 2005 and declined to discuss how executives handled any such audit. She said Avon is fully cooperating with the investigation.

While grand juries gather information to determine whether there is enough evidence to bring criminal charges, they also can decline any action.

The investigation of Avon's headquarters comes as members of Congress pressure the Justice Department to hold more high-level executives accountable for corruption overseas. In December, the government unveiled charges against a group of former executives of German conglomerate Siemens AG. Siemens has said it is cooperating.

Avon opened an internal investigation into possible bribery in China in 2008, more than two years after the purported audit report. The company's internal review was later expanded to other regions of the world. The door-to-door cosmetics company has said the internal probe was triggered by an employee who sent a letter in 2008 to Chief Executive Andrea Jung alleging improper spending on travel for Chinese government officials.

The investigation put a cloud over the 12-year tenure of Ms. Jung, who won plaudits for securing the direct-sales license in China. She said in December she would step down once the company finds a replacement CEO; her announcement came amid pressure from investors concerned about Avon's financial performance. Avon has said questions about the company's activities in China kicked off probes by the Justice Department and Securities and Exchange Commission, as well as the audit committee of Avon's board.

Ms. Jung declined to comment. She has said little about the investigations in the past, except that the company is cooperating with the government.

Some high-ranking Avon executives have lost their jobs in the probe. The company said it fired Vice Chairman Charles Cramb on Jan. 29 in connection with the overseas corruption probe and another investigation into allegedly improper disclosure of financial information to analysts. Mr. Cramb couldn't be reached for comment.

Continued in article

February 17, 2012 reply from Bob Jensen to Jagdish Gangolly

Hi Jagdish,

I never suggested profiling when it comes to things like policies on investigating and prevention of plagiarism or cheating in general. The policies must apply to all national origins, and rule enforcement must apply to every student and faculty member. And this is not a racial thing since many of our Asian, Irish, Norwegian, and Latin students were born and educated in the U.S.

What is sad, however, in the United States is when being "street smart" is synonymous knowing how to get away with cheating relative to people who are more trusting and are not "street smart."

I do, however, believe that there is relativism of many things in different nations, including their heritages for bribery customs and norms for cheating/corruption ---

Corruption Perceptions Index 2009 | Transparency International
http://wbpllc.wordpress.com/2009/11/19/corruption-perceptions-index-2009-transparency-international/

The interactive map is at http://media.transparency.org/imaps/cpi2009/

As a footnote when viewing the graphic at the above site, I notice how greatly some nations vary from their neighbors. For example, Argentina is perceived as being over twice as corrupt than Chile. Italy and France are more more corrupt than Germany even though all three nations have similar religious (Catholic) heritages. Religion is probably not the dominant factor in controlling corruption.

Law and tax rule enforcement, however, can be very powerful. The least-corrupt nations seem to rise above the other nations in terms of vigorous law enforcement and tax collections.

However, law enforcement is not synonymous with brutality. Russia, for example, has a brutal police and prison system that has not quelled widespread corruption. The same is true for Viet Nam.

Respectfully,
Bob Jensen

"KPMG LOSES A COUPLE OF MOTIONS IN AN OVERTIME CASE," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, February 10, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/523

All of the large accounting firms are experiencing litigation dealing with the issue of overtime. One such case that commenced on January 19, 2011 is Pippins, Schindler, and Lambert v. KPMG, LLP. KPMG filed several motions in this case and recently the judge denied two of them. While early, it isn’t looking good for KPMG.

We earlier discussed these overtime cases in “Consistency in Accounting and Legal Discourses: The Overtime Cases.” While we are sympathetic to the position of the Big Four, we noted that they might have a hard time meeting the exemptions in the Fair Labor Standards Act (FLSA), which normally requires payment of at least 150 percent of one’s salary when the employee works overtime.

The FLSA provides two exemptions that might apply in this case. The first exemption exists if the worker is an administrative employee. For this to occur, the employee’s primary duty must involve the management or general business operations of the firm. The second exemption, the learned professional exemption, accrues if the worker’s primary duty involves the performance of work that requires knowledge of an advanced type and acquired by specialized intellectual instruction.

Difficulty arises with both of these possible exemptions because they come face-to-face with Code of Professional Conduct Rule 201 and PCAOB Standard No. 10. Rule 201 and Standard No. 10 require partners and managers of audit firms to supervise the accounting associates. They must inform them of the audit objectives and the audit procedures; additionally, the partners and managers have to monitor the work of the associates. Such oversight appears to negate any assertions for an administrative or professional exemption.

Be that as it may, we find interesting recent activity in the Pippins, Schindler, and Lambert v. KPMG case. The first motion concerned whether KPMG has to preserve computer hard drives of its former associates. The audit firm argued against this requirement primarily because of the expense, which it estimated to be at least $1.5 million. It claimed that the benefits did not justify the costs. KPMG suggested that it preserve only a random sample of 100 hard drives. Further, KPMG sought the court to order the plaintiffs to bear the costs of preserving the hard drives.

Judge Colleen McMahon denied all parts of the motion. She noted that plaintiffs desire access to the hard drives because they might contain information pertaining to the job duties performed by the audit associates and to the hours they worked. In addition, as the court conditionally certified FLSA collective action, more employees or former employees may opt-in the collective lawsuit. Accordingly, as information on the hard drives is relevant to the case and because more individuals may join the collective action, Judge McMahon ordered preservation of all the hard drives.

The judge apparently was miffed at KPMG. She chastises the firm as “unreasonable.” Specifically she calls unreasonable

(1)KPMG’s refusal to turn over so much as a single hard drive so its contents could be examined; and (2) its refusal to do what was necessary in order to engage in good faith negotiations over the scope of preservation …

Thus, on February 3, 2012, Judge McMahon denied KPMG’s motion in its entirety.

Continued in article

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

It's troubling enough to study one university's financial reports. It's a nightmare to compare universities.
"So You Want to Examine Your University's Financial Reports?" by Charles Schwartz, Chronicle of Higher Education, February 7, 2012 ---
http://chronicle.com/article/So-You-Want-to-Examine-Your/130672/

With financial difficulties facing many universities, some faculty members feel the urge to take a critical look into their own institution's audited financial reports and see what they can learn.

The impulse is admirable, but some guidance is needed before you enter such unfamiliar territory. Having spent some time looking at such things at my own institution (the University of California, which provides an enormous amount of financial data online), I must warn about the dreadful pitfalls awaiting any newcomer.

When you wade into those financial reports, you should understand that the numbers are invariably correct. What you need to be skeptical about are the words and labels attached to the numbers. There is, of course, a large amount of jargon. For example, if you wanted to find out how much money is spent on administration and management, you might start with "institutional support," which covers high-level administration on the campus; then there is "academic administration," (a subcategory of "academic support"), which covers the deans' offices; and then there are lower levels of administrative services buried in every other category.

It turns out that the trickiest category is the one you would think faculty members understand the best: expenditures for "instruction." Let me show you some data for my own university, looking at its two most famous campuses. This chart comes from page eight of the latest UC Annual Financial Report.

Operating Expenses by Function, 2010-11 ($ in Millions)

Total Instruction Research Medical Centers

UC Berkeley $2,026 $ 566 $ 533 0

UC Los Angeles $4,563 $1,240 $ 702 $1,285

UCLA has a medical school and associated hospitals; Berkeley doesn't. That mostly explains the large difference in total expenditures between the two institutions. Otherwise, one thinks of the two campuses as quite comparable in size and academic quality. So why is there such a disparity in the expenditures for instruction? The answer is not easy to find by simply reading the audited financial report.

The answer starts to appear when you search more detailed financial reports (the best resource at my university is called Campus Financial Schedules) and find tables relating revenues to expenditures. For UCLA there is a contribution of $530 million for instruction that comes from "sales and services of educational activities."

What is that? It turns out that faculty members in the medical school not only teach and carry out research but are also doctors who treat patients. That activity, called "clinical practice," is a lucrative business that is conducted by the university. In the accounting system, such revenues are lumped into the category "sales and services of educational activities." Part of that money is used to cover costs of the clinical practice (offices, supplies, personnel); and a large part of it is paid out to the medical faculty members on top of their regular academic salaries. It just happens that the accounting system lumps all of those payments to faculty members under the heading of "expenditures for instruction." Who knew?

Does that have any troublesome consequences? Yes. There is a famous national repository for detailed data on the nation's colleges and universities: the U.S. Department of Education's Integrated Postsecondary Education Data System (IPEDS). One of the things you can get from that lovely online source is the per-student expenditure for instruction, for any college or university, in any year. And if you look up that data for Berkeley and UCLA, you will find that the latter amount is twice as big as the former. IPEDS uses data supplied by the individual campuses, the very same data that I mentioned above. Nobody seems to be aware of how misleading those numbers can be if the campus you ask about happens to be in the medical-services business. (By the way, not all campuses with medical enterprises use the same accounting procedures I described.) IPEDS is seriously distorted.

Continued in article

Jensen Comment
Think of college and university financial reports as being fund-based accounting reports similar to municipal, state, and federal government financial reports. Reporting standards are so messed up for such financial reporting that it's usually possible to hide anything from the public simply by overwhelming them with a truck load of information that is not indexed or otherwise linked in a comprehensible manner.

The Sad State of Not-for-Profit accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

Issues in Computing a College's Cost of Degrees Awarded and "Worth" of Professors ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#CostAccounting

"New Business-School (AACSB) Accreditation Is Likely to Be More Flexible, Less Prescriptive," by Katherine Mangan, Chronicle of Higher Education, February , 2012 ---
http://chronicle.com/article/New-Business-School/130718/

New accreditation standards for business schools should be flexible enough to encourage their widely divergent missions without diluting the value of the brand that hundreds of business schools worldwide count among their biggest selling points.

That message was delivered to about 500 business deans from 38 countries at a meeting here this week.

The deans represented the largest and most geographically diverse gathering of business-school leaders to attend the annual deans' meeting of AACSB International: the Association to Advance Collegiate Schools of Business.

The association is reviewing its accreditation standards, in part to deal with the exponential growth in the number of business schools overseas, many of which are seeking AACSB accreditation.

The committee that is drawing up proposed new standards gave the deans a glimpse at the changes under consideration, which are likely to acknowledge the importance of issues like sustainable development, ethics, and globalization in today's business schools. A council made up of representatives of the accredited schools will have to approve the changes for them to take effect, and that vote is tentatively scheduled for April 2013.

Joseph A. DiAngelo, the association's chair-elect and a member of the committee reviewing the standards, said that when the rules are too prescriptive, schools' mission statements, which drive their curricula and hiring patterns, all start to look the same.

"It's all vanilla. I want to see the nuts and the cherries and all the things that make your school unique," said Mr. DiAngelo, who is also dean of the Erivan K. Haub School of Business at Saint Joseph's University, in Philadelphia.

The last time the standards were revised, in 2003, schools were put on notice that they would have to measure how much students were learning—a task some tackled with gusto. One business school Mr. DiAngelo met with on a recent accreditation visit "had 179 goals and objectives, and they only have 450 students," he said. "I said, You can't be serious."

The committee's challenges include providing a more flexible accreditation framework to allow schools to customize their approaches without angering members that have already sweated out the more rigorous and prescriptive process.

And even though many schools outside the United States have trouble meeting the criteria for accreditation, especially when it comes to having enough professors with Ph.D.'s, "We don't think it's appropriate to have dual standards for schools in the U.S. and those outside the U.S.," said Richard E. Sorensen, co-chair of the accreditation-review committee and dean of the Pamplin College of Business at Virginia Tech.

Continued in article

Jensen Comment
In the 1970s when I guided the University of Maine at Orono to AACSB accreditation the standards were relatively fixed for all business schools that got accredited. By the 1990s when I participated (but did not lead) the AACSB accreditation effort of Trinity University, the accreditation standards had changed significantly. The relevant accreditation standards became menu driven. Getting accreditation entailed choosing missions from the menu. In other words attaining accreditation became mission driven. Whereas an R1 university's main mission might be having a leading research reputation and a doctoral program, a non-R1 university might have more focus on other missions such as teaching reputation or innovative programs for minority student admissions.

There were and still are limits set on mission-driven AACSB accreditation standards. For example, to my knowledge no program that has more online students than onsite students to my knowledge as ever attained AACSB accreditation. However, universities having prestigious online business and accounting programs like the University of Connecticut can have online degree programs provided their main missions are to serve onsite students. No North American for-profit business program to my knowledge has ever been accredited, including some prestigious MBA programs initiated by leading consulting firms. Outside North America, however, the AACSB does seem to have a bit more flexibility in terms of a for-profit mission.

In North America, the AACSB seems to fear opening Pandora's box to for-profit universities. At the same time, I do not know of any for-profit university that currently has admission standards and academic standards that I personally would consider a great candidate for AACSB accreditation. This, of course, does not mean that some questionable non-profit universities that somehow achieved AACSB accreditation have stellar admission and academic standards. Maybe I'm a snob, but I think the AACSB took this mission-driven thing a bridge too far. The renewed effort to provide even more flexible standards may cheapen the currency even more.

Sigh! Maybe I really am an old snob!

Unreliability of Higher Education's Accrediting Agencies
"Mend It, Don't End It," by Doug Lederman, Inside Higher Ed, February 4, 2011 ---
http://www.insidehighered.com/news/2011/02/04/education_department_panel_hears_ideas_about_improving_higher_education_accreditation

About two-thirds of the way through the first day of the Education Department's two-day forum on higher education accreditation, something strange happened: a new idea emerged.

Not that the conversation that preceded it was lacking in quality and thoughtfulness. The discussion about higher education's system of quality assurance included some of the sharper minds and best analysts around, and it unfolded at a level that was quite a bit higher than you'd find at, say, the typical Congressional hearing.

The discussion was designed to help the members of the Education Department's National Advisory Committee on Institutional Quality and Integrity understand the accreditation system, so it included a wide range of voices talking about many aspects of quality, regulation and oversight in higher education. The exchanges served largely to revisit history and frame the issues in a way that probably seemed familiar, at least to those who follow accreditation closely.

The basic gist on which there was general agreement:

Higher education accreditation is imperfect (seriously so, in the eyes of some), with many commentators citing how rarely the agencies punish colleges and how inscrutable and mysterious their process is to the public.

Politicians and regulators are asking accrediting agencies to do things they were never intended to do, like make sure colleges don't defraud students.

Despite those flaws, most seemed less than eager to try to create a wholly different system to assure the quality of America's colleges and universities, because they see it as either difficult or undesirable.

Yet given Education Secretary Arne Duncan's formal charge to the newly reconstituted panel, which was distributed at its first formal meeting in December, most of the higher education and accreditation officials who attended the policy forum said they had little doubt that the panel is strongly inclined to recommend significant changes, rather than just ruminating about how well the system is working.

Continued in article

Jensen Comment
On of the biggest abuses is the way for-profit universities buy out failing non-profit colleges for the main purpose of gaining accreditation by buying it rather than earning it. The scandal is that the accrediting agencies, especially the North Central accrediting agency, let for-profits simply buy this respectability. For-profit universities can be anywhere and still buy a North Central Association accreditation.

I do not know of any successful attempt of a for*profit university to buy out a failing university that has AACSB accreditation.

Bob Jensen's threads about accreditation are at
http://www.trinity.edu/rjensen/Assess.htm#AccreditationIssues

LIBOR --- http://en.wikipedia.org/wiki/LIBOR

"UBS, Credit Suisse Among Banks in Swiss Libor-Fixing Probe," by Elena Logutenkova, Bloomberg News, February 3, 2012 ---
http://www.bloomberg.com/news/2012-02-03/switzerland-s-comco-opens-investigation-into-ubs-credit-suisse.html

UBS AG (UBSN) and Credit Suisse Group AG (CSGN) are among 12 banks facing a Swiss inquest into possible manipulation of the London interbank offered rate, the latest probe into how the benchmark for $350 trillion of financial products is set.

“Collusion between derivative traders might have influenced” Libor and its Japanese equivalent, Tibor, the Swiss competition watchdog, Comco, said in an e-mailed statement today. “Market conditions regarding derivative products based on these reference rates might have been manipulated too.”

Comco said it opened the investigation after receiving an application for its “leniency program,” which indicated that traders from various banks might have influenced the rate. Libor is set daily by the British Bankers’ Association based on data from banks, which report how much it would cost them to borrow from each other for various periods of time. Regulators in the U.S., U.K. and European Union have been examining how Libor is set, while Japan’s securities watchdog has probed Tibor.

“We are taking these investigations very seriously and are fully cooperating with the authorities,” said Yves Kaufmann, a spokesman for UBS in Zurich. UBS, the biggest Swiss bank, said in July that it was granted conditional immunity from some agencies, including the U.S. Department of Justice.

A spokesman for Credit Suisse said the bank is “not in the position” to comment at the moment.

Jensen Comment
This could be really huge since hundreds of thousands of derivatives financial instruments and hedging contracts use LIBOR as an underlying. Although LIBOR is not technically a risk free interest rate, it fundamentally assumes that traders are not manipulating the rate for devious purposes. It's probably the most popular interest rate underlying in derivatives financial instruments contracts.

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

Bob Jensen's fraud updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Accounting for Derivative Financial Instruments and Hedging Activities

Hi Patricia,

The bottom line is that accounting authors, like intermediate textbook authors, provide lousy coverage of FAS 133 and IAS 39 because they just do not understand the 1,000+ types of contracts that are being accounted for in those standards. Some finance authors understand the contracts but have never shown an inclination to study the complexities of FAS 133 and IAS 39 (which started out as a virtual clone of FAS 133).

My 2006 Accounting Theory syllabus before I retired can be viewed at http://www.trinity.edu/rjensen/acct5341/acct5341.htm

There are some great textbooks on derivatives and hedging written by finance professors, but those professors never delved into the complexities of FAS 133 and IAS 39. My favorite book may be out of print at the moment, but this was a required book in my theory course: Derivatives: An Introduction by Robert A Strong, Edition 2 (Thomson South-Western, 2005, ISBN 0-324-27302-9)

Professor Strong's book provides zero about FAS 133 and IAS 39, but my students were first required to understand the contracts that they later had to account for in my course. Strong's coverage is concise and relatively simple.

When first learning about hedging, my Trinity University graduate students and CPE course participants loved an Excel workbook that I made them study at
www.cs.trinity.edu/~rjensen/Calgary/CD/Graphing.xls
Note the tabs on the bottom that take you to different spreadsheets.

There are some really superficial books written by accounting professors who really never understood derivatives and hedging in finance.

Sadly, much of my tutorial material is spread over hundreds of different links.

However, my dog and pony CD that I used to take on the road such as a training course that I gave for a commodities trading outfit in Calgary can be found at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/ T
his was taken off of the CD that I distributed to each participant in each CPE course, and now I realize that a copyrighted item on the CD should be removed from the Web.

In particular, note the exam material given at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/ExamMaterial/
My students had access to this material before they took my exams.

Note that some of the illustrations and exam answers have changed over time. For example, the exam material on embedded derivatives is still relevant under FASB rules whereas the IASB just waved a magic wand and said that clients no longer have to search for embedded derivatives even though they're not "clearly and closely related" to the underlyings in their host contracts. I think this is a cop out by the IASB.

Links to my tutorials on FAS 133 and IAS 39, including a long history of multimedia, can be found at
http://www.trinity.edu/rjensen/caseans/000index.htm

Probably the most helpful thing I ever generated was the glossary at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

What made me the most money consulting in this area can be found at
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm

But the core of what I taught about derivatives and hedge accounting in my accounting theory course can be found in the FAS 133 Excel spreadsheets listed near the top of the document at
http://www.cs.trinity.edu/~rjensen/

I also salted my courses with real world illustrations of scandals regarding derivatives instruments contracts, a continuously updated timeline of which is provided at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Hope this helps. Once again you may want to look at the exam material at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/ExamMaterial/

The bottom line is that accounting authors like intermediate textbook authors provide lousy coverage of FAS 133 and IAS 39 because they just do not understand the 1,000+ types of contracts that are being accounted for in those standards. Some finance authors understand the contracts but have never shown an inclination to delve into the complexities of FAS 133 and IAS 39 (which started out as a virtual clone of FAS 133).

Respectfully,
Bob Jensen

Hi again Patricia,

If a student asks why FAS 133 had to become so complicated tell them that it's because of the difference between economists and accountants. Economists allow hedging even when hedged items have not been booked by accountants. This causes all sorts of misleading accounting outcomes if hedge accounting relief is not provided for derivative contracts that are hedges rather than speculations.

Students may still ask why FAS 133 became the most complicated accounting standard in the history of the world.

Before FAS 133, companies were getting away with enormous off-balance-sheet-financing (OBSF) with newer types of derivative financial instruments. FAS 80 covered booking of options and futures contracts, but forward contracts and swaps were not booked when they were either speculations or hedges. After interest rate swaps were invented by Wall Street n the 1980s, for example, swap contracting took off like a rocket in worldwide finance. Trillions of dollars in swap debt were being transacted that were not even booked until FAS 133 went into effect in the 1990s.

Originally the FASB envisioned a relatively simple FAS 133. Most derivative financial instruments contracts (forwards, swaps, futures, and options) would be initially booked at fair value (with is zero in most instances except for options) and then reset to changed fair value at least every 90 days. All changes in value would then be booked as current earnings or current losses. Sounds simple except for some dark problems of trying to value some of these contracts.

But then, in the exposure draft period, companies made the FASB aware of an enormous problem that arose because of a difference between economists and accountants. Economists invented hedging contracts without caring at all whether a hedged items were booked or not booked by accountants. For example, the hedged item might be a forecasted transaction by Corp X to issue $100 million in bond debt at spot rates ten months from now. Economists showed Corp X how to hedge the cash flow risk of this unbooked forecasted transaction with a forward contract or swap contract.

Perfect hedges have zero effect on accounting earnings volatility when both the hedged item and its hedging derivative contract are booked by accountants --- such as when existing booked debt is changed from floating rate debt to fixed rate debt with an interest rate swap derivative contract.

Perfect hedges could have an enormous effect on earnings volatility when the hedged item is not booked and the hedging derivative contract is booked. For example, all changes up and down in the fair value of the booked derivative contracts would not be offset in the books by changes in value of the unbooked hedged items even though from an economics standpoint there is no change in economic earnings when changes in value of the booked derivative contract are perfectly offset by changes in value of the unbooked hedged item.

And most hedging circumstances are such that the hedging contract is booked under FAS 133 and the hedged item is not booked such as forecasted purchases of jet fuel by Southwest Airlines over the next two years.

Companies that hedged unbooked assets or liabilities would thereby punished with enormous accounting earnings volatility when they hedged economic earnings. The FASB ultimately agreed that this was misleading and thereby introduced hedge accounting relief in FAS 133 by keeping changes in the booked value of hedging contracts out of booked current earnings. For cash flow hedges and foreign currency hedges this is accomplished by using OCI. OCI is not used for fair value hedging, but hedge accounting relief is provided for fair value hedges in other ways. Look up fair value hedging under "Hedge" at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#H-Terms

Because there are thousands of types of hedging contracts, FAS 133 became the most complicated standard ever issued by the FASB. It's the only standard that became so complicated that an implementation group (called the DIG) was organized by the FASB to field implementation questions by auditors and their clients. DIG pronouncements, in turn, became so complicated that at times most accountants could not understand these pronouncements. DIG links are surrounded by red boxes at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

One of the most difficult aspects of FAS 133 is that hedge accounting relief is allowed only to the extent that hedges are effective. Hedges are seldom perfectly effective in terms of value changes at interim points in time even though they may be perfectly effective when hedges mature. Hedge effectiveness tests have become extremely complicated. FAS 133 still has some bright lines whereas the IASB in IFRS 9 is making hedge effectiveness testing principles based in IFRS 9. That's like giving an alcoholic a case of booze every week.

Thus if a student asks why FAS 133 had to become so complicated tell them that it's because of the difference between economists and accountants. Economists allow hedging even when hedged items have not been booked by accountants. This causes all sorts of misleading accounting outcomes if hedge accounting relief is not provided for derivative contracts that are hedges rather than speculations.

Respectfully,
Bob Jensen

Question
What is the main advantage and main disadvantage of speculating or hedging with purchased options?

Main Advantage
The main advantage of purchased options is that the total loss is bounded by the premium paid initially. In the case of other derivatives like forwards, futures, swaps, and written options, the risks are generally not bounded unless they are bounded by other hedging contracts. Strategies thereby become more complicated.

Main Disadvantage
The main disadvantage is the cost (premium) that must be paid initially for purchased options. Most other alternatives have no up front premiums although premiums can be written into more complex OTC alternatives.

Question
What are reverse convertible securities?

"Simple options thrive in risky world - SuperDerivatives," by Toni Vorobyova, Reuters, February 8, 2012 ---
http://uk.reuters.com/article/2012/02/08/uk-superderivatives-idUKLNE81701V20120208

Investors want simple derivative products to cushion the pain of stock market losses and have turned their back on complex, custom-built products which were earning a fortune for investment banks, the head of equities at a leading derivatives pricing firm said.

The collapse of Lehman Brothers - the largest bankruptcy in U.S. history which left the bank facing billions of dollars in derivatives claims - has burnt many investors, choking off demand for more complex options, according to Mikael Benguigui, head of equities at SuperDerivatives.

Such trends were last week acknowledged by Deutsche Bank (DBKGn.DE), which noted lower revenue for equity derivatives sales and trading compared with 2010 as a result of what it said was a more challenging environment and lower client activity.

"The market has changed completely. Banks are not willing to take on risk. There is a general consensus in the market now to avoid going into too-complex, too-exotic options," Benguigui said.

"What we see is that people are pricing fairly simple structured products, fairly commoditised products. It's not what we saw five or six years ago when every month banks were inventing a new product."

The pace of growth in the equity derivatives market has slumped from the 33 percent seen in 2007 - before the 2008 collapse of Lehman - to 9 percent in 2011, according to data from the World Federation of Exchanges. Within that, stock index options are the most popular category and are enjoying the strongest growth.

The timeframe on such products has also shrunk: five-year options are popular, but banks are reluctant to take on the risk of offering products for seven years or longer. This is in contrast to pre-crisis days, when they would quote for 12 years or more, Benguigui, a derivatives veteran who also worked at Citi (C.N) and JPMorgan (JPM.N), said.

"The feedback from the investment banking side is that a lot of them are struggling. We are coming back to less complicated options and less complicated strategy, so it's more plain vanilla. And plain vanilla means less room for margin - it's more liquid, it's easy to put banks into competition," he said.

NO BIG UPSIDE

SuperDerivatives offers equity derivatives pricing tools - from a live platform to a one-off portfolio valuation service - to banks, hedge funds, asset managers, custodians and hedge fund administrators in more than 60 countries.

Among the most popular are so-called reverse convertible securities, which are linked to an underlying stock or index and offer a high coupon.

Upon maturity, if the value of the stock or index is above a certain level, the holder gets back the full investment. Otherwise, they get a pre-agreed number of shares.

Such a product ensures a steady relatively high return, in exchange for which investors give up their right to benefit from any unexpected surge in a share price.

"The big upside - no one really believes in it. There might be moderate upside, but they are happy to have a fixed coupon. Moderate downside can happen and they don't want to suffer on that, so they are happy to have the investment back. If they are completely wrong and something really bad happens, it's no worse than being long the stock from day one," Benguigui said.

"This sort of super-easy product has big, big flows in the UK and also in Switzerland."

Regulation is key to regaining investor confidence in a market where many found themselves unable to exit positions as the global financial crisis unfurled.

"Right now, every regulatory body is pushing for more transparency, better liquidity. They are asking the buy side to be more independent by using a platform where you can price everything independently," Benguigui said.

"When the market changes like this, the volume is going to come back. But ... investment banks are not going to be allowed to do what they did before in terms of taking risk or playing with the capital. I don't think we are going to see huge volumes again on complex instruments where banks were making fortunes."

Links to my tutorials on derivative financial instruments, including a long history of multimedia, can be found at
http://www.trinity.edu/rjensen/caseans/000index.htm

Also look up "Option" at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#O-Terms

Ernst & Young

Audit committee: leading practices and trends

This publication outlines key considerations for audit committees as they focus on risk oversight, committee composition and self-assessment. Also included are suggestions for executive sessions, interaction with other board committees, continuing education and new member orientation --- Click Here
http://www.ey.com/Publication/vwLUAssets/AuditCommitteeLeadingPractices_BB2278_February2012/$FILE/AuditCommitteeLeadingPractices_BB2278_February2012.pdf

"The Fed Votes No Confidence The prolonged—'emergency'—near-zero interest rate policy is harming the economy," by Charles Schwab, The Wall Street Journal, February 6, 2012 ---
http://online.wsj.com/article/SB10001424052970204740904577197374292182402.html?mod=djemEditorialPage_t

We're now in the 37th month of central government manipulation of the free-market system through the Federal Reserve's near-zero interest rate policy. Is it working?

Business and consumer loan demand remains modest in part because there's no hurry to borrow at today's super-low rates when the Fed says rates will stay low for years to come. Why take the risk of borrowing today when low-cost money will be there tomorrow?

Federal Reserve Chairman Ben Bernanke told lawmakers last week that fiscal policy should first "do no harm." The same can be said of monetary policy. The Fed's prolonged, "emergency" near-zero interest rate policy is now harming our economy.

The Fed policy has resulted in a huge infusion of capital into the system, creating a massive rise in liquidity but negligible movement of that money. It is sitting there, in banks all across America, unused. The multiplier effect that normally comes with a boost in liquidity remains at rock bottom. Sufficient capital is in the system to spur growth—it simply isn't being put to work fast enough.

Average American savers and investors in or near retirement are being forced by the Fed's zero-rate policy to take greater investment risks. To get even modest interest or earnings on their savings, they move out of safer assets such as money markets, short-term bonds or CDs and into riskier assets such as stocks. Either that or they tie up their assets in longer-term bonds that will backfire on them if inflation returns. They're also dramatically scaling back their consumer spending and living more modestly, thus taking money out of the economy that would otherwise support growth.

We've also seen a destructive run of capital out of Europe and into safe U.S. assets such as Treasury bonds, reflecting a world-wide aversion to risk. New business formation is at record lows, according to Census Bureau data. There is still insufficient confidence among business people and consumers to spark an investment and growth boom.

We're now in the 37th month of central government manipulation of the free-market system through the Federal Reserve's near-zero interest rate policy. Is it working?

Business and consumer loan demand remains modest in part because there's no hurry to borrow at today's super-low rates when the Fed says rates will stay low for years to come. Why take the risk of borrowing today when low-cost money will be there tomorrow?

Federal Reserve Chairman Ben Bernanke told lawmakers last week that fiscal policy should first "do no harm." The same can be said of monetary policy. The Fed's prolonged, "emergency" near-zero interest rate policy is now harming our economy.

The Fed policy has resulted in a huge infusion of capital into the system, creating a massive rise in liquidity but negligible movement of that money. It is sitting there, in banks all across America, unused. The multiplier effect that normally comes with a boost in liquidity remains at rock bottom. Sufficient capital is in the system to spur growth—it simply isn't being put to work fast enough.

Average American savers and investors in or near retirement are being forced by the Fed's zero-rate policy to take greater investment risks. To get even modest interest or earnings on their savings, they move out of safer assets such as money markets, short-term bonds or CDs and into riskier assets such as stocks. Either that or they tie up their assets in longer-term bonds that will backfire on them if inflation returns. They're also dramatically scaling back their consumer spending and living more modestly, thus taking money out of the economy that would otherwise support growth.

We've also seen a destructive run of capital out of Europe and into safe U.S. assets such as Treasury bonds, reflecting a world-wide aversion to risk. New business formation is at record lows, according to Census Bureau data. There is still insufficient confidence among business people and consumers to spark an investment and growth boom.

Jensen Comment

The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

Bob Jensen's threads on the bailout mess are at
http://www.trinity.edu/rjensen/2008Bailout.htm

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

"Audit Watchdog Fines Ernst & Young $2 Million," by Michael Rapoport, The Wall Street Journal, February 8, 2012 ---
http://online.wsj.com/article/SB10001424052970204136404577211384224280516.html

Ernst & Young LLP agreed to pay $2 million to settle allegations by the government's auditing regulator that the firm wasn't skeptical enough in assessing how a client, Medicis Pharmaceutical Corp., accounted for a reserve covering product returns.

The Public Company Accounting Oversight Board also sanctioned four current or former partners of the Big Four accounting firm, including two whom it barred from the public-accounting field. Ernst & Young and the four partners settled the allegations without admitting or denying the board's findings.

The $2 million fine is the largest monetary penalty imposed to date by the board, which inspects accounting firms and writes and enforces the rules governing the auditing of public companies.

The board said Ernst & Young and its partners didn't properly evaluate Medicis's sales-returns reserve for the years 2005 through 2007. The firm accepted the company's practice of imposing the reserve for product returns based on the cost of replacing the product, instead of at gross sales price, when the auditors knew or should have known that wasn't supported by the audit evidence, the board said.

Medicis later revised its accounting for the reserve and restated its financial statements as a result.

Continued in article

Bob Jensen's threads on Ernst & Young ---
http://www.trinity.edu/rjensen/Fraud001.htm

How to paint rosy scenarios with principles-based artistic brushes
"IFRS Might Produce Better Earnings, Study Predicts," Compliance Week, February 3, 2012 ---
http://www.complianceweek.com/ifrs-might-produce-better-earnings-study-predicts/article/226132/

Putting a College Diploma Inside a Tool Belt
"The Future of American Colleges May Lie, Literally, in Students' Hands," Chronicle of Higher Education, February 5, 2012 ---
http://chronicle.com/article/Tools-for-Living/130615/?sid=cr&utm_source=cr&utm_medium=en

Jensen Comment
The risk in this education/training module is that it will do a poor job of meeting both goals. My advice would be to keep the academic standards high and provide more of a survey of what trade workers do rather than get bogged down in how they do it. For example, it is doubtful that a graduate of such a program will be able to work in a transmission shop without much more tech schooling and apprenticeship. The hard thing about being a mechanic or a plumber is becoming experienced in the highly variable problems that are encountered on the job. For example, automobiles now contain computers that greatly complicate automotive repair relative to taking the head off a Model T Ford and scraping off the carbon.

National Association of Colleges and Employers (NACE) --- http://www.naceweb.org/home.aspx

"2011 Accounting Graduates Earning Average Salaries of $50,000," AccountingWeb, January 31, 2012 ---
http://www.accountingweb.com/topic/education-careers/2011-accounting-graduates-earning-average-salaries-50000

Accounting major college graduates earned an average of $50,500. Entry-level accounting and finance jobs tend to see steady growth. Highest-paying employers of accounting majors were securities, commodities, and financial investments employers.

Continued in article

NACE Salary Calculator Center --- http://www.jobsearchintelligence.com/NACE/salary-calculator-intro/

Jensen Comment
I always warned students to look more at career potential than starting salaries. For example, a student's lowest starting salary from a public accountancy firm may be that student's best offer in terms of career training, experience with quality clients, working atmosphere, travel requirements, work-at-home opportunities, promotion prospects, etc. Some firms are better than others in terms of chances of being admitted into the partnership. Some firms are better than others in terms of working with clients that offer job change opportunities.

For example, the highest starting salaries for accounting, finance, and economics graduates are usually Wall Street securities, commodities, banking, and investments employers. But these are usually accompanied by high costs of living and possibly time consuming commutes. Compensation may depend heavily on commissions and bonuses. And a given starting employee may be only one of hundreds of new hires competing for recognition and promotion. Accepting a lower salary in a Big Four auditing firm or even a smaller auditing firm in Des Moines may actually be a better career choice even if the starting salary is less than $60,000.

Bob Jensen's threads on career opportunities and warnings are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

STEM (Science, Technology, Engineering, and Mathematics) --- http://en.wikipedia.org/wiki/STEM_fields

"Re-Engineering Engineering Education to Retain Students," by Josh Fischman, Chronicle of Higher Education, February 19, 2012 ---
http://chronicle.com/blogs/percolator/re-engineering-engineering-education-to-retain-students/28745?sid=wc&utm_source=wc&utm_medium=en

Vancouver, British Columbia—Alarmed by the tendency of engineering programs to hemorrhage undergraduates, at a time when the White House has called for an additional million degrees in science, technology, engineering and math fields—known as STEM—education researchers here at the annual meeting of the American Association for the Advancement of Science proposed ways to improve the numbers. At a symposium on engineering education, one group outlined a broad revamping of curriculum, while another proposed more modest changes to pedagogy.

The re-evaluation of curriculum is an effort called Deconstructing Engineering Education Programs. The project is led by Ilene Busch-Vishniac, the provost of McMaster University in Ontario and a mechanical engineer, and involves faculty from nine universities, including large public institutions like the University of Washington and small private ones like Smith College.

Patricia Campbell, a collaborator on the project who leads an education-consulting firm in Groton, Mass., said that the time to get an engineering degree was a major reason that undergraduates dropped the major. “We call these four-year schools,” she said. “But 64 percent of STEM undergraduates complete their degrees in six years.” In engineering, she continued, that was largely due to two factors: a proliferation of courses, called “topic creep,” and rigid chains of prerequisite courses that students had to follow to move on to higher courses.

Matthew Ohland, an associate professor of engineering education at Purdue University, added that the rigid structure not only prevented students from getting out of these programs with a degree, but it also kept potential students from migrating in. For example, he said, an industrial-engineering program might insist its students take a particular economics course to fulfill the program’s general-education requirements. But sophomores and juniors might have already taken a related but different econ course. To join the program, they would have to retake economics, a strong disincentive.

Ms. Campbell (who was formerly a professor at Georgia State University) and her colleagues attempted to streamline this system, focusing on mechanical engineering. At nine schools, they identified mechanical engineering courses that covered 2,149 topics. But after closely looking at the coursework, they found a number of similar topics with different names, and narrowed the list of unique topics to 833. Ultimately they grouped the courses on those topics into 12 clusters, each of which contained chains of classes focused around closely related topics, and required few courses from another cluster. The clusters covered all 833 topics, and instructional times ranged from 52 to 115 hours, with an average length of 91 hours. That corresponds, roughly, to four hours of course time each week for one semester on the low end or one year on the high end.

That means, Ms. Campbell said, that a mechanical-engineering student could cover all the required topics, but do so in four years, by taking three clusters each year.

It would also, she claimed, meet the standards of the Accreditation Board for Engineering and Technology, because it includes everything that accredited engineering programs do. Mr. Ohland, who works as an evaluator for the board, said the accreditor is open to new approaches like these, although he acknowledged there were many of what he called “horror stories” about the accreditor being very traditional and resistant to change. “If you do something too wild, you have to convince [the board] that it won’t hurt students.”

No institution has adopted the cluster formulation. Ms. Campbell said that faculty members were leery of the new course formulations, which grouped topics that they usually taught with other topics they did not. The solution, she said, was team-teaching of a course, but that’s something that pushes many professors beyond their comfort levels.

A less-radical approach would be to improve teaching techniques in existing courses, said another symposium participant, Susan S. Metz, executive director of the Lore-El Center for Women in Engineering and Science at Stevens Institute of Technology in Hoboken, N.J. She leads the Engage project, a consortium of engineering schools at 30 institutions, supported by the National Science Foundation, to identify best practices in teaching.

Continued in article

Jensen Comment
In accountancy we face somewhat similar problems in that even in four-year degree programs accounting majors are required to take more courses in their major than most other majors on campus, including majors in economics, finance, marketing, and management. To that we now add a fifth year of courses required to sit for the CPA examination.

But in accountancy we face a different job market than engineers. There are no shortages of top accounting majors to meet the available entry level jobs in CPA firms, corporations, and government agencies in most states. There is a shortage of accounting PhD graduates, but these shortages are not caused by undergraduate professional accountancy curricula. The main problem lies in that accountancy PhD degrees take twice as long as most other doctoral degrees and require mathematics and statistics prerequisites not taken by former accounting majors ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

In the roaring 1990s there was great worry among the CPA firms that accounting was losing top majors to the soaring bubble of jobs in computer science, IT, and finance. But that bubble burst big time making homeless people out of computer science, IT, and finance graduates. Students who had not yet declared majors returned to the accounting fold in spite of the expanding requirements to have a fifth year (150-credits) to sit for the CPA examination.

The curriculum of accountancy has been and probably always will be dictated by content of the CPA examination. For example, when the CPA examination commenced to have larger and tougher problems in governmental accounting, accounting programs beefed up governmental accounting courses. The same beefing up is now taking place with ethics content in the curricula. Perhaps this isn't such a bad thing until more shortages of accounting graduates arise.

The problem with the CPA-exam focus of accounting curricula lies in finding accounting instructors qualified to teach upper division accountancy, auditing, tax, and AIS courses. There's a huge shortage of accountancy PhD graduates and many of them are econometricians not qualified to teach upper division accounting courses. As a result accounting programs are turning more and more to the AACSB's Professionally Qualified (PQ) adjunct instructors who are strong in accountancy but do not have doctoral degrees. A few even have doctoral degrees but are not interested in doing accountics research and publishing required for AQ tenure tracks.

Hence even though we could streamline accounting curricula along the same lines suggested for engineering majors in the above article, I personally don't think there's a need to meet the supply of available jobs in accountancy in the United States and Canada.

And apart from engineering and technology, I'm not certain that we are not deluding high school students about career opportunities in science and mathematics opportunities. For example, chemistry and physics are now ranked among the "most useless" majors and students with four-year degrees or even PhD degrees in these disciplines have to branch into other fields to find careers.

"Texas May Cut Almost Half of Undergrad Physics Programs," Inside Higher Ed, September 27, 2011 ---
http://www.insidehighered.com/news/2011/09/27/qt#271341

Note that "useless" in context means an oversupply of graduates relative to job opportunities in a discipline. The jobs themselves may be high paying, but 300 may apply for a single opening such that the 299 that got turned away wish they'd majored in some other discipline.

The most useless 20 college degrees," The Daily Beast, April 27, 2011 ---
http://www.thedailybeast.com/blogs-and-stories/2011-04-27/useless-college-majors-from-journalism-to-psychology-to-theater/

As college seniors prepare to graduate, The Daily Beast crunches the numbers to determine which majors—from journalism to psychology —didn’t pay.
Some cities are better than others for college graduates. Some college courses are definitely hotter than others. Even some iPhone apps are better for college students than others. But when it comes down to it, there’s only one question that rings out in dormitories, fraternities, and dining halls across the nation: What’s your major?

Slide Show
01.Journalism
02. Horticulture
03. Agriculture
04. Advertising
05. Fashion Design
06. Child and Family Studies
07. Music
08. Mechanical Engineering Technology (but not Mechanical Engineering per se)
09. Chemistry
10. Nutrition
11. Human Resources
12. Theatre
13. Art History
14. Photography
15. Literature
16. Art
17.Fine Arts
18. Psychology
19. English
20. Animal Science

Private Equity --- http://en.wikipedia.org/wiki/Private_equity

Leveraged Buyout (LBO) --- http://en.wikipedia.org/wiki/Leveraged_buyout

"Private Equity: Fact, Fiction and What Lies in Between," knowledge@whrton, February 8, 2012 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2939

What good is private equity, anyway?

As its critics see it, these investment pools make money the wrong way -- buying "target companies," slashing jobs, piling on debt and selling the prettied-up remnants, which by then are doomed to fail. To make matters worse, private equity firms get a stunning tax break, paying 15% on profits instead of 35%.

But the industry and its defenders, including presidential candidate Mitt Romney who made his fortune in PE, say it is a strong creator of jobs and value, and a vital source of outsized returns for pension funds, university endowments and other investment pools that serve ordinary people.

Which is true?

While there is fodder for both views, academic research finds that the truth for the industry as a whole is not so dramatic. If the entire PE industry were to disappear overnight, the economy probably would not feel much effect, positive or negative. "In the absence of private equity firms and funds, there are a lot of other types of capital that are trying to do very similar types of things," says Wharton accounting professor Wayne Guay.

Adds Wharton finance professor Richard J. Herring: "The question of whether they add value, in my mind, is really one of whether they only undertake financial restructuring ... or whether they replace management and the board, and undertake an operational restructuring that improves the efficiency of the enterprise."

Continued in article

Also see Tom Selling's Accounting Onion post at Click Here
http://accountingonion.typepad.com/theaccountingonion/2012/02/vulture-capitalism-accounting-and-mitt-romney.html

Separating Fact from Hype and Wishful Thinking about Education Technology
"Hurdles Remain Before College Classrooms Go Completely Digital," by Dave Copeland, ReadWriteWeb, February 20, 2012 ---
http://www.readwriteweb.com/archives/hurdles_remain_before_college_classrooms_go_comple.php

OnlineUniversities.com came out with an optimistic infographic last week about how college classrooms are going digital.

But as someone who makes as much as a quarter of his income from teaching college classes in any given year, and who also spends a good amount of time speaking at conferences trying to help professors incorporate technology and social media into their curriculum, the view from the trenches is very different than the iPad-in-every-backpack proponents would have you believe.

This is not to say that tech isn't changing the way we teach and the way students learn: it most certainly is. But probably not as fast as some people outside of higher ed think it is.

Since 2006, Mashery has managed the APIs for more than 100 brands such as The New York Times, Netflix, Best Buy and Hoovers. Powering the more than 10,000 apps built upon these APIs, Mashery enables its customers to distribute their content, data or products to mobile devices and web mashups.

People who say we're at the dawn of a new way of learning at the college level are overlooking some rather significant economic and cultural hurdles. At the same time, academic freedom means professors can choose to implement technology a lot, a little bit or not at all into their curriculum. And implementing it "a lot" isn't always a good thing, particularly if it isn't used in a way that boosts learning outcomes.
We (Don't) Have The Technology

If you were to visit the library on the campus where I teach, you would see students waiting to use outdated desktops in the computer labs and library, particularly around midterms and finals week. It seems odd at first, considering the school has a laptop requirement for all undergraduates. That means you have to have a laptop computer when you enroll, and presumably, as an instructor, I can require my students to bring them to any class.

But here's the reality: laptops break, and students can't afford replacements.

The mainstream media has sold us a myth of college still being the place for the ultra-elite, for kids who start compiling "brag sheets" in the fourth grade and have parents that shell out five figures to hire a college admissions coach.

But in practice, most college students these days are like the ones I teach at a four-year state college: they are, by-and-large, the first in their family to attend college. Almost all of my students work, and many work full-time or multiple part-time jobs. Some are parents. An increasing number are so-called nontraditional students and are enrolling after an extended break from education. These students often support families and, in many case, have college-aged children who need their own laptops.

Now factor in that the fastest growing segment of higher education are community colleges, which by-and-large draw kids from working class backgrounds or cater to people who have been laid off and are trying to get trained for a new career.

For a lot of students, replacing a broken laptop is a choice between skipping a rent payment or sucking it up and waiting in those long lines at the computer lab. Asking them to shell out for an iPad on top of the laptop just isn't feasible for many college students, and that means its going to take longer to get everyone on board with the tech revolution in higher ed.

Tenure Doesn't Equal Tech Savvy

One of the concerns among students on the campus where I teach is that the university employs an alert system that sends them text and email messages if there is a life-threatening emergency on campus (think Virginia Tech in 2007). But what are they supposed to do, these students ask, if they're in a class where the teacher bans them from using smartphones and laptops?

Academic freedom means professors get to run their classrooms in the way they want, and that includes choosing the tools they use to teach. Having sat in meetings where faculty members have threatened to file union complaints because email means students can - GASP! - contact them at any time, I think we're a ways off from blanket incorporation of social media and tablet textbooks across the curriculum.

These same professors, many of whom predate the Internet era in higher ed, never concede that email also means fewer student visits during office hours for simple questions, which means more time to get actual work done. This isn't meant as a knock on them, but there are varying degrees of enthusiasm for incorporating tech into teaching and, unlike high schools, tech enthusiasm can't be mandated by a curriculum committee.

High School's Chilling Effects

Career academics are not, however, the only ones to blame. A lot of students come to college with backward views of what social media is and what it can accomplish. And most importantly, what is and isn't acceptable on social media.

And why shouldn't they? They come from schools where teachers can be reprimanded or even fired for connecting with students on social networks. Several schools across the country are implementing bans on teachers friending not only current students but former students on Facebook.

There's no easy fix for overcoming these preexisting biases. Step one, as a professor, is make sure you don't use Facebook for classwork: even though it's the default social network for so many of us, there's still too much of a creep factor in crossing that student-professor line (and, frankly, with Facebook's ever-shifting privacy policies, even if you think you're protected you may end up seeing stuff about your students you'd be better off not knowing about).

But that leaves us to decide which social network we should use with our students. Dedicated social networks like the one being rolled out for students by Microsoft seem like a good idea, but my own experience is that a site students check for reasons other than school tends to produce more frequent check-ins and a more organic discussion about classwork, which is exactly what I want to accomplish with social media in my classes.

I tried using Google+ last September, only to be thwarted in a freshman writing class where some of the students were not yet 18. Google has since relaxed its age restrictions, but the social network is still too new for students to gravitate toward it. In my experiment, students found it confusing, or at least less intuitive than Facebook, and I was finding most would only use it if I mandated it.

I've had the best luck with Twitter, including the use of it in a film class so we can discuss the film as we're screening it each week (for a sample, see this storify of tweets from the class discussion of Shawshank Redmeption). But, again, only about half of my students will use it if I don't require it. And of the students who start using it because I require it in my class, fewer than 10% will continue to use it when the semester ends.

Hope On The Horizon: The Kindle Effect

The people I thought would be stingiest about adopting technology in their classrooms have, in many cases, been the most willing to change. I now see a lot of those seemingly stodgy old English professors walking around campus with a Kindle tucked under their arm.

Continued in article

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

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

"Suspended Lawyer Who Wrote ‘Bulletproof Asset Protection’ Pleads Guilty in Tax Case, Must Pay $40M," by Martha Neil, ABA Journal, February 15, 2012 ---
http://www.abajournal.com/news/article/suspended_lawyer_who_authored_bulletproof_asset_protection_pleads_guilty_in/

A suspended Colorado lawyer who authored the book Bulletproof Asset Protection pleaded guilty in federal court in Las Vegas on Monday to multiple tax-related charges.

William S. Reed, 61, of Santa Barbara, Calif., was indicted in July, along with two other defendants, on accusations he participated in a business scheme between 1998 and 2006 that helped others hide assets from creditors and the Internal Revenue Service, the Las Vegas Review-Journal reports.

He pleaded guilty to conspiracy to defraud the United States, attempted tax evasion and aggravated identity theft, and agreed to pay about $40 million to the IRS and the Federal Trade Commission. The two other defendants await trial.

Reed allegedly had $70,000 in cash hidden in his vehicle when he was arrested last year, reports KLAS. He faces up to 12 years when he is sentenced in May.

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

"Chicago Called Most Corrupt City In Nation," CBS Chicago TV, February 14, 2012 ---
http://chicago.cbslocal.com/2012/02/14/chicago-called-most-corrupt-city-in-nation/

A former Chicago alderman turned political science professor/corruption fighter has found that Chicago is the most corrupt city in the country.

He cites data from the U.S. Department of Justice to prove his case. And, he says, Illinois is third-most corrupt state in the country.

University of Illinois professor Dick Simpson estimates the cost of corruption at $500 million.

It’s essentially a corruption tax on citizens who bear the cost of bad behavior (police brutality, bogus contracts, bribes, theft and ghost pay-rolling to name a few) and the costs needed to prosecute it.

“We first of all, we have a long history,” Simpson said. “The first corruption trial was in 1869 when alderman and county commissioners were convicted of rigging a contract to literally whitewash City Hall.”

Corruption, he said, is intertwined with city politics

“We have had machine politics since the Great Chicago Fire of 1871,” he said. “Machine politics breeds corruption inevitably.”

Simpson says Hong Kong and Sydney were two similarly corrupt cities that managed to change their ways. He says Chicago can too, but it will take decades.

He’ll be presenting his work before the new Chicago Ethics Task Force meeting tomorrow at City Hall.

A major U.S. city long known as a hotbed of pay-to-play politics infested with clout and patronage has seen nearly 150 employees, politicians and contractors get convicted of corruption in the last five decades.

Chicago has long been distinguished for its pandemic of public corruption, but actual cumulative figures have never been offered like this. The astounding information is featured in a lengthy report published by one of Illinois’s biggest public universities.

Cook County, the nation’s second largest, has been a “dark pool of political corruption” for more than a century, according to the informative study conducted by the University of Illinois at Chicago, the city’s largest public college. The report offers a detailed history of corruption in the Windy City beginning in 1869 when county commissioners were imprisoned for rigging a contract to paint City Hall.

It’s downhill from there, with a plethora of political scandals that include 31 Chicago alderman convicted of crimes in the last 36 years and more than 140 convicted since 1970. The scams involve bribes, payoffs, padded contracts, ghost employees and whole sale subversion of the judicial system, according to the report.

Elected officials at the highest levels of city, county and state government—including prominent judges—were the perpetrators and they worked in various government locales, including the assessor’s office, the county sheriff, treasurer and the President’s Office of Employment and Training. The last to fall was renowned political bully Isaac Carothers, who just a few weeks ago pleaded guilty to federal bribery and tax charges.

In the last few years alone several dozen officials have been convicted and more than 30 indicted for taking bribes, shaking down companies for political contributions and rigging hiring. Among the convictions were fraud, violating court orders against using politics as a basis for hiring city workers and the disappearance of 840 truckloads of asphalt earmarked for city jobs.

A few months ago the city’s largest newspaper revealed that Chicago aldermen keep a secret, taxpayer-funded pot of cash (about $1.3 million) to pay family members, campaign workers and political allies for a variety of questionable jobs. The covert account has been utilized for decades by Chicago lawmakers but has escaped public scrutiny because it’s kept under wraps.

Judicial Watch has extensively investigated Chicago corruption, most recently the conflicted ties of top White House officials to the city, including Barack and Michelle Obama as well as top administration officials like Chief of Staff Rahm Emanual and Senior Advisor David Axelrod. In November Judicial Watch sued Chicago Mayor Richard Daley's office to obtain records related to the president’s failed bid to bring the Olympics to the city.

Bob Jensen's threads on the sad state of governmental accounting are at
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

Bob Jensen's threads on political corruption are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

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

Our goal is for our economy to look more like Texas, and a lot less like California.
Sam. Brownback, 2012 Governor of Kansas --- http://en.wikipedia.org/wiki/Sam_Brownback

"The Heartland Tax Rebellion: More states want to repeal their income taxes," The Wall Street Journal, February 7, 2012 ---
http://online.wsj.com/article/SB10001424052970203889904577200872159113492.html#mod=djemEditorialPage_t

Oklahoma Governor Mary Fallin is starting to feel surrounded. On her state's southern border, Texas has no income tax. Now two of its other neighbors, Missouri and Kansas, are considering plans to cut and eventually abolish their income taxes. "Oklahoma doesn't want to end up an income-tax sandwich," she quips.

On Monday she announced her new tax plan, which calls for lowering the state income-tax rate to 3.5% next year from 5.25%, and an ambition to phase out the income tax over 10 years. "We're going to have the most pro-growth tax system in the region," she says.

She's going to have competition. In Kansas, Republican Governor Sam Brownback is also proposing to cut income taxes this year to 4.9% from 6.45%, offset by a slight increase in the sales tax rate and a broadening of the tax base. He also wants a 10-year phase out. In Missouri, a voter initiative that is expected to qualify for the November ballot would abolish the income tax and shift toward greater reliance on sales taxes.

South Carolina Governor Nikki Haley wants to abolish her state's corporate income tax. And in the Midwest, Congressman Mike Pence, who is the front-runner to be the next Republican nominee for Governor, is exploring a plan to reform Indiana's income tax with much lower rates. That policy coupled with the passage last week of a right-to-work law would help Indiana attract more jobs and investment.

That's not all: Idaho, Maine, Nebraska, New Jersey and Ohio are debating income-tax cuts this year.

But it is Oklahoma that may have the best chance in the near term at income-tax abolition. The energy state is rich with oil and gas revenues that have produced a budget surplus and one of the lowest unemployment rates, at 6.1%. Alaska was the last state to abolish its income tax, in 1980, and it used energy production levies to replace the revenue. Ms. Fallin trimmed Oklahoma's income-tax rate last year to 5.25% from 5.5%.

The other state overflowing with new oil and gas revenues is North Dakota thanks to the vast Bakken Shale. But its politicians want to abolish property taxes rather than the income tax.

They might want to reconsider if their goal is long-term growth rather than short-term politics. The American Legislative Exchange Council tracks growth in the economy and employment of states and finds that those without an income tax do better on average than do high-tax states. The nearby table compares the data for the nine states with no personal income tax with that of the nine states with the highest personal income-tax rates. It's not a close contest.

Skeptics point to the recent economic problems of Florida and Nevada as evidence that taxes are irrelevant to growth. But those states were the epicenter of the housing bust, thanks to overbuilding, and for 20 years before the bust they had experienced a rush of new investment and population growth. They'd be worse off now with high income-tax regimes.

The experience of states like Florida, New Hampshire, Tennessee and Texas also refutes the dire forecasts that eliminating income taxes will cause savage cuts in schools, public safety and programs for the poor. These states still fund more than adequate public services and their schools are generally no worse than in high-income tax states like California, New Jersey and New York.

They have also recorded faster revenue growth to pay for government services over the past two decades than states with income taxes. That's because growth in the economy from attracting jobs and capital has meant greater tax collections.

The tax burden isn't the only factor that determines investment flows and growth. But it is a major signal about how a state treats business, investment and risk-taking. States like New York, California, Illinois and Maryland that have high and rising tax rates also tend to be those that have growing welfare states, heavy regulation, dominant public unions, and budgets that are subject to boom and bust because they rely so heavily on a relatively few rich taxpayers.

The tax competition in America's heartland is an encouraging sign that at least some U.S. politicians understand that they can't take prosperity for granted. It must be nurtured with good policy, as they compete for jobs and investment with other states and the rest of the world.

"Our goal is for our economy to look more like Texas, and a lot less like California," says Mr. Brownback, the Kansas Governor. It's the right goal.

Continued in article

State Individual Income Tax Rates in the 50 States, 2000-2011 ---
http://www.taxfoundation.org/taxdata/show/228.html
On a per capita basis ---
50-State Table of State and Local Individual Income Tax Collections Per Capita

Comparison of Corporate Income Tax Rates in the 50 States ---
http://www.taxfoundation.org/taxdata/show/230.html
On a per capita basis ---
http://www.taxfoundation.org/taxdata/show/281.html
This is a little misleading since many states like Illinois give their largest corporate employers "Get Out of Tax Free" cards (or offsetting subsidies)

State Sales, Gasoline, Cigarette, and Alcohol Tax Rates by State, 2000-2010 ---
http://www.taxfoundation.org/publications/show/245.html

PBS Video: What Do Tax Rates' Ups and Downs Mean for Economic Growth?
http://video.pbs.org/video/2176062522
Thank you Paul Caron for the heads up.

Marginal Tax Rates Around the World --- http://www.econlib.org/library/Enc/MarginalTaxRates.html

Tax Foundation --- http://en.wikipedia.org/wiki/Tax_Foundation

Video from the Tax Foundation --- How Much Do U.S. Corporations Really Pay in Taxes? New Video Documents High Effective Rates
http://taxfoundation.org/news/show/27953.html
Thank you Paul Caron for the heads up at the Tax Prof blog

U.S. companies pay among the highest corporate tax rates in the world, even after accounting for all deductions and loopholes, according to a new video produced by the Tax Foundation. This explanation of “effective” tax rates for corporations, based on recent academic studies of tax systems around the globe, is the third in a 5-part series on corporate taxes. “The impression that a large number of U.S. companies are using loopholes and creative accounting to get out of paying taxes could not be more wrong,” said Tax Foundation president Scott Hodge. “American corporations are consistently paying at the highest levels in the world, and that burden impacts their ability to compete both at home and abroad.”

Jensen Comment
The Tax Foundation has been around since 1937, but it has been recently heavily criticized by liberals like Paul Krugman for misleading research.

Note that just because a corporation elects to not transmit profits earned abroad back to the United States, thereby deferring U.S. corporate taxes, does not mean it is not paying taxes on these profits that are often subject to foreign corporate taxes that are usually lower than U.S. corporate taxes on those profits.

Bob Jensen's threads on taxation ---
http://www.trinity.edu/rjensen/Bookbob1.htm#Taxation

Center for Audit Quality (CAW) --- http://en.wikipedia.org/wiki/Center_for_Audit_Quality

New CAQ Video Explains the Financial Statement Audit ---
http://www.thecaq.org/newsroom/release_02062012.htm

Where do the audit firms go wrong in financial statement audits? ---
http://www.trinity.edu/rjensen/Fraud001.htm

From Rice University (as far as I can tell nothing is yet available for accountancy)
"Why Pay for Intro Textbooks?" by Mitch Smith, Inside Higher Ed, February 7, 2012 ---
http://www.insidehighered.com/news/2012/02/07/rice-university-announces-open-source-textbooks

If ramen noodle sales spike at the start of every semester, here’s one possible reason: textbooks can cost as much as a class itself; materials for an introductory physics course can easily top $300.

Cost-conscious students can of course save money with used or online books and recoup some of their cash come buyback time. Still, it’s a steep price for most 18-year-olds.

But soon, introductory physics texts will have a new competitor, developed at Rice University. A free online physics book, peer-reviewed and designed to compete with major publishers’ offerings, will debut next month through the non-profit publisher OpenStax College.

Using Rice’s Connexions platform, OpenStax will offer free course materials for five common introductory classes. The textbooks are open to classes anywhere and organizers believe the programs could save students $90 million in the next five years if the books capture 10 percent of the national market. OpenStax is funded by grants from the William and Flora Hewlett Foundation, the Bill & Melinda Gates Foundation, the 20 Million Minds Foundation and the Maxfield Foundation.

Traditional publishers are quick to note that the new offerings will face competition. J. Bruce Hildebrand, executive director for higher education of the Association of American Publishers, said any textbook’s use is ultimately determined by its academic value. “Free would appear to be difficult to compete with,” Hildebrand said. “The issue always, however, is the quality of the materials and whether they enable students to learn, pass their course and get their degree. Nothing else really counts.”

In the past, open-source materials have failed to gain traction among some professors; their accuracy could be difficult to confirm because they hadn't been peer-reviewed, and supplementary materials were often nonexistent or lacking because they weren't organized for large-scale use.

OpenStax believes it addressed those concerns with its new books, subjecting the texts to peer review and partnering with for-profit companies to offer supplementary materials for a cost.

Whether the books are used at Rice is up to each professor, but several colleges and universities – “in the low 10s” said Connexions founder and director Richard Baraniuk – have already signed on for the first batch of texts. Baraniuk sees a quality product with the potential to defray a student’s total cost and increase access to higher education and expects more colleges to integrate the books as word spreads.

While open-source materials are nothing new, a series of free self-contained textbooks designed to compete head-to-head with major publishers is. Instructors building a class with open-source materials now must assemble modules from several different places and verify each lesson’s usefulness and accuracy.

The new textbooks eliminate much of that work, which Baraniuk thinks will be make the free materials more palatable to professors who have been reluctant to adopt open-source lessons. In the next five years, OpenStax hopes to have free books for 20 of the most common college courses.

OpenStax used its grant money to hire experts to develop each textbook and then had their work peer reviewed. The process has taken more than 18 months and will go live next month with sociology and physics books. The only cost to users comes if an instructor decides to use supplementary material from a for-profit company OpenStax partners with, such as Sapling Learning.

Two introductory biology texts, one for majors and another for nonmajors, are slated to go online in the fall along with an anatomy and physiology book. Students and professors will be able to download PDF versions on their computers or access the information on a mobile device. Paper editions will be sold for the cost of printing. The 600-page, full-color sociology book is expected to sell for $30 for those who want a print version -- those content with digital will pay nothing. Leading introductory sociology texts routinely cost between $60 and $120 new.

Continued in article

Jensen Comment
These open source textbooks work best in disciplines that are not being constantly updated with updates --- like mathematics. However, the textbooks available to date for OpenStax include such introductory textbooks as biology which changes more quickly than introductory mathematics.

In accounting, intermediate accounting is particularly problematic even with for-profit publishing houses as new domestic and international accounting standards and implementation guides keep coming forth on a weekly basis.

I have a directory for free textbooks in various academic disciplines, including accountancy and finance. Many of these were previous hot selling books that were dropped when publishers merged and thinned out their product lines after the mergers (giving copyrights to authors whose books were dropped) ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
But I find it increasingly difficult for me to recommend some of those free books because there is no economic incentives for authors to keep updating free textbooks and supplements (like answer books and text banks) when the textbooks are free.

Ambitious instructors may be better off scouring for course materials from prestigious universities. These course materials are more likely to be updated relative to older free textbooks ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Creative Accounting Inflation of Reported Cash from Operations

I have long argued that if cash flow statements were not accompanied by accrual accounting financial statements, managers would manipulate the timings of cash flows in cash collections and terms of contracts. Here's some empirical evidence that this happens in spite of being accompanied by accrual accounting financial statements.

"Incentives to Inflate Reported Cash from Operations Using Classification and Timing," by Lian Fen Lee, The Accounting Review, January 2012, pp. 1-34

ABSTRACT:

This study examines when firms inflate reported cash from operations in the statement of cash flows (CFO) and the mechanisms through which firms manage CFO. CFO management is distinct from earnings management. Unlike the manipulation of accruals, firms cannot manage CFO with biased estimates, but must resort to classification and timing. I identify four firm characteristics associated with incentives to inflate reported CFO: (1) financial distress, (2) a long-term credit rating near the investment/non-investment grade cutoff, (3) the existence of analyst cash flow forecasts, and (4) higher associations between stock returns and CFO. Results indicate that, even after controlling for the level of earnings, firms upward manage reported CFO when the incentives to do so are particularly high. Specifically, firms manage CFO by shifting items between th estatement of cash flows categories both within and outside the boundaries of generally accepted accounting principles (GAAP), and by timing certain transactions such as delaying payments to suppliers or accelerating collections from customers.

Data Availability: Data are available from public sources identified in the study.

Keywords: classification shifting, real activities manipulation, cash flow reporting

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

New (2012) Evidence That Blaming Bank Failure on Fair Value Accounting Standards Was Pure BS
(Except in Terms of Executive Bonus Payments)

Former FDIC Director William Isaac --- http://en.wikipedia.org/wiki/William_Isaac

Bankers were quick to blame fair value accounting standards for the banking failures following the bursting of the real estate bubble in 2007
Must of us accounting professors suspected that this was pure scapegoating bullshit
This type of naive and dangerous reasoning was started on September 19, 2008 by former FDIC director Bill Isaac

In my opinion, Bill Isaac is an ignorant advocate of horrible and dangerous bank accounting
First of all he blamed the subprime collapse of thousands of banks on the FASB requirements for fair value accounting (totally dumb) --- http://www.trinity.edu/rjensen/2008bailout.htm#FairValue

Now he wants the FASB to continued to grossly under estimate loan loss reserves (now that the FASB is finally trying to fix the problem)
“AccountingWEB Exclusive: Former FDIC Chief says FASB proposal is 'irresponsible'," AccountingWeb, June 3, 2010 ---
http://www.accountingweb.com/topic/accounting-auditing/aw-exclusive-former-fdic-chief-says-fasb-proposal-irresponsible

Bull Crap Teaching Case 1
From The Wall Street Journal Accounting Weekly Review on

Bank Capital Gets Stress Test
by Deborah Solomon and Jon Hilsenrath
Feb 26, 2009
Click here to view the full article on WSJ.com
http://online.wsj.com/article/SB123557705225772665.html?mod=djem_jiewr_AC

TOPICS: Bad Debts, Banking, Financial Analysis, Financial Statement Analysis

SUMMARY: The Obama administration is proposing new bank capital requirement tests that will be designed to assess whether "...banks can survive even if the unemployment rate rises above 10% and home prices fall by another 25%....worse than most economists and the Federal Reserve currently expect." If banks fail to demonstrate sufficient capital to weather those circumstances, they may either raise additional funds privately or accept further investment from the U.S. government. "The government's investment would come in the form of convertible preferred shares, which institutions could choose to convert into common equity at any time....Officials said they expect banks would convert the shares to common equity as needed to help protect against losses."

CLASSROOM APPLICATION: Questions help students to understand the meaning of capital beyond the balance sheet definition of assets - liabilities = equity and to understand the relationship between economic forecasting and bank capital requirements. The article also discusses the use of preferred shares versus common stock and the use of convertible preferred shares.

QUESTIONS:
1. (Introductory) Define bank capital in terms of the balance sheet equation.

2. (Advanced) What tests are used to assess a bank's health based on the level of its capital or equity? (Hint: for background information and an international perspective, you may investigate the Basel and Basel II Accords of the Basel Committee on Banking Supervision of the Group of Ten nations. See the related articles.)

3. (Introductory) How can economic and financial advisors relate the potential unemployment rate and mortgage default rate in the U.S. economy to banks' capital needs?

4. (Advanced) If financial institutions fail capital requirement tests based on new thresholds as outlined by the Obama administration, the U.S. government may invest in "...convertible preferred shares, which institutions could choose to convert into common equity at any time." Define and describe the differences between preferred and common shares. Also define convertibility features.

5. (Introductory) Why might financial institutions not want to issue common shares of stock but be allowed to do so by converting preferred shares whenever they so choose?

6. (Introductory) What is the difference between financial institutions issuing stock to the U.S. government in the ways described in this article and nationalizing our financial institutions?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
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Page: C3

http://online.wsj.com/article/SB116234873761209749.html
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Mar 04, 2008
Page: 03/04

"Bank Capital Gets Stress Test," by Deborah Solomon and Jon Hilsenrath, The Wall Street Journal, Feb 26, 2009
http://online.wsj.com/article/SB123557705225772665.html?mod=djem_jiewr_AC

The Obama administration, in unveiling details of its financial-rescue plan, laid out a dark economic scenario it expects banks to be able to withstand, the starting point for what could become a significant new infusion of government cash into the banking system.

To ensure banks can survive even if the unemployment rate rises above 10% and home prices fall by another 25%, the administration will require some institutions to either raise private money or accept a bigger investment from the U.S. government. U.S. officials don't expect the economy to deteriorate that sharply, but they want to be sure banks are prepared nonetheless.

The first step in the latest effort to shore up the banking sector will be a series of "stress tests" to assess whether the largest U.S. banks can survive a protracted slump. The tests aren't expected to be finished until April. Banks will then have up to six months to address any shortfall.

Unlike the Bush administration's effort to pump $250 billion into banks, the Obama team didn't commit a set amount of money to the effort and President Barack Obama said Tuesday it is likely that banks will need additional funds beyond the $700 billion rescue package approved by Congress last fall.

The government's investment would come in the form of convertible preferred shares, which institutions could choose to convert into common equity at any time. Regulators and investors have become more concerned about the amount of common stock banks hold, since that is a bank's first line of defense against losses.

To ensure their balance sheets are strong, the biggest banks will be required to undergo a tough assessment, including whether they have the right type of capital. Officials said they expect banks would convert the shares to common equity as needed to help protect against losses.

A bank's capital is its cushion against losses, a buffer that ensures its depositors and other lenders will get paid even if the bank runs into trouble.

Economists said most of the nation's largest banks will likely have to raise capital under the economic assumptions that regulators plan to use. The stress test assumes an unemployment rate averaging 8.9% in 2009 and 10.3% in 2010. Because that is an average for a whole year, the test envisions the jobless rate reaching higher than those levels on a monthly basis during these stretches. It was 7.6% in January

Under some circumstances, the government might end up owning majority stakes in banks.

"I think you'll find most firms need more capital and that Bank of America and Citigroup are going to need a boatful of new capital," said Douglas Elliott, a fellow at the Brookings Institution.

Discuss Would nationalizing banks improve or worsen the crisis? Share your thoughts at Journal Community.Banks that get a government investment will have to comply with strict executive-compensation restrictions, including curtailed bonuses for top executives and earners. The securities will pay a 9% dividend -- higher than the 5% banks are required to pay under the Bush-era program -- and banks would be restricted in paying dividends and from buying back their own stock. The securities would automatically convert to common stock after seven years.

Banks that have already sold preferred shares to the government as part of the $250 billion program would also be able to swap the preferred shares for convertible securities that can convert to common shares.

Administration officials said the effort is an attempt to avoid nationalizing banks and to make sure institutions can lend money. While officials said most banks are considered well capitalized, uncertainty about economic conditions is hindering their ability to lend money or attract private capital.

Treasury Secretary Timothy Geithner sought to knock down speculation that the government may nationalize banks, saying such a move is "the wrong strategy for the country and I don't think it's the necessary strategy." Mr. Geithner, speaking on The NewsHour with Jim Lehrer, said there may be situations where the government provides "exceptional support" but that the best outcome is if the banks "are managed and remain in private hands."

U.S. officials will demand that financial institutions test the resilience of their portfolios and capital against a grim, though not catastrophic, economic landscape. The test assumes a 3.3% contraction in gross domestic product in 2009, which would be the worst performance since 1946. And it assumes home-price declines of another 22% in 2009 and 7% in 2010.

That would be worse than most economists and the Federal Reserve currently expect. Private economists on average forecast a 2% contraction in economic output this year and a 2% rebound next year, with the jobless rate remaining below 10%.

Some private forecasters said they can imagine worse.

"I don't have any problem believing the unemployment rate is going to move to 12% or that vicinity," said Laurence Meyer, vice chairman of Macroeconomic Advisers LLC, a forecasting firm whose models are widely used in Washington and New York.

Mr. Meyer said regulators had to strike a delicate balance in designing their test. If they painted a truly grim scenario -- the economy contracted by 9% in 1930, 6% in 1931 and 13% in 1932 -- it could force banks to raise more capital than they are capable of raising, driving them further into the government's arms.

"You don't want to know the answer to some of the questions you might ask," Mr. Meyer said.

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory01.htm

Bob Jensen's threads on the bailout mess --- http://www.trinity.edu/rjensen/2008Bailout.htm

Bull Crap Teaching Case 2
Forbes serves up barf --- No it's worse than barf!
It's clear that Forbes never read the excellent December 2008 SEC research report on this topic.
"Obama Repeats Bush's Worst Market Mistakes: Bad accounting rules are the cause of the banking crisis," by Steve Forbes, The Wall Street Journal, March 6, 2009 --- http://online.wsj.com/article/SB123630304198047321.html?mod=djemEditorialPage

What is most astounding about President Barack Obama's radical economic recovery program isn't its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama's hero.

The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.

That works when you have very liquid securities, such as Treasurys, or the common stock of IBM or GE. But when the credit crisis hit in 2007, there was no market for subprime securities and other suspect assets. Yet regulators and auditors kept pressing banks and other financial firms to knock down the book value of this paper, even in cases where these obligations were being fully serviced in the payment of principal and interest. Thus, under mark-to-market, even non-suspect assets are being artificially knocked down in value for regulatory capital (the amount of capital required by regulators for industries like banks and life insurance).

Banks and life insurance companies that have positive cash flows now find themselves in a death spiral. Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. When banks or insurers write down the value of their assets they have to get new capital. And the need for new capital is a signal to ratings agencies that these outfits might deserve a credit-rating reduction.

So although banks have twice the amount of cash on hand that they did a year ago, they lend only under duress, or apply onerous conditions that would warm Tony Soprano's heart. This is because they know that every time they make a loan or an investment there is a risk of a book write-down, even if the loan is unimpaired.

If this rigid mark-to-market accounting had been in effect during the banking trouble in the early 1990s, almost every major commercial bank in the U.S. would have collapsed because of shaky Latin American and commercial real estate loans. We would have had a second Great Depression.

But put aside for a moment the absurdity of trying to price assets in a disrupted or non-existent market, of not distinguishing between distress prices and "normal" prices. Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.

Continued in article

Jensen Comment
By now investors know which large banks are stuck with trillions of dollars in non-performing loans. Wrapping them gold ribbons by reporting them way above market value is hardly going to induce investors to go out an buy enormous amounts of common shares of CitiBank, Bank of America, Wells Fargo, and JP Morgan. This artificial gilding of capital ratios does nothing to solve the problem of detoxifying the poison of non-performing loans and poisonous collateralized bonds.

This type of naive and dangerous reasoning was started on September 19, 2008 by former FDIC director Bill Isaac --- http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting

It's certain that FAS 157 needs some amending for broken markets, but what Isaac and Forbes are proposing serve as no basis for improvements on FAS 157. After Isaac proposed elimination of fair value accounting for troubled banks, Congress ordered, in no uncertain terms, the SEC to do a research study on what was causing so many bank failures like the huge failures of WaMu and Indy Mac. Although the SEC has been disgraced for a lot of reasons as of late, the particular study that emerged in a very short period of time (December 2008) is an excellent study of why banks were failing.

But political pressures mounted in spite of the SEC research findings. On April 2, 2009 in a 3-2 vote the FASB reached a highly controversial decision to ease fair value accounting in such a way that banks will be able to report higher earnings due to changes in accounting rules.

New Empirical Evidence Highlights the Bullshit of Bill Isaac and His Banking Cronies

"A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis," by Brad A. Badertscher, Jeffrey J. Burks, and Peter D. Easton, The Accounting Review, January 2012, pp. 59-90 ---

ABSTRACT:

Critics argue that fair value provisions in U.S. accounting rules exacerbated the recent financial crisis by depleting banks' regulatory capital, which curtailed lending and triggered asset sales, leading to further economic turmoil. Defenders counter-argue that the fair value provisions were insufficient to lead to the pro-cyclical effects alleged by the critics. Our evidence indicates that these provisions did not affect the commercial banking industry in the ways commonly alleged by critics. First, we show that fair value accounting losses had minimal effect on regulatory capital. Then, we examine sales of securities during the crisis, finding mixed evidence that banks sold securities in response to capital-depleting charges. However, the sales that potentially resulted from the charges appear to be economically insignificant, as there was no industry- or firm-level increase in sales of securities during the crisis.

. . .

ABSTRACT:

Critics argue that fair value provisions in U.S. accounting rules exacerbated the recent financial crisis by depleting banks' regulatory capital, which curtailed lending and triggered asset sales, leading to further economic turmoil. Defenders counter-argue that the fair value provisions were insufficient to lead to the pro-cyclical effects alleged by the critics. Our evidence indicates that these provisions did not affect the commercial banking industry in the ways commonly alleged by critics. First, we show that fair value accounting losses had minimal effect on regulatory capital. Then, we examine sales of securities during the crisis, finding mixed evidence that banks sold securities in response to capital-depleting charges. However, the sales that potentially resulted from the charges appear to be economically insignificant, as there was no industry- or firm-level increase in sales of securities during the crisis.

JEL Classifications: M41; M42; M44.

Data Availability: Data are available from sources identified in the article.

Keywords: regulatory capital, standard setting, other-than-temporary impairments, fair value accounting, mark-to-market, pro-cyclical, contagion, credit crisis, asset sales

Bob Jensen's threads on the banker bullshit criticisms of fair value accounting ---
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValue

Deloitte's Diamond in the Rough

On Wednesday, Diamond said its audit committee found that a "continuity" payment made to growers in August 2010 of approximately $20 million and a momentum payment made to growers in September 2011 of approximately $60 million weren't accounted for in the correct periods. The audit committee also identified what it called material weaknesses in the company's internal controls. Diamond said it will restate its results for both years.

From The Wall Street Journal Accounting Weekly Review on February 10, 2012

Snack CEO Ousted in Accounting Inquiry
by: Emily Glazer, Joann S. Lublin, and John Jannarone
Feb 09, 2012
Click here to view the full article on WSJ.com

TOPICS: Accounting Fraud, Debt Covenants, FASB, Financial Statement Analysis, Financial Statement Fraud, Restatement

SUMMARY: The Diamond Foods Inc. Board of Trustees launched an investigation into accounting for payments made to walnut growers in August 2010 and September 2011 after a WSJ investigative report questioned the transactions. That WSJ article was covered in this review and is listed as a related article. "Diamond originally maintained that the [2010] payments were an advance on the 2011 walnut crop. But three growers contacted by The Wall Street Journal said they were told by the company's representatives to go ahead and cash the checks even though they didn't intend to deliver walnuts [in 2011]." The investigation has found a material weakness in internal controls and that payments to walnut growers were not properly accounted for. "The company will restate its results for both years."

CLASSROOM APPLICATION: Note to instructors: you likely will want to remove the above summary before distributing to students and use it as a solution to question #1. The article is useful in accounting systems or auditing classes to discuss internal control weaknesses; in financial reporting classes to discuss restatements, debt covenants, and/or business acquisitions; and in any class to discuss corporate management ethics.

QUESTIONS:
1. (Introductory) Summarize the events at Diamond Foods reported in this article and the first related article.

2. (Introductory) What has happened to the CEO and CFO as a result of their alleged actions? What do you think was their motive for these alleged actions?

3. (Advanced) What financial statement results will be restated by Diamond Foods? Describe the specific changes you expect to see in the balance sheet, the income statement, and the statement of stockholders' equity.

4. (Advanced) What are debt covenants? How might problems with debt covenants because of these recent events affect Diamond Foods Inc.'s operations?

5. (Advanced) Refer to the second related article. Identify all financial statement ratios listed in that article, explaining their meaning and how they might be affected by the items you listed in answer to question 2 above.

6. (Introductory) What is a material weakness in internal control? What must be done when such a weakness is found at any company? What further must be done when the company is public?

7. (Advanced) Why is Procter & Gamble now concerned about selling its Pringles operations line to Diamond Foods?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Diamond Payments Questioned By Growers
by Hannah Karp
Dec 12, 2011
Page: B1

Walnuts Leave Diamond in the Rough
by John Jannarone
Feb 09, 2012
Online Exclusive

"Snack CEO Ousted in Accounting Inquiry," by Emily Glazer, Joann S. Lublin, and John Jannarone, The Wall Street Journal, February 9, 2012 ---
http://online.wsj.com/article/SB10001424052970204369404577211490040427400.html?mod=djem_jiewr_AC_domainid

Diamond Foods Inc. fired its chief executive and chief financial officer, and said it would restate financial results for two years, after an internal probe found it had wrongly accounted for payments to walnut growers.

The findings mark a stunning comedown for the once-obscure walnut growers' cooperative, which under Chief Executive Michael J. Mendes tried to become a force in the snacks business through a series of acquisitions since 2005. Those efforts peaked last April, when Diamond agreed to pay $2.35 billion to buy the Pringles canned-chips business from Procter & Gamble Co.

P&G is now highly unlikely to complete the sale, a person familiar with the matter said Wednesday. Diamond's shares, already down by about 60% since late September, fell more than 40% on Wednesday after the company's board audit committee released the findings of its investigation.

Results of the internal probe—which was launched after The Wall Street Journal raised accounting questions in September—will now be turned over to the U.S. Securities and Exchange Commission and the San Francisco U.S. attorney's office, which have been investigating Diamond and how it handled the payments, a person familiar with the matter said. Federal investigators have progressed slowly in recent weeks, because they were waiting for the audit committee to produce its report, two people familiar with the matter said.

The board notified Mr. Mendes and his chief financial officer, Steven M. Neil, late Tuesday that they had been removed from their jobs and placed on administrative leave. Mr. Mendes cleaned out his office early Wednesday morning, a person familiar with the matter said.

Mr. Neil's attorney, Mike Shepard, said: "I think it's very disappointing news what we saw from the company in light of the fact that experts in the area say the company's accounting was strongly supported."

Mr. Mendes couldn't immediately be reached for comment.

The executives will remain on leave while the company negotiates their severance, their exit from their board seats and possibly clawbacks of previously awarded pay, a person familiar with the matter said Wednesday.

Diamond board member Rick Wolford will serve as acting CEO. Michael Murphy, managing director at Alix Partners LLP, will serve as acting CFO. The board also appointed Robert J. Zollars as chairman. The company said it will begin searching for permanent replacements.

The accounting controversy sprung out of California's walnut groves, which once sold the bulk of their output to Diamond. But the interests of growers and the company began to separate after the company began to answer to public shareholders. Growers have complained that Diamond, which sets walnut prices in secret and pays for crops in a series of payments months after they are delivered, began paying less than other buyers in recent years, according to growers and investors who have conducted their own surveys.

At issue in the audit committee's investigation were payments made in August 2010 and September 2011, according to the company. The September payments, which the company called "momentum payments," confused growers who couldn't tell whether they were for the current or prior fiscal year.

Diamond originally maintained that the payments were an advance on the 2011 walnut crop. But three growers contacted by The Wall Street Journal said they were told by the company's representatives to go ahead and cash the checks even though they didn't intend to deliver walnuts last year. At the time, Diamond said its agreements with growers are confidential.

That question mattered a lot for Diamond's financial reports. Shareholders suing the company allege the payments may have been used to shift costs from the last fiscal year into the current one, burnishing Diamond's earnings and improperly boosting its stock price.

The company declined to comment on shareholders' claims that the payments had been used to inflate its earnings. Those suits have been consolidated.

On Wednesday, Diamond said its audit committee found that a "continuity" payment made to growers in August 2010 of approximately $20 million and a momentum payment made to growers in September 2011 of approximately $60 million weren't accounted for in the correct periods.

The audit committee also identified what it called material weaknesses in the company's internal controls. Diamond said it will restate its results for both years.

Around the time of the September payments, Diamond reported that its earnings for the year ended July 31 had nearly doubled, to $50 million, sending its shares soaring above $90. The shares began a steep decline soon afterward, after The Wall Street Journal raised questions about the company's accounting for the payments.

The probe has caused Diamond Foods to delay its planned acquisition of the Pringles snack brand from P&G.

P&G in April agreed to sell the potato-crisp maker to Diamond Foods, a deal that would allow it to triple the size of its snack business.

That deal is now in question, as Diamond is covering most of the purchase price by issuing stock to P&G's shareholders. The deal was initially valued at $2.35 billion. Since the deal was announced, Diamond's stock has lost nearly two-thirds of its value.

P&G had said completing the deal depends on a favorable resolution of the accounting probe.

"We're obviously disappointed by the information released by Diamond Foods," says Paul Fox, a P&G spokesman. "We need to evaluate our next steps…either retain the business or we sell it. It's already attracted considerable interest from outside parties."

Diamond Foods had annual sales just shy of $1 billion in the latest fiscal year. Pringles has annual sales of nearly $1.4 billion.

Diamond said in November it had opened an investigation into the payments. The audit committee, advised by law firm Gibson, Dunn & Crutcher LLP and accounting firm KPMG LLP, looked at hundreds of thousands of documents, a person familiar with the matter said.

The committee reached its conclusion that the company's accounting was flawed on Tuesday, Diamond said in a securities filing. Once it had, the board moved quickly to make changes. It decided that day to remove Messrs. Mendes and Neil because of "a loss of confidence by the board more than anything else,'' a person familiar with the matter said.

The restatements could put Diamond in violation of its lending agreements. That means it may have to negotiate with creditors, which in theory could impose increases in Diamond's debt costs.

The company had just over $500 million in debt as of its last official filing.

The new executives were appointed Tuesday with the exception of Mr. Murphy, the new CFO, who took his job Wednesday, according to the filing. Diamond informed P&G about the probe's results less than an hour before issuing a news release, people familiar with the matter said.

The audit committee didn't uncover any evidence of intent to deceive shareholders, according to a person familiar with the matter. "There was a breakdown of controls,'' the person said.

Continued in article

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Diamond Foods, Inc.

San Francisco, California

We have audited the accompanying consolidated balance sheets of Diamond Foods, Inc. and subsidiaries (the “Company”) as of July 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2010. We also have audited the Company’s internal control over financial reporting as of July 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in “Management’s Report on Internal Control over Financial Reporting”, management excluded from its assessment the internal control over financial reporting at Kettle Foods, which was acquired on March 31, 2010 and whose financial statements constitute less than 10% of consolidated assets, and less than 15% of consolidated net sales of the consolidated financial statement amounts as of and for the year ended July 31, 2010. Accordingly, our audit did not include the internal control over financial reporting at Kettle Foods. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamond Foods, Inc. and subsidiaries as of July 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Deloitte & Touche LLP
San Francisco, California
October 5, 2010

A December 21, 2011 WSJ Article on Those Startling Deloitte Audits That Are Beginning to Remind Us of Those Sorry Andersen Audits
"Accounting Board Finds Faults in Deloitte Audits," by Michael Rapaport, The Wall Street Journal, December 21, 2011 ---
http://online.wsj.com/article/SB10001424052970204879004577110922981822832.html

Inspectors for the government's audit-oversight board found deficiencies in 26 audits conducted by Deloitte & Touche LLP in its annual inspection of the Big Four accounting firm.

The report from the Public Company Accounting Oversight Board, released Tuesday, said some of the deficiencies it found in its 2010 inspection of Deloitte's audits were significant enough that it appeared the firm didn't obtain enough evidence to support its audit opinions.

The 26 deficient audits found were out of 58 Deloitte audits and partial audits reviewed by PCAOB inspectors. The inspectors found that, in various audits, Deloitte didn't do enough testing on issues like inventory, revenue recognition, goodwill impairment and fair value, among other areas. In one case, follow-up between Deloitte and the audit client led to a change in the client's accounting, according to the report.

The board didn't identify the companies involved, in accordance with its typical practice.

The report is the first PCAOB assessment of Deloitte's performance issued since the board rebuked Deloitte in October by unsealing previously confidential criticisms of the firm's quality control.

Deloitte said in a statement that it is "committed to the highest standards of audit quality" and has taken steps to address both the PCAOB's findings on the firm's individual audits and the board's broader observations on Deloitte's quality control and audit quality. The firm said it has been making a series of investments "focused on strengthening and improving our practice."

Last month, the board released its annual reports on PricewaterhouseCoopers LLP, in which it found 28 deficient audits out of 75 reviewed, and KPMG LLP, in which it found 12 deficient audits out of 54 reviewed. The yearly report on the fourth Big Four firm, Ernst & Young LLP, hasn't yet been issued.

The PCAOB conducts annual inspections of the biggest accounting firms in which it scrutinizes a sample of each firm's audits to evaluate their performance and compliance with auditing standards. The first part of the report is released publicly, but a second part, in which the board evaluates the firm's quality controls, remains confidential as long as the firm resolves any criticisms to the board's satisfaction within a year.

Only if that doesn't happen does the PCAOB release that section of the report, as it did with Deloitte in October, the first time it had done so with one of the Big Four. In that case, the board made public a section of a 2008 inspection report in which it said Deloitte auditors were too willing to accept the word of clients' management and that "important issues may exist" regarding the firm's procedures to ensure thorough and skeptical audits.

Bob Jensen's threads on Deloitte and the Other Large Auditing Firms ---
http://www.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's threads on professionalism and independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm

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

From The Wall Street Journal Accounting Weekly Review on February 10, 2012

On 'Bleak' Street, Bosses in Cross Hairs
by: Liz Moyer
Feb 08, 2012
Click here to view the full article on WSJ.com

TOPICS: Compensation, Restatement, Stock Options

SUMMARY: Goldman Sachs and Morgan Stanley have announced clawback provisions that affect managers as well as their traders if those traders put the firms at risk "of substantial financial or legal repercussions. The firms said the policy disclosure...shows [that] the companies won't just go after the excessive risk-takers if bad trades hurt the firms' profits." The policies resulted from proxy fights initiated by the New York City Comptroller John Liu who is responsible for the city's pension funds. The provisions apply to both stock and cash bonus compensation plans. "In its proxy last year, Goldman said its clawback policy allowed for forfeiture of stock awards "in the event that conduct or judgment results in a restatement of the firm's financial statements or other significant harm to the firm's business." The firm also can claw back pay for misconduct that results in legal or reputational harm."

CLASSROOM APPLICATION: The article is useful when introducing the incentives associated with compensation plans-either cash or stock--in financial accounting classes for intermediate level undergraduates or MBA students. It also can be used to discuss general corporate governance issues, particularly as they are being raised by institutional investors.

QUESTIONS:
1. (Introductory) What are compensation "clawback" provisions?

2. (Advanced) What improvement in incentives do clawback provisions help to implement?

3. (Introductory) Who will be affected by the clawback provisions announced by Goldman Sachs and Morgan Stanley?

4. (Advanced) What is the notion of corporate governance? How have corporate governance activists influenced the decisions and disclosures by Goldman Sachs and Morgan Stanley management?

Reviewed By: Judy Beckman, University of Rhode Island

"On 'Bleak' Street, Bosses in Cross Hairs," by: Liz Moyer. The Wall Street Journal, February 8, 2012 ---
http://online.wsj.com/article/SB10001424052970204136404577209383447837986.html?mod=djem_jiewr_AC_domainid

Wall Street's bleak bonus season just got bleaker at Goldman Sachs Group Inc. and Morgan Stanley, where it is becoming clear that traders aren't the only ones at risk of having their pay taken back. Their bosses are on the hook, too.

The Wall Street securities firms said they would seek to recover pay from any employee whose actions expose the firms to substantial financial or legal repercussions. The firms said the policy isn't new, but the disclosure shows the companies won't just go after the excessive risk-takers if bad trades hurt the firms' profits. The latest disclosures clarify for the first time that managers are on the line.

The companies disclosed the clawback policies separately in Securities and Exchange Commission filings in late January and early February, in connection with agreements they reached to end proxy fights being waged by the office that runs New York City's pension funds.

New York City Comptroller John Liu filed papers last year seeking to force the firms to strengthen their clawback policies.

The move comes at a touchy time on Wall Street, where pay is in decline after a year of mixed financial performance and stock-price declines. At Goldman Sachs, compensation and benefits dropped 21% from a year ago to $12.22 billion, taking per capita pay and perks down to $367,000, a level last seen in the financial crisis. The firm cut 2,400 jobs last year, joining roughly two dozen firms around the globe that plan to shed more than 100,000 positions.

"These two firms have set the standard for clawback policies in the banking industry," said Mr. Liu in a statement Tuesday. "We appreciate the dialogue we've had on this issue and will continue to call for them to disclose the amount of clawbacks if forthcoming regulation does not require it."

Goldman Sachs and Morgan Stanley declined to comment.

Though soft economic growth, volatile markets and tighter rules rank as bigger worries for most on Wall Street than clawbacks triggered by the actions of traders, it is hard to ignore the risk completely. UBS AG, Switzerland's largest bank by assets, said Tuesday that it will cut investment-bank bonuses 60% following a retrenchment that started after a London-based employee made unauthorized trades that cost the bank $2.3 billion.

Regulators have pressured banks to detail clawbacks in compensation agreements since the financial crisis, when, they contend, incentives encouraged Wall Street workers to overlook risk in pursuit of profit.

The banks said they adopted clawback policies but said little beyond that.

It is unclear how effective clawback policies have been in reining in risky behavior. Michael Deutsch, an employment lawyer who specializes in Wall Street pay, said that despite their prevalence, "the actual implementation of a clawback has been pretty rare."

Now, under pressure from shareholders such as the New York comptroller's office, Goldman Sachs and Morgan Stanley are clarifying their stance. The shareholder group also made these demands on J.P. Morgan Chase & Co. The firm hasn't addressed the proposal.

Goldman Sachs and Morgan Stanley separately said they anticipate a new global regulation from the Basel Committee on Banking Supervision that requires they disclose aggregate dollar amounts clawed back in a given year.

"We believe clawbacks are a focus for our regulators," Goldman Sachs said in correspondence with the comptroller's office disclosed in an SEC filing.

In exchange for the clarifications, the shareholder group withdrew proxy proposals that called on the banks to broaden the scope of their policies, hold managers and supervisors accountable to clawbacks, and publicly disclose clawbacks.

Continued in article

"Clawbacks Without Claws," by Gretchen Morgenson, The New York Times, September 10, 2011 ---
http://www.nytimes.com/2011/09/11/business/clawbacks-without-claws-in-a-sarbanes-oxley-tool.html?_r=2&emc=tnt&tntemail1=y

AFTER the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books.

Fair Game Clawbacks Without Claws By GRETCHEN MORGENSON Published: September 10, 2011

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AFTER the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books. Add to Portfolio

Diebold Inc New Century Financial Corp NutraCea

Go to your Portfolio »

Under the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission was encouraged to hit executives where it hurts — in the wallet — if they certified financial results that turned out to be, in a word, bogus.

SarbOx was supposed to keep managers honest. They would have to hand back incentive pay like bonuses, even if they didn’t fudge the accounts themselves.

That, anyway, was the idea. The record suggests a bark decidedly worse than its bite. The S.E.C. brought its first case under Section 304 of SarbOx in 2007. Since then, it has filed cases demanding that only 31 executives at only 20 companies return some pay.

In 2007 and 2008, most of the cases involved shenanigans with stock options and produced some big recoveries. In the wake of the financial crisis, the dollars recouped have amounted to an asterisk. Since the beginning of 2009, the S.E.C. has pursued 18 executives at 10 companies. So far, it has recovered a total of $12.2 million from nine former executives at five. The other cases are pending.

“It seems like a dormant enforcement tool,” Jack T. Ciesielski, president of R. G. Associates and editor of The Analyst’s Accounting Observer, says of the SarbOx provision. “It was supposed to be a deterrent, but it’s only really a deterrent if they use it.”

How assiduously the S.E.C. enforces this aspect of Sarbanes-Oxley is important. Only the S.E.C. can bring cases under Section 304. Companies can’t. Nor, it appears, can shareholders. In 2009, the Court of Appeals for the Ninth Circuit ruled that there was no private cause of action for violations of Section 304.

Half the companies pursued by the S.E.C. during the past three years have been small and relatively obscure.

For example, the commission sued executives at SpongeTech Delivery Systems (2008 revenue: $5.6 million), contending that the company had booked $4.6 million in phony sales that year. NutraCea, a maker of dietary supplements with 2008 sales of $35 million, was sued along with Bradley D. Edson, its former chief executive, over what the S.E.C. called its recording of $2.6 million in false revenue. An executive at Isilon Systems, a data storage company, was pursued because, the S.E.C. maintained, the company had inflated sales by $4.8 million during 2007.

No money has been recovered in the SpongeTech or Isilon matters, which are still pending. Mr. Edson, who could not be reached for comment, returned his 2008 bonus of $350,000.

In all cases when executives have returned money, they have neither admitted nor denied allegations.

The S.E.C. typically recovers more money from executives at bigger companies. But top executives are rarely compelled to return all their incentive pay.

In a case brought last year against Navistar, for example, the S.E.C. contended that the company had overstated its income by $137 million from 2001 through 2005. Daniel C. Ustian, who is Navistar’s chief executive and who was not charged with wrongdoing, returned common stock worth $1.32 million. He had received $2.2 million in incentive pay and restricted stock during the time that the S.E.C. says Navistar inflated its accounting. A company spokeswoman said Mr. Ustian would not comment.

Robert C. Lannert, Navistar’s former chief financial officer, who also was not charged, gave back stock worth $1.05 million. His incentive pay consisted of only $828,555 during the years that the S.E.C. said the company misstated its results. He didn’t return a phone call seeking comment.

ANOTHER case brought by the S.E.C. last year involved Diebold, a maker of automated teller machines. Contending that Diebold had overstated its results by $127 million between 2002 and 2007, the commission sued to recover money from three former executives. Walden W. O’Dell, who is a former C.E.O. and who was not charged, repaid $470,000 in cash, and 30,000 Diebold shares and 85,000 stock options. During the years that the S.E.C. alleged that results were overstated, he received bonuses totaling $1.9 million, in addition to restricted stock worth $261,000 and 295,000 stock options. Mr. O’Dell didn’t return a message seeking comment. The cases against the other Diebold executives are pending. A company spokesman said it had settled with regulators and declined to comment further.

Continued in article

"Commissioner slams SEC settlement," SmartPros, July 13, 2011 ---
http://accounting.smartpros.com/x72323.xml

One of the SEC's five commissioners has taken the extraordinary step of publicly dissenting from an enforcement action on the grounds that it was too weak.

Commissioner Luis A. Aguilar said the Securities and Exchange Commission should have charged a former Morgan Stanley trader with fraud in view of what he called "the intentional nature of her conduct."
The dissent comes weeks after the SEC took flak for negotiating a $153.6 million fine from J.P. Morgan Chase in another enforcement case but taking no action against any of the firm's employees or executives.

Under a settlement announced Tuesday, the SEC alleged that former Morgan Stanley trader Jennifer Kim and a colleague who previously settled with the agency had executed at least 32 sham trades to mask the amount of risk they had been incurring and to get around an internal restriction.

Their trading contributed to millions of dollars of losses at the investment firm, the SEC said.

Without admitting or denying the SEC's findings, Kim agreed to pay a fine of $25,000.

Aguilar said the settlement was "inadequate" and "fails to address what is in my view the intentional nature of her conduct."

"The settlement should have included charging Kim with violations of the antifraud provisions," Aguilar wrote.

Continued in article

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

Clawback Teaching Case: Earnings Management and Creative Accounting

"Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes," by Miriam A. Cherry and Jarrod Wong, SSRN, August 23, 2009 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460104

Abstract:
In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term "clawback" was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term "clawback" reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of clawbacks that accounts for these seemingly variant usages. In the process, we distinguish between retroactive and prospective clawback provisions, and explore the implications of such provisions for contract law in general. Ultimately, we advocate writing prospective clawback terms into contracts directly, or implying them through default rules where possible, including via potential amendments to the law of securities regulation. We believe that such prospective clawbacks will result in more accountability for executive compensation, reduce inequities among investors in certain frauds, and overall have a salutary effect upon corporate governance.

Clawback in the Context of TARP --- http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program

On October 14, 2008, Secretary of the Treasury Paulson and President Bush separately announced revisions in the TARP program. The Treasury announced their intention to buy senior preferred stock and warrants in the nine largest American banks. The shares would qualify as Tier 1 capital and were non-voting shares. To qualify for this program, the Treasury required participating institutions to meet certain criteria, including: "(1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive." The Treasury also bought preferred stock and warrants from hundreds of smaller banks, using the first $250 billion allotted to the program.

The first allocation of the TARP money was primarily used to buy preferred stock, which is similar to debt in that it gets paid before common equity shareholders. This has led some economists to argue that the plan may be ineffective in inducing banks to lend efficiently.[15][16]

In the original plan presented by Secretary Paulson, the government would buy troubled (toxic) assets in insolvent banks and then sell them at auction to private investor and/or companies. This plan was scratched when Paulson met with United Kingdom's Prime Minister Gordon Brown who came to the White House for an international summit on the global credit crisis.[citation needed] Prime Minister Brown, in an attempt to mitigate the credit squeeze in England, merely infused capital into banks via preferred stock in order to clean up their balance sheets and, in some economists' view, effectively nationalizing many banks. This plan seemed attractive to Secretary Paulson in that it was relatively easier and seemingly boosted lending more quickly. The first half of the asset purchases may not be effective in getting banks to lend again because they were reluctant to risk lending as before with low lending standards. To make matters worse, overnight lending to other banks came to a relative halt because banks did not trust each other to be prudent with their money.[citation needed]

On November 12, 2008, Secretary of the Treasury Henry Paulson indicated that reviving the securitization market for consumer credit would be a new priority in the second allotment

From The Wall Street Journal Accounting Weekly Review on August 13, 2010

Clawbacks Divide SEC
by: Kara Scannell
Aug 07, 2010
Click here to view the full article on WSJ.com

TOPICS: Accounting, Auditing, Executive Compensation, Restatement, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission, Stock Options

SUMMARY: During the settlement with Dell, Inc. in which founder Michael Dell agreed to pay a $4 million penalty without admitting or denying wrongdoing, Commissioner Luis Aguilar raised the issue of "clawing back" compensation to executives based on inflated earnings. "The SEC alleged Mr. Dell hid payments from Intel Corp. that allowed the company to inflate earnings....Under [Section 304 of the 2002 Sarbanes-Oxley law], the SEC can seek the repayment of bonuses, stock options or profits from stock sales during a 12-month period following the first time the company issues information that has to be restated." The SEC has been working on a formal policy to guide them in cases in which an executive has not been accused of personal wrongdoing, "but hammering out a policy acceptable to the five-member Commission...may be difficult." The related article announced the clawback provision when it was enacted into law in July and compares it to the previous requirements related to executive compensation under Sarbanes-Oxley.

CLASSROOM APPLICATION: The article covers topics in financial reporting related to restatement, executive compensation topics, the Sarbanes-Oxley law, and the SEC's recent enforcement efforts in general.

QUESTIONS:
1. (Introductory) Based on the main and related article, define and describe a "clawback" policy.

2. (Introductory) Why will most publicly traded companies implement change as a result of the new law and resultant SEC requirements?

3. (Advanced) When must a company restate previously reported financial results? Cite the authoritative accounting literature requiring this treatment.

4. (Advanced) Describe one executive compensation plan impacted by reported financial results. How would such a plan be impacted by a restatement?

5. (Introductory) What is the difficulty with applying the new clawback provisions to executive stock option plans? Based on the related article, how are companies solving this issue?

6. (Advanced) Is it possible that executives who are innocent of any wrongdoing could be affected financially by these new clawback provisions? Do you think that such executives should have to repay to their companies compensation amounts received in previous years? Support your answer.

7. (Advanced) Refer to the main article. Consider the specific case of Dell Inc. founder Michael Dell. Do you believe Mr. Dell should have to return compensation to the company? Support your answer.

8. (Introductory) How do the new requirements under the financial reform law enacted in July exceed the requirements of Sarbanes-Oxley? In your answer, include one or two statements to define the Sarbanes-Oxley law.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Law Sharpens 'Clawback' Rules for Improper Pay
by JoAnn S. Lublin
Jul 25, 2010
Online Exclusive

"Clawbacks Divide SEC," by: Kara Scannell, The Wall Street Journal, August 7, 2010 ---
http://online.wsj.com/article/SB10001424052748703988304575413671786664134.html?mod=djem_jiewr_AC_domainid

A dispute over how to claw back pay from executives at companies accused of cooking the books is roiling the Securities and Exchange Commission.

Commissioner Luis Aguilar, a Democrat, has threatened not to vote on cases where he thinks the agency is too lax, people familiar with the matter said. That prompted the SEC to review its policies for the intermittently used enforcement tool.

"The SEC ought to use all the tools at its disposal to try to seek funds for deterrence," Mr. Aguilar said in an interview on Tuesday. "It's important for us to the extent possible to try to deter, and part of that means using tools Congress has given us."

The issue of clawbacks came up during the SEC's recent settlement with Dell Inc. and founder Michael Dell, people familiar with the matter said.

The SEC alleged Mr. Dell hid payments from Intel Corp. that allowed the company to inflate earnings. He agreed to pay a $4 million penalty to settle the case without admitting or denying wrongdoing, but didn't return any pay.

Mr. Aguilar initially objected to the Dell settlement, according to people familiar with the matter. It is unclear whether the penalty—considered high by historical standards for an individual—swayed Mr. Aguilar's vote or whether he removed himself from the case.

In the interview, Mr. Aguilar spoke generally about clawbacks and declined to discuss Dell or other specific cases.

A spokesman for the SEC declined to comment.

Section 304 of the 2002 Sarbanes-Oxley law gave the SEC the ability to seek reimbursement of compensation from the chief executive and chief financial officer of a company when it restates its financial statements because of misconduct.

Under the law, the SEC can seek the repayment of bonuses, stock options or profits from stock sales during a 12-month period following the first time the company issues information that has to be restated.

Last year, the SEC used the tool for the first time against an executive who wasn't accused of personal wrongdoing.

In that case the SEC sued Maynard Jenkins, the former chief executive of CSK Auto Corp., for $4 million in bonuses and stock sales. Mr. Jenkins is fighting the allegations.

SEC attorneys have been working on a more formal policy to guide them in such cases, people familiar with the matter said. They were seeking to tie the amount of the clawback to the period of wrongdoing, these people said.

Mr. Aguilar felt the emerging new policy wasn't stringent enough and told the SEC staff he would recuse himself from cases when he didn't agree with the enforcement staff's recommendations, the people said.

Amid the standoff, SEC enforcement chief Robert Khuzami has halted the initial policy and set up a committee to take another look at the matter, the people said.

Hammering out a policy acceptable to the five-member commission, which has split on recent high-profile cases, may be difficult.

The divisions worry some within the SEC because the absence of an agreement could affect cases in the pipeline, especially on close calls where Mr. Aguilar's vote might be necessary to go forward.

Mr. Aguilar's hard line on clawbacks was bolstered by the Dodd-Frank law, signed by President Obama on July 21. It says stock exchanges need to change listing standards to require companies to have clawback policies in place that go further than the Sarbanes-Oxley policy.

Section 954 of the law says that pay clawbacks should apply to any current or former employee and instructs companies to seek pay earned during the three-year period before a restatement "in excess of what would have been paid to the executive under the accounting restatement."

Since becoming a commissioner in late 2008, Mr. Aguilar has called for a tougher enforcement approach, including a rework of the agency's policy of seeking penalties against companies.

In a speech in May, Mr. Aguilar took up the issue of executive pay in the context of the SEC's lawsuit against Bank of America Corp. for failing to disclose to shareholders the size of bonuses paid to Merrill Lynch executives. The bank agreed to pay $150 million to settle the matter.

Mr. Aguilar said that penalty "pales" in comparison to the $5.8 billion in bonuses paid during the merger.

"Perhaps what should happen is that, when a corporation pays a penalty, the money should be required to come out of the budget and bonuses for the people or group who were the most responsible," he said.

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

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

Hi Dennis,

I do not have direct answers to your specific questions. However, I did combine two tidbits that may be of interest to you and to other subscribers to the AECM. These specialty certifications are commonly held by persons seeking to be paid for expert witnessing. In my opinion, there's a lack of accountability of most of these so-called "certificates" and the organizations that grant such certificates.

On the other hand, there's also merit in some of the complaints by these associations directed at our most respected colleges and universities. For example, most college accounting programs teach about valuation accountics science models (such as residual income and free cash flow models) that are typically more misleading than helpful when it comes to real world valuation of business firms. It's not common to find college professors who have a history of outstanding professional experience in valuation or forensics. The problem with professors of accounting is that they have no comparative advantages when it comes to valuation of items of value that are not booked such as value of human resources and other intangibles and interactions thereof.

College curricula in accounting and finance are terribly lacking in courses and research professors knowledgeable about the professions of valuation or forensics. For example, most of our auditing courses spend more time stressing how financial audits are not designed to detect fraud rather than becoming professionally focused on ways to detect fraud. We do have course modules on internal controls, but these typically are very superficial relative to what graduates will encounter in the real world of fraud and systems weaknesses.

The bottom line is that both valuation and forensics are topics that are poorly covered at the university level. And coverage by mysterious associations offering certificates do not always pass the smell tests of credibility.

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

The National Association of Certified Valuators and Analysts (NACVA) ---
http://www.nacva.com/

Business Valuation Standard --- http://en.wikipedia.org/wiki/Business_valuation_standard

Business Valuation Standards (BVS) are codes of practice that are used in business valuation. Each of the three major United States valuation societies — the American Society of Appraisers (ASA), American Institute of Certified Public Accountants (CPA/ABV), and the National Association of Certified Valuation Analysts (NACVA) — has its own set of Business Valuation Standards, which it requires all of its accredited members to adhere to.^[1] The AICPA's standards are published as Statement on Standards for Valuation Services No.1 and the ASA's standards are published as the ASA Business Valuation Standards. All AICPA members are required to follow SSVS1. Additionally, the majority of the State Accountancy Boards have adopted SSVS1 for CPAs licensed in their state.

Criticism of the abovementioned organizations are as follows:
1) These are neither the major valuation societies, nor are they the only valuation societies. They are however, organizations which engage in considerable self-promotion among their members to foster the delusion among their members, that by the mere fact of membership, their members are more qualified to perform business appraisal than non-members.

2) These are all privately held organizations, in which membership is voluntary.

3) There are no regulations mandating that one must belong to any of these organizations in order to practice as a business appraiser.

4) In that these are voluntary membership organizations, their standards have little or no weight with either the business valuation community at large or with the legal and judicial community who appraisers often serve.

5) The standards and ethics of these organizations are constructed to be vague and self-serving, with numerous exceptions, designed more to excuse conflicts of interest, membership poor performance and unsupported opinion, than to encourage, independence, scientific analysis and high quality work. Conflicts of interest are a problem, particularly among CPA/Appraisers, who regularly join these organizations so that they can offer valuation services to their existing accounting clients, in violation of independence rules and ethics.

6) The education which these organizations offer is unaccredited and of low quality, in that it does not reach the threshold level of education in finance of an accredited university.

7) Educational standards have to be kept low to attract new members and membership dues.

8) The credentials which these organizations issue are often issued for reasons of favoritism and cronyism over merit.

9) The purpose of these organizations is often tarnished by the politics of a few active, insider members who consider themselves more entitled then other members, and consequently use the organization resources to further their own self-interests over the interests of the membership at large.

10) There is no accounting of the membership dues paid into these membership organizations. Consequently, members do not know where, to whom, or on what their dues money is spent.

Forensic Accounting --- http://en.wikipedia.org/wiki/Forensic_accounting

American College of Forensic Examiners International (ACFEI) ---
http://www.acfei.com/
The ACFEI is mulit-disciplinary, only one discipline of which is accounting

Association of Certified Fraud Examiners (ACFE) ---
http://www.acfe.com/
The ACFE is more focused in on accounting and business fraud than the ACFEI

Other Forensic Associations ---
http://www.hgexperts.com/forensic-science.asp

To my knowledge, the only AACSB-accredited university to offer a forensic accounting certificate is the University of West Virginia ---
http://www.be.wvu.edu/fafi/index.htm
There are also tracks for forensic accounting in the Masters of Public Accounting Degree curriculum.

"Forensic Accounting And Auditing: Compared And Contrasted To Traditional Accounting And Auditing," by Dahli Gray, American Journal of Business Education, Volume 1, Number 2, 2008 ---
http://scholar.googleusercontent.com/scholar?q=cache:lnY92RzjASgJ:scholar.google.com/+ACFE+ACFEI+"lawsuit"&hl=en&as_sdt=0,20

Forensic versus traditional accounting and auditing are compared and contrasted. Evidence gathering is detailed. Forensic science and fraud symptoms are explained. Criminalists, expert testimony and corporate governance are presented.

"Financial Reporting Quality in U.S. Private Firms," Ole-Kristian Hope, Wayne B. Thomas, and Dushyantkumar Vyas, SSRN, January 29, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1995124

Abstract:
We provide a large-scale investigation of financial reporting quality (FRQ) among U.S. private firms. Private firms are vital to the economy but have received limited attention from researchers due to a lack of available data. Using a new database that contains accounting data for a large sample of U.S. private firms, we provide interesting new evidence on their FRQ. Relative to publicly traded companies, we find that private firms have lower FRQ as proxied for by several commonly used FRQ measures and are less conservative. Further, we provide the first exploration of cross-sectional variations in the FRQ of private firms. Specifically, we show that private firms with greater external financing needs and a greater presence of long-term debt have higher FRQ and greater conservatism. Private firms with greater owner-manager separation (i.e., C corporations) tend to exhibit lower FRQ but more conservatism.

Number of Pages in PDF File: 45

Keywords: Private firms, financial reporting quality, public versus private, within private examination, demand, opportunism

Bob Jensen's threads on accounting theory and practice are at
http://www.trinity.edu/rjensen/Theory01.htm

"Top 5 Weirdest Companies on the Market," by Katie Morel, Open Forum, January 27, 2012 ---
http://www.openforum.com/articles/top-5-weirdest-companies-on-the-market?extlink=em-openf-SBdaily

PBS Video: What Do Tax Rates' Ups and Downs Mean for Economic Growth?
http://video.pbs.org/video/2176062522
Thank you Paul Caron for the heads up.

Marginal Tax Rates Around the World --- http://www.econlib.org/library/Enc/MarginalTaxRates.html

Although I favor raising taxes at all income levels with much higher marginal rates for the wealthy, keep in mind that there are limits. A close friend in Sweden argued that at one point for certain wealthy Swedes like him the marginal tax rate exceeded 100% --- which has to really discourage both working and investing risk capital.

In the 1970s and 1980s economic growth in Sweden was very low compared to other Western European nations, and much of this is attributed to high marginal tax rates (80+%) on workers in general and even higher for wealthy Swedes, many of whom shifted their wealth and even themselves out of Sweden ---
http://en.wikipedia.org/wiki/Sweden

A bursting real estate bubble caused by inadequate controls on lending combined with an international recession and a policy switch from anti-unemployment policies to anti-inflationary policies resulted in a fiscal crisis in the early 1990s.^] Sweden's GDP declined by around 5%. In 1992, there was a run on the currency, with the central bank briefly jacking up interest to 500%.

The response of the government was to cut spending and institute a multitude of reforms to improve Sweden's competitiveness, among them reducing the welfare state and privatising public services and goods. Much of the political establishment promoted EU membership, and the Swedish referendum passed with 52% in favour of joining the EU on 13 November 1994. Sweden joined the European Union on 1 January 1995.

Marginal Tax Rates by Country ---
http://www.nationmaster.com/graph/tax_hig_mar_tax_rat_ind_rat-highest-marginal-tax-rate-individual

By 2009, Sweden had dropped its marginal tax rate of well over 80% to 57%. This still leaves Sweden with the third-highest marginal tax rate. At a marginal tax rate of 35%, the United States is tied with many nations at Rank 37. The reason almost half of U.S. taxpayers, many of whom are well above the poverty level, pay zero or very low income tax is that there are so many ways to avoid or defer income taxes, especially with all the newer types of credits available in the revised U.S. Tax Code.

Sometimes what appears to be a raising of income taxes is merely a shifting of taxes such as when huge and painful increases on a state's cost of capital are passed to its more regressive sales and property taxes and apartment rentals. It will be very tough if school districts, towns, cities, counties, and states must compete head-to-head in bond markets with corporations.

The problem with tax exempt bonds is that there are gazillions of dollars invested in these bonds such that even small increases in tax-exempt cost of capital can clobber citizens in need of schools, road repairs, welfare, etc.

Rates Versus Enforcement
Marginal Tax Rates by Country ---
http://www.nationmaster.com/graph/tax_hig_mar_tax_rat_ind_rat-highest-marginal-tax-rate-individual

One of the problems in comparing marginal tax rates and economic growth by country is the enormous problem of variations in tax enforcement between nations. Countries (read that Greece and Italy) may have relatively high marginal tax rates where enforcement is a sham. Illinois just imposed one of the largest tax rate increases among all 50 states in the United States. But Illinois is handing out "Get Out of Tax Free" cards right and left for large corporations that threaten to pull up stakes in Illinois and move on to states that have lower tax rates.

Benefits Covered in Tax Payments
Marginal Tax Rates by Country ---
http://www.nationmaster.com/graph/tax_hig_mar_tax_rat_ind_rat-highest-marginal-tax-rate-individual

Another problem in comparing marginal tax rates and economic growth by country is that countries vary in terms of what taxpayers receive in return. Many nations provide health care benefits for all citizens in revenues collected from taxes. Others provide less health services from taxation. Some nations can keep taxes lower because they are protected by the military might of neighbors. Canada, for example, has never had to invest heavily in its military because it lives under the powerful military umbrella of the United States. Israel is a high taxation state, but taxes would soar through the roof if the United States did not heavily subsidize military protection of Israel.

To help explain what is really going on here I wrote a teaching case:
A Teaching Case: Professor Tall vs. Professor Short vs. Freddie Mac
http://www.trinity.edu/rjensen/TallVerusShort.htm

Question
Why won't Freddie Mac provide more relief to homeowners having mortgages that are under water --- meaning the prepayment balance due is more than 80% of the current value of the property?

"Freddie Mac’s big bet against homeowners," by Suzy Khimm, The Washington Post, January 31, 2012 ---
http://www.washingtonpost.com/blogs/ezra-klein/post/freddie-macs-big-bet-against-homeowners/2012/01/30/gIQAQ8tYcQ_blog.html

ProPublica’s Jesse Eisinger and NPR’s Chris Arnold have discovered that Freddie Mac has used a complex derivative transaction to place large bets that rely on millions of American homeowners remaining in overpriced mortgages to pay off. The bets in Freddie’s investment portfolio — which totaled $3.4 billion in 2010 and 2011 — directly contradict the housing giant’s stated mission to provide affordable mortgages to Americans.

Freddie’s bet against refinancing — known as an “inverse floater,” which depends on mortgages interest payments — underscores a central tension between the White House and the Federal Housing Finance Agency, which gained conservatorship of Fannie and Freddie after the crisis. When Freddie and Fannie’s huge investment portfolios profit, it helps reduce the potential burden on taxpayers. That’s been a priority for FHFA under Edward DeMarco’s leadership. At the same time, Fannie and Freddie could, by easing the way for homeowners to lower their payments, help heal the housing market. That’s the priority for the White House. As such, Freddie Mae made “a direct bet against the administration’s public policy effort,” Christopher Mayer, professor of housing finance at Columbia University, tells me.

When it comes to refinancing, “there’s always been this lingering question — why aren’t the GSEs doing more? Everyone says it’s because of their portfolio, ” said Mayer, who’s been a proponent of mass refinancing through Fannie and Freddie. He points out that Freddie, in recent months, had tighter rules for refinancing than its counterpart Freddie. “Now we know why,” Mayer says.

Continued in article

Jensen Comment
To help explain what is really going on here I wrote a teaching case:
A Teaching Case: Professor Tall vs. Professor Short vs. Freddie Mac
http://www.trinity.edu/rjensen/TallVerusShort.htm

"Once a Castle, Home is Now a Debtors' Prison," Nicolas P. Retsinas, Harvard Business School, February 2, 2012 ---
http://hbswk.hbs.edu/item/6791.html

We have created a housing hybrid in America, refashioning the single-family home into a mini debtors' prison. Almost 11 million dot the landscape. In Las Vegas and Phoenix, over 50 percent of homeowners live in one.

Forget the notion of the home as "castle," protecting the owner from greedy landlords. Forget too the expectation that a physical nest will morph into a nest egg. For 22 percent of people who hold mortgages, those notions are anachronistic—relics of a long-ago era before unemployment soared, the Dow plummeted, and credit default swaps surfaced. In today's jargon, these owners are underwater—they owe more than the value of their homes.

But underwater is a misnomer. People underwater either swim or drown.

These underwater owners linger, trapped in their very own debtors' prisons. Their task is Sisyphean: they work, pay the monthly debt to the lender, yet see a perpetual gap between payments and value. The payments can seem like an extortion episode from The Sopranos.

Exit strategies are few. If an owner sells the house for less than the mortgage, the owner must pay the lender the difference. Owners will still need to find someplace else to live.

An owner can walk away from the loan and join the "strategic defaulters," who defaulted not because they could not pay but because they did not want to. Their house was a bad investment. The advantage of this maneuver is real: strategic defaulters save money. Sometimes they can rent a comparable home. But they risk a lower credit rating, which could bar them from buying another home for up to seven years.

Understandably, most owners do not grab either of these solutions; instead, they live shackled in what the Chinese call fang nu—slaves to their house.

One owner's misery is personal; when over a fifth of mortgage-holders are shackled, the personal misery becomes national. For the country, these homes are an economic shackle, hobbling the housing market. They also distort the labor market: people offered jobs far afield stay put, reluctant (and unable) to leave their underwater homes. Since the recovery of the housing market will undergird any broader recovery, we must address these debtors' prisons.

Novel solutions

The solutions will force lenders to throw out their textbooks.

First, lenders can recognize the wisdom of short sales, accepting less than the face value of the mortgage. Currently banks do accept short sales but only after protracted negotiations. One advice columnist recently advised sellers eager to unload an underwater house to keep trying—on the third try, a bank might relent. A short sale will put the house on the market, opening it to another buyer, letting the seller move. Lenders could proactively set prices for short sales.

Continued in article

To help explain what is really going on here I wrote a teaching case:
A Teaching Case: Professor Tall vs. Professor Short vs. Freddie Mac
http://www.trinity.edu/rjensen/TallVerusShort.htm

"UCLA MBA Applicants Rejected for Plagiarism Totals 52," by: Louis Lavelle, Business Week, February 2, 2012 ---
http://www.businessweek.com/bschools/blogs/mba_admissions/archives/2012/02/ucla_mba_applicants_rejected_for_plagiarism_totals_52.html

The number of MBA applicants at UCLA’s Anderson School of Management that have been rejected because of plagiarism has grown exponentially, with 40 more rejected in the second round of applications.

The new cases of plagiarism bring the total to 52. As we reported yesterday, 12 cases of plagiarism were discovered in a batch of 870 first-round applications. An additional 40 cases were discovered in the applications submitted for the second-round, says Elise Anderson, a spokeswoman for the school. The third round, which has an April 18 deadline, typically gets another 500 to 700 applications, Anderson says. So it’s possible that more plagiarized essays will be found in the third round.

The plagiarism was discovered through the use of a service called Turnitin for Admissions, which scans admissions essays looking for text that matches any documents in the Turnitin database. The archive contains billions of pages of web content, books and journals, as well as student work previously submitted to Turnitin for a plagiarism check. Turnitin flags any matches it finds, but individual schools determine if the similarity constitutes plagiarism. The service is now in use by nearly 20 business schools, including those at Penn State, Iowa State, Northeastern, and Wake Forest.

Anderson said the school does not currently notify applicants that their essays will be checked through Turnitin. She said the school is determining what, if any, disclosure should be made on its web site.

Research done by Turnitin suggests that plagiarism in admissions essays is vast. The company's study of 453,000 "personal statements" received by more than 300 colleges and universities in an unnamed English-speaking country found that "more that 70,000 applicants that applied though this system did so with statements that may not have been their own work." That's more than 15 percent.

For schools that do not currently vet application essays with Turnitin, the apparent prevalence of plagiarized essays raises an interesting question: Is it ethical for a school to turn a blind eye to this and award degrees to people who got their foot in the door by lying?

And for those that do screen essays, there's another issue. Many students use the same essays (with minor modifications) at every school they apply to, but there's no mechanism in place to flag plagiarized essays discovered by one school to all the other schools where that essay may have been submitted. One way to do this would be for the school discovering the plagiarism to notify the Graduate Management Admission Council, and have GMAC send a notice to every school that received the applicant's GMAT scores.

Continued in article

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

One year alternative to a two-year MBA program
"An MBA Alternative: MIT Sloan's Master of Finance Program," Bloomberg News, February 13, 2012 ---
http://www.businessweek.com/business-schools/an-mba-alternative-mit-sloans-master-of-finance-program-02132012.html

For years, MIT’s Sloan School of Management offered no degree to rival the master of finance programs at Princeton, Columbia, and Carnegie Mellon. That changed in 2008, when the university made finance its first new one-year master’s program in more than 25 years. (It previously offered a finance certificate.) “MIT produces new degrees very rarely,” says Andrew Lo, the director of Sloan’s Laboratory for Financial Engineering.

Enrollment in the MFin program will increase to 120 students for the class of 2013, up from 57 for the class of 2010. Despite this growing popularity, however, administrators face a number of industry challenges, including how Wall Street’s troubles have begun to take a toll on graduates’ career prospects.

The program reported 92 percent of its 2011 class had job offers three months after graduation, down from 100 percent for the class of 2010. More than 220,000 job cuts are expected in the global financial-services industry this year, eclipsing 174,000 dismissals in 2009, Bloomberg data show. And in a fluid regulatory environment, teaching finance grows more complex. The so-called Volcker rule proposes to separate the investment banking, private equity, and hedge fund businesses of banks from their consumer lending units.

MIT expects students who aim to work in finance, and who may have opted for an MBA in the past, to gravitate toward an MFin in the future. Sloan MFin students are younger than MBAs on average (71 percent of the 2011 class had work experience of six months or less, vs. an average of five years for MBAs). And the MFin student body is predominately international, with about 78 percent of the 2011 class coming from outside the U.S. The median salary for 2011 MFin graduates was $82,000, and BlackRock, Cambridge Associates, Citigroup, Deloitte, and Morgan Stanley were the class’s top hirers.

Lo spoke with Bloomberg Businessweek‘s Erin Zlomek about the program. Here is an edited transcript of their conversation:

With so many cuts in the financial industry, how are your graduates finding jobs, and what opportunities are they taking?

The international focus is a strength of our program and is partly dictated by our diverse class. These students are eclectic in the kinds of positions they want and the cities they want to interview in. We have a variety of small and large firms that recruit with us. Students also go on international job treks. (A recent trip was to Banco Santander.)

Students who are passionate about finance are likely interested in the notion of risk and reward and how different resources are channeled through different securities markets. When this is true, careers can develop across many industries, even outside of finance. Take health care. One of the most challenging aspects in health care is figuring out how to finance innovation–it is very expensive and risky. An industry as far removed from finance as health care requires financial innovation, and with the right kind of vehicles, tremendous innovation can occur.

Also, I think our students recognize that when an industry is in flux, those are the times when the most opportunities are being created.

What skills do graduates of the MFin program tend to have?

Our grads understand particular programming languages–namely, Matlab, which is common in the financial world. Our students are trained in areas like risk management and derivatives, and they know how to deal with financial data. They’ve been exposed to different trading strategies. They also know how trading systems can fail and cause significant loss if not properly managed.

How does the application process compare with that of the MBA?

The applications are quite similar. Where it differs are the essays: We want the applicant to be specific about why they are interested in finance. We want applicants to have a good appreciation for different career paths in the industry. In this program, we are not trying to turn out a better day trader–we are trying to turn out responsible financial innovators.

Describe your curriculum.

We start all of our students with a rigorous introduction into financial theory and cover the basic capital markets, corporate finance, and accounting. This gives them a solid foundation of the mathematics and economics of these markets. Students can then take electives on topics such as investments, risk management, and fixed income. There are also action learning courses, such as a seminar in financial engineering, where they get to work on actual problems posed by financial institutions. There is also an externship, where students spend two to four weeks also working on actual projects.

Continued in article

Home page of the MIT's Master of Finance Program --- http://mitsloan.mit.edu/academic/mfin/

Program

What are the M. Fin. requirements?
Required courses, restricted and general electives, a proseminar, and an optional Master's thesis. The M.Fin. program easily meets the Institute's requirement of a minimum of 66 units of graduate level credit, including at least 42 H-level units.

How long does it take to complete the program?
Approximately one year. Students typically spend the summer plus two academic terms (fall and spring) in residence, and graduate in June. MIT undergraduates who have already taken 15.401 and 15.402 will need just nine months (fall and spring terms) to complete the program requirements.

Would the summer session occupy the full summer term?
No, we plan an intensive program of approximately 6 weeks that begins in July.

What happens in the summer for MIT undergraduates who have already completed 15.401 and 15.402?
These students will be encouraged to take finance jobs or internships during the summer to gain practical experience.

Why not offer a degree in Financial Engineering?
Finance is broader than just financial engineering, which suggests “quants and traders only.” The M.Fin. addresses the broader area of finance.

Is there a possiblity for students to attain an internship in their field of interest while taking classes?
Practical training is an important component of a student's preparation. M.Fin. students are expected when possible to take advantage of IAP (January) as an opportunity to gain practical experience in an area of finance. One opportunity for students is to take advantage of our optional Research Practicum. During the research practicum, students spend three months working directly with client teams at companies like Goldman Sachs, JP Morgan, Credit Suisse, BlackRock, and Fairhaven Capital. International students must check with the ISO to ensure compliance with immigration regulations before participating in practical training.

Can one complete the M.Fin. Program part-time or via distance learning?
No, the M.Fin. program is full-time only and takes place on the MIT campus.

Jensen Comment
MIT has no comparable Master of Accounting program, and the number of accounting courses is quite limited relative to universities attempting to prepare students to take and pass the CPA examination ---
http://mitsloan.mit.edu/academic/courses-list.php?list=Accounting1

MIT does offer a finance track within its two-year MBA program.

A humanities graduate having no prerequisites in accounting, business, and economics can be admitted to the MBA program. However, it's not clear how such a humanities undergraduate could complete a Master of Finance degree in one year. The online literature is somewhat vague about what an applicant needs to enter and complete the Master of Finance degree program in one year.

A Professor Asks Former Students to Pump Up His RateMyProfessor Scores
"UNC Law Prof Sends a ‘Rather Embarrassing’ Request, Asks Former Students to Help His Online Rating," by Christopher Danzig, Above the Law, February 23, 2012 ---
http://abovethelaw.com/2012/02/unc-law-prof-sends-a-rather-embarrassing-request-asks-former-students-to-help-his-online-rating/

With the proliferation of online rating sites, an aggrieved consumer of pretty much anything has a surprising range of avenues to express his or her discontent.

Whether you have a complaint about your neighborhood coffee shop or an allegedly unfaithful ex-boyfriend, the average Joe has a surprising amount of power through these sites.

Rating sites apparently even have the power to bring a well-known UNC Law professor to his electronic knees.

It’s not every day that a torts professor sends his former students a “rather embarrassing request” to repair his online reputation. It’s also certainly not every day that the students respond en masse….

On Tuesday, Professor Michael Corrado sent the following email to 2Ls who took his torts class last year, basically pleading for their help (the entire email is reprinted on the next page):

Continued in article

RateMyProfessor Site ---
http://www.ratemyprofessors.com/

The Number One Scandal in Higher Education is Grade Inflation
And RateMyProfessor is one of the main causes of grade inflation
http://www.trinity.edu/rjensen/Assess.htm#RateMyProfessor

"The Law School System Is Broken," National Jurist, February 2012 --- Click Here
http://www.nxtbook.com/splash/nationaljurist/nationaljurist.php?nxturl=http%3A%2F%2Fwww.nxtbook.com%2Fnxtbooks%2Fcypress%2Fnationaljurist0212%2Findex.php#/18/OnePage
Thank you Paul Caron for the heads up

Companies are starting to realize they don't get a bump in stock price because they paid extra for another audit firm's name.
Trent Gazzaway

"Fewer Companies Changing Auditors," by Tammy Whitehouse, The Wall Street Journal, January 31, 2012 ---
http://professional.wsj.com/article/TPCOMPWK0020120130e81v00004.html?mod=wsj

Fewer companies changed their auditor last year, according to a Compliance Week analysis, and while smaller firms made some inroads, the pecking order among major audit firms remained relatively stable in 2011.

Among the Big 4 firms, KPMG won more new public company audit clients in 2011 and Deloitte & Touche lost the largest number, but the smaller firms outshone the Big 4 overall in winning new business.

CLICK HERE TO SEARCH OUR AUDITOR CHANGES DATABASE!

CLICK HERE TO DOWNLOAD A SPREADSHEET OF AUDITOR CHANGES FOR 2011.

KPMG and its affiliates lost 27 audit engagements in 2011 but picked up 43 new ones, for a net gain of 16 audits, according to a Compliance Week review of Form 8-K filings announcing auditor changes in 2011. Deloitte, however, lost 30 clients and replaced them with only 8 new engagements for a net slide of 22. That was the largest swing among any of the first- and second-tier firms, but still a small move overall considering that 938 public companies changed auditors last year.

The turnover was flatter at PwC, where 23 departures and 25 hirings produced a net gain of two clients for the year. Ernst & Young suffered a net loss of five clients, on 26 departures replaced by 21 engagements.

Second-tier firms made small gains on the Big 4. Overall, the Big 4 firms lost more clients than they gained, but the opposite is true for the next tier of audit firms—that is, those audit shops large enough to be inspected annually by the Public Company Accounting Oversight Board, but who aren't among the Big 4. Those firms—BDO, Crowe Horwath, Grant Thornton, McGladrey & Pullen, MaloneBailey, and ParenteBeard—lost a total of 65 clients but scooped up 93 more, for a net gain of 28. In contrast, the Big 4 collectively suffered a net loss of eight clients.

Still, second tier firms remain miles behind the Big 4 in terms of net client billings, according to data compiled by Bowman's Accounting Report based on 2010 fiscal year billings. The smallest Big 4 firm, KPMG, is nearly four times larger than the next firm, RSM McGladrey & Pullen, with $5.02 billion in net billings compared to $1.38 billion for McGladrey.

Across the entire audit market, churn dropped 22 percent, from 1,205 in 2010 to only 938 last year.

Reasons for auditor turnover vary widely, and “losing a client” is not always a bad thing. For example, a company may indeed decide to switch to another auditing firm because it was offered better service or a lower price—but an audit firm might also decide to resign an account because the client was too risky to keep. Of the total 938 auditor changes executed last year, 646 were cases where the company dismissed the auditor; in 244 cases the audit firm resigned (although it's not always clear whether the auditor walked away from the client or the client asked the firm to resign); in 35 cases, the auditor was terminated. In 14 cases the filings did not include a specific reason for the change.

The data is not surprising to Erick Burchfield, senior director and financial consulting lead at the Kennedy Consulting Research & Advisory firm. He describes 2011's data as fairly typical for audit engagements, with changes concentrated among middle-market or smaller companies and audit firms. Larger companies tend to change auditors infrequently, he says, because of the complexity of the engagements and the cost and difficulty associated with a transition to a new firm.

The differences among Big 4 firms are perhaps more noteworthy, although not easy to explain. None of the Big 4 firms were willing to discuss the data, except KPMG to provide some updates and corrections to Compliance Week's auditor-change database. Burchfield says Deloitte's drop in engagements could stem from any number of issues. As the Big 4 pursue growth strategies, they focus more on advisory and tax services than audit, he says. “Nowhere is that more true than at Deloitte,” he says.

The Big 4 firms are taking careful note of the regulatory tone these days too— particularly in Europe, where the European Commission is considering measures to force the creation of audit-only firms and mandatory rotation, and in the United States where the PCAOB is flirting with mandatory rotation as well. Profit margins are already stronger in non-audit areas for the major accounting firms, so their growth strategies revolve around investing in those areas, Burchfield says. And Deloitte's recent unflattering reviews from the PCAOB probably haven't helped it win new business.

“Companies are starting to realize they don't get a bump in stock price because they paid extra for another audit firm's name.” —Trent Gazzaway,

National Managing Partner,

Grant Thornton

While all four firms have had their share of shareholder litigation and fraud entanglements, Deloitte is still the only Big 4 firm to suffer a public disciplinary action from the PCAOB, and the only firm to have its audit quality control methods openly criticized by the PCAOB. It also remains in a standoff with the Securities and Exchange Commission over audit documentation at a Chinese affiliate in connection with accounting fraud allegations at Longtop Financial.

Still, the rest of the Big 4 are in the same uncomfortable spotlight as Deloitte. The PCAOB has issued blistering reports to the entire group lately based on audit inspections that found all the firms had a higher frequency of poor audits. While all Big 4 firms experienced nearly a doubling of failed audit inspections, Deloitte fared the worst, with failed inspections jumping from 22 percent in 2009 to 45 percent in 2010.

Independent accounting analyst Art Bowman says litigation and regulatory enforcements are not likely to cause a Big 4 firm like Deloitte to lose business. “I'm not thinking Deloitte has a quality-control problem with its clients,” he says. “When they were the Big 8 or Big 6 and they would get beaten up occasionally and fined, it meant something. In these days, it's just a cost of doing business. A $1 million fine is not even an erasure mark on a spreadsheet.”

According to Bowman, perhaps the biggest factor that might lead to auditor turnover, especially away from Big 4 firms and toward middle market or smaller firms, is cost. “The economy is a big factor,” he says. “Every company out there is looking for ways to save money.”

Small Proposition

Not surprisingly, the smaller firms make the same argument. Trent Gazzaway, national managing partner for audit services at Grant Thornton, says smaller firms have had a great value proposition to compete against larger firms over the past few years. Following the swinging pendulum in the 2000s—when the Sarbanes-Oxley Act compelled the Big 4 to shed audit clients early on, then woo them back as internal control auditing matured—tough economic times have forced companies to scrutinize what they spend on audit services.

Continued in article

Companies are starting to realize they don't get a bump in stock price because they paid extra for another audit firm's name.
Trent Gazzaway

Jensen Comment
I think that the PCAOB inspection reports over the years clearly demonstrate that switching to a more expensive audit firm does not necessarily buy you a better audit.

On the other hand the Madoff fraud most certainly demonstrates that having an auditor with deep pockets may be in the best interest of investors and creditors.

If a rule requiring rotation of audit firms ever goes into effect, there already are home designs for the nomadic auditing profession --- Click Here
http://www.openculture.com/2012/02/the_instant_mongolian_home.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
Not shown are the easily-moved Oh Boys (complete with showers over the toilets) that can be set up beside the newly constructed houses

Teaching case from The Wall Street Journal Accounting Weekly Review on February 4, 2012

Amazon's Spending Habit Hurts Profit
by: Stu Woo and John Letzing
Feb 01, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Financial Statement Analysis, Interim Financial Statements, Operating Income, Ratios

SUMMARY: Amazon first sold its Kindle Fire tablet product in this holiday quarter. The company showed increased revenues compared to the fourth quarter of 2010, but operating costs increased 38% and profits dropped even further by 57%. The stock price fell 8.8% after the announcement. The company does not report separately its sales of Kindles, but analyst have estimated they sell the product at break even or a bit of a loss under the "razor blade" model, expecting profits from online book sales and other applications for the product. The related article analyzes balance sheet amounts of cash (decreasing) and accounts payable (increasing) and a drop in free cash flow.

CLASSROOM APPLICATION: The article is useful to introduce revenues, operating margin, quarterly reporting, and some balance sheet ratios for a company and a product with which students should be familiar.

QUESTIONS:
1. (Introductory) Define the accounting terms revenues, operating margin, and operating margin percent.

2. (Introductory) How did Amazon's revenues compare between the further quarter of 2011 and the corresponding period of 2010? Was the company profitable during the fourth quarter of 2011?

3. (Advanced) Explain why the stock price reacted negatively to Amazon's announcement about its performance in the fourth quarter of 2011.

4. (Advanced) Analysts estimate that Amazon sells its Kindle Fire at a loss. Why would the company do this? How does that strategy impact the 2011 4th quarter profits discussed above?

5. (Advanced) Refer to the related article. What financial statement ratios are used to assess the results reported by Amazon? List every ratio you find in the article and describe how they are calculated.

6. (Introductory) U.S. markets are often accused of having too much of a short term perspective on publicly traded companies' operating results. How is that perspective evident in the results discussed in these articles?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Turning Amazon Cash to Kindling
by John Jannarone
Feb 01, 2012
Page: C14

"Amazon's Spending Habit Hurts Profit," by Stu Woo and John Letzing, The Wall Street Journal, February 1, 2012 ---
http://online.wsj.com/article/SB10001424052970204740904577195371567545142.html?mod=djem_jiewr_AC_domainid

Amazon.com Inc. is struggling to make money as quickly as it spends it, putting the squeeze on the online retailer's latest financial results and crimping its outlook.

The Seattle-based e-commerce giant on Tuesday said its fourth-quarter revenue rose 35% from a year earlier, but profit plunged 57% as the company continued to spend on warehouses, technology and its Kindle electronic devices. Amazon's operating expenses rose 38% in the quarter from a year earlier. Journal Community

Amazon also forecast lower-than-expected sales in the current quarter, estimating first-quarter revenue of $12 billion to $13.4 billion. Analysts had been expecting $13.4 billion. The company said it could report an operating loss for the first quarter.

Amazon's shares fell 8.8% in after-hours trading to $177.31, after ending 4 p.m. trading at $194.44.

For more than a year, the Seattle-based company's formula was quick sales growth—often more than 40%—paired with high spending. Amazon's latest results surprised analysts because while the retailer continued to spend, the revenue growth didn't follow. The fourth quarter, which encompasses the crucial holiday shopping season, is also a barometer of Amazon's performance.

"It's a disappointment against relatively high expectations," said Steve Weinstein, an analyst with ITG Investment Research, adding that Amazon's spending "reflects a company making a lot of investments in their business."

In a conference call with analysts, Amazon's finance chief, Tom Szkutak, defended the company's spending. "We feel very good about the investments that we're making," he said. "We're still experiencing very high growth."

Amazon did widen its operating margin to 1.5%, up from 0.7% a quarter earlier but down from 3.8% a year earlier.

Amazon also continues to outpace the growth of overall Internet sales, which Forrester Research estimates are rising at roughly 10% a year.

Amazon has evolved from its roots as an online peddler of physical books to an Internet equivalent of Wal-Mart Stores Inc. In recent years, it has also banked on its Kindle devices as a revenue stream. Amazon has sold its black-and-white Kindle reading devices since 2007. Last fall, it introduced the Kindle Fire, a $199 tablet computer that is cheaper than Apple Inc.'s market-leading iPad.

Amazon declined to reveal precise Kindle sales figure for the holiday quarter, saying only that sales of all Kindle devices increased 177% in the holiday period compared with a year earlier. Jordan Rohan, a Stifel Nicolaus analyst, estimated that Amazon sold six million Kindle Fires in the fourth quarter.

For the fourth quarter, Amazon reported a profit of $177 million, down from $416 million a year earlier. Revenue was $17.43 billion, compared with $12.95 billion last year. For all of 2011, Amazon earned $631 million in profit on $48.1 billion in sales, compared with $1.2 billion in profit and $34.2 billion in revenue a year earlier. Operating expenses rose 44% to $47.2 billion. Part of that spending ramp-up comes from Amazon's staggering hiring rate. It ended the year with 56,200 employees, up 67% from 2010.

Amazon is known to sacrifice profits for revenue. Piper Jaffray analyst Gene Munster estimated that the company loses at least $11 per customer on its Prime program, which offers unlimited quick shipping to customers who pay a $79 annual fee. Online-retail analysts estimate that Amazon recoups some of that cost because Prime members triple their spending on Amazon after joining the program.

The retailer also sells its Kindle gadget for a loss, losing as much as $15 per device, Mr. Munster estimated. Amazon makes up for that by selling digital books, music, software and video on those devices.

Amazon can also offset some losses by letting third-party retailers sell products on its marketplace. Mr. Szkutak said Amazon has made improvements to the marketplace to help both buyers and sellers. "It was great for the bottom line," he said.

Continued in article

Bob Jensen's threads on CPV analysis are at
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting

"GROUPON CFO’S SPIN RAISES MORE RED FLAGS," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, February 15, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/530

This past week, CFO.com asked for our opinion on Groupon’s Fourth Quarter 2011 operating results. Regular readers of our blog will not be surprised to learn that we took exception to Groupon’s continued emphasis on non-GAAP financial metrics at the expense of complete and transparent operating cash flow (OCF) disclosures. After all, we first raised the red flag on these two issues almost eight months ago in Groupon: Comedy or Drama?.

What is news is that Groupon’s chief financial officer now finds it necessary to defend his reporting practices from the critique of these two Grumpy Old Accountants! Unfortunately, the Groupon CFO only raises more red flags about the Company, the quality of its management, and of course, it’s financial reporting.

In defending his continued use of non-GAAP measures, Groupon’s CFO argues that he has been “transparent” as to why the Company relies on these disclosures, namely “to help investors better evaluate the company,” because “sometimes GAAP metrics don’t tell the entire story.” That may be true, but it doesn’t imply that non-GAAP metrics add anything substantive to the story. Often non-GAAP numbers tell significantly less of the story.

Take consolidated segment operating income (CSOI) for example. It starts with GAAP operating income and adds back very large expense amounts for stock-based compensation and acquisition-related expenses. Or how about pro-forma net income which starts with GAAP net income and again adds back the very same large expenses related to stock based compensation and acquisition-related charges. These metrics pretend that stock-based compensation and acquisition-related costs are unimportant when they are very real costs that the entity has incurred. Instead of being transparent, managers who eliminate these items are merely trying to find a nonnegative number to report.

We just don’t see how such metrics (which only bias reported performance upward) help analysts unless you believe analysts can’t read financial statements or add and subtract. Could the Company be feeding the “sell side” analyst community performance results that will make it easier for them to sell Groupon stock? After all, these are the only analysts we know of that don’t read and can’t add.

And then there is Groupon’s Magic Cash Machine! Groupon’s CFO took exception to our criticism about providing only aggregate cash flow data that failed to explain the 234 percent improvement in 2011 OCF. But even he recognizes that “it is pretty unusual to have a business that loses money from a GAAP income perspective, but actually generates free-cash flow.” Sorry Mr. CFO, “pretty unusual” does not hack it…this situation refutes all logic!

In most growth companies, OCF tend to lag net income, not the other way around. If costs exceed revenues, how is it possible to create and report huge and increasing cash flows? We know of only two ways: either delay payments to vendors or lie about what your cash flows really are! So, instead of dismissing our suggestion as “silly” that Groupon is boosting its reported cash flows by delaying payments and playing the float, prove us wrong by releasing a complete, detailed statement of cash flows. Surely, the CFO has this handy.

Continued in article

Multiple Teaching Cases About Accounting at Groupon

From The Wall Street Journal Accounting Weekly Review in February 4, 2012

Groupon and Its 'Weird' CEO
by: Shayndi Raice
Jan 31, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Cash Flow, Financial Reporting, Financial Statement Analysis, SEC, Securities and Exchange Commission, Segment Analysis

SUMMARY: The article quotes excerpts from Groupon, Inc. CEO Andrew Mason's comments in an interview with the WSJ. The related video shows Mr. Mason's responses to written questions flashed on screen. Accounting topics addressed in the interview are two topics with which the SEC was concerned during the company's IPO process: (1) the company's use of "Adjusted Consolidated Segment Operating Income, which showed the company's revenue minus certain marketing costs" and (2) Mr. Mason's writing of a memo about the firm to employees which was then leaked to the press during a quiet period imposed by SEC just prior to the IPO. The stock is now trading at $21.49 as of the date of this writing, slightly above the $20/share IPO price.

CLASSROOM APPLICATION: The article is useful in discussing segment reporting requirements, handling of marketing costs, and the overall IPO process.

QUESTIONS:
1. (Introductory) What two accounting and financial reporting issues impacted Groupon during its process of becoming a publicly traded company?

2. (Introductory) What is Groupon CEO Andrew Mason's assessment of having used an unusual accounting metric in the company's first filing for its initial public offering (IPO)?

3. (Advanced) Refer to the related article. What was the unusual accounting metric? How is this metric justified in Mr. Mason's current interview with TWSJ?

4. (Advanced) Consider the requirements for segment reporting. How may operating income as reported by business segment differ from total consolidated operating income presented on the income statement? State your source for accounting requirements that allow this treatment.

5. (Introductory) What is an S-1 registration statement and what is a "quiet period"? How and why did Mr. Mason violate this requirement for a quiet period?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Groupon's Accounting Lingo Gets Scrutiny
by Shayndi Raice and Nick Wingfield
Jul 28, 2011
Page: A1

"Groupon and Its 'Weird' CEO," by: Shayndi Raice, The Wall Street Journal, Jan 31, 2012,---
http://online.wsj.com/article/SB10001424052970203920204577193181377853716.html?mod=djem_jiewr_AC_domainid

Groupon Inc. Chief Executive Andrew Mason wants to prove his company is worth the fuss after its roller-coaster ride to an initial public offering last year.

The 31-year-old founder took his Chicago-based daily deals site public in November at a valuation of $13 billion, well below the $15 billion to $20 billion price tag Groupon once thought it could command. The IPO also brought on questions about another bubble in the Internet sector and the viability of the daily-deals business model.

Critics pointed out that Groupon was unprofitable and was spending heavily to acquire new subscribers amid a flood of competition from daily-deal clones. The company also raised eyebrows at the Securities and Exchange Commission over an unusual accounting metric called Adjusted Consolidated Segment Operating Income, which showed the company's revenue minus certain marketing costs.

Groupon's stock soared 31% above its $20 IPO price on its first day of trading, but withered in following weeks. Shares closed at $19.63, down 2.1%, in 4 p.m. trading Monday. The company is set to report its first quarterly results as a public company next week.

Mr. Mason, who sometimes posts online videos of himself in his underwear doing yoga or dancing, sat down for a recent interview in his Chicago office to discuss challenges facing the company and his ability to handle them. Edited excerpts:

WSJ: Do you think you're mature enough to be the CEO of a multi-billion dollar company?

Mr. Mason: I got the company this far. To the degree I was weird, I was weird before we were a public company and managed to get it worth whatever it's worth. I'm going to continue doing my thing and work my butt off to add value for shareholders and as long as they and the board see fit to keep me in this role, I feel enormously privileged to serve.

WSJ: Groupon has been criticized by analysts and investors for not being profitable. How important is profitability?

Mr. Mason: We believe that the most important thing for us to be focused on is growing the business, building something that our consumers and our merchant partners love. And when you focus on those inputs, revenue and profitability is the output and it follows naturally.

WSJ: Some critics say the daily deal model is too easy to replicate.

Mr. Mason: There's proof. There are over 2,000 direct clones of the Groupon business model. However, there's an equal amount of proof that the barriers to success are enormous. In spite of all those competitors, only a handful are remotely relevant.

WSJ: Why?

Mr. Mason: People overlook the operational complexity. We have 10,000 employees across 46 countries. We have thousands of salespeople talking to tens of thousands of merchants every single day. It's not an easy thing to build.

WSJ: You had a rough IPO. What was the hardest part?

Mr. Mason: After filing the S-1, we entered a quiet period that greatly restricted our ability to have a conversation with the public. It was frustrating to not be able to directly address many of the concerns that people raised about the business.

WSJ: Including discussing "Adjusted Consolidated Segment Operating Income?" You were accused by critics of trying to hide your high marketing costs from investors.

Mr. Mason: Groupon spends money on marketing in a way that's different from traditional Internet and e-commerce companies. Our marketing spend is designed to drive subscribers to our daily mailing list. A traditional e-commerce company is driving transactions. Our own proprietary advertising network can continually advertise to our customers at virtually no additional cost. There's an upfront investment that we know pays off over the long-term.

WSJ: Was it a mistake to include that metric?

Mr. Mason: In retrospect, I think it was naive, and I wouldn't have included it. The list of companies that have added their own financial metrics is not a savory group. It created a distraction that wasn't worth the benefit.

WSJ: The SEC also took issue with a memo you wrote to employees during the quiet period that was leaked to the press.

Mr. Mason: I wrote the memo because 23-year-olds were coming into my office and asking how they should respond to their parents when they ask if Groupon is about to go bankrupt. The risks of not communicating to my employees were greater than the risks of doing otherwise.

If I knew it was going to leak, I would have been less bizarre, and I wouldn't have made a joke about my now-wife. She was upset. (He joked that his then-girlfriend asked him why he never said anything nice about her.)

WSJ: Groupon's stock price is trading below its IPO price of $20. Why?

Mr. Mason: Luckily there are people smarter than me in this world that know the answers to those kinds of questions. I leave that to the financial community.

Continued in article

Question
How can a company that's "technically insolvent" have any sort of IPO success?

"GROUPON IS TECHNICALLY INSOLVENT," by Anthony H. Catach Jr. and J. Edward Ketz, Grumpy Old Accountants, October 21, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362

Two Update Teaching Cases on Groupon: IPO, Working Capital, and Cash Flow

From The Wall Street Journal Weekly Accounting Review on November 11, 2011

Case 1
Exclusive Deal Floats Groupon
by: Rolfe Winkler
Nov 05, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: business combinations, Financial Analysis, Goodwill, Impairment

SUMMARY: Groupon filed its initial public offering (IPO) on Friday, November 4, 2011, selling only a total of 6.4% of the company's total shares. The IPO proceeds brought in $805 million, the third smallest total for all IPOs since 1995, only larger than the IPOs of Vonage Holdings and Orbitz in total proceeds. In terms of the percent of outstanding shares sold, only Palm has sold a smaller percentage in that same time frame. Quoting from the related article, "Silicon Valley and Wall Street took Groupon's stock market debut as a sign that investors are still willing to make risky bets on fast-growing but unprofitable young Internet companies....Groupon shares rose from their IPO price of $20 by 40% in early trading, and ended at the 4 p.m. market close at $26.11, up 31%. The closing price valued Groupon at $16.6 billion...."

CLASSROOM APPLICATION: Questions focus on measuring the implied fair value of an entire business from the value of only a portion. The concept is used in accounting for business combinations and in goodwill impairment testing.

QUESTIONS:
1. (Introductory) Summarize the Groupon initial public offering (IPO). How many shares were sold? At what price?

2. (Introductory) Describe the market activity of the stock on its first day of trading. How does that activity show that "investors are...willing to make risky bets on...young Internet companies"?

3. (Advanced) How has the Groupon stock fared to the date you write your answer to this question?

4. (Advanced) Define the term "implied fair value". How did sale of only 6.3% of the shares outstanding translate into an overall firm valuation of $12.8 billion? Show your calculation.

5. (Advanced) Given the range of trading reported in the article and your answer to question 3 above, what is the range of total firm value shown during this short time of public trading of Groupon stock? Again, show your calculations. How does the small percentage of shares contribute to the size of this range?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Groupon IPO Cheers Valley
by Shayndi Raice and Randall Smith
Nov 05, 2011
Page: B3

"Exclusive Deal Floats Groupon," by: Rolfe Winkler, The Wall Street Journal, November 5, 2011 ---
http://online.wsj.com/article/SB10001424052970203716204577017892088810560.html?mod=djem_jiewr_AC_domainid

Even by dot-com standards, Groupon's initial public offering is puny in terms of the number of shares it actually sold to the public. According to Dealogic, dating back to 1995 just three U.S. tech companies floated a smaller percentage of their shares in their IPOs. Palm sold 4.7% of its shares in a $1 billion offering; Portal Software sold 6.2% in a tiny $64 million offering, and Ciena sold 6.2% in a $132 million offering. Then comes Groupon, which sold 6.3% this week as part of its $805 million offering.

That is well below the median of 21% for the 50 largest technology IPOs dating back to 1995, according to Dealogic.

Groupon's limited float strategy isn't new. Two of this year's other big Internet IPOs, LinkedIn and Pandora Media also sold a limited number of shares, just 9.4% of the total outstanding for both companies. Those deals were also led by Morgan Stanley.

Considering doubts about Groupon's business model, in order to ensure a strong first day's trading, the underwriters not only limited the free-float, but they also scaled back their original valuation target.

At Friday's close of trading, Groupon shares were at $26.11 apiece, 31% above the IPO price. That puts Groupon's market capitalization at about $17 billion, or roughly eight times next year's likely revenue. That is steep, considering that the daily-deals Internet company is still unprofitable and that growth appears to be slowing quickly.

Case 2
Groupon Holds Cash Tight
by: Sarah E. Needleman and Shayndi Raice
Nov 10, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Cash Flow, Cash Management, Financial Statement Analysis

SUMMARY: Groupon finally completed its IPO on Friday, November 4, 2011, and interest in the company is therefore naturally high. Competitors to Groupon attempt to obtain market share from the newly public company by offering quicker payment terms to the small business which provide the merchant benefits offered by Groupon. Small businesses need their working capital as fast as possible and therefore some complain about the Groupon terms. Groupon argues that its terms are designed to ensure that merchant suppliers cannot use Groupon for a quick infusion of cash just prior to closing operations.

CLASSROOM APPLICATION: Questions ask students to analyze Groupon's financial statements-particularly its working capital components-to assess the issues with the company's payment terms.

QUESTIONS:
1. (Introductory) What are Groupon's payment terms? How do those terms help Groupon's customers, the buyers of its electronic coupons?

2. (Introductory) How do Groupon's payment terms help Groupon's own financial position and operating results? In your answer, define the financial concepts of cash flow and working capital mentioned in the article.

3. (Advanced) Groupon issued its initial public offering of stock (IPO) on Friday, November 4, 2011. Access the S-1 registration statement filed with the SEC for this offering on June 2, 2011. It is available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm Click on the link to the Table of Contents, then on Index to Consolidated Financial Statements, then on Consolidated Balance Sheets. As of December 31, 2010, how much working capital did the company have? Did this amount improve through the quarter ended March 31, 2011?

4. (Advanced) Given your measurement of Groupon's working capital, how easy do you think it would be for Groupon to address its competition by changing its payment terms? Support your answer.

5. (Advanced) Continue working with the Groupon audited consolidated financial statements as of December 31, 2010 and the unaudited quarterly statements. What items comprise Groupon's Accounts Receivable? How collectible are these amounts?

6. (Advanced) What items comprise Groupon's Accounts Payable, accrued Merchants Payable, and Accrued Expenses? Given your knowledge of Groupon's payment terms, can you identify how soon each of these payments must be made?

7. (Advanced) Consider how you would schedule a detailed estimate of the timing of Groupon's cash flows for the three current liabilities discussed above.

Reviewed By: Judy Beckman, University of Rhode Island

"Groupon Holds Cash Tight by: Sarah E. Needleman and Shayndi Raice, The Wall Street Journal, November 10, 2011 ---
http://online.wsj.com/article/SB10001424052970204358004577027992169046500.html?mod=djem_jiewr_AC_domainid

Rivals of Groupon Inc. are threatening the daily deal site leader by offering quicker payment to merchants, possibly jeopardizing a key part of Groupon's business model.

Groupon keeps itself in cash by collecting money immediately when it sells its daily coupons to consumers while extending payments to the merchants over 60 days. For instance, a hair salon might run a deal offering $100 of services for just $50 on Groupon's website, which then keeps as much as half of the total collected and sends the remainder to the salon in three installments about 25 to 30 days apart.

"The payment timing is so erratic you can't count on any of that money helping to pay your bills," says Mark Grohman, owner of Meridian Restaurant in Winston-Salem, N.C.

After running three Groupon promotions this year and last, Mr. Grohman says he won't use the service again in part because it puts too big a strain on his cash flow. "With smaller margins in restaurants, you need that capital in the bank as fast as possible," he says.

Heissam Jebailey, co-owner of two Menchie's frozen-yogurt franchises in Winter Park, Fla., says he also has begun to view Groupon's installment payments as too slow.

Enlarge Image SBGROUPON SBGROUPON

"You want to get paid in full as quickly as possible," says Mr. Jebailey, who has run deals with both Groupon and its rival LivingSocial Inc. offering customers $10 of frozen yogurt for $5. He says both promotions were successful but that he'd only use Groupon again if the service promises to pay faster. "We're the ones that have to cover the cost of goods for giving away everything at half price," he says. "I will not do another deal with Groupon unless they agree to my terms."

Groupon executives have no plans to change payments terms, said a person familiar with the matter. Because Groupon has a backlog of 49,000 merchants in line to offer a deal with the site, executives feel confident that they don't need to make any changes to payment terms, said another person.

While Groupon pays merchants in installments of 33% over a period of 60 days, LivingSocial and Amazon.com Inc.'s Amazon Local pay merchants their full share in 15 days. Google Inc.'s Google Offers promises 80% of the merchant's cut within four days, and the remainder over 90 days.

Groupon pays in installments for a reason, according to a person familiar with the matter: It has seen some merchants try to use Groupon to get a quick infusion of cash before going out of business, leaving customers with vouchers that can't be redeemed.

The Chicago-based start-up has a policy of offering refunds to customers who aren't satisfied, and as a result it is cautious about doing deals with merchants who may not carry through on their end, says the person familiar with the matter.

Groupon also says it pays merchants before they provide services to customers and will accelerate payments if merchants experience unusually fast consumer redemption.

"We believe Groupon's payment terms are fair to merchants and important to protect consumers," says Julie Mossler, director of communications for Groupon.

It also is in Groupon's best interest to stretch out payments to its customers for as long as possible, says John Hanson, a certified public accountant and executive director at Artifice Forensic Financial Services LLC in Washington, D.C. "It makes their cash position look stronger on their books."

Steady cash flow has helped fuel the valuation of Groupon, which first sold shares to the public last week. Groupon's stock was down nearly 4% Wednesday, bringing its share price of $23.98 closer to the company's IPO price of $20 a share. Based on the 5.5% of shares that trade, the company has a valuation of about $15 billion. But its working-capital deficit has ballooned to $301.1 million as of Sept. 30, and the amount it owes its merchants is also way up.

Groupon's "accrued merchant payable" balance increased to $465.6 million as of Sept. 30, from $4.3 million at year-end 2009, its filings say. This merchant payable balance exceeded Groupon's cash and contributed to the company's working capital deficit, according to the company's filing.

Offering merchants faster payment terms could hurt its cash flow and force it to raise funds to cover its day-to-day cash needs, Groupon said in a recent securities filing. In international markets, the company pays merchants only once a coupon has been redeemed.

Every one-day reduction in Groupon's merchant payables represents a risk of about $14 million in free cash flow, according to estimates by Herman Leung, a Susquehanna analyst. "It's a key driver of cash flow dollars and a key assumption in the Groupon model," he says of the 60-day payment period. "It's highly sensitive."

To be sure, Groupon has faced waves of competition for more than a year, and many of those challengers already have come and gone.

Continued in article

Teaching cases on the accounting scandals at Groupon (especially overstatement of revenues) and its auditor (Ernst & Young) ---
See Below

"GROUPON IS TECHNICALLY INSOLVENT," by Anthony H. Catach Jr. and J. Edward Ketz, Grumpy Old Accountants, October 21, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362

Today (October 21) Groupon issued amendment Number 6 to its S-1 filing. The most interesting data are on page 9 of the report, which we repeat below.

What stands out to us is that stockholders’ equity on September 30 is negative—the firm has become technically insolvent! Our prediction that Groupon has a high probability of failure remains intact.

Continued in article

Jensen Comment
This illustrates that on occasion insolvent firms may have value depending upon the net value of all the things that don't get posted to the balance sheet under GAAP. Common examples include contingency assets/liabilities that are not yet booked, intangibles such as the value of employees, and a boatload of other items that accountants just cannot measure with enough confidence and stability to put into the general ledger.

One of the best examples is the early years of Amazon.com that every year incurred relatively large losses in the income statement but managed to continue to sell equity shares because investors sniffed out huge value in the air surrounding the net assets.

Groupon of course is another matter, Catenach and Ketz, the grumps, have never liked the stench surrounding the air over Groupon as if it was a pile of something that smells very bad.

Trust No one, Particularly Not Groupon's Accountants and Auditors (Ernst & Young)

From The Wall Street Journal Weekly Accounting Review on September 30, 2011

Groupon Unsure on IPO Time
by: Shayndi Raice and Randall Smith
Sep 26, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Accounting Changes and Error Corrections, Audit Report, Auditing, Disclosure, Disclosure Requirements, Financial Accounting, Financial Reporting, SEC, Securities and Exchange Commission

SUMMARY: This article presents financial reporting and auditing issues stemming from the Groupon planned IPO. Groupon originally filed for an initial public offering in June 2011. At the time, the filing contained a measure Adjusted Consolidated Segment Operating Income that is a non-GAAP measure of performance. The SEC at the time required the company to change its filing to use GAAP-based measures of performance. The SEC has continued to scrutinize the Groupon financial statements and has required the company to report revenue based only on the net receipts to the company from sales of its coupons after sharing proceeds with the businesses for which it makes the coupon offers.

CLASSROOM APPLICATION: The article is useful in financial accounting and auditing classes. Instructors of financial accounting classes may use the article to discuss reporting of the change in measuring revenues and related costs. Instructors of auditing classes may use the article to discuss non-standard audit reports. Links to SEC filings are included in the questions. The video is long; discussion of Groupon's issues stops at 5:30.

QUESTIONS:
1. (Introductory) According to the article, what accounting and disclosure issues have delayed the initial public offering of shares of Groupon, Inc.? What overall economic and financial factors are also affecting this timing?

2. (Introductory) What was the problem with Groupon CEO Andrew Mason's letter to Groupon employees? Do you think Mr. Mason intended for this letter to be made public outside of Groupon? Should he have reasonably expected that to happen?

3. (Advanced) What accounting change forced restatement of the financial statements included in the Groupon IPO filing documents? You may access information about this restatement directly at the live link included in the online version of the article. http://online.wsj.com/public/resources/documents/grouponrestatement20110923.pdf

4. (Introductory) According to the article, by how much was revenue reduced due to this accounting change?

5. (Introductory) Access the full filing of the IPO documents on the SEC's web site at http://sec.gov/Archives/edgar/data/1490281/000104746911008207/a2205238zs-1a.htm Proceed to the Consolidated Statements of Operations on page F-5. How are these comparative statements presented to alert readers about the revenue measurement issue?

6. (Advanced) Move back to examine the consolidated balance sheets on page F-4. Do you think this accounting change for revenue measurement affected net income as previously reported? Support your answer.

7. (Advanced) Proceed to footnote 2 on p. F-8. Does the disclosure confirm your answer? Summarize the overall impact of these accounting changes as described in this footnote.

8. (Advanced) What type of audit report has been issued on the Groupon financial statements in this IPO filing? Explain the wording and dating of the report that is required to fulfill requirements resulting from the circumstances of these financial statements.

Reviewed By: Judy Beckman, University of Rhode Island

Groupon's Fast-growing Business Faces a Churning Point
by: Rolfe Winkler
Sep 26, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Cost Accounting, Cost Management, Disclosure, Financial Statement Analysis, Managerial Accounting

SUMMARY: This article focuses on financial statement analysis of the Groupon IPO filing documents including some references to cost measures. "Forget the snappy 'adjusted consolidated segment operating income.' That profit measure...was rightly rejected by regulators. It is the complete absence of details on subscriber churn that is more problematic. How often are folks unsubscribing from Groupon's daily emails?...The issue is important since...the cost of adding new subscribers has increased quickly."

CLASSROOM APPLICATION: The article may be used in a financial statement analysis or managerial accounting class.

QUESTIONS:
1. (Introductory) What is the overall concern about Groupon's business condition that is expressed in this article?

2. (Advanced) The author states that the cost of adding new subscribers has increased. How was this cost determined? How does this calculation make the cost assessment comparable from one period to the next?

3. (Advanced) What does Groupon CEO Andrew Mason say about the company's cost of acquiring customers? What income statement expense item shows this cost? How does the increasing unit cost discussed in answer to question 2 above bring the CEO's assertion into question?

4. (Advanced) In general, how does the author of this assess the quality of the filing by Groupon for its initial public offering? Why should that assessment impact the thoughts of an investor considering buying the Groupon stock when it is offered?

Reviewed By: Judy Beckman, University of Rhode Island

"Groupon: Comedy or Drama?" by Grumpy Old Accountants Anthony H. Catanach Jr. and J. Edward Ketz, SmartPros, July 2011 ---
http://accounting.smartpros.com/x72233.xml

"Trust No one, Particularly Not Groupon's Accountants," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, August 24, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/

"Is Groupon "Cooking Its Books?" by Grumpy Old Accountants Anthony H. Catanach Jr. and J. Edward Ketz, SmartPros, September 2011 ---
http://accounting.smartpros.com/x72233.xml

Teaching Case
When Rosie Scenario waved goodbye "Adjusted Consolidated Segment Operating Income"

From The Wall Street Journal Weekly Accounting Review on August 19, 2011

Groupon Bows to Pressure
by: Shayndi Raice and Lynn Cowan
Aug 11, 2011
Click here to view the full article on WSJ.com

TOPICS: Advanced Financial Accounting, SEC, Securities and Exchange Commission, Segment Analysis

SUMMARY: In filing its prospectus for its initial public offering (IPO), Groupon has removed from its documents "...an unconventional accounting measurement that had attracted scrutiny from securities regulators [adjusted consolidated segment operating income]. The unusual measure, which the e-commerce had invented, paints a more robust picture of its performance. Removal of the measure was in response to pressure from the Securities and Exchange Commission...."

CLASSROOM APPLICATION: The article is useful to introduce segment reporting and the weaknesses of the required management reporting approach.

QUESTIONS:
1. (Introductory) What is Groupon's business model? How does it generate revenues? What are its costs? Hint, to answer this question you may access the Groupon, Inc. Form S-1 Registration Statement filed on June 2, 011 available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm

2. (Advanced) Summarize the reporting that must be provided for any business's operating segments. In your answer, provide a reference to authoritative accounting literature.

3. (Advanced) Why must the amounts disclosed by operating segments be reconciled to consolidated totals shown on the primary financial statements for an entire company?

4. (Advanced) Access the Groupon, Inc. Form S-1 Registration Statement filed on June 2, 011 and proceed to the company's financial statements, available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm#dm79801_selected_consolidated_financial_and_other_data Alternatively, proceed from the registration statement, then click on Table of Contents, then Selected Consolidated Financial and Other Data. Explain what Groupon calls "adjusted consolidated segment operating income" (ACSOI). What operating segments does Groupon, Inc., show?

5. (Introductory) Why is Groupon's "ACSOI" considered to be a "non-GAAP financial measure"?

6. (Advanced) How is it possible that this measure of operating performance could be considered to comply with U.S. GAAP requirements? Base your answer on your understanding of the need to reconcile amounts disclosed by operating segments to the company's consolidated totals. If it is accessible to you, the second related article in CFO Journal may help answer this question.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Groupon's Accounting Lingo Gets Scrutiny
by Shayndi Raice and Nick Wingfield
Jul 28, 2011
Page: A1

CFO Report: Operating Segments Remain Accounting Gray Area
by Emily Chasan
Aug 15, 2011
Page: CFO

"Groupon Bows to Pressure," by: Shayndi Raice and Lynn Cowan, The Wall Street Journal, August 11, 2011 ---
https://mail.google.com/mail/?shva=1#inbox/131e06c48071898b

Groupon Inc. removed from its initial public offering documents an unconventional accounting measurement that had attracted scrutiny from securities regulators.

The unusual measure, which the e-commerce had invented, paints a more robust picture of its performance. Removal of the measure was in response to pressure from the Securities and Exchange Commission, a person familiar with the matter said.

In revised documents filed Wednesday with the SEC, the company removed the controversial measure, which had been highlighted in the first three pages of its previous filing. But Groupon's chief executive defended the term Wednesday. [GROUPON] Getty Images

Groupon, headquarters above, expects to raise about $750 million.

Groupon had highlighted something it called "adjusted consolidated segment operating income", or ACSOI. The measurement, which doesn't include subscriber-acquisitions expenses such as marketing costs, doesn't conform to generally accepted accounting principles.

Investors and analysts have said ACSOI draws attention away from Groupon's marketing spending, which is causing big net losses.

The company also disclosed Wednesday that its loss more than doubled in the second quarter from a year ago, even as revenue increased more than ten times.

By leaving ACSOI out of its income statements, the company hopes to avoid further scrutiny from the SEC, the person familiar with the matter said. The commission declined comment.

Groupon in June reported ACSOI of $60.6 million for last year and $81.6 million for the first quarter of 2011. Under generally accepted accounting principles, the company generated operating losses of $420.3 million and $117.1 million during those periods.

Wednesday's filing included a letter from Groupon Chief Executive Andrew Mason defending ACSOI. The company excludes marketing expenses related to subscriber acquisition because "they are an up-front investment to acquire new subscribers that we expect to end when this period of rapid expansion in our subscriber base concludes and we determine that the returns on such investment are no longer attractive," the letter said.

There was no mention of when that expansion will end, but the person familiar with the matter said the company reevaluates the figures weekly.

Groupon said it spent $345.1 million on online marketing initiatives to acquire subscribers in the first half and that it expects "to continue to expend significant amounts to acquire additional subscribers."

The latest SEC filing also contains new financial data. Groupon on Wednesday reported second-quarter revenue of $878 million, up 36% from the first quarter. While the company's growth is still rapid, the pace has slowed. Groupon's revenue jumped 63% in the first quarter from the fourth.

The company's second-quarter loss was $102.7 million, flat sequentially and wider than the year-earlier loss of $35.9 million.

Groupon expects to raise about $750 million in a mid-September IPO that could value the company at $20 billion.

The path to going public hasn't been easy. The company had to file an amendment to its original SEC filing after a Groupon executive told Bloomberg News the company would be "wildly profitable" just three days after its IPO filing. Speaking publicly about the financial projections of a company that has filed to go public is barred by SEC regulations. Groupon said the comments weren't intended for publication.

Continued in article

"Groupon, Zynga and Krugman's Frothy Valuations," by Jeff Carter, Townhall, September 2011 ---
http://finance.townhall.com/columnists/jeffcarter/2011/09/13/groupon,_zynga_and_krugmans_frothy_valuations

Jensen Comment
In the 1990s, high tech companies resorted to various accounting gimmicks to increase the price and demand for their equity shares ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

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

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

"Compensation and the Myth of the Corporate Superstar," by Charles M. Elson and Craig K. Ferrere, Harvard Business Review Blog, February 1, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/02/compensation_and_the_myth_of_t.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

The public is up in arms about some of the big bonuses being paid to the CEOs of big bailed-out banks. The boss of Britain's RBS, one of the biggest casualties of the banking crash, has felt obliged to turn down a $1.5 million bonus in the face of mounting anger and the threat of legislation.

It all used to be very different. Al Dunlap, the former Sunbeam CEO, and once handsomely rewarded corporate icon, was fond of reminding his investors that "the best bargain is an expensive CEO." Great managers, the argument went, deserve the big bucks because of the tremendous wealth they create.

According to this logic, expecting RBS to pay its CEO, Stephen Hester, less is analogous to asking that it pay less for any other necessary business commodity. If executive talent has a price, a firm will get only that which it pays for. So if Stephen Hester were not paid his bonus, another firm would bid away his services and RBS would not be able to attract and retain similar talent at more modest pay levels.

This notion that there is an open and competitive market for highly talented executives is at the heart of the process by which CEO pay is set. Board compensation committees rely almost exclusively on comparisons to CEO compensation at companies of similar size and in similar industries.

This practice, known as peer benchmarking, is used to approximate the next best employment option for that executive in the labor-market, the reservation wage. Pay is typically targeted at the 50th, 75th, or 90th percentile of this group. The implicit assumption is that a talented manager is interchangeable between firms, and thus should be paid very nearly what other executives are paid.

But although the notion that talent is a competitive market is both attractive and plausible, it is highly questionable. Executive talent is not fully transferable between companies. Scholars have long recognized a distinction between firm-specific and general skills. It is quite apparent that successful CEOs leverage not only their intrinsic talents but also, and more importantly, a vast accumulation of firm-specific knowledge developed over a multi-year career. Whether it is deep knowledge of an organization's personnel or the processes specific to a particular operation, this skill set is learned carefully over a long tenure with a company and not easily capable of quick replication at other firms. In fact, when "superstar" executives change companies, the result is usually disappointing.

If this is true, then the CEO labor market is less competitive than CEO compensation committees implicitly assume. Executives are in fact to a great extent captive to their companies, which ought to provide boards with scope for negotiating actively on compensation rather than relying on peer comparisons. The best bargain in corporate America, then, is not Al Dunlap's superstar CEO, but rather the home-grown executive, with whom fair and modest pay is negotiated, often less than suggested by peer comparisons.

Continued in article

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

"Facebook Accounting Policies Look Ultra-Conservative," by Emily Chasan, The Wall Street Journal, February 1, 2012 ---
http://blogs.wsj.com/cfo/2012/02/01/facebook-accounting-policies-look-ultra-conservative/?mod=wsjpro_hps_cforeport

Facebook appears to be staying conservative in its accounting choices, after several other Internet IPOs sparked questions over how they presented their financial reports this year.

While Groupon came under fire for its use of non-GAAP measures and Zynga’s “average daily bookings” figures raised some eyebrows, Facebook is avoiding deviations from standard accounting principles.

In Facebook’s nearly 200-page S-1 filing, “non-GAAP” is mentioned only once, when the company discusses how it monitors free cash flow . . .

Continued in article

Jensen
Since Facebook's CEO has a one-dollar annual salary and no bonus plan, it is unlikely that he will be cooking the books to pad his bonus like many other CEOs dreaming up creative accounting to pad their bonuses (the worst case in history being Franklin Raines when he was CEO of Fannie Mae --- for which he and Fannie's audit firm, KPMG, were both fired) ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

Of course this does not mean that in the future that Facebook, like virtually all companies, will not face temptations now and then to chose less-conservative accounting alternatives. It appears at this moment in time that investors are so hell-bent on getting in on the Facebook IPO that conservative accounting choices probably did not really matter like they might've mattered in the Groupon IPO if Groupon had not been caught cooking the books.

"FACEBOOK GETS AN “A” IN FINANCIAL REPORTING," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, February 6, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/519

From Ernst & Young on February 4, 2012

2011 year-end issues audit committees should consider

Audit committees continue to face change, economic volatility and regulatory uncertainty as they head into the year-end reporting season. Our publication, 2011 year-end issues audit committees should consider, discusses the key challenges facing audit committees and lays out 20 questions audit committees should consider as they prepare for their upcoming discussions. Our publication also provides additional insights and references to other Ernst & Young publications.

See (free registration required) http://www.ey.com/UL/en/AccountingLink/Current-topics-More-topics

February 4, 2012 message from Dan Stone

You've got to admire a guy that knows what he wants, picks up accounting skills, and thinks big..... I hope someone will start case study research on "jailhouse CPAs."

Dan Stone

-------------------------------------------------

source:
http://www.syracuse.com/news/index.ssf/2012/01/how_jailhouse_cpa_ronald_willi.html

As he sat in a state prison in 2006, Ronald Williams claimed he made $500,000. The IRS didn’t question it.

The IRS sent Williams a refund check for $327,456 to his address: Camp Gabriels Correctional Facility in northern New York.

But when prison staff opened his mail April 10, 2007, imagine the surprise: Prisoners don’t get six-figure tax refund checks.

Corrections staff sent the check back to the IRS, gave Williams a copy and put him on notice: no more fake tax forms.

But baited by the hundreds of thousands of dollars he almost received, Williams tried 11 more times, using income amounts that went up and up — the highest was $293 million, according to Assistant U.S. Attorney Tamara Thomson.

While the prisons are full of jailhouse lawyers, Williams was instead a jailhouse CPA: He helped at least one other inmate prepare similar returns in exchange for stamps and canned food — prison currency.

Williams, 48, of Buffalo, was convicted Thursday in U.S. District Court in Syracuse of 11 counts of filing false tax returns and one count of helping another prisoner do it.

..... <continued at source>

From Paul Caron's Tax Prof Blog on February 20, 2012 ---
http://taxprof.typepad.com/

I am thrilled that our Law Professor Blogs Network has been named one of The 10 Best Websites for Law Students by The National Jurist:

For law students who know what legal field they are interesyted in Law Professor Blogs is a great resource. Broken down by specialty, the blogs on the site are created by law professors, for law professors. The blogs contain links to recent news in their fields, as well as abstracts of newly published papers.

The other sites in the Top 10 are:

ABA Journal

Above the Law

The Careerist

Jurisprudence on Slate.com

Legal Blog Watch

Lowering the Bar

SCOTUSblog

The Prime Time Crime Review

Wall Street Journal Law Blog

Bob Jensen's threads on accountancy and tax news sites are at
http://www.trinity.edu/rjensen/AccountingNews.htm

"Just How Efficient Is The Market?" Seeking Alpha, February 3, 2012 ---
http://seekingalpha.com/article/339761-just-how-efficient-is-the-market

For much of the last 25 years, most of the investment management world has promoted the idea that individual investors can't beat the market. To beat the market, stock pickers of course have to discover mispricings in stocks, but the Nobel-acclaimed Efficient Market Hypothesis (EMH) claims that the market is a ruthless mechanism acting instantly to arbitrage away any such opportunities, claiming that the current price of a stock is always the most accurate estimate of its value (known as "informational efficiency"). If this is true, what hope can there be for motivated stock pickers, no matter how much they sweat and toil, vs. low-cost index funds that simply mechanically track the market? As it turns out, there's plenty!

The (absurd) rise of the Efficient Market Hypothesis

First proposed in University of Chicago professor Eugene Fama’s 1970 paper Efficient Capital Markets: A Review of Theory and Empirical Work, EMH has evolved into a concept that a stock price reflects all available information in the market, making it impossible to have an edge. There are no undervalued stocks, it is argued, because there are smart security analysts who utilize all available information to ensure unfailingly appropriate prices. Investors who seem to beat the market year after year are just lucky.

However, despite still being widely taught in business schools, it is increasingly clear that the efficient market hypothesis is "one of the most remarkable errors in the history of economic thought" (Shiller). As Warren Buffett famously quipped, "I'd be a bum on the street with a tin cup if the market was always efficient."

Similarly, ex-Fidelity fund manager and investment legend Peter Lynch said in a 1995 interview with Fortune magazine: “Efficient markets? That’s a bunch of junk, crazy stuff.”

So what's so bogus about EMH?

Firstly, EMH is based on a set of absurd assumptions about the behaviour of market participants that goes something like this:

Investors can trade stocks freely in any size, with no transaction costs;

Everyone has access to the same information;

Investors always behave rationally;

All investors share the same goals and the same understanding of intrinsic value.

All of these assumptions are clearly nonsensical the more you think about them but, in particular, studies in behavioural finance initiated by Kahneman, Tversky and Thaler has shown that the premise of shared investor rationality is a seriously flawed and misleading one.

Secondly, EMH makes predictions that do not accord with the reality. Both the Tech Bubble and the Credit Bubble/Crunch show that that the market is subject to fads, whims and periods of irrational exuberance (and despair) which can not be explained away as rational. Furthermore, contrary to the predictions of EMH, there have been plenty of individuals who have managed to outperform the market consistently over the decades.

Continued in article

"Just How Efficient Is The Market?" Seeking Alpha, February 3, 2012 ---
http://seekingalpha.com/article/339761-just-how-efficient-is-the-market

"Fama Says Too-Big-to-Fail `Distorting' Financial System (of efficient markets)" Bloomberg Video ---
http://www.bloomberg.com/video/64476076/

Question for Fama and French ---
http://www.dimensional.com/famafrench/2009/03/qa-confidence-in-the-bell-curve.html#more
It would be very enlightening if you would comment on the Nassim Nicholas Taleb ("The Black Swan") attack on the use of Gaussian (normal bell curve) mathematics as the foundation of finance. As you may know, Taleb is a fan of Mandelbrot, whose mathematics account for fat tails. He argues that the bell curve doesn't reflect reality. He is also quite critical of academics who teach modern portfolio theory because it is based on the assumption that returns are normally distributed. Doesn't all this imply that academics should start doing reality-based research?

Answer from Gene Fama (Chicago)
EFF: Half of my 1964 Ph.D. thesis is tests of market efficiency, and the other half is a detailed examination of the distribution of stock returns. Mandelbrot is right. The distribution is fat-tailed relative to the normal distribution. In other words, extreme returns occur much more often than would be expected if returns were normal.

There was lots of interest in this issue for about ten years. Then academics lost interest. The reason is that most of what we do in terms of portfolio theory and models of risk and expected return works for Mandelbrot's stable distribution class, as well as for the normal distribution (which is in fact a member of the stable class). For passive investors, none of this matters, beyond being aware that outlier returns are more common than would be expected if return distributions were normal.

For other applications, however, the difference can be critical. Risk management by financial institutions is a good example. For example, portfolio insurance, which was the rage in the early 1980s, bombed in the crash of October 1987, because this was an event that was inconceivable in their normality based return model. The normality assumption is also likely to be a serious problem in various kinds of derivatives, where lots of the price is due to the probability of extreme events. For example, news story accounts suggest that AIG blew up because its risk model for credit default swaps did not properly account for outlier events.

Answer from Kenneth French (Dartmouth)
KRF: I agree with Gene, but want to make another point that he is appropriately reluctant to make. Taleb is generally correct about the importance of outliers, but he gets carried away in his criticism of academic research. There are lots of academics who are well aware of this issue and consider it seriously when doing empirical research. Those of us who used Gene's textbook in our first finance course have been concerned with this fat-tail problem our whole careers. Most of the empirical studies in finance use simple and robust techniques that do not make precise distributional assumptions, and Gene can take much of the credit for this as well, whether through his feedback in seminars, suggestions on written work, comments in referee reports, or the advice he has given his many Ph.D. students over the years.

The possibility of extreme outcomes is certainly important for things like risk management, option pricing, and many complicated "arbitrage" strategies. Investors should also recognize the potential effect of outliers when assessing the distribution of future returns on their portfolios. None of this implies, however, that the existence of outliers undermines modern portfolio theory or asset pricing theory. And the central implications of modern portfolio theory and asset pricing—the benefits of diversification and the trade-off between risk and return—remain valid under any reasonable distribution of returns.

Who is Nassim Nicholas Taleb? --- http://en.wikipedia.org/wiki/Taleb
Many finance professors make students watch some of Taleb's videos, especially the Black Swan --- Click Here
http://video.google.com/videosearch?q=taleb+black+swan+&www_google_domain=www.google.com&emb=0&aq=f&aq=f#
Black Swan Financial Collapse Black Swan --- http://www.dailymotion.com/video/x720r3_black-swan-paradigm-financial-colla_tech
(People underestimate the probability of rare events)

"How Dragon Kings Could Trump Black Swans Power laws have a hidden structure that reveals why extreme events are more common than we'd thought," MIT's Technology Review, August 4, 2009 ---
http://www.technologyreview.com/blog/arxiv/

Sornette gives as an example the distribution of city sizes in France which follows a classic power law, meaning that there are many small cities and only a few large ones. On a log-log scale, this distribution gives a straight line. Except for Paris, which is an outlier, many times larger than it ought to be if it were to follow the power law.

Paris is an outlier because it has been hugely influential in the history of France and so has benefited from various positive feedback mechanisms that have ensured its outsize growth. Apparently London occupies a similarly outlying position in the distribution of cities in the UK.

Sornette goes on to identify a number of data sets showing power laws with outliers that he says are the result of positive feedback mechanisms that make them much larger than their peers. He calls these events dragon kings. What's interesting about them is that they are entirely unaccounted for by a current understanding of power laws, from which Nassim Nicholas Taleb built the idea of black swans.

The special characteristic of dragon kings is that a positive feedback mechanism creates faster-than-exponential growth making them larger than expected.

So what to make of this? Sornette makes one interesting observation. The seemingly ubiquitous existence of these dragon kings in all kinds of data sets means that extreme events are significantly more likely than power laws alone suggest.

That's important. If you've ever wondered why we've experienced not just a single 100-year financial crises in the last couple of decades but two or three, here's your answer. It also implies that you'll experience a few more before your time is up.

But Sornette goes further. He argues that dragon kings may have properties that make them not only identifiable in real time but also predictable. He puts it like this: "These processes provide clues that allow us to diagnose the maturation of a system towards a crisis."

That's much more speculative. It's one thing to identify the feedback mechanisms that cause faster-than-exponential growth (and it's not clear that Sornette can do even this) but quite another to spot the event that trigger a crash.

Sornette looks to be onto something interesting with his notion of dragon kings: outliers that exist beyond the usual realm of power laws. That could be a hugely infuential. But his contention that these outliers are in some way more easily predictable than other events smacks more of wishful thinking than good science.

Ref: arxiv.org/abs/0907.4290: Dragon-Kings, Black Swans and the Prediction of Crises

Modern Portfolio Theory --- http://en.wikipedia.org/wiki/Portfolio_theory

Capital Asset Pricing Model (CAPM) --- http://en.wikipedia.org/wiki/CAPM

This is a Must Read
Dartmouth Professor Ken French comes in for the rescue of CAPM!
"How to use the Fama French Model," Empirical Finance Blog, August 1, 2011 ---
http://blog.empiricalfinancellc.com/2011/08/how-to-use-the-fama-french-model/

The CAPM is prolific, but doesn’t appear to work!

For example, in the figures below I’ve plotted the Fama-French 25 (portfolios ranked on size and book-to-market) against beta.

In the first figure, I plot the average excess return to the FF 25 against the average excess return one would expect, given beta.

If you’d like to see how I calculated the charts above, please reference the excel file here.

Given such a poor track record, is anyone still using the CAPM?

Lot’s of people, apparently…

Welch (2008) finds that ~75% of professors recommend the use of the model when estimating the cost of capital, and Graham and Harvey (2001) find that ~74% of CFOs use the CAPM in their work.

A few quotes from Graham and Harvey 2001 sum up common sentiment regarding the CAPM:

“While the CAPM is popular, we show later that it is not clear that the model is applied properly in practice. Of course, even if it is applied properly, it is not clear that the CAPM is a very good model [see Fama and French (1992)].

“…practitioners might not apply the CAPM or NPV rule correctly. It is also interesting that CFOs pay very little attentionto risk factors based on momentum and book-to-market-value.”

Of course, there are lots of arguments to consider before throwing out the CAPM. Here are a few:

Everyone learns about it and knows how to use it (although, Graham and Harvey suggest that many practitioners don’t even apply the CAPM theory correctly)

Data is easy to obtain on betas.

Roll’s critique–maybe the CAPM isn’t a junk theory, rather, the empirical tests showing the CAPM doesn’t work are bogus.

Regardless, being that this blog is dedicated to empirical data and evidence, and not about ‘mentally masturbating about theoretical finance models,’ we’ll operate under the assumption that the CAPM is dead until new data comes available.

The Fama French Alternative?

Given the CAPM doesn’t work that well in practice, perhaps we should look into the Fama French model (which isn’t perfect or cutting edge, but a solid workhorse nonetheless). And while the FF model inputs are highly controversial, one thing is clear: the FF 3-factor model does a great job explaining the variability of returns. For example, according to Fama French 1993, the 3-factor model explains over 90% of the variability in returns, whereas the CAPM can only explain ~70%!

The 3-factor model is great, but how the heck does one estimate the FF factors?

Dartmouth Professor Ken French comes in for the rescue!

Continued in article

Ken French's Link
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

"The Impact of Asymmetry on Expected Stock Returns: An Investigation of Alternative Risk Measures," by Stephen P. Huffman and Cliff Moll, SSRM, September 7, 2011 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1924048

February 8, 2012 reply from Paul Williams

Bob, It is astonishing that we are still having this debate. What always goes unremarked in these debates is the underlying political motivation for the development of EMH. It is not a coincidence that devotees of a free market ideology were the inventors of both EMH (randomness connotes irrationality so let's make randomness rational) and principal-agent theory (Berle and Means raised the prospect of managerial power, so let's construct a fable that concludes that concentrated economic power is still efficient). The mathematician David Orrell, in his book The Future of Everything, uses EMH as an example of misguided belief in modeling/prediction. As he notes: "In its insistence on rationality, the EMH is therefore a strange inversion of reality. Its primary aim, it appears, is not to predict the future, but to make it look like we all know what we're doing. This is dangerous for two reasons (p. 264)." The first reason Orrell cites is the one familiar from the work of Taleb, much discussed on this network. Less discussed, but perhaps more important is the second: "

The second danger comes from the insidious idea that "the market is always right," that it is some kind of hyper-rational being that can outwit any speculator or government regulator. This view of the economy, enshrined in EMH, turns the market into a deity who is watched over, granted legitimacy, and explained to the rest of us by the economic priesthood (ibid)." This priesthood includes most of accounting scholarship (the "rigorous research" (accountics) crowd) at least in the U.S. This theology has had disastrous consequences -- Alan Greenspan, a true believer, expressed some remorse over how wrong he was about the god he worshipped. Markets, particularly financial ones, left to their own devices, do not self-regulate, are not omnicient, and should never be left without public control (Adam Smith was quite adamant about this particularly with respect to "projectors" (18th jargon for "speculators"). The lack of innovation in accounting scholarship that AAA president Greg Waymire has made his presidential theme (Seeds of Innovation) is largely attributable to the EMH dogma that has held the AMerican academy in its thrall for over 40 years. Dogmas don't innovate; indeed innovation is characterized by the destruction of dogmas. "Ah, but faith tis pleasant 'til tis past; the trouble is, twill not last."

Paul

Bob Jensen's threads on the EMH are at http://www.trinity.edu/rjensen/theory01.htm#EMH

Reconsidering California Transport Policies: Reducing Greenhouse Gas Emissions in an Uncertain Future ---
http://www.rand.org/pubs/rgs_dissertations/RGSD292.htm

Jensen Comment
An explosive externality (nonconvexity in mathematical economics) is centers on greenhouse gas emissions and the setting of laws and regulations on such emissions. If we get beyond the outlier sensationalism of the "emissions are destroying the planet" versus "humans need jobs" extremes, there is a laboratory of sorts to study the emissions problems in our troubled state of California that has some of the worst air pollution problems in the United States and some of the worst economic problems (job losses, traffic congestion, refinery shortages, budget deficits, high taxes, labor strife, etc.) in the United States.

This is also one of the most troubling research problems in accountancy where the problems of measuring the costs of externalities are known but the research answers range from "we can't measure these costs" to "superficial research" recommendations that should be published as sick humor rather than academic research. Some of the less-than-stellar accounting research in this area, including my own not-so-great research publications, are cited at
http://maaw.info/SocialAccountingMain.htm

Accounting issues brought up in the above Rand Corporation study could be pursued to great depths by researchers who have both accounting and engineering backgrounds. Several examples are shown below:

Page 14
The second reason for the large discrepancy in estimated impact is an accounting problem. To the extent that liquid fuel providers are able to comply with the LCFS, they must do so by purchasing credits from non-liquid fuel providers (like utilities that provide electricity) and blending low carbon ethanol. Any electricity consumed for transportation in the CALD-GEM model is automatically credited to the fuels industry (and treated as a transfer between the purchasers of liquid motor fuels and electricity, bearing no net cost). So the only compliance strategy available within the model (and arguably, in reality as well), is to blend lower carbon ethanol. The accounting problem arises from the fact that the state’s GHG inventory and emissions targets are based on x combustion, rather than the life-cycle perspective used in the LCFS. Practically, this means that a substitute fuel must produce fewer greenhouse gas emissions during the combustion stage than the one it displaces in order to affect GHG reductions for the inventory targets. While the LCFS does indeed force fuel providers to blend lower carbon ethanol (either from Brazilian sugarcane or cellulosic ethanol made from one of many different feedstocks and conversion processes), this ethanol is chemically no different from the corn ethanol that is prominent now. Ethanol produces fewer greenhouse gas emissions through combustion than California’s blended gasoline, but the low-carbon intensity ethanol is no better than corn in this respect. Emissions reductions do occur over the life-cycle of the fuel, reducing the total GHG emissions for which California can be said to be responsible, but these “upstream” reductions accrue in other states — during the cultivation of ethanol feedstocks and across the transportation and distribution phases of the fuel, rather than during combustion. These emissions reductions do not contribute to the targets. Only by increasing the overall quantity of ethanol consumed — for example, by subsidizing the consumption of E85 — and displacing gasoline, can the LCFS affect reductions in GHG emissions. Unfortunately, the ARB’s estimated emissions savings from the program simply represents a 10% reduction in the CO2 emissions from the combustion of motor fuels based on the goal of the standards to reduce emissions by 10% (California Air Resources Board, 2009e). However, one cannot expect fuel providers to reduce the emissions from motor fuel combustion when the standard allows them to achieve credits by reducing the CO2 emissions in other stages of the fuels’ life-cycle, even though they occur beyond California’s boarders. The accounting discrepancy is not a large problem for electricity, which incurs most of its life-cycle carbon emissions when it is generated, but represents a considerable challenge for compliance strategies that rely heavily on ethanol blending.

Page 15
This is a shortcoming of California’s current strategy, and represents an important disconnect between the accounting methodology used to calculate the state’s Greenhouse Gas Inventory and the methodology used to estimate savings from the LCFS. Updating the LCFS standards for carbon intensity so that they are based on the baseline GHG emissions from combustion, rather than the full life-cycle, could induce the desired GHG savings from combustion, but would change the nature of the standards. Alternatively, since emissions reductions would occur in other states as a result ...

Page 90
The ARB estimates the carbon intensity of Midwestern corn ethanol to be 98gCO2/MJ, compared to the most current EPA estimate of 75gCO2/MJ. If the ARB revises its estimates downward, making conventional corn ethanol significantly less carbon intensive, the program costs associated with the LCFS could drop dramatically. However, the carbon intensity of Brazilian sugarcane is even more adversely impacted by the current land-use impact estimate than Midwestern corn ethanol and would benefit even more if the EPA’s carbon intensity values are used. If the carbon intensity estimates are revised for all fuels in the program (including California reformulated gasoline (E10), the baseline fuel on which the carbon intensity targets are based) based on EPA’s methodology, Brazilian sugarcane would be an even more attractive alternative to corn ethanol. However, such accounting changes will also, predictably, lead to lower consumption of lignocellulosic ethanol until it is fully cost-competitive with existing corn-based products. Program changes that make readily-available Brazilian ethanol more attractive could reduce program costs and provide reassurance to fuel providers worries about the rate of progress in the advanced ethanol market.

Page 98
One important distinction to note in a carbon specific policy, whether tax or permit based, is that carbon can be assessed either at the point where fuel is burned or through the entire life-cycle of the fuel. Using a life-cycle perspective requires additional accounting on the part of regulators, and increases the burden of monitoring transportation fuel providers to ensure that the fuels brought to market use approved pathways (for production, distribution, etc). These estimates of carbon intensity for fuel pathways are likely to be contentious, as providers petition for lower regulatory estimates of carbon intensity for their fuel products.

Page 142
The remaining facets of the policy are modeled faithfully. The LCFS regulations allow for some flexibility in credit accounting from one year to the next. In particular, fuel providers (industry, in this case) may carry credits over from one year to the next.

Page 184
Transportation fuels are likely to enter the state’s cap-and-trade program in some capacity by 2016, but the precise accounting methodology by which the passenger transportation sector complies with a carbon cap has yet to be defined. As a simplification, all of the potential VMT levers are modeled as fuel tax increases — above the current California fuel excise tax of $0.355/gallon and federal fuel excise tax of $0.184/gallon. These policies are implemented in 2016 and are fixed at the same level until the end of the simulation in 2020.

Page 198
The methodology used to estimate statewide carbon emissions is still evolving and being integrated into the regulatory definitions of the state’s cap-and-trade program, which will also be administered by the Air Resources Board. This creates ambiguity about the carbon accounting methodology for transportation fuels, which are scheduled to enter the cap-and-trade program in 2015.

Page 216
The second reason for the large discrepancy in estimated impact is an accounting problem. To the extent that liquid fuel providers are able to comply with the LCFS, they must do so by purchasing credits from non-liquid fuel providers (like utilities that provide electricity) and blending low carbon ethanol. Any electricity consumed for transportation in the CALD-GEM model is automatically credited to the fuels industry (and treated as a transfer between the purchasers of liquid motor fuels and electricity, bearing no net cost).

Page 281
Definitions and accounting practices are important considerations

February 26, 2012 message from Dennis Beresford

Bob,

Warren Buffett's annual letter to shareholders, available at the Berkshire Hathaway website, is, as always, a must read. Of particular interest is his comment on page 15 about a very nonsensical aspect of GAAP for business combinations.

Denny

After which Bob Jensen added the following tidbit

Abpve is a message from Denny about the Uselessness of GAAP for Business Combinations

I don't think anybody considers GAAP the most useful input to management when making decisions regarding mergers and acquisitions since GAAP mainly deals with booked items and management focuses very heavily on the values and risks of unbooked items like human resources, contingencies, and interaction (covariance) values of booked and unbooked items.

But GAAP could conceivably be of more interest to investors when evaluating the stewardship of management with respect to mergers and acquisitions.

Added Note:
I've always enjoyed the folksy writing style in these shareholder letters. If you peruse through all of them you will get a greater sense of the value added by corporate executives on investments.

BERKSHIRE HATHAWAY INC.SHAREHOLDER LETTERS ---
http://www.berkshirehathaway.com/letters/letters.html

Shareholder Letter for 2011 ---
http://www.berkshirehathaway.com/letters/2011ltr.pdf

. . .

Partially offsetting this overstated liability is $15.5 billion of “goodwill” attributable to our insurance companies that is included in book value as an asset. In effect, this goodwill represents the price we paid for the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true value. If an insurance business produces large and sustained underwriting losses, any goodwill asset attributable to it should be deemed valueless, whatever its original cost. Fortunately, that’s not the case at Berkshire. Charlie and I believe the true economic value of our insurance goodwill – what we would pay to purchase float of similar quality – to be far in excess of its historic carrying value. The value of our float is one reason

. . .

Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their operational accomplishments were truly extraordinary.

But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock. Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%.

Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.

Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period? I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years.

Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $11⁄2 billion more than if the “high-price” repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.

In the end, the success of our IBM investment will be determined primarily by its future earnings. But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.

. . .

Certain shareholders have told me they hunger for more discussions of accounting arcana. So here’s a bit of GAAP-mandated nonsense I hope both of them enjoy.

Common sense would tell you that our varied subsidiaries should be carried on our books at their cost plus the earnings they have retained since our purchase (unless their economic value has materially decreased, in which case an appropriate write-down must be taken). And that’s essentially the reality at Berkshire – except for the weird situation at Marmon.

We purchased 64% of the company in 2008 and put this interest on our books at our cost, $4.8 billion. So far, so good. Then, in early 2011, pursuant to our original contract with the Pritzker family, we purchased an additional 16%, paying $1.5 billion as called for by a formula that reflected Marmon’s increased value. In this instance, however, we were required to immediately write off $614 million of the purchase price retroactive to the end of 2010. (Don’t ask!) Obviously, this write-off had no connection to economic reality. The excess of Marmon’s intrinsic value over its carrying value is widened by this meaningless write-down.

. . .

There is little new to report on our derivatives positions, which we have described in detail in past reports.

(Annual reports since 1977 are available at www.berkshirehathaway.com.) One important industry change,however, must be noted: Though our existing contracts have very minor collateral requirements, the rules have changed for new positions. Consequently, we will not be initiating any major derivatives positions. We shun contracts of any type that could require the instant posting of collateral. The possibility of some sudden and huge posting requirement – arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack – is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength.

Our insurance-like derivatives contracts, whereby we pay if various issues included in high-yield bond indices default, are coming to a close. The contracts that most exposed us to losses have already expired, and the remainder will terminate soon. In 2011, we paid out $86 million on two losses, bringing our total payments to $2.6 billion. We are almost certain to realize a final “underwriting profit” on this portfolio because the premiums we received were $3.4 billion, and our future losses are apt to be minor. In addition, we will have averaged about $2 billion of float over the five-year life of these contracts. This successful result during a time of great credit stress underscores the importance of obtaining a premium that is commensurate with the risk.

Charlie and I continue to believe that our equity-put positions will produce a significant profit, considering both the $4.2 billion of float we will have held for more than fifteen years and the $222 million profit we’ve already realized on contracts that we repurchased. At yearend, Berkshire’s book value reflected a liability of $8.5 billion for the remaining contracts; if they had all come due at that time our payment would have been $6.2 billion.

Tom Selling has some posts of possible interest on business combinations:

Business Combinations
http://accountingonion.typepad.com/theaccountingonion/business-combinations/

Goodwill ---
http://accountingonion.typepad.com/theaccountingonion/goodwill/

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

"The Perils of High CFO Incentive Pay: Negatives like future lawsuits are greater for high CFO bonuses even than for high CEO incentives, a Harvard Business School study says," by Ed Zwirn, CFO World, January 30, 2012 ---
http://www.cfoworld.com/compensation/30379/perils-high-cfo-incentive-pay

Performance-based pay, of course, is an important instrument for aligning the interests of managers with the interests of shareholders. But an abundance of recent evidence suggests that these high-powered incentives also provide managers with incentives to cook the books.

And while previous literature on the relationship between incentive pay and earnings manipulation has focused largely on CEOs, a yet-to-be-published paper by Harvard Business School’s Felix Oberholzer-Gee and Julie Wulf takes this focus to the level of CFOs and division managers as well. And it finds that high chief financial officer pay levels may deserve special scrutiny by companies.

“Companies report significantly higher discretionary accruals, excess sales and have a higher incidence of future lawsuits when CFOs are paid larger bonuses,” write Oberholzer-Gee and Wulf. “The magnitudes of these effects are much larger for CFOs in comparison to both CEOs and division managers.”

Higher bonuses lead CFOs to increase accruals upward and to shift revenues toward the fourth quarter, they find, with a one-standard deviation in CFO bonuses increasing excess Q4 sales by 71.5% of their mean value. The comparable figure for CEO bonuses is 45.9% and that for division managers is an “insignificant” 37%.

A similar calculation of the CFO stock option effect finds that excess sales rise by 66.6% of their mean value, while the comparable CEO effect is 45.8%.

Companies whose CFOs receive a large number of options were also found to report higher discretionary accruals and experience a greater likelihood of future lawsuits.

Also supported by their research, the authors add, are changes “in the SEC requirements regarding disclosure of CFO compensation” motivated “by concerns about increases in equity incentives and the effect this might have on the quality of financial statements.”

Continued in article

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

A USB Port of Sorts for the mobile phones, iPads, Kindle Fires, and other tablet computers
"For iPad And Mobile Devices, a 'Port' out of the Norm," by Water S. Mossberg, The Wall Street Journal, February 9, 2012 ---
http://online.wsj.com/article/SB10001424052970204136404577211141651710950.html

The pocket-size USB flash drive has become nearly ubiquitous in the PC world, for moving files among machines and for adding extra storage. But it can't be used with most tablets because they lack standard USB ports.

Now, there's a special, modified, pocket flash drive that works as usual with PCs and Macs, but can transfer and stream files to popular mobile devices without standard USB ports, such as Apple's iPad and iPhone, Amazon's Kindle Fire and many other Android devices. Its secret: It has built-in Wi-Fi to beam the files to and from tablets and smartphones wirelessly. It can even stream files like videos to many devices simultaneously.

It's called the AirStash and is made by a tiny company called Wearable Inc., and distributed by Maxell Corp. It's available at Amazon.com and a few other retailers for $150 for an 8 gigabyte model, which can increase the storage capacity of a base iPad by 50%. An AirStash model with 16 gigabytes is $180.

The AirStash is a clever device that solves a genuine problem, though not without some issues. In my tests, it worked as advertised, without crashing or exhibiting bugs. But it's pricey and has one big drawback: When a device is connected to the AirStash via Wi-Fi, it can't be connected to the Internet. The company plans a fix for that as early as next month.

The AirStash looks like other USB flash drives, except a bit wider. Its storage is provided by a removable SD memory card that pops into the bottom edge. You can substitute your own larger card. In fact, you can swap in the memory card from your camera and beam your photos. [PTECH] Wearable Inc.

The AirStash drive with removable SD memory card

This product is aimed at the iPad and iPhone, and the company has a free app for those products that makes it easy to manage and view the files on the drive. But its wireless file transfers also work, via the Web browser, on non-Apple devices, even computers. And the company plans an Android version of the app.

A typical way to use the AirStash would be to first plug it into your computer like any flash drive and copy onto it photos, documents, videos, podcasts or songs. Then remove it from the computer and press a small button on the front of the AirStash that turns on its Wi-Fi network. Next, you connect your iPad to this network, launch the AirStash app and all the files on the drive show up.

Enlarge Image PTECH-JUMP PTECH-JUMP Wearable Inc.

The AirStash app allows an iPad to wirelessly import photos from the drive.

Enlarge Image PTECH-JUMP PTECH-JUMP Wearable Inc.

The AirStash app allows an iPad to create a new directory on the drive, below.

From the app, you can view documents, play songs, watch videos, view photos or listen to podcasts. On a non-Apple device, there's no special app, but you can still access the content on the drive. You just link up to the AirStash Wi-Fi network, launch your Web browser and go to airstash.net. A page appears with a list of the drive's contents.

AirStash performed some feats I found impressive. In one test, I was able, from about 75 feet away, to flawlessly watch three movies stored on the AirStash at the same time on three devices. I had "Inception" playing on an iPad; "The King's Speech" playing on a Kindle Fire; and "Star Trek" playing on a Dell laptop. I stress, none of these movies was stored on the devices—all were stored on the AirStash.

In another test, I was able to watch a movie on an iPad, play a song on an Android-based Motorola Droid and read a PDF file on a Mac, simultaneously. Once again, all these files were stored on an AirStash drive 75 feet away.

The AirStash can beam material to as many as eight devices at once, except for video, where the limit is three devices. It can beam the same video to three devices at the same time. A parent could use one AirStash to provide different videos to each of three kids during a drive in the car.

Wearable, the maker of the AirStash, boasts it works in both directions: You can also write files to the AirStash from a device like an iPad. Technically, this is true. For instance, from the AirStash app, you can export photos stored on an iPad or iPhone to the drive.

But several iPad apps for viewing or editing documents, which the company says work with AirStash, require a geeky setup process, and I couldn't get them to send edited documents back to the drive.

There are some other limitations. For instance, on non-Apple devices, the Web interface is rudimentary, and on the Kindle Fire, music can't be streamed from the AirStash.

Continued in article

Video Tutorial
"Windows on an Ipad," MIT's Technology Review, January 30, 2012 ---
http://www.technologyreview.com/video/?vid=796&nlid=nldly&nld=2012-01-31

"Working In Word, Excel, PowerPoint on an iPad," by Walter S. Mossberg, The Wall Street Journal, January 12, 2012 ---
http://online.wsj.com/article/SB10001424052970203436904577154840906816210.html?mod=WSJ_Tech_RightMostPopular

Although Apple's popular iPad tablet has been able to replace laptops for many tasks, it isn't a big hit with folks who'd like to use it to create or edit long Microsoft Office documents.

While Microsoft has released a number of apps for the iPad, it hasn't yet released an iPad version of Office. There are a number of valuable apps that can create or edit Office documents, such as Quickoffice Pro, Documents To Go and the iPad version of Apple's own iWork suite. But their fidelity with Office documents created on a Windows PC or a Mac isn't perfect.

This week, Onlive Inc., in Palo Alto, Calif., is releasing an app that brings the full, genuine Windows versions of the key Office productivity apps—Word, Excel and PowerPoint—to the iPad. And it's free. These are the real programs. They look and work just like they do on a real Windows PC. They let you create or edit genuine Word documents, Excel spreadsheets and PowerPoint presentations.

I've been testing a pre-release version of this new app, called OnLive Desktop, which the company says will be available in the next few days in Apple's app store. More information is at desktop.onlive.com.

My verdict is that it works, but with some caveats, limitations and rough edges. Some of these downsides are inherent in the product, while others have to do with the mismatch between the iPad's touch interface and the fact that Office for Windows was primarily designed for a physical keyboard and mouse.

Creating or editing long documents on a tablet with a virtual on-screen keyboard is a chore, no matter what Office-type app you choose. So, although it isn't a requirement, I strongly recommend that users of OnLive Desktop employ one of the many add-on wireless keyboards for the iPad.

OnLive Desktop is a cloud-based app. That means it doesn't actually install Office on your iPad. It acts as a gateway to a remote server where Windows 7, and the three Office apps, are actually running. You create an account, sign in, and Windows pops up on your iPad, with icons allowing you to launch Word, Excel or PowerPoint. (There are also a few other, minor Windows programs included, like Notepad, Calculator and Paint.)

In my tests, the Office apps launched and worked smoothly and quickly, without any noticeable lag, despite the fact that they were operating remotely. Although this worked better for me on my fast home Internet connection, it also worked pretty well on a much slower hotel connection.

Like Office itself, the documents you create or modify don't live on the iPad. Instead, they go to a cloud-based repository, a sort of virtual hard disk. When you sign into OnLive Desktop, you see your documents in the standard Windows documents folder, which is actually on the remote server. The company says that this document storage won't be available until a few days after the app becomes available.

To get files into and out of OnLive Desktop, you log into a Web site on your PC or Mac, where you see all the documents you've saved to your cloud repository. You can use this Web site to upload and download files to your OnLive Desktop account. Any changes made will be automatically synced, the company says, though I wasn't able to test that capability in my pre-release version.

Because it's a cloud-based service, OnLive Desktop won't work offline, such as in planes without Wi-Fi. And it can be finicky about network speeds. It requires a wireless network with at least 1 megabit per second of download speed, and works best with at least 1.5 to 2.0 megabits. Many hotels have trouble delivering those speeds, and, in my tests, the app refused to start in a hotel twice, claiming insufficient network speed when the hotel Wi-Fi was overloaded.

The free version of the app has some other limitations. You get just 2 gigabytes of file storage, there's no Web browser or email program like Outlook included, and you can't install additional software. If many users are trying to log onto the OnLive Desktop servers at once, you may have to wait your turn to use Office.

In the coming weeks, the company plans to launch a Pro version, which will cost $10 a month. It will offer 50 GB of cloud document storage, "priority" access to the servers, a Web browser, and the ability to install some added programs. It will also allow you to collaborate on documents with other users, or even to chat with, and present material to, groups of other OnLive Desktop users.

The company also plans to offer OnLive Desktop on Android tablets, PCs and Macs, and iPhones.

In my tests, I was able to create documents on an iPad in each of the three cloud-based Office programs. I was able to download them to a computer, and alter them on both the iPad and computer. I was also able to upload files from the computer for use in OnLive Desktop.

OnLive Desktop can't use the iPad's built-in virtual keyboard, but it can use the virtual keyboard built into Windows 7 and Windows' limited touch features and handwriting recognition. As noted above, I recommend using a wireless physical keyboard. But even these aren't a perfect solution, because the ones that work with the iPad can't send common Windows keyboard commands to OnLive Desktop, so you wind up moving between the keyboard and the touch screen, which can be frustrating. And you can't use a mouse.

Another drawback is that OnLive Desktop is entirely isolated from the rest of the iPad. Unlike Office-compatible apps that install directly on the tablet, this cloud-based service can't, for instance, be used to open Office documents you receive via email on the iPad. And, at least at first, the only way you can get files into and out of OnLive Desktop is through its Web-accessible cloud-storage service. The free version has no email capability, and the app doesn't support common file-transfer services like Dropbox or SugarSync. The company says it hopes to add those.

OnLive Desktop competes not only with the iPad's Office clones, but with iPad apps that let you remotely access and control your own PCs and Macs, and thus use Office and other computer software on those.

Continued in article

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

Auditing Cloud Computing: A Security and Privacy Guide
by Ben Halpert
ISBN: 978-0-470-87474-5
August 2011
I don't see any reviews here at the moment

Graham & Dodd and Modern Financial Analysis
by Joseph Calandro, Jr.
Jacob Wolinsky Book Review
January 19, 2012
Value Walk ---
http://www.valuewalk.com/2012/01/graham-dodd-and-modern-financial-analysis-by-joseph-calandro-jr/#.TybSn8hSRup

I had the privilege to hear Joseph Calandro, Jr speak on value investing at a recent NYSSA event, sponsored by the Value Investing. Committee (the Committee is consulting with Joe and using his ‘Suggestions for Modern Security Analysts’ paper as a blueprint when planning future events). Joe keeps a low profile, but he is the author of a fantastic book on value investing; Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffett’s Valuation Principles to Acquisitions, Catastrophe Pricing and Business Execution.

The presentation focused on Warren Buffett’s acquisition of GEICO, and calculating intrinsic value for the company at the time.

I will not focus much on my notes as they do not do justice to the presentation. However, the presentation outline has been embedded below for readers’ viewing. It is highly recommended that readers see Joe’s guest post here and interview here.Special thanks to Chris Goulakos, Richard Ivey MBA Candidate, and NYSSA Value Investing Committee member for chairing and helping to organize the event.

"Temple U. Project Ditches Textbooks for Homemade Digital Alternatives," by Nick DeSantis, Chronicle of Higher Education, February 7, 2012 --- Click Here
http://chronicle.com/blogs/wiredcampus/temple-project-ditches-textbooks-for-homemade-digital-alternatives/35247?sid=wc&utm_source=wc&utm_medium=en

When students groan about buying traditional textbooks, their grievances follow a familiar refrain: They’re expensive and usually boring. So this fall, a team of Temple University professors heeded those complaints and abandoned the old-fashioned texts for low-cost alternatives that they built from scratch.

The pilot project gave 11 faculty members $1,000 each to create a digital alternative to a traditional textbook. To enliven their students’ reading, the instructors pulled together primary-source documents and material culled from library archives. Steven J. Bell, the associate university librarian for research and instructional services at Temple, said the project tried to create new kinds of learning experiences while saving students money at the same time. The textbooks covered a variety of subjects, including biomechanics, writing, and marketing. The Temple program mirrors a similar effort announced at the University of Massachusetts at Amherst in December.

Kristina M. Baumli, a lecturer in Temple’s English department, said she was motivated to join the project because textbook content doesn’t always meet the intellectual curiosity of students. Her students reacted “with glee” at the online book’s free price tag, she said. She used Blackboard to bring together content for the paperless text, but said that her students weren’t stuck reading in front of a screen every night. The course’s local ethnography project ensured that students could go outside and experience the material firsthand.

“It pushed them from the computer out into the real world,” Ms. Baumli said.

She acknowledged that her online text sometimes allowed students to get distracted by Facebook or other Web sites during class, but added that those same students would probably waste time sending text messages in a class using a traditional textbook anyway. By requiring students to grapple with primary sources and find their own journal articles, she said, she could teach in a way that emphasized process rather than memorization of facts in a book. One of her colleagues in the project even required students to submit assignments to be included in their marketing textbook, which was eventually used as study material for the final exam.

Continued in article

Jensen Comment
One hope from such a project is that it will force commercial textbook publishers to provide better quality materials. For example, one comparative advantage of commercial publishers is is the number of video supplements that accompany their textbooks. But in accountancy, the videos themselves are low quality in most instances. In an effort to compete, perhaps these publishers will upgrade the quality of their multimedia supplements, student guides, end-of-chapter problems and cases, test banks, Excel practice sets, etc.

In some accountancy courses, I think it is asking a lot of faculty to maintain constantly-updated textbook materials. It may be much more efficient to adopt a commercial textbook and then provide supplemental materials on topics that are constantly changing.

The bottom line is that I think better use can be made of faculty time then to pay them peanuts to develop high quality textbook replacements.

Bob Jensen's threads on free textbook alternatives (which may not be updated very often if updated at all) ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
The above page also provides links to faculty who extensively share their own course materials for free.

Free videos and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
The above page also provides links to faculty who extensively share their own course materials for free.

"Top 3 Rules for Good Facebook Manners," by Richie Frieman, Quick and Dirty Tricks, December 2, 2011 ---
http://manners.quickanddirtytips.com/top-3-rules-for-good-facebook-manners.aspx?WT.mc_id=0

I added the above link to the Writing Forum on the AAA Commons ---
http://commons.aaahq.org/posts/c5fdcaace5

Jensen Comment
Another good manners idea is to give credit where credit is due, particularly on heads up messages. However, when you have friends who often send you messages you should understand their wishes. I have friends, often from CPA firms, who send me messages that as a rule they would like me to post but not associate their names with the posts.

And I have friends who send me messages who generally want me to give them credit for their finds. For example, David Albrecht sometimes sends me humor finds that he would like to have me give him credit for finding.

For example, a few days ago David sent me links to the following hilarious videos:

http://www.youtube.com/v/gBnvGS4u3F0?hl=en&fs=1&autoplay=1

http://www.youtube.com/v/mgCIKGIYJ1A?hl=en&fs=1&autoplay=1

http://www.youtube.com/v/LuVPnW0s3Vo?hl=en&fs=1&autoplay=1

Bob Jensen's helpers for writers ---
http://www.trinity.edu/rjensen/Bookbob3.htm#Dictionaries

CMS = LMS = Learning Management System ---
http://en.wikipedia.org/wiki/Learning_management_system

"A 'More Modern' LMS From Blackboard ," Chronicle of Higher Education, February 8, 2012 ---
http://www.insidehighered.com/quicktakes/2012/02/08/more-modern-lms-blackboard

Blackboard today unveiled a “more modern” look for its industry-leading learning management system, Blackboard Learn, which has been criticized in some quarters for being hard to use and unappealing to look at. The new interface is meant to “surface” some of the system’s features — especially its real-time assessment tools — in the hope that instructors will use them more frequently. The new design also puts an emphasis on customization: a “course entry wizard” guides instructors through the process of setting up courses “based on different pedagogical models and content models,” according to Brad Koch, director of product development. Afterward, instructors can manually rearrange items on their course pages and select from a buffet of design themes (“pizzazz,” “coral,” “mosaic,” etc.). Notably, the new interface will be capable of assuming the form of the LMS interfaces for WebCT and Angel Learning, which Blackboard bought years ago — a possible attempt to keep those clients as the company begins to stop supporting the legacy versions of the WebCT and Angel LMS products.

In recent months, competitors have attempted to cast Blackboard as aesthetically retrograde and more concerned with the needs of high-level administrators than those of individual instructors. During a demo of the new interface last week, Ray Henderson, the president of Blackboard Learn, said the company was aware of the knocks against its interface. And while he insisted that back-end integrations with campus information systems were still Blackboard’s trump card against more lightweight entrants to the LMS marketplace, “We think design and user experience [will only get] more important,” Henderson said.

Bob Jensen's threads on the history of CMS/LMS systems ---
http://www.trinity.edu/rjensen/290wp/290wp.htm

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

"ECONOMIC IMPACTS OF CAPITALIZING LEASES: THE ELF STUDY," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, January 30, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/arch ives/491#more-491

The Equipment Leasing & Financing (ELF) Foundation issued a study on leases in December. We assume these elves were hoping Santa would present them a gift of no amendments to lessee accounting. After all, why report economic reality if you don’t have to?

Specifically, ELF issued “Economic Impacts of the Proposed Changes to Lease Accounting Standard” in an attempt to display the dysfunctional consequences of the FASB’s exposure draft on the topic. The foundation empirically studied the impact of this proposal on more than 1,800 publicly traded companies. The results show deteriorations in corporate balance sheets and income statements, so ELF concluded the new lease accounting will be disastrous for the U.S. economy.

Before we lob grenades at the FASB for its lack of support for capitalism, let’s take a closer look at the study and its conclusions. When we do, we find biases and myths that render the report’s conclusions worthless.

Let’s begin with the comment letters. The FASB received about 800 letters on this leasing project; upon reading them, one finds a number of concerns from the letter writers, including ambiguities in the exposure draft, the need for more explanation, the magnitude of implementation costs, and the problem of debt covenants. We dismiss these concerns and the letters in general because corporate managers acting in their self-interest have long orchestrated major campaigns to smear the FASB whenever it attempted to improve financial reporting. The number of letters doesn’t mean a thing; the source says it all.

While there are indeed some items that need conceptual editing, and perhaps even some parts that could use more explanations, these features too often are a smokescreen to force the FASB to compromise its principles to better align with managerial objectives. As to implementation costs, we think the argument silly for the necessary data should already be collected if these firms have good internal control systems, particularly in light of developing fair value disclosure requirements. Any firm that does not currently assimilate these data is admitting poor stewardship.

With respect to debt covenants, we thought that corporate managers and general counsel would have figured out that one should always include in these contracts a provision to hold accounting methods constant. And surely, these highly compensated legal minds are familiar with waivers and modifications of debt covenants, aren’t they? Any firm foolish enough not to immunize itself contractually from accounting changes deserves whatever consequences it faces.

With respect to the empirical analysis by ELF, for the most part, it is well done and corresponds closely with academic research over the last 30 years. In particular, ELF estimates the direct and indirect impacts from the capitalization of leases. As other studies have found, this research reports large increases to reported debt and some decreases to net income because of the front-loading effect in capitalized leases. Analysts (and our accounting students) have known this for decades…there is no news here.

The report also points out that these effects vary by industry and by firm. For example, the impacts are greatest for firms such as CVS and Walgreen and for industries such as banking and airline. The impact is smallest, of course, for those who do not employ leases.

For the U.S. economy, the study estimates the addition of $2 trillion of reported debt, an 11 percent increase, and a decrease in pre-tax income of 2.4 percent. ELF concludes that these effects will have deleterious effects on the economy and thus recommends opposing the FASB’s exposure draft. At this point, however, it confuses reported items on the financial statements with real and fictional constructs. The question the authors should be asking is whether the stuff currently omitted from financial reports is real.

In particular, is the lease obligation that arises in capital leases real? Of course. Does the non-capitalization of leases change this? Of course not! Because the lessee has signed a contract with a lessor that requires it to make certain future payments, the liability is real whether or not the firm records it. That’s why sophisticated financial analysts have been estimating lease obligations for at least two decades. That’s why rating agencies have been estimating lease obligations for several years. If you want to know the truth and the corporation does not disclose the truth, sophisticated investors and their analysts will make their own assessments and include them in their analyses.

Because of these changes in the reported numbers, the ELF study group posits “induced impacts” and claims a variety of dysfunctional consequences such as job losses and increased interest rates. Unfortunately, because the researchers ignored the fact that many financial analysts and investors already estimate the effects of leases and recast the financial statements accordingly, these induced impacts are exaggerated and thus misleading. Stock and debt markets already incorporate such information into their models; therefore, the aggregate effects of capitalizing leases are likely nil.

The authors mention the fact that capitalization will make cash flow from operating activities higher, but they do not emphasize it. We wonder whether this de-emphasis is because they don’t want to report any positive effects from adopting this accounting proposal. Further, if they continue to believe that markets are naïve in their assimilation of financial information, they would have to conclude that higher free cash flows imply higher stock prices.

Continued in article

"A Perspective on the Joint IASB/FASB Exposure Draft on Accounting for Leases," by the American Accounting Association's Financial Accounting Standards Committee (AAA FASC): Yuri Biondi et al., Accounting Horizons, December 2011, pp. 861-877

. . .

CONCLUSION

The committee members are in agreement about the importance of lease accounting for users of financial statements. Overall, we are pleased to see that this exposure draft introduces the “right-of-use” model, rather than the ownership model, which has worked so poorly in practice. Unfortunately, current lease accounting is plagued by loopholes, transaction structuring, and other actions by management to circumvent the intent of the standard. Preventing all transaction structuring is of course a difficult endeavor. The ED makes a good effort at dealing with the current problems of lease accounting, but some big loopholes (concerning especially scope, SPE and intragroup operations, definition of lease term, discounting, and executory contracts for services) remain that need to be closed off. With regard to revaluation, we prefer the current FASB approach (impairment testing), but are opposed to fair value assessments and reassessments that create structuring opportunities.

The ED as currently specified is not ready for use and needs significant modification. In response to comments from this committee and others, the FASB/IASB have held a number of re-deliberation meetings in 2011 and directed staff to re-examine several issues. Key focus has been on the scope and definition of a lease, measurement of contingent rentals, renewal options, revaluations, the discount rate to be used, lack of consistency between the lessor and lessee accounting, and consistency with current revenue recognition and financial statement presentation projects.

As of March 27, 2011 (see IASB 2011), the FASB/IASB have affirmed the scope and definitions used in the lease ED, the need to distinguish a lease from a service contract, the need to separate lease and non-lease components of a contract, and to have two types of leases called finance leases (current IASB terminology) and other than finance leases (like current operating leases in U.S. GAAP). Additional clarification has been issued about the discount rate to be used by the lessor and lessee (the rate charged by the lessor to the lessee) though this is complicated because the lessor's rate may not be known by the lessee. Additional guidance has also been issued to count a renewal option in the lease term “when there is a significant economic incentive for an entity to exercise an option to extend the lease.” The need to align this standard with the revenue recognition, consolidation, and financial statement presentation projects indicate that the board has continued need for re-deliberation, and is struggling to construct a lease standard that will achieve consistent and comparable financial reporting.

Yuri Biondi (principle author), Robert J. Bloomfield, Jonathan C. Glover, Karim Jamal, James A. Ohlson, Stephen H. Penman, Eiko Tsujiyama, and T. Jeffrey Wilks

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

Question About Accounting for Revenues
Who had the audacity to insult IFRS by saying:
It is easy to see that in the case of multiple elements, prescribing a principles-based accounting with guiding implications is an unattainable goal.

Answer
American Accounting Association's Financial Accounting Standards Committee (AAA FASC): James A. Ohlson, Stephen H. Penman, Yuri Biondi, Robert J. Bloomfield, Jonathan C. Glover, Karim Jamal, and Eiko Tsujiyama

"Accounting for Revenues: A Framework for Standard Setting,"
American Accounting Association's Financial Accounting Standards Committee (AAA FASC): James A. Ohlson, Stephen H. Penman, Yuri Biondi, Robert J. Bloomfield, Jonathan C. Glover, Karim Jamal, and Eiko Tsujiyama
Accounting Horizons, September 2011
http://aaajournals.org/doi/full/10.2308/acch-50027

This paper proposes an accounting for revenues as an alternative to the proposals currently being aired by the FASB and IASB. Existing revenue recognition rules are vague, resulting in messy application, so the Boards are seeking a remedy. However, their proposals replace the traditional criteria—revenue is recognized when it is both “realized or realizable” and “earned”—with similarly vague notions that require both the identification of a “performance obligation” and the “satisfaction” of a performance obligation. Our framework aims for the concreteness that yields practical accounting solutions. It has two features. First, revenue is recognized when a customer makes a payment or a firm commitment to pay. Second, revenue recognition and profit recognition are combined, with profit recognition determined on the basis of objective criteria about the resolution of uncertainty under a contract, and then conservatively so. Two alternative approaches are offered: the complete contract method (where profit is recognized only on the termination of a contract) and the profit margin method (where a profit margin is applied to recognized revenues throughout the contract as the contract profit margin becomes clear. The latter requires resolution of uncertainty, so the completed contract method is the default.

. . .

It is easy to see that in the case of multiple elements, prescribing a principles-based accounting with guiding implications is an unattainable goal. Suppose we start out with a very simple setting in which the economics of the contract is fully certain. This certainty does not tell us anything about how one is supposed to allocate the total revenue to a given performance element, let alone how one is supposed to allocate some expense to each and every element. The allocation issues now introduce uncertainty in the income measurement, not an appealing feature when there is no uncertainty in the first instance. Again, of course, one can argue that argument is not fair insofar as it does not deal with realities. That said, the point to be made here is that an allocation on the basis of revenues (constant profit margin in case of certainty) would seem to be of greater appeal than other alternatives.

The next point is now rather obvious. A setting with multiple elements and uncertainties in total contract price and total expense becomes very baffling. No wonder that GAAP has developed standards on the basis of “types” of contracts as found across industries. No other solution is available, as far as we are concerned.

A framework that focuses on the decomposition of contracts into multiple performance elements cannot, in our view, provide a solid foundation for revenue and expense measurement.10 The following prediction can be offered: if FASB and IASB retain the idea of accounting for revenue recognition via multiple elements of performance satisfaction, then whatever framework they come up with will lack in operational implications when it comes down to working out specific standards. In fact, we would argue that it is exceedingly unlikely that such an approach can spell out useful benchmarks of how accounting should be done in simple, baseline settings. Like Concepts Statement 5 on revenue recognition, it will be long on some general characterizations of what constitutes the governing ideas in revenue recognition, but short on operational implications when it comes to the standard setting. Under these circumstances, regulators will go on with their task without ever having to refer to a framework that rules out certain kinds of accounting currently prevalent. No reasonable practical precepts of accounting will be ruled out and, thus, one can expect the occasional roles for the completed contract method and profit margin methods.11 In sum, the idea of a standard setting for revenue recognition without any prior constraints will remain firmly in place.12

We should perhaps stress that our critique of a “performance-based” accounting for revenues and related expenses is not conceptual per se. To the contrary, we would argue that such an approach to the accounting is sound, provided that the performance-element is clearly observable and unambiguous as to what has been performed, what it is worth to the contractor, and what the allocated cost ought to be. In other words, the setting is such that one can, as a practical matter, break the contract into smaller units without introducing hard-to-resolve ambiguities. But this would seem to be the exception rather than the rule, and one might reasonably argue that it is intrinsic to contracts that they rarely can be split into objective “elements.” Customers typically do not do so. Thus, one has to move away from “performance-elements” and substitute the correlative, namely, customer payments, and then address profit recognition as a matter of uncertainty resolution. When everything is said and done, we think any accounting standards dealing with revenue recognition will drift into this perspective in practice.

CONCLUDING REMARKS

It is hard to avoid complex accounting principles to the extent their dependence on transactions has to pick up all sorts of fine print. Conversely, relatively straightforward accounting principles require easy-to-understand events on which the rules are based. One can think of this as reflecting a trade-off between easy-to-understand and simple accounting, as opposed to more sophisticated accounting that may pose considerable difficulties to implement and appreciate. The former means that the accounting depends only on few basic observable inputs, with a corresponding drawback that some economically relevant aspects may be neglected by the accounting. A more sophisticated accounting, by contrast, means that the accounting tries to pick up on a large set of relevant features at the cost of making the accounting much more subjective. Revenue recognition must deal with these issues, of course. It should be fairly apparent that our tilt is toward a straightforward accounting. We contend that a framework works best when it focuses on rules with relatively straightforward inputs. With such a framework in place, standard setters can proceed to address what refinements are advisable as additional subtleties are introduced (such as industry and business models). In sum, we believe it can be quite useful to settle certain recurring revenue recognition issues up front in a concrete, easy-to-understand manner.

In our view, the FASB-IASB Exposure Draft is remiss on this dimension. It simply does not pay enough attention to (1) what should be the basic transactions and events on which the accounting must rest, and (2) how the input maps into recognition and measurement rules. Discussion evolves over time, so there is ample room for a “new-and-improved” FASB-IASB standard that differs substantially from the current document.

Ernst & Young

Technical Line: Revenue recognition proposal - automotive

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently re-exposed their joint revenue recognition proposal, which would converge revenue recognition guidance under US GAAP and IFRS into a single model and replace essentially all revenue recognition guidance, including industry-specific guidance.

This industry-specific publication supplements our Technical Line, Double-exposure: The revised revenue recognition proposal, and highlights some of the more significant implications that the latest revenue recognition proposal may have on the automotive sector. Ernst & Young comments on FASB proposals on consolidation and accounting for investment companies and investment property entities

In our comment letter on the consolidation proposal, we express support for the Board's efforts to more closely align the guidance in US GAAP with IFRS and our belief that the proposed principal-agent guidance would alleviate many concerns investors in the asset management industry had with FASB Statement No. 167. Given that the proposal would substantially reduce the differences between the two consolidation models in US GAAP, we also encourage the Board to consider moving toward a single model.

In our letter on the investment company proposal, we express support for the objective of amending the investment company definition to clarify whether an entity is within the scope of Topic 946. However, we believe more outreach with preparers and users is critical to determine whether the proposed changes are appropriate and respond to user needs. In a related letter, we oppose creating specialized accounting for investment property entities and suggest that existing diversity in practice among real estate entities would be better addressed by refining the definition of and accounting by an investment company. We believe that a single set of criteria for investment entities that measure their investments at fair value with all changes in fair value recognized in net income would be preferable.

Deloitte's IFRS Insights of Revenue Recognition --- http://www.iasplus.com/insight/revenue.pdf

Bob Jensen's threads on revenue recognition ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

Bob Jensen's threads about principles-based versus rules-based (bright line) accounting standards ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines

"What You Can Learn From Mitt Romney's (203 page) Tax Return?" WSJ via Paul Caron's Tax Prof Blog, January 29, 2011 ---
http://taxprof.typepad.com/

Wall Street Journal, What You Can Learn From Mitt's Tax Return, by Laura Saunders:
Watch the Video --- Click Here
http://online.wsj.com/video/heres-what-we-learned-from-romneys-taxes/C6F7C4F0-0431-4D69-90DB-7A6F3472EDCE.html?KEYWORDS=What+You+Can+Learn+From+Mitt+Romney%27s+Tax+Return

[Mitt Romney's tax returns] lift the veil on how the wealthy can use the tax code to their advantage. Here are some lessons the experts have gleaned:

Avoid salary, wages and tips to the extent possible

Muni-bond interest isn't the be-all and end-all

Strive for "qualified" dividends

If you have a "Schedule C" business, think twice before claiming a home-office deduction

Generate income from long-term capital gains

Know the score on itemized deductions

Capital gains and dividends can help trigger the AMT

Beware of small benefits requiring large tax-prep efforts

Offshore investments can save onshore taxes

Capital Gains Tax History and Debates --- http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

Jensen Comment
I think the rich should be taxed at possibly higher rates through a tougher alternative minimum tax rather than increases in the capital gains tax. For example, the AMT should be worked to include capital gains. The AMT has a less direct impact on starving the nation's risk and venture capital relative to increases in the capital gains tax. Increases in the capital gains tax simply make it less profitable to risk savings for investments in new startup businesses and expansion of small businesses as well as buying into risky IPOs.

Low capital gains taxes give some relief to investors for holding on to long-term investments over decades of inflation such as selling farm land that has been owned for 50 years. If capital gains rates are increased they should be offset with inflation index adjustments much like we see in certain types of investments like U.S. Treasury Inflation Protected Securities (TIPS) investments ---
http://www.investopedia.com/terms/t/tips.asp
Also see inflation index bond --- http://en.wikipedia.org/wiki/Inflation-indexed_bond

Current (low?) capital gains tax rates provide some inflation relief but in many instances they are not sufficient to offset declines in the purchasing power of the dollar between when an investment is purchased and when it is sold decades later. There are some inflation protections (exclusions) for primary residence homes but not for most other types of long-term holdings.

The problem is that there are so many loopholes in the U.S. Tax Code that wealthy people will find other avenues to avoid or defer taxes other than investing their capital in risky ventures and long-term ties ups of their capital. Purportedly Warren Buffet has positioned himself so he will not have to pay the Buffet Tax he proposes for other wealthy people. Wealthy people may have many alternatives for shifting funds into better tax deals such as special provisions for urban development and other sweet deals built in to current tax rules.

Taxes need to be reformed, although I do not think the flat tax is the best way to go about tax reform. There are too many externalities to be considered before changing economic behavior in this nation so drastically in one swoop.

Bob Jensen's helpers for taxpayers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Writing Rules by Henry Miller, Elmore Leonard, Margaret Atwood, Neil Gaiman & George Orwell --- Click Here
http://www.openculture.com/2012/01/writing_rules.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

I added the above tidbit to the Writing Forum on the AAA Commons ---
http://commons.aaahq.org/posts/c5fdcaace5

Bob Jensen's helpers for writers are at http://www.trinity.edu/rjensen/Bookbob3.htm#Dictionaries

"Everybody: Singular or Plural," Grammar Girl, January 27, 2012 ---
http://grammar.quickanddirtytips.com/indefinite-pronouns.aspx?WT.mc_id=0

. . .

When it comes to indefinite pronouns, grammarians disagree about whether words such as everyone and somebody are singular or plural when you use a pronoun to refer to them. Several listeners have recently asked about this conundrum.

For example, Linda asks, “Is everyone and, likewise, everybody singular or plural?” And Connie from College Station, Texas, asks, “Are you hanging in there on pronoun references to singular forms such as everyone and everybody?”

Although I'll focus on the words everyone and everybody, the same rules apply to the words no one, nobody, anyone, anybody, someone, and somebody. Earlier I stated that grammarians don’t agree on the issue of indefinite pronouns. There are actually two issues concerning this topic: Are the words everyone and everybody singular or plural? And can I use a plural pronoun (such as their) to refer to these words? Grammarians actually agree that the words everyone and everybody are singular. Grammar Girl (that is I!) herself explains the answer in her book. She says, everyone sounds like a lot of people, but in grammar land, everyone is a singular noun and takes a singular verb. For example:

Everyone loves Squiggly. (This is right because everyone is singular and paired with a singular verb, loves.)

Everyone are happy. (This is wrong because it's pairing the singular noun everyone with a plural verb, are.)

Everyone hates subject-verb agreement. (This is right because everyone and hates are both singular.)

It’s OK to hate subject-verb agreement, but sometimes you just have to do things you don’t want to do. I promise to pick weeds if you promise to make sure your subjects agree with your verbs. Now, if you’re in Britain, you don’t have to worry so much about everyone and everybody because sometimes they’re considered plural. In Britain, it’s standard to use everyone and everybody with a singular verb and plural pronoun (1).

Subject-Verb Agreement

That's not so in America, however. So we’re now ready to tackle the second question: whether it’s OK to use the plural pronouns their, them, and they to refer to everybody or everyone. American grammarians don't agree on this issue. Some feel that if you can't write, “Everyone are happy,” then you shouldn't be able to write, “Everyone is putting a smile on THEIR face.” These grammarians cringe when they hear the word their used this way.

The root of this problem is that English doesn't have a word to refer to a singular noun of undetermined gender. As a solution, grammarians in the past have suggested that writers use just his to refer to everyone or everybody, but most now consider this solution to be sexist. Some alternate his with her; some use the phrase his or her. But I can’t imagine most of you could comfortably utter the following sentence: “Everyone is putting a smile on his or her face.” Therefore, I don’t recommend you use this type of construction unless you want to sound like a crusty old curmudgeon.

Sticklers have to face reality, though. For example, noted grammarian Bryan Garner has this to say about writers' tendencies to use their to refer to these singular pronouns: “Disturbing though these developments may be to purists, they’re irreversible. And nothing that a grammarian says will change them (2).”

The Write-Around

Grammarians agree that there is no perfect solution to this problem. I favor the advice that Grammar Girl has given in a previous episode. One of her suggestions is to rewrite the sentence to avoid the problem. So let’s go back to the problematic sentence we saw earlier: “Everyone is putting a smile on their face.” This one is fairly easy to rewrite: you could say, “Everyone is smiling.” Let’s make up another one: “Everyone had their hands in their pockets because it was so cold.” It wouldn’t sound so bad to write, “All the people had their hands in their pockets because it was so cold.” Just make sure your rewritten sentence fits in with the other sentences around it.

If rewriting isn't possible and the people you are writing for don't have a style guide, Grammar Girl suggested using “he or she if you want to play it safe, or using they if you feel bold and are prepared to defend yourself.”

The Curious Case of the Misplaced Modifier

Finally, thanks again to today's guest-writer, Bonnie Trenga, who is the author of The Curious Case of the Misplaced Modifier and who blogs at http://sentencesleuth.blogspot.com.

I added the above tidbit to the Writing Forum on the AAA Commons ---
http://commons.aaahq.org/posts/c5fdcaace5

Bob Jensen's helpers for writers are at http://www.trinity.edu/rjensen/Bookbob3.htm#Dictionaries

"My Favorite Quotes about Teaching – Number Five," by Joe Hoyle, January 26, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/01/my-favorite-quotes-about-teaching_26.html

"Exiting watchdog sees flaws in SEC's rulewriting," by Sarah N. Lynch, Reuters, January 30, 2012 ---
http://www.reuters.com/article/2012/01/30/us-sec-cost-benefit-report-idUSTRE80T0IV20120130

In his final act before departing the U.S. Securities and Exchange Commission on Friday, the agency's inspector general, David Kotz, criticized how the agency analyzes the economic impact of some of its Dodd-Frank rules.

Kotz's criticism, contained in a report, could have ramifications for the SEC, which has lost several court battles over the years because of flaws in how it demonstrates that the benefits of a rule outweigh its costs.

"We found that the extent of quantitative discussion of cost-benefit analyses varied among rulemakings," Kotz wrote in his report. "Based on our examination of several Dodd-Frank Act rulemakings, the review found that the SEC sometimes used multiple baselines in its cost-benefit analyses that were ambiguous or internally inconsistent."

Last year, U.S. business groups successfully convinced a federal appeals court to overturn one of the SEC's Dodd-Frank rules that aimed to empower shareholders to more easily nominate directors to corporate boards.

In rejecting the rule, the court said the agency failed to properly weigh the economic consequences.

Some of the business groups, such as the U.S. Chamber of Commerce, have since raised similar concerns with other rulemakings pending before the SEC.

Congress passed the Dodd-Frank act in 2010 to more closely police financial markets and institutions after the 2007-2009 financial crisis. The legislation gives the SEC responsibility to write roughly 100 new rules.

Although the SEC is not subject to an express statutory requirement to conduct a cost-benefit analysis of its rules, other laws do require the agency to consider the effects of its rules on capital formation, competition and efficiency.

In addition, the SEC must also follow federal rulemaking procedures, such as providing the public with an opportunity to comment on its proposals.

This is the second report Kotz has issued looking at the quality of the SEC's cost-benefit analysis.

Both reports were issued after certain members of the Senate Banking Committee, including ranking Republican Richard Shelby, voiced concerns about whether regulators were adequately examining the economic impact of Dodd-Frank rules.

To determine how well the SEC is faring, Kotz's office retained Albert Kyle, a finance professor at the University of Maryland's Robert H. Smith School of Business, to help carry out the review.

Friday's report covered a sample of Dodd-Frank rulemakings, including a rule allowing shareholders a non-binding vote on compensation, several asset-backed securities rules and two proposals pertaining to the reporting of security-based swap data.

Kotz's report was critical of the agency in a number of areas.

In one instance, the report cites a memo in which former General Counsel David Becker gave his opinion that the SEC should do thorough cost-benefit analyses on rules that are not explicitly required by Congress.

Rules mandated by Congress, however, generally would not need the same level of cost-benefit research, the memo said.

The report suggested that the agency should reconsider these guidelines, or else it risks "not fulfilling the essential purposes of such analyses."

SEC management, in a written response to the report, disagreed with that point.

"We believe Professor Kyle's opinion fails to appreciate both the practical limitations on the scope of cost-benefit a regulator can conduct, and the distinct roles of Congress and administrative agencies," they said.

Continued in article

Jensen Comment
The main problem of cost-benefit analysis of rules and laws arises mainly from externalities and interactions (covariances) that are seemingly impossible to measure. For example, Congress can study the direct revenue and cost impacts of dropping mortgage interest deductions in computing income tax (possibly on a flat tax basis), but it's seemingly impossible to measure the impact of such a tax law change will have on families, home maintenance, and retirement savings. For example, it's naive to assume that couples who elect to rent a home rather than to buy a home because of the loss of a tax deduction will save an equivalent amount each month toward a retirement nest egg.

Similarly, when the accounting standard setters finally agree on a new standard for lease accounting, there may well be tremendous externalities in such a major shift in accounting lease and ownership contracting, employment, the business cycle, etc.

"Former Penn State Prof Charged With $3M Fraud," Inside Higher Ed, February 1, 2012 ---
http://www.insidehighered.com/quicktakes/2012/02/01/former-penn-state-prof-charged-3m-fraud

Bob Jensen's threads on professors who cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize

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

"Elsevier Publishing Boycott Gathers Steam Among Academics," by Josh Fischman, Chronicle of Higher Education, January 30, 2012 ---
http://chronicle.com/blogs/wiredcampus/elsevier-publishing-boycott-gathers-steam-among-academics/35216?sid=wc&utm_source=wc&utm_medium=en

Elsevier, the global publishing company, is responsible for The Lancet, Cell, and about 2,000 other important journals; the iconic reference work Gray’s Anatomy, along with 20,000 other books—and one fed-up, award-winning mathematician.

Timothy Gowers of the University of Cambridge, who won the Fields Medal for his research, has organized a boycott of Elsevier because, he says, its pricing and policies restrict access to work that should be much more easily available. He asked for a boycott in a blog post on January 21, and as of Monday evening, on the boycott’s Web site The Cost of Knowledge, nearly 1,900 scientists have signed up, pledging not to publish, referee, or do editorial work for any Elsevier journal.

The company has sinned in three areas, according to the boycotters: It charges too much for its journals; it bundles subscriptions to lesser journals together with valuable ones, forcing libraries to spend money to buy things they don’t want in order to get a few things they do want; and, most recently, it has supported a proposed federal law (called the Research Works Act) that would prevent agencies like the National Institutes of Health from making all articles written by its grant recipients freely available.

Hal Abelson, a professor of computer science at the Massachusetts Institute of Technology and an open-publishing advocate, signed the pledge and wrote that “With the moves of these megapublishers, we [are] seeing the beginning of monopoly control of the scholarly record.” Benjamin R. Seyfarth, an associate professor in the School of Computing at the University of Southern Mississippi, wrote that “nearly all university research is funded by the public and should be available for free.”

Continued in article

Jensen Comment
How Elsevier and various other oligopoly academic journals rip off campus libraries ---
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals

You could join in on the boycott by requesting that your campus library cancel its subscriptions to the following journals. However, this is probably too extreme since virtually all the research published in these accounting journals is not funded by taxpayers like the real science research in question. Note especially that Elsevier publishes both the Journal of Accounting and Economics (JAE) and Accounting, Organizations and Society (AOS).

You could join in on the boycott by requesting that your campus library cancel its subscriptions to the following journals. However, this is probably too extreme

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Journal 121. IFRS: A Quick Reference Guide
Book, 2008, by Robert Kirk 122. Finance Director's Handbook
Book, 2009, by Glynis Morris 123. Budgeting Practice and Organisational Structure
Book, 2010, by David Dugdale 124. Managerial Judgement and Strategic Investment Decisions
Book, 2010, by Elaine Harris 125. The Effective Measurement and Management of ICT Costs and Benefits
Book, 2007, by Dan Remenyi

Results 126 - 150 of 681 << Previous | Next >> 126. CIMA Official Exam Practice Kit Fundamentals of Ethics, Corporate Governance & Business Law 2011-2012 edition
Book, 2011 127. CIMA Official Exam Practice Kit Fundamentals of Business Economics 2011-2012 edition
Book, 2011 128. Due Diligence Handbook
Book, 2009, by Linda S. Spedding 129. Non-Executive Director's Handbook
Book, 2008, by Patrick Dunne 130. CIMA Official Study Text Fundamentals of Business Mathematics 2011-2012 edition
Book, 2011 131. CIMA Revision Cards Fundamentals of Business Mathematics 2011-2012 edition
Book, 2011 132. CIMA Revision Cards Fundamentals of Business Economics 2011-202 edition
Book, 2011 133. CIMA Revision Cards Fundamentals of Ethics, Corporate Governance & Business Law 2011-2012 edition
Book, 2011 134. CIMA Official Study Text Fundamentals of Business Economics 2011-2012 edition
Book, 2011 135. CIMA Official Exam Practice Kit Fundamentals of Business Maths 2011-2012 edition
Book, 2011 136. Financial Planning Using Excel
Book, 2009, by Sue Nugus 137. International Financial Reporting Standards in Depth
Book, 2005, by Robert Kirk 138. Interest Rate Risk Management
Book, 2005, by Christine Helliar 139. Financial Reporting
Book, 1999, by Robert Kirk 140. Success and Failure of Activity-Based Techniques
Book, 1999, by A. Friedman 141. International Risk Management
Book, 2007, by Margaret Woods 142. Better Exam Results
Book, 2004, by Sam Malone 143. Successful Foreign Acquisitions
Book, 2003, by Tony Appleyard 144. Data Warehousing and the Management Accountant
Book, 2001, by Ian Cobb 145. Corporate Social Responsibility
Book, 2005, by John Innes 146. Shareholder or Stakeholder Value
Book, 2001, by S. Cooper 147. Cost System Design and Profitabillity Analysis in UK Companies
Book, 2000, by COLIN DRURY 148. Information System Development in the Small Firm
Book, 2000, by Falconer Mitchell 149. International Taxation Handbook
Book, 2007, by Greg Gregoriou 150. Accountants' Response to Ethical Issues as Work
Book, 2000, by C. Fisher

The list goes on and on at --- Click Here
http://www.elsevier.com/wps/find/simple_search.cws_home?action=simple_search&keywords=Accounting&boost=true&&sort_by=&able=default&td=681&sln=All&hits=25&offset=0&pubtype=Any&S=68&R=4&C=1&P=2&B=513&I=3&A=2&U=1&J=66&NA=17&EB=3&PR=581&E=1&navigator=no

Humor for February 1-29, 2012

Forwarded by Paula

I just took a leaflet out of my mailbox informing me that I can have sex at 79.

I'm so happy, because I live at number 71. So it's not too far to walk home afterwards. And it’s the same side of the street. I don’t have to cross the road!

February 6, 2012 message from David Albrecht

Bob
A friend sent these to me. They're pretty funny.

Dave

There are 3 of them, don't wanna miss any of them, they are a hoot and short (about 30 seconds each).

http://www.youtube.com/v/gBnvGS4u3F0?hl=en&fs=1&autoplay=1

http://www.youtube.com/v/mgCIKGIYJ1A?hl=en&fs=1&autoplay=1

http://www.youtube.com/v/LuVPnW0s3Vo?hl=en&fs=1&autoplay=1

Forwarded by Paula

A lady goes to the bar on a cruise ship and orders a Scotch with two drops of water. As the bartender gives her the drink she says 'I'm on this cruise to celebrate my 80th birthday and it's today.' The bartender says 'Well, since it's your birthday, I'll buy you a drink. In fact, this one is on me.' As the woman finishes her drink the woman to her right says 'I would like to buy you a drink, too.' The old woman says 'Thank you. Bartender, I want a Scotch with two drops of water.' 'Coming up' says the bartender

As she finishes that drink, the man to her left says 'I would like to buy you one, too.' The old woman says 'Thank you. Bartender, I want another Scotch with two drops of water.' 'Coming right up' the bartender says.

As he gives her the drink, he says 'Ma'am, I'm dying of curiosity. Why the Scotch with only two drops of water?' The old woman replies 'Sonny, when you're my age, you've learned how to hold your liquor... Holding your water, however, is a whole other issue.' '

OLD' IS WHEN.... Your sweetie says 'Let's go upstairs and make love' and you answer: 'Pick one, I can't do both!'

OLD' IS WHEN... Your friends compliment you on your new alligator shoes And you're barefoot! '

OLD' IS WHEN... A sexy babe or hunk catches your fancy ... And your pacemaker opens the garage door!

OLD' IS WHEN... Going braless pulls all the wrinkles out of your face.

OLD' IS WHEN.... You don't care where your spouse goes ... Just as long as you don't have to go along.

OLD' IS WHEN... You are cautioned to slow down by the doctor instead of by the police

'OLD' IS WHEN.. 'Getting a little action' Means you don't need to take any fiber today

OLD' IS WHEN... 'Getting lucky' means you find your car ... In the parking lot.

OLD' IS WHEN... An 'all nighter' means not getting up To use the bathroom.

Forwarded by Gene and Joan

> > The reason the Irish celebrate St. Patrick's Day is because
> > this is when St.Patrick drove the Norwegians out of Ireland.
> >
> > It seems that some centuries ago, many Norwegians came
> > to Ireland to escape the bitterness of the Norwegian
> > winter. Ireland was having a famine at the time, and food was
> > scarce. The Norwegians were eating almost all the fish caught
> > in the area, leaving the Irish with nothing to eat but
> > potatoes. St. Patrick, taking matters into his own hands, as
> > most Irishmen do, decided the Norwegians had to go.
> >
> > Secretly, he organized the Irish IRATRION (Irish Republican
> > Army to Rid Ireland of Norwegians). Irish members of IRATRION
> > passed a law in Ireland that prohibited merchants from selling
> > ice boxes or ice to the Norwegians, in hopes that their fish
> > would spoil. This would force the Norwegians to flee to a
> > colder climate where their fish would keep.
> >
> > Well, the fish spoiled, all right, but the Norwegians, as
> > every one knows today, thrive on spoiled fish. So, faced with
> > failure, the desperate Irishmen sneaked into the Norwegian
> > fish storage caves in the dead of night and sprinkled the
> > rotten fish with lye, hoping to poison the Norwegian invaders.
> >
> > But, as everyone knows, the Norwegians thought this only added
> > to the flavor of the fish, and they liked it so much they
> > decided to call it "lutefisk", which is Norwegian for
> > "luscious fish".
> >
> > Matters became even worse for the Irishmen when the Norwegians
> > started taking over the Irish potato crop and making something
> > called "lefse".
> >
> > Poor St. Patrick was at his wit's end, and finally on March
> > 17th, he blew his top and told all the Norwegians to "GO TO
> > HELL". So they all got in their boats and emigrated
> > to Minnesota or the Dakotas---- the only other paradise on
> > earth where smelly fish, old potatoes and plenty of cold
> > weather can be found in abundance.
> >
> > The End.
> >
> > And now you know the true story.

Forwarded by Paula

Mildred, the church gossip, and self-appointed monitor of the church's morals, kept sticking her nose into other people's business.

Several members did not approve of her extra-curricular activities, but feared her enough to maintain their silence.

She made a mistake, however, when she accused Frank, a new member, of being an alcoholic after she saw his old pickup parked in front of the town's only bar one afternoon.

She emphatically told Frank (and several others) that every one seeing it there would know what he was doing!

Frank, a former Marine and man of few words, stared at her for a moment and just turned and walked away.

He didn't explain, defend, or deny. He said nothing.

Later that evening, Frank quietly parked his pickup in front of Mildred's house.... walked home.... and left it there all night

History Repeating Itself
Greece is collapsing, the Iranians are getting aggressive, and Rome is in disarray. Welcome back to 430 BC
John Cleese

Forwarded by Auntie Bev

ALERTS TO THREATS IN 2012 EUROPE : BY JOHN CLEESE
The English are feeling the pinch in relation to recent events in Libya, Egypt and Syria 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 Uniforms and Sing Marching Songs." They also have two higher levels: "Invade a Neighbour" 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.

Australia ,meanwhile, has raised its security level from "No worries" to "She'll be alright, Mate." Two more escalation levels remain: "Crikey! I think we'll need to cancel the barbie this weekend!" and "The barbie is cancelled." So far no situation has ever warranted use of the final escalation level.
-- John Cleese - British writer, actor and tall person.

A final thought -“Greece is collapsing, the Iranians are getting aggressive, and Rome is in disarray. Welcome back to 430 BC”.

Humor Between February 1-29, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor022912

Humor Between January 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor013112

Humor Between December 1-31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor123111

Humor Between November 1 and November 30, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor113011

Humor Between October 1 and October 31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor103111

Humor Between September 1 and September 30, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor093011

Humor Between August 1 and August 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor083111

Humor Between July 1 and July 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor073111

Humor Between May 1 and June 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor063011

Humor Between April 1 and April 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor043011

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 February 29, 2012 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 Resume --- http://www.trinity.edu/rjensen/Resume.htm

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

**For an elaboration on the reasons you should join a ListServ (usually for free) go to http://www.trinity.edu/rjensen/ListServRoles.htm**
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which started out as an accounting education technology Listserv. It has mushroomed into the largest global Listserv of accounting education topics of all types, including accounting theory, learning, assessment, cheating, and education topics in general. At the same time it provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
~~CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/~~ (closed down) CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.
Yahoo (Practitioners) http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the activities of the AICPA. This can be anything from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld http://accountantsworld.com/forums/default.asp?scope=1 This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.
Business Valuation Group BusValGroup-subscribe@topica.com This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM]

Concerns That Academic Accounting Research is Out of Touch With Reality

What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings
http://www.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated
http://www.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling
http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://www.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying

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 Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

January 31, 2012

Bob Jensen's New Bookmarks January 1-31, 2012
Bob Jensen at Trinity University

Bob Jensen's Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

Hasselback Accounting Faculty Directory --- http://www.hasselback.org/

Blast from the Past With Hal and Rosie Wyman ---
http://www.cs.trinity.edu/~rjensen/temp/Wyman2011.htm

Bob Jensen's threads on business, finance, and accounting glossaries ---
http://www.trinity.edu/rjensen/Bookbus.htm

Accounting News Links ---
http://www.trinity.edu/rjensen/AccountingNews.htm

The new AAA Digital Library ---
http://aaajournals.org/

Issues and Resources from the AAA (Some New and Important Stuff) ---
http://aaahq.org/resources.cfm

AAA Newsroom ---
http://aaahq.org/newsroom.cfm

AAA Commons ---
http://commons.aaahq.org/pages/home

AAA Faculty Development ---
http://aaahq.org/facdev.cfm

AAA FAQs ---
http://aaahq.org/about/faq.htm

Listservs, Blogs, and Social Media ---
http://www.trinity.edu/rjensen/ListservRoles.htm

Accounting Career Helpers and Links ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

Bob Jensen's Helpers for Accounting Educators ---
http://www.trinity.edu/rjensen/Default3.htm

Free online courses, lectures, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Education Technology Links ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm

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

Bob Jensen's Threads (with many links to resources for educators) ---
http://www.trinity.edu/rjensen/threads.htm

U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/

Money Chart --- http://xkcd.com/980/huge/#x=-8064&y=-2880&z=4
Thank you George Wright for the heads up.

How Income Taxes Work (including history) --- http://money.howstuffworks.com/income-tax.htm

Why not start with the IRS? (The best government agency web site on the Internet) http://www.irs.gov/

IRS Site Map --- http://www.irs.gov/sitemap/index.html

FAQs and answers --- http://www.irs.gov/faqs/index.html

Taxpayer Advocate Service --- http://www.irs.gov/advocate/index.html

Forms and Publications, click on Forms and Publications

IRS Free File Options for Taxpayers Having Less Than $57,000 Adjusted Gross Income (AGI) ---
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=104

Free File Fillable Forms FAQs ---
http://www.irs.gov/efile/article/0,,id=226829,00.html

Bob Jensen's tax filing helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Hint:
If you plan to cheat, use TurboTax since our U.S. Treasury Secretary in charge of the IRS explained how to get away with cheating by using Turbo Tax ---
http://www.youtube.com/watch?v=eKVxGlkPRlo

Here's what happens if you don't use TurboTax

So why not the Turbo Tax Defense?
"Former Ohio State Bar President Gets One Year in Prison for Tax Fraud," by Paul Caron, Tax Prof Blog, January 19, 2012 ---
http://taxprof.typepad.com/

Leslie Hines, a former senior antitrust partner in Thompson Hine's Cleveland office, was sentenced Tuesday to serve a year and a day in prison in connection with his guilty plea on a federal tax fraud charge, according to a press release issued by the Justice Department.

Federal prosecutors had been seeking a sentence of up to 16 months in prison for Jacobs, who was charged last October with filing false tax returns and overstating his business expenses by more than $250,000.

According to court filings [PDF], Jacobs filed four federal income tax returns between 2004 and 2007 that inflated his business expenses by as little as $25,000 and as much as $94,000 in an effort to lower the taxable income he collected from his Thompson Hine partnership. Prosecutors said Jacobs's income in each of those years should have ranged from $633,303 to $759,973.

Jensen Comment
A better lawyer would've embezzled more than that from clients.
Even a lousy accountant could've fabricated expense receipts better than that.
Hence Mr. Hines should've been either an accountant or a better lawyer.

Better yet he should've used the TurboTax Defense that works for big crooks ---
Watch the video how how Mr. Hines should6ve proceeded ---
http://www.youtube.com/watch?v=eKVxGlkPRlo

January 24, 2012 heads up from Barry Rice

Video 1
TurboTax SnapTax Mobile App - File Taxes on Your Android and iPhone!
http://www.youtube.com/watch?v=M-VyLXLAipg

Video 2
SnapTax From TurboTax Will Let You File Your Taxes From Your iPhone ---
http://www.youtube.com/watch?v=4jQ2xLQvbio

Jensen Advice
I instead recommend:

IRS Free File Options for Taxpayers Having Less Than $57,000 Adjusted Gross Income (AGI) ---
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=104

Free File Fillable Forms FAQs ---
http://www.irs.gov/efile/article/0,,id=226829,00.html

Some of the following science tutorial links might be useful resources in accountancy PhD programs and PhD preparation programs such as the prep masters degree program at BYU that won an AAA Innovation in Accounting Education Award. These links are taken from the thousands of tutorial links at
http://www.trinity.edu/rjensen/Bookbob2.htm

The Sourcebook for Teaching Science: Employing Scientific Methods ---
http://www.csun.edu/science/books/sourcebook/

Free Mathematics and Statistics Tutorials ---
http://www.trinity.edu/rjensen/Bookbob2.htm#050421Mathematics

Pathways to Science --- http://www.pathwaystoscience.org/index.asp

Pathways to Science: STEM
http://www.pathwaystoscience.org

Life Sciences - FREE Teaching and Learning Resources ---
http://free.ed.gov/subjects.cfm?subject_id=54&toplvl=41

The Scientist --- Multimedia http://the-scientist.com/category/multimedia/

STEM Planet --- http://www.stemplanet.org/

Salvadori Center [STEM Education Resources] --- http://www.salvadori.o

New York State STEM Education Collaborative
http://www.nysstemeducation.org/index.html

Afterschool Alliance: Afterschool and STEM --- http://www.afterschoolalliance.org/STEM.cfm

I-STEM --- http://www.istem.illinois.edu/index.html

Office of Science Education - LifeWorks --- http://science.education.nih.gov/LifeWorks.nsf/feature/index.htm

Planet Earth --- http://www.learner.org/resources/series49.html

Biography of an Experiment --- http://www.haverford.edu/kinsc/boe/

What Do I Do Now? Laboratory Tales From Teaching Assistants ---
http://www.udel.edu/chem/white/C601/TA-Tales.pdf

Research Techniques Workbook Modules [biology] http://biology.hunter.cuny.edu/tech/table_of_contents.htm

What is Bioinformatics? --- http://abacus.bates.edu/bioinformatics1/

"Garage Demos": Physical models of Biological Processes
http://www.researchandteaching.bio.uci.edu/lecture_demo.html

Great Science For Girls --- http://www.greatscienceforgirls.org/

Try Engineering --- http://www.tryengineering.org

STEM Resources for Teachers and Students --- http://www.thinkfinity.org/stem

Life Sciences Education (Journal) --- http://www.lifescied.org/

NOVA: scienceNOW: Explore Teacher's Guides ---
http://www.pbs.org/wgbh/nova/sciencenow/educators/subject-anth.html

Nova Video: The Fabric of the Cosmos ---
http://www.pbs.org/wgbh/nova/physics/fabric-of-cosmos.html#fabric-time

NOVA: Journey of the Butterflies --- http://www.pbs.org/wgbh/nova/nature/journey-butterflies.html

Center for Science & Technology Policy Research --- http://sciencepolicy.colorado.edu/

National Institute of General Medical Sciences --- http://www.nigms.nih.gov/Education/

The MacKinney Collection of Medieval Medical Illustrations --- http://www.lib.unc.edu/dc/mackinney/

Tough Talk: A Toolbox for Medical Educators --- http://depts.washington.edu/toolbox/

National Institutes of Health: Science Education: Research & Training --- http://www.nih.gov/science/education.htm

Biography of an Experiment --- http://www.haverford.edu/kinsc/boe/

Research Techniques Workbook Modules [biology] http://biology.hunter.cuny.edu/tech/table_of_contents.htm

What is Bioinformatics? --- http://abacus.bates.edu/bioinformatics1/

"Garage Demos": Physical models of Biological Processes
http://www.researchandteaching.bio.uci.edu/lecture_demo.html

Case Studies in Primary Health Care --- http://ocw.jhsph.edu/courses/casestudiesinphc/index.cfm

Teaching Medical Physics --- http://www.nationalstemcentre.org.uk/elibrary/collection/565/teaching-medical-physics

Physics to go videos --- http://www.physics.org/article-interact.asp?id=59

TSG@MIT Physics --- http://scripts.mit.edu/~tsg/www/

The Richard Feynman Trilogy: The Physicist Captured in Three Films --- Click Here
http://www.openculture.com/2012/01/the_richard_feynman_film_trilogy.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Celebrate Stephen Hawking’s 70th Birthday with Errol Morris’ Film, A Brief History of Time --- Click Here
http://www.openculture.com/2012/01/celebrate_stephen_hawkings_70th_birthday_with_the_errol_morris_film_of_ia_brief_history_of_timei.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Neil deGrasse Tyson on the Decline of Scientific Research in America --- Click Here
http://www.openculture.com/2012/01/neil_degrasse_tyson_on_the_decline_of_scientific_research_in_america.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Findings (in medical research) --- http://publications.nigms.nih.gov/findings/

Free Social Science and Philosophy Tutorials --- http://www.trinity.edu/rjensen/Bookbob2.htm#Social

Video course covers Plato, Aristotle, Machiavelli, Hobbes, Locke, Rousseau, and Tocqueville.
Introduction to Political Philosophy: A Free Yale Course"--- Click Here
http://www.openculture.com/2011/07/introduction_to_political_philosophy.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Also see the BBC's "Big Thinker" Lecture Series --- Click Here
http://www.openculture.com/2011/07/bertrand_russell_bbc_lecture_series_.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Free Science and Medicine Tutorials --- http://www.trinity.edu/rjensen/Bookbob2.htm#Science

Healthy Sleep --- http://healthysleep.med.harvard.edu/healthy/

Free Education Discipline Tutorials ---
http://www.trinity.edu/rjensen/Bookbob2.htm#EducationResearch

Thousands of links to free tutorials
http://www.trinity.edu/rjensen/Bookbob2.htm

Free online courses, lectures, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Big Brother Watch
"Hiding Income? Look Out, Here Comes the 1099-K What merchants need to know about a new form that requires payment processors to report transactions to the IRS," by Karen E. Klein, Bloomberg Business Week, January 24, 2012 ---
http://www.businessweek.com/small-business/hiding-income-look-out-here-comes-the-1099k-01242012.html

Starting this month, business owners will begin getting new tax forms issued by their credit-card and online-payment processors and intended to keep businesses from hiding income. The form, called 1099-K, will document all 2011 transactions processed for sellers with more than 200 transactions and $20,000 in annual gross receipts. The IRS estimates that 53 million forms will be issued by such processors as eBay, PayPal, and Amazon as well as credit-card companies, says Steven Aldrich, chief executive officer of Outright.com, which makes online bookkeeping applications for self-employed people and small business owners. Aldrich spoke with Smart Answers columnist Karen E. Klein about how small business owners should handle the new forms. Edited excerpts of their conversation follow.

The new 1099-K requirement was signed into law by President George W. Bush in 2008 but is just now taking effect. Why is the government mandating this?

Electronic payments are a growing part of our economy, but up to now they have not been officially reported to the IRS. People were on their scout’s honor to report this income. This new form is designed to help close the gap between what businesses and individuals owe the IRS and what they actually pay. It is expected to bring about $9.5 billion into the U.S. Treasury over 10 years by taxing revenue flowing through electronic networks.

That’s a big number.

It is a big number, but our concern is keeping the burden on small business low enough so they don’t lose their competitiveness and don’t have a big burden of extra time they have to put into dealing with this. All businesses will get these, not just small businesses, but larger businesses have got tax teams and people to handle these matters and small business people usually do not. Our concern is that small business owners could be distracted and worried when they get this form and not know what to do with it.

This is going out for the first time to individuals such as eBay and Etsy online sellers. Have they gotten any notice about the form?

The payment processors were required to obtain sellers’ tax identification numbers for these forms, so many of them sent out notices last year when they were verifying the information and making sure the right people got the right form.

What information will the form list?

It’s actually very simple. At the top is a box with your total gross revenue for the year, processed by PayPal or whichever payment processor you use. Beneath that box is a breakdown of revenue month by month.

How is that number going to be compared with what’s reported on an individual’s tax return?

The IRS will look at the gross sales amount reported on the 1099-K and compare it with the total gross receipts reported on an individual’s Schedule C. The amount on the tax return has to be at least as much as what’s reported on the 1099-K.

The interesting thing is that these amounts reported to the IRS are gross sales numbers. But businesses never actually make their gross sales because of refunds, frauds, exchanges, and returns. But none of those expenses are taken out of the gross sales amount.

And business owners don’t pay taxes on gross income, but on net income.

Exactly. So it will be incumbent on the business owner to take the gross amount reported on the 1099-K and capture all the transaction fees, charges, and returns, in addition to the other expenses of running their business, in their tax reporting.

Is that going to be a big burden for micro-businesses?

It’s not going to be a big deal if you have good record keeping. The problem is that most small business owners are still using paper and pencil and spreadsheets to track their business data. This reporting is really a clarion call to move those people into the digital age. Certainly, if you’re taking electronic payments, you need to move to a digital form of keeping your books.

Are there other pitfalls related to the 1099-K?

For service providers, like consultants, who are taking advantage of electronic payment systems, they might get a 1099-MISC for some part of their consulting revenue. But that income would also show up on the 1099-K if it was processed electronically. That could result in double counting that income, so that’s something to be very careful about, especially as more people in the service industry are starting to use services such as PayPal or mobile credit-card readers instead of taking cash or check payments.

Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

"Note to a Former Student," by Joe Hoyle, January 21, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/01/note-to-former-student.html

Free CPA Review Courses and Practice Examinations (managed by Professor Joe Hoyle) --- http://cpareviewforfree.com/

Free accounting textbook from a generous accounting professor ---
http://www.ibtimes.com/prnews/20081218/ny-flat-world-knowldg.htm
Also see http://www.flatworldknowledge.com/Joe-Hoyle-Podcast

"Ernst & Young: Named Top Employer In 2012 Stonewall Workplace Equality Index," by Erica deVry, Big4.com, January 20, 2012 ---
http://www.big4.com/ernst-young/eernst-young-named-top-employer-in-2012-stonewall-workplace-equality-index

The Stonewall Workplace Equality Index, which showcases the UK’s top 100 public and private sector employers for gay, lesbian, and bisexual staff, has named Ernst & Young Employer of the Year for 2012, climbing from third place last year. The firm also received top ranking in Stonewall’s inaugural ‘Global Best Practice Index’.

Commenting on Stonewall’s recognition, Harry Gaskell, Managing Partner for Advisory and Head of Diversity and Inclusiveness at Ernst & Young said:

“Being named the 2012 Employer of the Year is an achievement that we’re very proud of. I’m really happy with the great progress the firm has made since it first entered the Workplace Equality Index in 2005 and look forward to continuing to champion diversity and inclusiveness in 2012.”

Ernst & Young’s leading role in developing the concept of inclusive leadership, its sponsorship of National Student Pride, its engagement with clients about sexual orientation as a workplace issue, and strong leadership driven from the top are some of the progressive initiatives attributed to the firm’s success.

"Deloitte Given Perfect Rating on Human Rights Campaign Corporate Equality Index," by Kalen Smith, Big4.com, January 13, 2012 ---
http://www.big4.com/uncategorized/deloitte-given-perfect-rating-on-human-rights-campaign-corporate-equality-index

The Human Rights Campaign has named Deloitte one of the best places to work for the sixth year in a row. In their 2012 Corporate Equality Index, the HRC noted that it gave Deloitte a 100 percent rating.

Deloitte chief talent officer, Jennifer Steinmann, said that Deloitte is constantly working to provide a workplace that employees will be proud of. Steinmann said that they offer a culture that helps the LGBT community and encourages all of its employees to feel accepted.

Steinmann said that Deloitte offers a number of solutions to the variety of challenges they face as they strive to create an environment that increases employee morale and gives all employees the opportunity to thrive. Deloitte has used a number of Business Resource Groups to educate employees and offer them the resources they need to address the challenges they face in the workplace.

HRC is making its standards increasingly strict. Due to the changes in their eligibility standards, about 50 percent of companies have fallen off of the list. New standards include providing a culture for members of the LGBT community and promoting company citizenship.

Steinmann and other representatives at Deloitte state that they are proud of the fact that Deloitte has consistently earned this recognition since 2006.

Bob Jensen's threads on the best places to work are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

Question
Does the Nortel scandal reaffirm the PCAOB implication that Deloitte is the worst of the Big Four auditing firms?

What happens when a company intentionally falsifies its restatements of financial statements to the tune of $1 billion?
"Nortel executives shifted accounting funds to achieve results," by Janet mcfarland, Globe and Mail, January 17, 2012 ---
http://www.theglobeandmail.com/report-on-business/nortel-executives-shifted-accounting-funds-to-achieve-results-crown/article2305453/

Nortel Networks Corp. executives knew as early as the fall of 2002 that they were facing losses in the first half of 2003, but manipulated accounting reserves to ensure a profit in the period so they could trigger their “return to profitability” bonus payments, a Toronto court heard Tuesday.

In his opening statement in the fraud trial of three former Nortel executives, Crown attorney Robert Hubbard said the executives even turned an unexpected profit into a loss in the final quarter of 2002 because it came too early to trigger their bonuses.

“Contrary to Nortel’s own policy for closing its books, senior executives solicited further [accounting] accruals from across the company to turn a profit into a loss,” Mr. Hubbard told Mr. Justice Frank Marrocco of the Ontario Superior Court.

Continued in article

Crown alleges Nortel CEO also falsified results restatement ---
http://www.theglobeandmail.com/report-on-business/crown-alleges-nortel-ceo-also-falsified-results-restatement/article2300479/

"Nortel's auditors flagged no fraud at company, defence lawyer says," The Canadian Press, January 19, 2012 ---
http://www.canadianbusiness.com/article/66615--nortel-s-auditors-flagged-no-fraud-at-company-defence-lawyer-says

Defence lawyers in the fraud trial of three former Nortel Networks executives say the company's independent auditors gave their stamp of approval to financial matters at Nortel.

The lawyers say that contradicts Crown allegations the men were conspiring to defraud the company by cooking its books and manipulating profit reports.

David Porter, counsel for Nortel's ex-CEO Frank Dunn, says accounting firm Deloitte and Touche closely and continuously reviewed and approved the finances of the fallen telecom equipment maker.

He says that external approval negates the Crown's allegations the accused oversaw a widespread scheme to falsify Nortel's records.

He says the kind of white collar crime ring described by the Crown would be unprecedented and would have to involve hundreds of accredited accountants at both Nortel and Deloitte.

Porter delivered opening arguments on behalf of all three accused as the court hears from the defence after a 2 1/2 day opening statement by the Crown.

Continued in article

Question
Does this reaffirm the PCAOB implication that Deloitte is the worst of the Big Four auditing firms?

Personally, I doubt it since all four auditing firms seem to be making a lot of mistakes lately.

"Deloitte Faulted by PCAOB Over Unresolved Audit Deficiencies," by Jesse Hamilton, Business Week, October 17, 2011 ---
http://www.businessweek.com/news/2011-10-17/deloitte-faulted-by-pcaob-over-unresolved-audit-deficiencies.html

Deloitte & Touche LLP repeatedly failed to support assumptions in audits examined in a 2007 inspection, the Public Company Accounting Oversight Board said in the first public report of unresolved deficiencies involving one of the so-called Big Four accounting firms.

The firm’s quality controls and independence systems give “cause for concern,” the PCAOB said in its report, which was released today. The Washington-based nonprofit, created in 2002 to oversee audits of public companies after the collapses of Enron Corp. and WorldCom Inc., gives audit firms at least a year to fix deficiencies and only releases the reports in cases where auditors fail to make sufficient improvements.

“These deficiencies may result, in part, from a Firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis,” the PCAOB said in the Deloitte report, which didn’t name the clients involved in the cited audits.

The PCAOB in 2007 looked at Deloitte’s practices through inspections at the company’s New York headquarters and 18 other offices. The report made public today lays out instances in which the firm insufficiently weighed clients’ valuation of assets and income-tax assumptions. The watchdog also faulted Deloitte’s independence procedures, saying it “has no formal system in place to monitor the services its foreign affiliates actually perform.”

“In our drive for continuous improvement, we have been making a series of investments focused on strengthening and improving our practice,” Deloitte Chief Executive Officer Joe Echevarria said in a statement. Echevarria, who has been with the firm since 1978, was elected to the top job in April.

The disclosure isn’t a disciplinary action, said Colleen Brennan, a PCAOB spokeswoman. Dozens of smaller registered public accounting firms have had similar criticisms made public and have retained their registration, she said.

The 2007 Inspection Report is at http://pcaobus.org/Inspections/Reports/Documents/2008_Deloitte.pdf

Bob Jensen's threads about Deloitte ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Fitch: Major Global Accounting Changes Hover as Standard-Setting Fatigue Sets In," Market Watch, January 18, 2012 ---
http://www.marketwatch.com/story/fitch-major-global-accounting-changes-hover-as-standard-setting-fatigue-sets-in-2012-01-18
Thank you Patricia Walters for the heads up.

Once you suck at rating bonds enough, obviously the next logical step is to start predicting the progress made by a couple of rulemaking bodies who have a solid track record of stretching out a timeline to nowhere:

Fitch Ratings expects the U.S. will still move forward with plans to incorporate International Financial Reporting Standards (IFRS) into U.S. GAAP, although in a prolonged, cautious and incremental way, according to a new report. Fitch believes a renewed emphasis on issuing converged, 'high quality' accounting standards and the need to re-expose updated proposals for comments has significantly slowed the completion of many accounting projects jointly initiated by FASB and the IASB. The major priority projects initially scheduled for a June 2011 completion are still at various stages of completion in 2012 and some will likely extend into 2013.

[via Fitch]

January 19, 2012 message from Pat Walters

Fitch Ratings has just issued its Global Accounting and Financial Reporting Outlook for 2012. Among other topics, the report summarizes the various approaches to incorporating IFRS into national standards and which option is the likely one for the SEC (and why) as well as what the SEC's options might be IF it decides to require or permit US companies to use IFRS.

This paper doesn't take a position about whether this is a good idea or not. It simply presents the options on the table, makes assessments as to the likelihood that one would be taken, and assesses the impacts of the various options.

I find the Fitch accounting reports to be well thought out and well written. They are certainly accessible to students.

The report also compares the three FASB models (current, 2010, revised/expected 2012) and IFRS 9 in a nice table.

On mandatory auditor rotation, the report concludes "The proposal stands moer of a change to become final in the E.U., while stiff resistance by accounting firms and issuers may prove to be too formidable for the proposal to become law in the U.S."

Enjoy,
Pat

January 19, 2012 reply from Bob Jensen

Hi Pat,

Thank you for this. I agree that it is a very good summary document and probably makes the best guess as the way "condorsement" will take place over many years to come.

See the attached table.

I'm bothered by the lack of definition "country-specific" in terms of condorsement. I assume the U.S. will be able to stay on LIFO since the U.S. Tax Code is obviously country specific.

But there's a huge gray zone that bothers me. For example consider embedded derivatives in financial instruments. IFRS 9 says to forget about hunting for embedded derivatives since they are ipso facto (ha ha) insignificant. Since U.S. companies deal in possibly more financial instruments that the rest of the world combined, my prior experience with corporate executives who have made presentations in some of my hedge accounting dog and pony shows is that it is both common for financial instruments to have embedded derivatives and that the risk metrics in the embedded derivatives frequently differ from risk metrics in the host contracts.

If U.S. companies are in fact taking advantage of the IFRS 9 loophole to hide risk, does this make the issue "country specific??

The embedded derivatives way to hide risk is only one of many other possible "country specific" issues. Suppose U.S. companies begin taking misleading advantage of the softness of IFRS 9 in testing for hedge effectiveness. This is another huge loophole that will allow for hiding of risk if auditors go soft on client efforts to declare questionable hedges as effective.

Actually the list of gray areas can possibly go on infinitum in terms of what become "country specific" issues.

And worse, if there is too much condorsement on "country specific" issues departures of U.S. IFRS from London IFRS grows wider and wider and wider. This could become self-defeating in terms of the original intent of convergences.

And if such gray zone condorsement catches on with over 100 other nations who turn gooey on the way they define their "country specific" departures from IFRS, then we're back to another tower of Accountancy Babel.

It appears to me that the major goal of having one set of worldwide accounting standards always was and will forever be an impossible dream. But then again, those of us that have a knee-jerk hatred for monopoly power are greatly relieved.

Thanks again,
Bob Jensen

January 19, 2012 reply by Bob Jensen

Hi Saeed,

If the condorsement track is to be taken, there are two opposing alternatives that must also be resolved by the SEC?

Alternative 1
Is the fundamental basis of accounting to be IFRS with condorsement (country-specific) exceptions that are to be blended in piecemeal year after year ad infinitum? And if so, when will the foundational shift to IFRS take place?

Alternative 2
Is the fundamental basis of accounting to be the FASB Codification database with IFRS substitutions to take place piecemeal year after year ad infinitum? The issue of timing is less earth shaking in this latter alternative for clients, professors, and students.

The big international auditing firms and the AICPA prefer Alternative 1 since that alternative will abruptly lead to hundreds of millions of dollars more in up front revenues for IFRS client training courses, IFRS consulting, and IFRS study materials relative to Alternative 2. And there will be fewer differences accounting rules to contend with under Alternative 1 until the condorsement exceptions are blended in piecemeal over the years.

Client and security analyst positions on these alternatives are harder to predict and probably more varied. Alternative 2 will have many more delayed expenses in IFRS training and software conversions. But many of the clients want the marshmallow principles-based standards to get around the barbed wire of FASB rules based standards. SEC studies to date reveal that security analysts and investors probably favor the slower Alternative 2 track.

So we wait on pins and needles until the SEC can make up its mind!

We also wait on pins and needles until we get a working definition of "country-specific."

Respectfully,
Bob Jensen

Question
What is the most downloaded article published by the Journal of Accounting Research?

Answer
"International Accounting Standards and Accounting Quality," JAR, March 2008 ---
http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2008.00287.x/full

It was at the JAR site on Wiley.com ---
http://onlinelibrary.wiley.com/journal/10.1111/%28ISSN%291475-679X

Most Accessed

International Accounting Standards and Accounting Quality
MARY E. BARTH, WAYNE R. LANDSMAN, MARK H. LANG

Most Cited
The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity
HOLLIS ASHBAUGH-SKAIFE, DANIEL W. COLLINS, WILLIAM R. KINNEY JR, RYAN LAFOND

A September 2007 version of this paper may be downloaded free from SSRN ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=688041

Abstract:
We examine whether application of International Accounting Standards is associated with higher accounting quality. The application of IAS reflects the combined effects of features of the financial reporting system, including standards, their interpretation, enforcement, and litigation. We find that firms applying IAS from 21 countries generally evidence less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do a matched sample of firms applying non-US domestic standards. Differences in accounting quality between the two groups of firms in the period before the IAS firms adopt IAS do not account for the post-adoption differences. We also find that firms applying IAS generally evidence an improvement in accounting quality between the pre- and post-adoption periods. Although we cannot be sure that our findings are attributable to the change in the financial reporting system rather than to changes in firms' incentives and the economic environment, we include research design features to mitigate the effects of both.
Number of Pages in PDF File: 55

Keywords: IAS, IASB, International Accounting Standards, International Accounting Standards Board, International Financial Reporting Standards

Jensen Comment
This article was written before changes were made in both IASB and FASB standards. Some of these changes narrowed the differences between IASB and FASB standards. Others widened these differences, particularly in the area of accounting for derivative financial instruments and hedging.

"IFRS and US GAAP: Similarities and Differences" according to PwC (2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities and differences mentioned in the booklet are not comprehensive of all similarities and differences. The document is, however, a valuable addition to students of FASB versus IASB standard differences and similarities.

It's not easy keeping track of what's changing and how, but this publication can help. Changes for 2011 include:

Revised introduction reflecting the current status, likely next steps, and what companies should be doing now
(see page 2);

Updated convergence timeline, including current proposed timing of exposure drafts, deliberations, comment periods, and final standards
(see page 7);

More current analysis of the differences between IFRS and US GAAP -- including an assessment of the impact embodied within the differences
(starting on page 17); and

Details incorporating authoritative standards and interpretive guidance issued through July 31, 2011
(throughout).

This continues to be one of PwC's most-read publications, and we are confident the 2011 edition will further your understanding of these issues and potential next steps.

For further exploration of the similarities and differences between IFRS and US GAAP, please also visit our IFRS Video Learning Center.

To request a hard copy of this publication, please contact your PwC engagement team or contact us.

Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly downplays the importance of these differences. It may well be that IFRS is more restrictive in some areas and less restrictive in other areas to a fault. This is one topical area where IFRS becomes much too subjective such that comparisons of derivatives and hedging activities under IFRS can defeat the main purpose of "standards." The main purpose of an "accounting standard" is to lead to greater comparability of inter-company financial statements. Boo on IFRS in this topical area, especially when it comes to testing hedge effectiveness!

One key quotation is on Page 165

IFRS does not specifically discuss the methodology of applying a critical-terms match in the level of detail included within U.S. GAAP.
Then it goes yatta, yatta, yatta.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

Bob Jensen's threads on accounting standards setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

January 29, 2012 reply from Jagdish Gangolly

This business of using "most accessed" index to measure anything, in my humble opinion, is meaningless. Given some time I could write a simple program to fool the site (just as a hacker a long time ago wrote a program to keep calling Jerry Falwell's donation hotline, and Rev. Falwell was stuck with al the phone bills).

Besides, I am not sure downloads means much these days. My own hard disk is cluttered with thousands of papers I downloaded that I hoped to read before my time is up; cheap storage has made most of us academics good packrats.

I think it is a Wiley gimmick to draw attention to the journal, or a veiled attempt at advertising without appearing to have done so.

There are other measures if one wants to study the impact of publications, or measure the productivity of scholars. Here are a few (by no means a comprehensive list):

1. Erdos number (or its cousin, the Kevin Bacon number) http://en.wikipedia.org/wiki/Erd%C5%91s_number www.oakland.edu/enp

Measures structural relationships in the network. In my view it is a very parochial measure.

(You can find your own Erdos number starting at http://academic.research.microsoft.com/ . I tried looking for mine, with some trepidation. My Erdos number is 4, which is not bad at all for some one who was an accountant most of his career. ).

2. H-index (and its variants/relatives such as H-B index, Durfee square, and Eddington number:) http://en.wikipedia.org/wiki/Arthur_Stanley_Eddington#Eddington_number_.28cycling.29)
http://en.wikipedia.org/wiki/H-index Measures impact as well as productivity

However, this index too can be misleading. For example, the legendary French mathematician Evariste Galois had H-index of 2.

3. g-index http://en.wikipedia.org/wiki/G-index Measures productivity only based on publications

This too can easily be gamed.

4. Impact factor ( http://en.wikipedia.org/wiki/Impact_factor ) which is based on the average number of citations per paper. This is a crummy measure because the average cites per paper is known to be not normally distributed (so arithmetic mean is a meaningless measure). Its distribution is called Bradford distribution, which is an example of power law distribution.

Most journals are measured by impact factors. So there is a tendency to fiddle with things to make one look good (a la El Naschie). In 2007, the journal "Folia Phoniatrica et Logopaedica" . fed up with its low impact factor (0.66) published an editorial citing ALL papers that it had published the previous 2 years. Their impact factor rose to 1.44 (See the Wikipedia article on impact factor). They were the Enron of academic publishing, and paid dearly; they were excluded in the Journal Citation Reports the following year.

Jagdish

Jagdish S. Gangolly
Department of Informatics
College of Computing & Information
State University of New York at Albany
Harriman Campus, Building 7A, Suite 220 Albany, NY 12222
Phone: 518-956-8251, Fax: 518-956-8247

Foreign Currency FX Converter --- http://www.xe.com/ucc/
Live Currency Converter --- http://www.livecurrencyconverter.com/
Also see http://www.oanda.com/currency/converter/

Affinity Fraud --- http://en.wikipedia.org/wiki/Affinity_fraud

Ponzi Fraud --- http://en.wikipedia.org/wiki/Ponzi_scheme

"Fleecing the flock The big business of swindling people who trust you," The Economist, January 28, 2012 ---
http://www.economist.com/node/21543526

WITH a nudge from their pastor, the 25,000 members of the New Birth Missionary Baptist Church near Atlanta opened their hearts, and their wallets, to Ephren Taylor. And why not, given his glittering credentials? Mr Taylor billed himself as the youngest black chief executive of a publicly traded company in American history. He had appeared on NPR and CNN. He had given a talk on socially conscious investing at the Democratic National Convention. Snoop Dogg, a rapper, had tapped him to manage a charitable endowment.

So when Mr Taylor’s “Wealth Tour Live” seminars came to town, faithful ears opened wide. Eddie Long, the mega-church’s leader, introduced Mr Taylor at one event with the words: “[God] wants you to be a mover and shaker…to finance you well to do His will.” Mr Taylor offered “low-risk investment with high performances”, chosen with guidance from God.

Divine inspiration, alas, has given way to legal tribulation. For many investors, the 20% guaranteed returns proved illusory. Mr Taylor (whereabouts unknown) stands accused of fraud in a number of lawsuits. Bishop Long, a co-defendant, has urged Mr Taylor to “do the right thing” and cover any losses. The charges are not the first blot on the minister’s reputation: last year he settled for an estimated $15m-25m claims that he had coerced young men into oral sex.

An essential element of Mr Taylor’s approach was to make those he targeted want to invest in him personally, says Cathy Lerman, a lawyer representing some of the victims. “He was a master of creating a marketing presence. He would say: ‘If you want to check me out, just Google me.’” He had no problem convincing them that he was an ordained minister, even though he had no formal seminary training, according to court documents.

It will take time to gauge the full extent of the losses, not least because it will require untangling a web of companies, some of them shells. Victims, many of whom entrusted their life savings to Mr Taylor, are still coming forward. Some call him “the black Bernie Madoff”.

Let us prey

Mr Madoff, whose victims lost perhaps $20 billion, perpetrated the largest “affinity fraud” ever. The term refers to scams in which the perpetrator uses personal contacts to swindle a specific group, such as a church congregation, a rotary club, a professional circle or an ethnic community. Once the scammer gains their trust, his scam spreads like smallpox. Most affinity frauds are Ponzi schemes, in which money from new investors is used to repay old ones, or is siphoned off by the promoters.

The Madoff fraud fed on multiple affinity circles: wealthy Jews in Florida and Israel, country-club types and European old money, lured with help from marketers running “feeder” funds. The next-largest alleged investment fraud of recent years, the $7 billion collapse of Allen Stanford’s empire, also concerned specific groups, including the Latin American and Libyan diasporas and Southern Baptists. Mr Stanford’s trial began on January 23rd. He denies wrongdoing.

Beneath the mega-scams swirls a mass of smaller cons, spanning the world. Any close-knit community can be a target. Last August a South Korean pastor was indicted for misappropriating 2.4 billion Korean won ($2.3m) that the faithful had handed over to set up a Christian bank. In Britain, Kevin Foster’s KF Concept targeted the former coal-mining towns of South Wales, bilking more than 8,000 victims with the help of glitzy roadshows.

Continued in article

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

Affinity fraud in some respects is related to audit firm fraud and negligence. When the audit firms are the largest international accounting firms we tend to trust their names and logos, sometimes at our own peril ---
http://www.trinity.edu/rjensen/Fraud001.htm

Question
Will the largest auditing firms ever really honor the spirit of their repeated pledges of independence?
Why do they keep pushing toward the edge of the cliff known as audit firm rotation?

"Someone Convinced KPMG and GE to End Their Little Loan Staff Arrangement," by Caleb Newquist, Going Concern, January 24, 2012 ---
http://goingconcern.com/post/someone-convinced-kpmg-and-ge-end-their-little-loan-staff-arrangement

Last fall, we reported that KPMG had issued an internal preservation notice to its employees in regards to "General Electric's Loan Staff Arrangements." As you may remember, this arrangement consisted of KPMG employees being loaned to GE to help supplement the work of the world's best tax law firm. Oh, and KPMG is the auditor for GE. Last year, Francine McKenna reported that this sketchy arrangement included KPMG employees, "having GE email addresses, are supervised by GE managers – there is no KPMG manager or partner on premises – and have access to GE employee facilities." In short, she wrote, "KPMG should know better" than try to pull this type of stunt on the PCAOB.

This morning, McKenna reports on the latest development on this little arrangement:

KPMG will no longer loan tax professionals to GE during busy season, according to a source close to the situation. KPMG was billing an extra $8-10 million, over and above the audit each year, for the service. It looks like a regulator got to both KPMG and GE, but quietly. I doubt we’ll ever see a public sanction or fine from the PCAOB or the SEC for KPMG.

It's not immediately clear when the arrangement ended but I can't imagine any of the staff being too broken up about this. The partners, on the other hand...well, yeah, that's $10 million in fees that will probably go away. If you ever worked under this arrangement or have worked for another client under something similar, email us your story and any background you might have.

Continued in article

"KPMG Nixes GE Loaned Tax Staff Engagement," by Francine McKenna, re:TheAuditors, January 26, 2012 ---
http://retheauditors.com/2012/01/26/kpmg-nixes-ge-loaned-tax-staff-engagement/

KPMG will no longer loan tax professionals to GE during busy season, according to a source close to the situation. KPMG was billing an extra $8-10 million, over and above the audit each year, for the service.

Loaning, assigning, or “seconding” tax or any “bookkeeping” staff to an audit client is prohibited by the Sarbanes-Oxley Act of 2002 and by regulations that precede Sarbanes-Oxley. It looks like a regulator got to both KPMG and GE, but quietly. I doubt we’ll ever see a public sanction or fine from the PCAOB or the SEC for KPMG.

My story exposing this prohibited activity by an auditor for an audit client was published in Forbes last March.

KPMG has been GE’s auditor for more than 100 years. Former SEC Chief Accountant Lynn Turner was surprised and quite angered at my revelation. In addition, Turner commented in his newsletter on an email I received from the Carpenters Pension Fund after my column appeared at Forbes.com. The pension fund sought to hold GE and KPMG accountable for auditor independence and have a discussion at the annual meeting about auditor rotation. They were blocked by GE and the SEC:

Continued in article

Jensen Comment
Recall that KPMG paid the largest fine ($456 million) in the history of accounting firms for selling phony tax shelters and pledged to cut back on tax consulting that tainted appearances of the firm's auditing independence.

Another KPMG defendant pleads guilty of selling KPMG's bogus tax shelters
One of the five remaining defendants in the government's high-profile tax-shelter case against former KPMG LLP employees is expected to plead guilty ahead of a criminal trial set to begin in October, according to a person familiar with the situation. The defendant, David Amir Makov, is expected to enter his guilty plea in federal court in Manhattan this week, this person said. It is unclear how Mr. Makov's guilty plea will affect the trial for the remaining four defendants. Mr. Makov's plea deal with federal prosecutors was reported yesterday by the New York Times. A spokeswoman for the U.S. attorney in the Southern District of New York, which is overseeing the case, declined to comment. An attorney for Mr. Makov couldn't be reached. Mr. Makov would be the second person to plead guilty in the case. He is one of two people who didn't work at KPMG, but his guilty plea should give the government's case a boost. Federal prosecutors indicted 19 individuals on tax-fraud charges in 2005 for their roles in the sale and marketing of bogus shelters . . . KPMG admitted to criminal wrongdoing but avoided indictment that could have put the tax giant out of business. Instead, the firm reached a deferred-prosecution agreement that included a $456 million penalty. Last week, the federal court in Manhattan received $150,000 from Mr. Makov as part of a bail modification agreement that allows him to travel to Israel.
Paul Davies, "KPMG Defendant to Plead Guilty," The Wall Street Journal, August 21, 2007; Page A11 --- Click Here

Jensen Comment
The criminal case fell apart for complicated reasons, but that did not exonerate KPMG as a firm nor return its $456 million settlement reached with the IRS.

After the 2005 $456 million settlement with the U.S. Treasury, the Chairman and CEO of KPMG, Timothy Flynn, issued the following Open Letter. Among other things, KPMG announced it will almost entirely stop preparing tax returns for "individuals."

August 29, 2005

AN OPEN LETTER TO KPMG LLP'S CLIENTS (from Timothy P. Flynn Chairman & CEO KPMG LLP)

This is to advise you that KPMG LLP (U.S.) has reached an agreement with the U.S. Attorney's Office for the Southern District of New York, resolving the investigation by the Department of Justice into tax shelters developed and sold by the firm from 1996 to 2002. This settlement also resolves the Internal Revenue Service's examination of these activities.

As a result of this settlement, KPMG LLP (U.S.) continues as a multidisciplinary firm providing high quality audit, tax, and advisory services to large multinational and middle market companies, as well as federal, state and local governments.

The Public Company Accounting Oversight Board (PCAOB) has reaffirmed that the resolution of this matter with the Department of Justice does not affect the ability of KPMG to perform quality audit services. Additionally, the Department of Justice states in the agreement that KPMG is currently a responsible contractor and expressly concludes that the suspension or debarment of KPMG is not warranted. KPMG currently audits the Department of Justice financial statements.

Further details on the resolution of this matter can be found in the attached Media Statement that the firm issued today; a Key Provisions and Terms document detailing the settlement; and a Quality & Compliance Measures document that provides an overview of the quality initiatives the firm has undertaken since 2002, including specific changes to Tax operations.

KPMG accepts the high level of responsibility inherent in performing its role as a steward of the capital markets. Let me be very clear: The conduct by former tax partners detailed in the KPMG statement of facts attached to the agreement is inexcusable. I am embarrassed by the fact that, as a firm, we did not identify this behavior from the outset and stop it. You have my personal assurance that the actions of the past do not reflect the KPMG of today.

I am proud to be Chairman of this remarkable organization and proud of the tremendous professionals of KPMG. We are resolute in our commitment to maintain the trust of the public, our clients and our regulators. You have my promise that, as our first priority, KPMG will deliver on our commitment to the highest levels of professionalism — integrity, transparency, and accountability.

We truly appreciate the strong support of our clients throughout this investigation. Your Lead Partner will be contacting you later to make sure that you have the information you need about this matter.

On behalf of all of our partners and employees, thank you for your continued support.

Timothy P. Flynn

Chairman & CEO
KPMG LLP

Attachments following below:

Media Statement

Key Provisions and Terms

Quality & Compliance Measures

News

For Immediate Release

Contact:

George Ledwith
KPMG LLP
Tel. (201) 505-3543

KPMG LLP STATEMENT REGARDING SETTLEMENT
IN DEPARTMENT OF JUSTICE INVESTIGATION

NEW YORK, Aug 29 — KPMG LLP made the following statement today in regard to a resolution reached by the U.S. firm with the Department of Justice in its investigation into tax shelters developed and sold from 1996 to 2002 and related conduct:

KPMG has reached an agreement with the U.S. Attorney's Office for the Southern District of New York and the Internal Revenue Service, resolving investigations regarding the U.S. firm's previous tax shelter activities.

"KPMG LLP is pleased to have reached a resolution with the Department of Justice. We regret the past tax practices that were the subject of the investigation. KPMG is a better and stronger firm today, having learned much from this experience," said KPMG LLP Chairman and CEO Timothy P. Flynn. "The resolution of this matter allows KPMG to confidently face the future as we provide high quality audit, tax and advisory services to our large multinational, middle market and government clients."

As part of the agreement, KPMG has agreed to make three monetary payments, over time, totaling $456 million to the U.S. government. KPMG will also implement elevated standards for its tax business.

Under the terms of the settlement, a deferred prosecution agreement, the charges will be dismissed on December 31, 2006, when the firm complies with the terms of the agreement. Richard C. Breeden has been selected to independently monitor compliance with the agreement for a three-year period.

All of the individuals indicted today are no longer with the firm. KPMG has put in place a process to ensure that individuals responsible for the wrongdoing related to past tax shelter activities are separated from the firm.

"As KPMG's new leaders, Tim Flynn and I are extremely proud of the 1,600 partners and 18,000 employees of today's KPMG," said John Veihmeyer, KPMG Deputy Chairman and COO. "Looking toward the future, our people, our clients and the capital markets can be confident that KPMG, as its first priority, will deliver on our commitment to the highest levels of professionalism."

With regard to claims by individual taxpayers, KPMG looks forward to resolving the civil litigation expeditiously and with full and fair accountability.

The resolution of the Department of Justice's investigation into the U.S. firm's past tax shelter activities has no effect on KPMG International member firms outside the United States.

KPMG LLP SETTLEMENT WITH THE U.S. DEPARTMENT OF JUSTICE
KEY PROVISIONS AND TERMS

SCOPE OF SETTLEMENT

"Global settlement" that resolves both the IRS examination and the DOJ investigation into the U.S. firm's past tax shelter activities and related conduct.

STRUCTURE OF AGREEMENT

KPMG "Statement of Facts" accepting responsibility for unlawful conduct of certain KPMG tax leaders, partners and employees relating to tax shelter activities.

Deferred Prosecution Agreement (DPA)

– Filing of charges, directed to past tax shelter activities.

– Dismissal of the charges on December 31, 2006, when KPMG has complied with the terms of the agreement.

– The agreement provides various remedies to the government, including extension of the term, should the firm fail to comply with the agreement.

KPMG currently audits the financial statements of the Department of Justice. The Department of Justice states in the agreement that KPMG is currently a responsible contractor and expressly concludes that the suspension or debarment of KPMG is not warranted.

KEY CONDITIONS TO BE MET BY KPMG LLP

Monetary Payments

Fine of $128 million; restitution to the IRS of $228 million; and IRS penalty of $100 million.
Total of $456 million to the U.S. government.

Timing: $256 million by September 1, 2005; $100 million by June 1, 2006; $100 million by December 21, 2006.

Payments will not be deductible for tax purposes, nor will they be covered by insurance.

Tax Practice Restrictions and Elevated Standards

Discontinue by February 26, 2006, the remainder of the private client tax practice and the compensation and benefits tax practice (exclusive of technical expertise maintained within Washington National Tax).

Continue individual tax planning and compliance services for (a) owners or senior executives of privately held business clients of KPMG; (b) individuals who are part of the international executive (expatriate) service program, which serves personnel stationed outside of their home country; and (c) trust tax return services provided to large financial institutions. Any tax planning and compliance services for individuals that do not meet these criteria will be discontinued by February 26, 2006, and no new engagements for individuals that do not meet these criteria will be accepted.

Prohibit pre-packaged tax products, covered opinions with respect to any listed transaction, providing tax services under conditions of confidentiality, charging fees other than based solely on hours worked (with the exception of revenue sales and use tax audits), relying on opinions of others unless KPMG concurs with the conclusions of such opinion, and defending any "listed transaction."

Comply with elevated standards regarding minimum opinion and tax return position thresholds.

Cooperation and Consistent Standards

Full cooperation with the government's ongoing larger investigation into the tax shelter activities; and toll the statute of limitations for five years.

All future statements must be consistent with the information in the KPMG statement of facts, and any contradicting statement will be publicly repudiated.

Compliance and Ethics Program

Maintain a compliance and ethics program that meets the criteria set forth in the U.S. Sentencing Guidelines.

Program to include related training programs and maintenance of hotline to contact monitor on an anonymous basis.

Independent Monitor

Richard Breeden

Term: Three years.

Scope:

– Review and monitor compliance with the provisions of the agreement, the compliance and ethics program, and the restrictions on the Tax practice as set forth in Paragraph 6 of the agreement.

– Review and monitor implementation and execution of personnel decisions made by KPMG regarding individuals who engaged in or were responsible for the illegal conduct described in the Information.

Internal Revenue Service Closing Agreement

An IRS closing agreement is part of the global settlement and DPA, which provides for enhanced IRS oversight of KPMG's Tax practice extending two years following the expiration of the monitor's term.

Provisions include instituting a Compliance and Professional Responsibility Program that is focused on disclosure requirements of IRC Section 6111 and list-maintenance requirements of IRC Section 6112. (The program is intended to enhance the recordkeeping and review processes that KPMG has in place to comply with existing disclosure and list-maintenance requirements.

Out of the crooked timber of humanity, no straight thing was ever made. -
Immanuel Kant

Apple Outsources Most of Its Manufacturing to Foreign Factories, Some of Which Are Disgraces to Humanity
"The Cost of Doing Business: Foxconn, Apple and the Fate of the Modern Worker," by Dan Rowinski, ReadWriteWeb, January 27, 2012 ---
http://www.readwriteweb.com/archives/the_cost_of_doing_business.php

Ours is an imperfect society. The nature of our reality, our desires and our need to possess, while maintaining a façade of moral righteousness, puts us at odds with the reality that exists within the systems we have created.
In recent days, the character of our era of consumerism has been put in question. We want what is new, shiny, fashionable. We want it now. With this desire we turn our heads from the consequences it takes to produce our toys, our symbols of status. When The New York Times reports that our gadgets are made in Chinese factories where working conditions can be horrendous, we express outrage and tweet the article from our iPads. The culture we have created comes with the cost of doing business.

The Conditions at Foxconn

The conditions at Chinese factories that make our gadgets can be deplorable. Workers often live in crowded dorms, work more than 60 hours a week, are punished with physical labor and withholding of wages, according to The New York Times report on conditions at Foxconn, which makes Apple's iPhones, iPad and iPods. In a response to the article, Apple CEO Tim Cook sent an email to Apple employees and the company released a "Supplier Responsibility Report." This is not a discussion solely about Apple though. Apple is the most valuable company in the world, so it naturally faces the most scrutiny. Other device makers, such as Dell, Nokia, Motorola and Hewlett-Packard, are clients of Foxconn as well.

Apple and Foxconn are just two examples in a larger system. Companies have to weigh the cost and benefits of the manufacturing process. This is not a new dilemma but is a matter of fact within the economy created by the Industrial Revolution. Nor is this quandary solely a matter of high tech devices. Companies like Nike have been cited in the past for the conditions at their manufacturing plants in Asia. How much do you really want to know about the synthetic polymer that is the backbone of much of the world's textile industry? What about the bread you eat, the TV you watch, the socks you wear?

Framing the Utilitarian vs. Deontological Conversation

"The mere knowledge of a fact is pale; but when you come to realize your fact, it takes on color. It is all the difference between hearing of a man being stabbed in the heart, and seeing it done." - Mark Twain

Continued in article

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

Oh No! Firefox is (now was) my favorite browser on my old XP computer that is still my favorite computer
Firefox Support Ending for Windows 2000, Windows XP Pre-SP2 ---
http://www.readwriteweb.com/hack/2012/01/firefox-support-ending-for-win.php

I have a new Windows 7 machine, but mostly I use it for radio!

Do you still have to be a techie who knows how to fool with the Windows Registry to get a fixed menu bar with Internet Explorer 9?

. . .

CONCLUSION

The committee members are in agreement about the importance of lease accounting for users of financial statements. Overall, we are pleased to see that this exposure draft introduces the “right-of-use” model, rather than the ownership model, which has worked so poorly in practice. Unfortunately, current lease accounting is plagued by loopholes, transaction structuring, and other actions by management to circumvent the intent of the standard. Preventing all transaction structuring is of course a difficult endeavor. The ED makes a good effort at dealing with the current problems of lease accounting, but some big loopholes (concerning especially scope, SPE and intragroup operations, definition of lease term, discounting, and executory contracts for services) remain that need to be closed off. With regard to revaluation, we prefer the current FASB approach (impairment testing), but are opposed to fair value assessments and reassessments that create structuring opportunities.

The ED as currently specified is not ready for use and needs significant modification. In response to comments from this committee and others, the FASB/IASB have held a number of re-deliberation meetings in 2011 and directed staff to re-examine several issues. Key focus has been on the scope and definition of a lease, measurement of contingent rentals, renewal options, revaluations, the discount rate to be used, lack of consistency between the lessor and lessee accounting, and consistency with current revenue recognition and financial statement presentation projects.

As of March 27, 2011 (see IASB 2011), the FASB/IASB have affirmed the scope and definitions used in the lease ED, the need to distinguish a lease from a service contract, the need to separate lease and non-lease components of a contract, and to have two types of leases called finance leases (current IASB terminology) and other than finance leases (like current operating leases in U.S. GAAP). Additional clarification has been issued about the discount rate to be used by the lessor and lessee (the rate charged by the lessor to the lessee) though this is complicated because the lessor's rate may not be known by the lessee. Additional guidance has also been issued to count a renewal option in the lease term “when there is a significant economic incentive for an entity to exercise an option to extend the lease.” The need to align this standard with the revenue recognition, consolidation, and financial statement presentation projects indicate that the board has continued need for re-deliberation, and is struggling to construct a lease standard that will achieve consistent and comparable financial reporting.

Yuri Biondi (principle author), Robert J. Bloomfield, Jonathan C. Glover, Karim Jamal, James A. Ohlson, Stephen H. Penman, Eiko Tsujiyama, and T. Jeffrey Wilks

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

The author of this particular case study is surprising at first blush.

But then the acronym ABC appears over and over.

ABC Costing --- http://en.wikipedia.org/wiki/Activity-based_costing

"Case Study: When to Drop an Unprofitable Customer," Harvard Business Review Blog, January 25, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/01/case_study_when_to_drop_an_unp.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you'd like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and email address.

As Tommy Bamford and Jane Oldenburg drove into the visitor section of Westmid Builders' car park, Jane pointed out the man they had come to see: Steve Houghton, Westmid's purchasing executive. He was in front of the headquarters building, waving a greeting. Jane waved back to her friend, whom she had known for decades, but Tommy scowled. He wasn't looking forward to this visit. "Oh, come on," Jane said, nudging him. "Look how friendly he is."

Tommy was a director and Jane was the Midlands regional sales manager for Egan & Sons, a supplier of doors and staircases to Westmid for 63 years. The two executives had to pause before crossing the gravel road that ran through Westmid's grounds, because of the steady stream of trucks traveling to and from construction sites around Birmingham and all the way to London. Despite the heavy traffic that April morning, Tommy knew that Westmid was hurting from the economic downturn in the UK. The company was building only half as many housing units this year as it had during recent boom times. With the steep falloff, Westmid was no longer Egan's biggest customer, but it still retained considerable clout. Too much clout.

"I'm flattered by such an august delegation," Steve said. "Shall we start with a tour?" Jane, a tiny and exuberant blonde with a boy's haircut, happily agreed. She had been here many times, of course, but Tommy was not a regular. Steve chatted away as he shuttled them in a little electric vehicle past warehouses and outbuildings.

Jane had promised Tommy that a visit to Westmid would change his view of the company. But he could not shake his newfound awareness of the amount of money Egan was losing with Westmid — the account's ratio of operating income to sales was a negative 28%. The two companies had enjoyed a smooth relationship for decades, but Tommy strongly believed the time had come to terminate it.

Steve kept glancing at Tommy during the tour. "You look pale," Steve said at one point. "I hope my driving isn't making you queasy."

"That's quite all right," Tommy said. "I've got a strong stomach."

The Power of Customer Costing

Egan & Sons, founded in Birmingham in 1908, was hardly a sleepy company. With three efficient plants staffed by 3,000 employees, it had reinvented itself to become an innovative manufacturer of modular steel staircases and fiberglass doors. Its accounting system, however, remained simple and traditional. The weaknesses became apparent only in the mid-2000s, when Chinese companies began to encroach on Egan's low end, severely undermining profitability.

With careful study, Tommy had figured out that the company's costing system had made it blind to its own operations: It allocated factory overhead to products as a percentage markup over direct labor costs, and corporate overhead as a percentage of sales. Thus, the company could not accurately identify its costs for serving individual customers or for designing and producing all the new products it had recently brought to the marketplace. The lack of traceability and transparency extended to the costs for specialized equipment that was used only for particular products or customers.

Tommy, an avid reader of the business literature, wanted Egan to adopt an activity-based costing, or ABC, approach. Enlisting several younger financial managers, he made the case to the executive director, Wilfred Hammond, who approved the hiring of a consultant with extensive experience in ABC. Tommy and the consultant assembled a team that began by identifying the costs associated with each customer order — starting from bidding, through raw-materials purchasing, production, and delivery, and culminating with invoicing and collection.

With 6,000 SKUs and 2,500 customers, the team had to crunch reams of data, but the basic ABC process was straightforward: Calculate the hourly (capacity) cost of the resources that performed each sales, production, administrative, storage, and distribution process and the time that each order required at each stage. Before long, the team could pinpoint the cost of every process performed for every customer and could trace revenue deductions — discounts, allowances, promotions, and returns — back to individual customers. These deductions, which totaled 12% of sales, had previously been collapsed into a single line item in the P&L for each customer.

At one point, Hammond had grilled Tommy about why the project was taking so long and costing so much. Tommy responded that the time and care were critical to producing valid, defensible numbers from which he could initiate candid discussions with the least profitable customers. Tommy also hoped to identify Egan's most profitable customers so that sales managers might extend and deepen relationships with them.

The Art and Science of Rationalizing

It took four months for the ABC project's initial findings to emerge. And they were shocking: Just 1% of Egan's SKUs accounted for 100% of its operating profits. The most profitable 20% generated more than double that amount, but the extra gains were canceled out by the company's unprofitable products, which generated losses equivalent to 120% of profits. The customer story was similar: The most profitable 1% of accounts generated 100% of profits, and the top 10% accounted for nearly double that amount. The remaining 90% of customers were either break-even or a drag on the bottom line.

So Hammond formed a management team to take action on the large number of unprofitable products and customers. At a "SKU rationalization meeting," the team classified its money-losing SKUs into four action categories: drop, reprice, redesign, or take no action (for products that had been ordered by important customers or were unprofitable only because of internal process inefficiencies). The company soon had a plan to eliminate or modify nearly half of its 6,000 SKUs.

Tommy chaired a subsequent "customer rationalization meeting," which he hoped would yield a similar consensus: that Egan should sever ties with its loss-making customers — especially the least profitable 1%, among them Westmid, whose accumulated losses cost Egan 40% of the company's profits.

Hammond was traveling and unable to attend the meeting, so Jane had monopolized it. "Customers aren't SKUs — they're relationships," she'd declared. "Some of these accounts are new ones with a huge upside. Do we really want to cut them off? And Westmid — sure, it's been tough going with them for the past few years, but things are starting to improve. And look at our history together: 63 years! They've been hugely profitable for us in good times, and they've stuck with us when lots of other customers have turned to China. We can't just cut them off based on a cost-accounting report."

Continued in article

Bob Jensen's threads on managerial and cost accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting

Frequent-flyer_program

“Citibank deems frequent-flier miles taxable, but does the IRS?” by David Lazarus, Los Angeles Times, January 24, 2012 ---
http://www.latimes.com/business/la-fi-lazarus-20120124,0,1228880.column

Frequent-flier miles clearly have value — why else would people want them? But do they also represent taxable income?

Citibank seems to think so. It's sending tax forms to people who received thousands of miles as a reward for opening a checking or savings account. Those forms value each mile at about 2.5 cents and list the total dollar amount as miscellaneous income.

This is news to tax pros.

"I've been practicing for 25 years and I've never had an instance where miles have been treated as taxable," said Gregg Wind, a West Los Angeles certified public accountant.

But he said that because Citi is reporting this as people's income to the Internal Revenue Service, customers may be on the hook for paying the taxes. "Otherwise," Wind said, "your chances of being audited could go up."

As tax time rolls around, the question of whether airline miles are a form of income is something that potentially affects millions of people. Miles are one of the most common rewards doled out by credit card issuers.

Larry Fechter, 66, of Palm Springs was among numerous Citi customers who received a Form 1099 in recent days. He opened a checking and a savings account with the bank last summer after being promised 25,000 American Airlines miles.

"The mileage was a very strong inducement," Fechter told me.

He said there was nothing in the original sales pitch that warned of the tax consequences of accepting the miles. As such, Fechter said it was a big surprise to get the form in the mail informing him that he has to pay taxes on $645 worth of miles.

If he were in the 28% tax bracket, that would mean a payment of $180.60 owed to Uncle Sam.

Adding insult to injury, Fechter said, his new Citi accounts paid less than $4 in interest on the cash he'd deposited.

"I'm shocked that they want me to pay taxes for mileage points," he said. "I've never had to do that before with any company I've done business with."

And there's a good reason for that. In 2002, the IRS issued a policy brief noting that because there are "numerous technical and administrative issues" relating to miles, such as how they're valued and used, the agency "has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles."

"Consistent with prior practice," it said, "the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel."

In other words, the tax man won't come after you for undeclared miles.

Or will he?

Catherine Pulley, a Citi spokeswoman, cited the 2012 instructions for Form 1099-MISC, which state that income tax must be paid if at least $600 in "prizes and awards" is received.

"The Internal Revenue Code recognizes rewards as taxable income," she said. "This recognition by the Internal Revenue Code is disclosed to customers prior to their election to participate in the promotion."

Not so much, actually. Buried in the fine print of Citi's letter offering the frequent-flier miles, it says only that "customer is responsible for taxes, if any." That's not quite the same as saying Citi will be ratting you out to the IRS for receiving hundreds of dollars in miscellaneous income.

So where does the IRS stand on all this? I found the tax agency surprisingly reticent on the matter of miles.

An IRS spokeswoman told me only that the 2002 policy brief "still stands." She declined to comment on how this squares with the prizes-and-awards provision of Form 1099, or what taxpayers should do in light of Citi's reporting their airline miles as income.

Wind, the accountant, was stunned by Citi's defense of reporting miles as taxable income. He said he couldn't think of any instance in which miles would be given out except as a prize or award.

"This opens up the notion that all miles are taxable," Wind said.

It does. And it's insufficient for the IRS to avoid taking a stand and to say only that it won't go after people for failing to declare their frequent-flier miles.

At the very least, the tax agency needs to clarify what happens when, as in this case, a business declares your miles as income paid to you. What happens if you don't do likewise?

As I say, this potentially affects millions of people — virtually anyone with airline miles. It'd be nice to know where we all stand.

Jensen Comment
I searched for “frequent flier miles” in the IRS Website and found no hits of relevance on this issue.

There are some huge issues to consider here. If frequent flier miles are to be taxable, are they to be taxed when awarded or when they are used in lieu of cash for airline tickets? It would seem that when the taxpayer is a cash basis taxpayer, it would only make sense to tax them if and when they are redeemed. Otherwise it would be a complete mess to have to apply for refunds for miles that expire unredeemed.

This opens Pandora’s Box to other types of redemptions. For example, every time I pay a Holiday Inn bill I get Priority Club redemption points. However, there are conditions on these points. Firstly, I have to have enough points for a free night. Secondly, some deals require that I pay for additional nights at a hotel in order to redeem my points for one free night. How can such points be “valued” for tax purposes?

How do airlines recognize revenue for frequent flyer miles? Which specific accounting rules apply?
http://answers.yahoo.com/question/index?qid=20080407083708AAR4zFl

How do airlines account for the liability for frequent flier miles?
United Airlines May 9, 2007
http://www.wikinvest.com/stock/United_Airlines_%28UAUA%29/Frequent_Flyer_Accounting

Frequent Flyer Accounting. In accordance with fresh-start reporting, the Company revalued its frequent flyer obligation to estimated fair value at the Effective Date, which resulted in a $2.4 billion increase to the frequent flyer obligation. The Successor Company also has elected to change its accounting policy for its Mileage Plus frequent flyer program to a deferred revenue model. The Company believes that accounting for frequent flyer miles using a deferred revenue model is preferable, as it establishes a consistent valuation methodology for both miles earned by frequent flyers and miles sold to non-airline business partners.

Before the Effective Date, the Predecessor Company had used the historical industry practice of accounting for frequent flyer miles earned on United flights on an incremental cost basis as an accrued liability and as advertising expense, while miles sold to non-airline business partners were accounted for on a deferred revenue basis. As of the Effective Date, the deferred revenue value of all frequent flyer miles are measured using equivalent ticket value as described below, and all associated adjustments are made to passenger revenues.

The deferred revenue measurement method used to record fair value of the frequent flyer obligation on and after the Effective Date was to allocate an equivalent weighted-average ticket value to each outstanding mile, based upon projected redemption patterns for available award choices when such miles are consumed. Such value was estimated assuming redemptions on both United and other participating carriers in the Mileage Plus program, and by estimating the relative proportions of awards to be redeemed by class of service within broad geographic regions of the Company’s operations, including North America, Atlantic, Pacific and Latin America.

Under the new method of accounting adopted for this program at the Effective Date, the Company reduced operating revenue by approximately $158 million more in the eleven months ended December 31, 2006 to account for the effects of the program as compared to the reduction in revenues that would have been recognized using the Predecessor Company’s accounting method. The Company’s new accounting policy does not continue the use of the former incremental cost method, which impacted revenues and advertising expense under that prior policy. Assuming the use of the Predecessor Company’s accounting for this program, for the eleven months ended December 31, 2006, the Company estimates that it would have recorded approximately $27 million of additional advertising expense.

The estimation of the fair value of each award mile requires the use of several significant assumptions, for which significant management judgment is required. For example, management must estimate how many miles are projected to be redeemed on United, versus on other airline partners. Since the equivalent ticket value of miles redeemed on United and on other carriers can vary greatly, this assumption can materially affect the calculation of the weighted-average ticket value from period to period.

Management must also estimate the expected redemption patterns of Mileage Plus customers, who have a number of different award choices when redeeming their miles, each of which can have materially different estimated fair values. Such choices include different classes of service (first, business and several coach award levels), as well as different flight itineraries, such as domestic and international routings, and different itineraries within domestic and international regions of United’s and other participating carriers’ flight networks. Customer redemption patterns may also be influenced by program changes, which occur from time to time and introduce new award choices, or make material changes to the terms of existing award choices. Management must often estimate the probable impact of such program changes on future customer behavior using limited data, which requires the use of significant judgment. Management uses historical customer redemption patterns as the best single indicator of future redemption behavior in making its estimates, but changes in customer mileage redemption behavior to patterns which are not consistent with historical behavior can result in material changes to deferred revenue balances, and to recognized revenue.

Management’s estimate of the expected breakage of miles as of the fresh-start date, and for recognition of breakage post-emergence, also requires significant management judgment. For customer accounts which are inactive for a period of 36 consecutive months, it has been United’s policy to cancel all miles contained in those accounts at the end of the 36 month period of inactivity. In early 2007, the Company announced that it is reducing the expiration period from 36 months to 18 months effective December 31, 2007. Under its deferred revenue accounting policy effective in 2006, the Company recognized revenue from breakage of miles by amortizing such estimated breakage over the 36 month expiration period. However, current and future changes to program rules, such as the recent change in the expiration period, and program redemption opportunities can significantly alter customer behavior from historical patterns with respect to inactive accounts. Such changes may result in material changes to the deferred revenue balance, as well as recognized revenues from the program. A hypothetical 1% change in the Company’s estimated breakage rate, estimated at 14% annually as of December 31, 2006, has approximately an $18 million effect on the liability.

At December 31, 2006, the Company’s outstanding number of miles was approximately 508.8 billion. The Company estimates that approximately 438.3 billion of these miles will ultimately be redeemed based on assumptions as of December 31, 2006 and, accordingly, has recorded deferred revenue of $3.7 billion. A hypothetical 1% change in the Company’s outstanding number of miles or the weighted-average ticket value has approximately a $42 million effect on the liability. These assumptions do not include the impact of reducing the expiration period from 36 months to 18 months.

From The Wall Street Journal Accounting Weekly Review on December 8, 2006

TITLE: Making Use of Frequent-Flier Miles Gets Harder
REPORTER: Scott McCartney
DATE: Dec 05, 2006
PAGE: D5
LINK: http://online.wsj.com/article/SB116528094651740654.html?mod=djem_jiewr_ac
TOPICS: Accounting, Auditing

SUMMARY: The Department of Transportation (DOT) has undertaken audit procedures on airlines to review how they are "living up to their 1999 'Customer Service Commitment.'" This document was written when "airlines were under pressure from Congress and consumers for lousy service and long delays" in order to "stave off new legislation regulating their business." The airlines also report little about the frequent flier mile plans they offer, and particularly focus only on the financial aspects of these plans in their annual reports and SEC filings, rather than, say, information about ease of redeeming miles in which customers may be particularly interested.

QUESTIONS:
1.) What information do airlines provide about frequent flier mileage offerings and redemptions in their annual reports and SEC filings?

2.) Why is this information important for financial statement users? In your answer, describe your understanding of the business model and accounting for frequent flier miles, based on the description in the article.

3.) Why did the Department of Transportation (DOT) undertake a review of airline practices? What type of audit would you say that the DOT performed?

4.) What audit procedures did the airlines abandon due to financial exigencies? What was the result of abandoning these audit procedures? In your answer, describe the incentives provided by the act of undertaking audit procedures on operational efficiencies and effectiveness.

Reviewed By: Judy Beckman, University of Rhode Island

"Making Use of Frequent-Flier Miles Gets Harder Falling Redemption Rate Is One of Many Service Issues, Government Report Find," by Scott McCartney, The Wall Street Journal, December 5, 2006; Page D5 --- http://online.wsj.com/article/SB116528094651740654.html?mod=djem_jiewr_ac

Which airline is the most accommodating when it comes to letting consumers cash in frequent-flier mileage awards? It's hard to know, a new government report says, because airlines disclose so little information.

One thing is clear: Over the past four years, the percentage of travelers cashing in frequent-flier award tickets has declined at four of the five biggest airlines, even though miles accumulated by consumers have increased.

The Department of Transportation's inspector general went back and checked how airlines were living up to their 1999 "Customer Service Commitment." Back then, airlines were under pressure from Congress and consumers for lousy service and long delays, and they promised reform to stave off new legislation regulating their business.

Seven years later, Inspector General Calvin L. Scovel III found that under financial pressure, many airlines quit auditing or quality control checks on their own customer service, leading to service deterioration. Airlines don't provide enough training for employees who assist passengers with disabilities, the investigation found, and don't always follow rules when handling passengers who get bumped from flights.

And as travelers have long complained, government auditors studying 15 carriers at 17 airports found airline employees often don't provide timely and accurate information on flight delays and their causes, and don't give consumers straightforward information about frequent-flier award redemptions.

"They can do better and must do better, and if they don't do better, Congress has authority to wield a big stick," said U.S. Rep John Mica, the outgoing chairman of the House Aviation Subcommittee who requested the inspector general's customer-service investigation. He said he's eager to hear the airline industry's response before making final judgments, but the report card gives airlines only "average to poor grades in a range of areas that need improvement."

Since airlines are returning to profitability and aggressively raising fares, there's more attention being paid to customer-service issues. Delays have increased; baggage handling worsened. As traffic has rebounded, airlines still under financial pressure because of high oil prices may not have adequate staff to live up to the promises they made on customer service.

The report called on the DOT to "strengthen its oversight and enforcement of air-traveler consumer-protection rules" and urged airlines to get back on the stick for customer service. The inspector general also reminded consumers that since airlines incorporated the customer-service commitment into their "contract of carriage" -- the legal rules governing tickets -- carriers can be sued for not living up to their customer-service commitment.

The industry says it is paying attention. The inspector general's Nov. 21 report "is a good report card for reminding us where we need to improve," said David Castelveter, a spokesman for the Air Transport Association, the industry's lobbying group, which coordinated the "Customer Service Commitment." Airlines will "react accordingly," he said.

One of the stickiest areas is frequent-flier redemptions because airlines are loath to release detailed information about their programs, considering it crucial competitive information. Frequent-flier programs have become big money-makers for airlines since they sell so many miles in advance to credit-card companies, merchants, charities and others. That allows them to pocket cash years in advance of a ticket, then incur very little expense when consumers eventually redeem the miles, if they ever do.

In 1999, airlines pledged to publish "annual reports" on frequent-flier redemptions. But at most carriers, the disclosure didn't change at all. Today, as then, carriers typically bury numbers deep in filings with the Securities and Exchange Commission and report only the number of awards issued, the estimated liability they have for the cost of awards earned but not yet redeemed and the number of awards as a percentage either of passengers or passenger miles traveled.

The inspector general said the hard-to-find information has only "marginal value to the consumer for purposes of determining which frequent-flier program best meets their need."

What you'd really want to know is which airline makes it easiest to get an award, particularly the cheapest domestic coach ticket, typically 25,000 miles, which is the most popular award. But airlines don't disclose how many awards are at the lowest level, and how many consumers have to pay double miles or so for a premium award of an "unrestricted" coach ticket.

The award market follows ticket prices and availability, so recent years have seen an increase in the price people have to pay to get the awards they want, and less availability of award seats, particularly at the cheapest level, because some airlines have cut capacity and demand for travel has been strong. Add in the flood of miles airlines are issuing, and the value of a frequent-flier mile has declined sharply.

The inspector general's report compares award-redemption rates at big airlines over the past four years and found a relatively steady drop at four carriers: UAL Corp.'s United Airlines, Continental Airlines Inc., AMR Corp.'s American Airlines and Northwest Airlines Corp. US Airways Group Inc. actually saw higher rates of redemption in 2005 than in 2002, and Delta Air Lines Inc. was unchanged. Both Delta and US Airways had higher redemption rates than competitors.

to claim short-trip tickets, adding more seats to award inventory this fall and offering a new credit card with easier redemption features. Northwest said its numbers have remained relatively consistent -- roughly one in every 12 seats is a reward seat.

Other airlines said declining redemption rates result from factors including an increase in paying customers, fuller planes and shifts in airline capacity. American says the number of awards it has issued has remained fairly constant, and while the number of passengers it carries has climbed, its seat capacity hasn't. In addition, several airlines said customer preferences like using miles for first-class upgrades or hoarding miles longer to land big international trips can affect the redemption rate. "Reward traffic does not spool up and absorb capacity increases as fast as revenue traffic does," said a Continental spokesman.

Those numbers don't include awards that their customers redeem on partner airlines, so some of the decline could be attributable to an increase in consumers' opting to grab award seats on foreign airlines or other partners, says frequent-flier expert Randy Petersen. American, for example, does disclose more redemption data on its Web site and showed that last year, it issued more than 955,000 awards for travel on its partners, compared with the 2.6 million used on American and American Eagle flights.

"The data can be misleading," said Mr. Petersen, founder of InsideFlyer.com. He'd like to see more data, including numbers on how many customers made requests but couldn't find seats.

But further disclosure is unlikely to happen unless the government forces it. "Left to their own devices," said Tim Winship, publisher of FrequentFlier.com, "I see no reason to expect airlines to step up and disclose more."

PwC Settles for a hefty $41.9 million for "overbilling"
PricewaterhouseCoopers LLP agreed to pay $41.9 million to settle charges it overbilled government agencies for travel expenses, the Justice Department said. The department alleged the company failed to disclose rebates it received from credit-card companies, airlines, hotels and rental-car agencies and didn't reduce reimbursement claims accordingly. PricewaterhouseCoopers didn't admit to any wrongdoing and said the policy that gave rise to the matter was changed in 2001. In late 2003, PricewaterhouseCoopers settled its share of a class-action lawsuit filed in state court in Arkansas that accused the company of overbilling corporate clients for travel-related expenses.
"Pricewaterhouse Settles Charges," The Wall Street Journal, July 12, 2005; Page C12 --- http://online.wsj.com/article/0,,SB112111341898682519,00.html?mod=todays_us_money_and_investing
Jensen Comment: PwC is not the only large firm of keeping travel rebates secret from clients. You can read more about this question of ethics below.

While many filings in the Texarkana case are under seal, one internal PricewaterhouseCoopers document from October 1999 estimated the firm's annual credits from travel rebates at $45 million, mostly from postflight rebates on airline tickets. As an example, the court record contains a December 1999 contract under which Budget Rent A Car Corp. agreed to pay PricewaterhouseCoopers a rebate equal to 3% of all rental revenue that Budget received from the firm, if annual sales to PricewaterhouseCoopers topped $15 million. The plaintiff in the Texarkana case has alleged that some of the firms' airline rebates topped 40% of the plane tickets' purchase prices.
Jonathon Weil, The Wall Street Journal, September 23, 2003 --- http://online.wsj.com/article/0,,SB106452493527358700,00.html?mod=todays%255Fus%255Fmoneyfront%255Fhs

Note from Bob Jensen: This is a classic problem of ethics. The issue is not so much what the largest accounting firms are/were doing before they got caught (I guess most have stopped doing it now). It’s more of a matter of keeping it secret from their clients, potential clients, and the public in general. For example, many (most) of us get frequent flier miles when we bill our airline tickets to universities and other organizations that pay our air fares. However, it's no big secret that we get those frequent flier miles. Some of us also get credit card rebates if we pay with credit cards such as Discover Card. This is a bit more of a gray area, but if the price is the same no matter how we pay the bill, I guess we can hold our head high and declare that we are not ripping off anybody as long a another form of payment would not reduce the bill. However, what the large accounting firms have been doing around the world for travel billings is a much more controversial matter of ethics. The above article notes how the Justice Department is investigating this rip off (my words) in more than just one of the large accounting firms. What gets me about the above revelation of the magnitude of this scheme is the hypocritical aspect in which large accounting firms are now preaching virtue but still show signs of practicing vice after all the scandals. Sometimes it seems they are not really listening to Art Wyatt's advice quoted above.

Question
When is the last time you ever heard of taxes being lower in Massachusetts, New York, and California?
Thank you Paul Caron for the heads up.

"NFL Final Four: Boston, New York, and San Francisco Trump Baltimore in Lower Taxes," by Steve H. Hanke and Stephen J.K. Walters, The Wall Street Journal, January 21, 2012 ---
http://online.wsj.com/article/SB10001424052970204468004577167283166176946.html?KEYWORDS=nfl

This Sunday's NFL championship games have it all: future Hall-of-Famers in abundance, jet-fueled offenses, bone-crushing defenses, and even a pair of coaches vying to bring a sibling rivalry to Super Bowl Sunday in two weeks.

And if you're a fan of cities more than their sports teams, you know that these games feature genuine superstars: Boston, New York and San Francisco are magnets to residents and employers, engines of prosperity, and league leaders on any quality-of-life measure.

Then there's our hometown. Baltimore is in need of a strategy for urban revival—the type of elixir that turned the other three cities around.

Some historical perspective is in order. Three decades ago, none of these cities worked very well and all were losing residents. Between 1950 and 1980, New York's population declined 10%, San Francisco's 12%, Baltimore's 17% and Boston's an astounding 30%.

These losses were accompanied by steady erosion of each city's job base, rising crime, declining school quality, and a sense that cities themselves might be passé. Many embraced the notion that the post-World War II exodus from core cities was a result of racism (fueling "white flight") or Americans' unfortunate taste for detached homes and expansive lawns.

Then, around 1980, some cities that had been in decline enjoyed dramatic reversals of fortune. Between 1980 and 2010, Boston's population grew 10%, New York's 16%, and San Francisco's 19%. But Baltimore continued its descent, losing another 21% of its residents.

Did those in turnaround cities magically discover the virtues of racial diversity or high-density living? Or did their leaders heed the lessons of previous decades and correct policy errors that had contributed to urban decay?

Neither. There was no sudden change in the cultures of the cities that would become superstars, and no real awareness among their governing elites that they were doing anything wrong. But their most damaging policy reflexes were, in fact, altered—against their will.

All these cities had long pursued progressive political agendas with pride. But the problem with redistributive policies at the local level is that the donor classes might move out as fast as beneficiary classes move in—or, as the population figures cited earlier show, even faster. Robin Hood may seem a heroic figure, but once his rich victims flee Nottingham, even that city's poor might question his effectiveness. Related Video

Steve Hanke on why New York, Boston, and San Francisco are flourishing while Baltimore is languishing.

San Francisco and Boston were rescued from their folly by statewide tax revolts. California's Prop 13, passed in 1978, capped property taxes in that state at 1%—which slashed San Francisco's rate by almost two-thirds. Massachusetts followed suit in 1980 with Prop 2½, which mandated that municipalities could not increase their total property tax receipts by more than 2.5% annually. New York City taxpayers did not revolt, but state legislators rationalized the Big Apple's chaotic property tax system in 1981; it now enjoys property tax rates that average about one-third of those in its surrounding suburbs (though its other taxes are certainly punishing).

While no single factor explains any city's destiny, it is not a mere coincidence that Boston, New York and San Francisco reversed their declines at the exact moment they became favorable environments for private investment in residential and business capital.

Every time a city raises the tax rate on residential and business property, its owners suffer a capital loss (which economists refer to as "tax capitalization"). In effect, tax hikes are incremental expropriations; owners flee not just because of short-term wealth losses but in fear of future damage to their property rights. Tax caps not only improve the immediate cash flow on investments in real property but—perhaps more important—secure it against further expropriations.

Baltimore has blithely ignored basic property-rights theory. When high property taxes chased many residents and business owners to the suburbs, the city raised rates further. When grandiose slum-clearance and transit plans destabilized neighborhoods, Baltimore's one-party establishment arranged eminent-domain seizures and pushed even more "big footprint" renewal projects.

The results leave no doubt about which strategy is more effective. Baltimore's real, median household income has been stagnant for the last three decades. New York's has risen 22% while Boston's and San Francisco's have soared by half. Baltimore's 2009 homicide rate was 4.7 times Boston's and 6.7 times New York's and San Francisco's.

Even Baltimore's sports facilities, which many assume have contributed mightily to our mythical renaissance, carry a lesson. Boston, New York and San Francisco have all declined to build their football teams new, lavish, government-financed stadiums within city limits. They've nevertheless thrived.

Maryland taxpayers, on the other hand, gifted Baltimore wonderful football and baseball stadiums near our Inner Harbor, on the theory that "stimulating" downtown development would be a game-changer that inevitably spread prosperity throughout the city. They're still hoping for that change.

In this, Baltimore is no different from other cities wedded to policies that repel investment. All try to make up for this deficiency via capital allocation by government—and all show disappointing results. As this weekend's championship cities demonstrate, greater respect for private capital and some protections for the property rights of its owners can have miraculous effects. Someday, even Baltimore might call that play.

Jensen Comment
But when you compare states rather than cities, people and businesses are exiting Taxachusetts, New York, and California to states having lower taxes. For example, many very wealthy people (like Mitt Romney) now reside in New Hampshire and commute or telecommute to Boston. Similarly, some wealthy people live in Delaware and commute and telecommute to New York and Baltimore. They have to pay state taxes on earned income within a state, but for very wealthy people earned income is generally less than investment income such as income from tax exempt bonds. The retired Barnie Frank, who is now quite wealthy, admits that a major portion of his investment portfolio is in Mass. municipal bonds that are tax exempt in his federal and state returns.

My good friend Bob Anthony, now deceased, made a lot of money on textbook royalties and investment income. It didn't take much imagination to figure out one of the major reasons he made New Hampshire his home state even when he was on the full-time faculty of Harvard University for most of his career. I'm not a wealthy man, but with my more modest savings in retirement it also does not take a lot of imagination to figure out why I chose to retire in New Hampshire rather than other states I considered such as the coast of Maine, the lakes of northern Minnesota and Wisconsin, or wonderful retirement places in northern California. The runner up retirement choice for me was the Nevada shores of Lake Tahoe, but real estate prices were too steep for me in that vicinity.

"States Where People Pay the Most (and Least) in Taxes," by Charles B. Stockdale, Michael B. Sauter, Douglas A. McIntyre, Yahoo Finance, July 21, 2011 ---
http://finance.yahoo.com/taxes/article/113173/states-pay-most-least-taxes-247wallst

Bob Jensen's threads on taxation are at
http://www.trinity.edu/rjensen/BookBob1.htm#010304Taxation

Marginal Tax Rates Around the World --- http://www.econlib.org/library/Enc/MarginalTaxRates.html

"How Much the Rich Pay Mitt Romney, the 1% and taxes," The Wall Street Journal, January 20, 2012 ---
http://online.wsj.com/article/SB10001424052970204555904577168683705018156.html?mod=djemEditorialPage_t

Mitt Romney's disclosure this week that his effective federal tax rate is "probably closer to the 15% rate than anything" has created the predictable political uproar. The White House and its media allies figure they've now got their stereotype of the Monopoly man, albeit without his cane and top hat, who they can crush in their planned class-warfare campaign.

We're not sure if facts will matter in this cacophony, but someone should at least try to introduce a little reality into the debate, especially since Mr. Romney seems so unprepared to make the case.

Start with the fact that, like Warren Buffett, Mr. Romney said he makes most of his money from investments, not wages or salary. Thus his income is really taxed twice: once at the corporate tax rate of 35%, then again at a 15% tax rate when it is passed through to him as dividends or via capital gains from the sale of stock.

All income from businesses is eventually passed through to the owners, so to ignore business taxes creates a statistical illusion that makes it appear that the rich pay less than they really do. By this logic, if the corporate tax rate were raised to, say, 60% from today's 35% and the dividend and capital gains tax were cut to zero, it would appear that business owners were getting away with paying no federal tax at all.

This all-too-conveniently confuses the incidence of a tax with the burden of a tax. The marginal tax rate on every additional dollar of capital gains and dividend income from corporate profits can reach as high as 44.75% at the federal level (assuming a company pays the 35% top corporate rate), not 15%.

The Congressional Budget Office recently examined the distribution of federal taxes on various income groups. The report was ballyhooed by liberals as proof of rising income inequality, but that argument is for another day. What everyone has ignored is what CBO found about the relative taxes paid by different groups. And, lo, the rich pay more, which is probably why the press didn't report it.

The nearby table from the CBO report shows that in 2007 the average income tax rate paid by the 1% was 18.8%, compared to 4.2% for Americans in a broadly defined middle class from the 21st to 80th income percentiles. The poorest 20% on average paid a net negative income-tax rate of 5.6% because of the checks they receive for tax credits that are "refundable." These are essentially transfer payments redistributing income from the rich and middle class to the poor.

As for all federal taxes, CBO found that in 2007 the top 1% paid an average rate of a little under 30%, compared to 15.1% for middle-income earners. In calculating this overall tax burden, CBO takes account of payroll taxes, which moves the rate of the lowest 20% of earners into positive territory at 4.7%. CBO also apportions to individuals who are shareholders the tax that corporations pay on corporate profits.

Continued in article

"Why Americans think the tax rate is high when it is not," The Economic Times ---
http://economictimes.indiatimes.com/news/international-business/why-americans-think-the-tax-rate-is-high-when-it-is-not/articleshow/11568197.cms

When people heard that Mitt Romney's federal income tax rate was about 15 per cent, the immediate reaction of many was to assume that their own tax rate was higher. The top marginal rate is 35 per cent, after all, and the marginal rate on a couple with $70,000 in taxable income is 25 per cent.

But the truth is that most households probably pay a lower rate than Romney. It is impossible to know for sure, given that he has yet to release his tax return. What is clear, though, is that a large majority of US households - about two out of three - pays less than 15 per cent of income to the federal government, through either income taxes or payroll taxes.

This disconnect between what we pay and what we think we pay is nothing less than one of the country's biggest economic problems.

Many Americans see themselves as struggling under the weight of a heavy tax burden (partly for the understandable reason that wage growth has been so weak). Yet taxes in the United States are quite low today, compared with past years or those in other countries. Most important, US taxes are not sufficient to pay for the programs that many people want, like Medicare, Social Security, road construction and education subsidies.

What does this combination create? An enormous long-term budget deficit.

Together, all federal taxes equaled 14.4 per cent of the nation's economic output last year, the lowest level since 1950. Add state and local taxes, and the share nearly doubles, to about 27 per cent, according to the Tax Policy Center in Washington - still lower than at almost any other point in the past 40 years.

As the economy recovers and incomes rise, tax payments will increase somewhat. But they will not keep pace with projected spending, in the form of Medicare, Medicaid and Social Security. And total taxes at current rates would still make up a smaller share of the economy than in virtually any other rich country - not just European nations but also Australia, Canada, Israel and New Zealand.

Obviously, tax increases are not the only way to solve the deficit. Spending cuts can, too. But so far, at least, many voters seem to prefer small, symbolic cuts, like those to foreign aid. Substantial cuts - be they the changes to Medicare that President Barack Obama included in his health care bill or the Medicare overhaul that Republicans prefer - tend to be politically unpopular.

Since the late 1970s, just before the modern tax-cutting push began, total federal tax rates have fallen for every income group. The payroll tax has risen, but declines in the income tax have more than made up for those increases. Nearly half the population now pays no federal income tax.

Most households pay less than 15 per cent of their income to the federal government because of tax breaks, like the exclusion for health insurance, and because marginal rates apply to only a small part of a taxpayer's income. On the first $70,000 of a couple's taxable income, the total federal income tax rate is only 13.8 per cent.

That said, taxes have fallen the most for the very affluent. Romney and his father - George W. Romney, the former automobile executive, Michigan governor and presidential candidate - do a nice job of illustrating the change.

Continued in article

Jensen Comment
Of course rich and poor alike pay other taxes such as taxes at the fuel pump and payroll deduction taxes if those ever come back (which seems increasingly unlikely in our political dogfight). And there are serious ways to be mislead by media-alleged tax rates. For example, do you compute the tax rate that you're paying now on your own tax return on the basis of full gross income versus adjusted gross income after exclusions and deferrals for such thinks as interest on municipal bonds, 401-K deferrals, and other tax breaks in the current tax rules? Chances are if you divide your 2011 what you pay in 2011 federal income taxes by the full "gross" income you will find that you're paying 10% or less.

Rich people take greater advantages of such tax law provisions such as exemption of interest on municipal and school bonds. But in a sense they are paying a virtual tax on those exemptions since municipal and school bonds have lower interest returns and/or more default risk. Hence computing the marginal rate that rich people pay in taxes becomes more complicated than you will ever learn from watching MSNBC or reading the New York Times.

I think the rich should be taxed at higher rates through a tougher alternative minimum tax rather than increases in the capital gains tax. The AMT has a less direct impact on starving risk and venture capital relative to increases in the capital gains tax. Increases in the capital gains tax simply put make it less profitable to risk savings for investments in new startup businesses and expansion of small businesses.

Low capital gains taxes give some relief to investors for holding on to long-term investments over periods of inflation. If capital gains rates are increased they should be offset with inflation index adjustments much like we see in certain types of investments like U.S. Treasury Inflation Protected Securities (TIPS) investments ---
http://www.investopedia.com/terms/t/tips.asp
Also see inflation index bond --- http://en.wikipedia.org/wiki/Inflation-indexed_bond

Bob Jensen's helpers for taxpayers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Tax Decision Case
From The Wall Street Journal Accounting Weekly Review on January 20, 2012

Most ETFs Are Tax-Smart. But Others...
by: Ari I. Weinberg
Jan 09, 2012
Click here to view the full article on WSJ.com

TOPICS: Capital Gains, Taxation

SUMMARY: The article describes an ETF's structure, how investor transactions affect taxation of other invested individuals, and how ETF managers can vary behaviors to be more or less tax efficient in their operations. It is part of the WSJ's "Investing in Funds: A Quarterly Analysis, January 2012."

CLASSROOM APPLICATION: The article is useful in classes covering personal taxation or financial planning.

QUESTIONS:
1. (Introductory) What is the difference between a mutual fund and an exchange traded fund (ETF)? In your answer, include a definition of each of these types of funds then make the comparison between the two.

2. (Introductory) How do changes in funds' investment portfolios result in taxable gains to investors?

3. (Advanced) How can investor requests for redemptions result in taxable gains (or deductible losses) for all investors in that mutual fund? How does the difference identified in answer to question 1 above mean that ETFs can avoid generating these tax implications for investors?

4. (Advanced) In what ways are some ETFs less tax efficient than other ETFs? How could you determine an ETF's history in this matter?

5. (Advanced) Overall, why does an investor care about taxable distributions from an investment before selling that investment himself or herself?

6. (Advanced) What is the purpose of Forms K-1 and 1099? What is the difference between the two forms? Which of these forms does the article's author believe a taxpayer/investor would prefer to receive from an ETF?

Reviewed By: Judy Beckman, University of Rhode Island

"Most ETFs Are Tax-Smart. But Others... ," by: Ari I. Weinberg, The Wall Street Journal, January 9, 2012 ---
http://online.wsj.com/article/SB10001424052970203893404577098661198194858.html?mod=djem_jiewr_AC_domainid

Exchange-traded funds are hardly the magic models of tax efficiency that some advisers or fund sponsors would like investors to believe. But generally, they are at least as good at minimizing tax pain for stock investors as index funds, the most tax-efficient type of mutual fund.

Here's a closer look at the tax advantages of ETFs and the limits of those benefits, particularly when investing in assets other than stocks. How does ETF structure affect taxes?

The vast majority of ETFs are regulated as traditional mutual funds under the Investment Company Act of 1940, and most are similar to conventional index funds in that they buy and hold the components of a market benchmark. The difference is that unlike their mutual-fund cousins, ETFs trade like stocks. As long as the indexes they are tracking don't see big changes in their components, ETFs, like index funds, rarely have to make portfolio changes.

Avoiding such changes helps limit realized capital gains that might have to be distributed to investors.

But there is a significant difference in how ETFs operate compared with mutual funds that also helps with tax efficiency. When a traditional mutual fund receives cash from investors, it issues fund shares and buys a representative set of its portfolio investments. When investors redeem, the fund delivers cash and may have to sell underlying investments, which can result in capital gains that are subject to tax. [NEEDillonline] David Plunkert

With ETFs, ordinary investors buy and sell ETF shares from other investors, not from the fund itself. Meanwhile, ETF shares are created and redeemed in so-called in-kind transactions with big institutional investors: To receive ETF shares, market makers, known as authorized participants, deliver the underlying securities (or a representative basket) to the fund manager. And when they redeem ETF shares, they are handed securities rather than cash, which often eliminates the need for the fund to take gains. What's the impact of ordinary investors' buying shares from each other?

With this design, buying and selling by one investor doesn't result in tax consequences for the rest of the fund because the ETF doesn't have to sell securities to pay off departing investors. ETFs allow investors to be "isolated from the actions of other investors," says Ryan Issakainen, ETF strategist for ETF sponsor First Trust Advisors LP. And, because the cost of trading is borne by the individual investor, securities-transaction costs for the fund itself are low. How do in-kind transactions affect a fund's tax efficiency?

They allow ETF managers to make tax-wise decisions about which securities to distribute and whether to sell securities or distribute them in-kind.

In industry parlance, ETFs can internalize losses and externalize gains. That is, when an index change requires an ETF to get rid of a stock that has fallen in price since purchase, the fund can make the sale on the open market, collect the cash and take the capital loss on its books. If the fund is looking at a winning trade, the bias is to pass that stock out in an in-kind redemption—taking its low cost basis out with it, as well as any potential capital-gains tax bill.

Continued in article

Bob Jensen's helpers for taxpayers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

"Marquet Embezzlement Report Reveals Continued High Rate Of Employee Theft For 2011 - Vermont tops list of highest risk states," Market Watch, January 17, 2012 ---
http://www.marketwatch.com/story/marquet-embezzlement-report-reveals-continued-high-rate-of-employee-theft-for-2011-2012-01-17
Thank you Caleb Newquist for the heads up.

Marquet International Ltd. announced today that it has released The 2011 Marquet Report On Embezzlement -- its annual study of major embezzlement cases in the United States. The study examined 473 major embezzlement cases active in the US in 2011 -- those with more than $100,000 in reported losses. The 2011 Marquet Report On Embezzlement examined several broad categories related to the white collar fraud phenomenon of employee theft, including:

-- Characteristics of the Schemes

-- Characteristics of the Perpetrators

-- Characteristics of the Victim Organizations

-- Judicial Consequences

Some noteworthy findings from the 2011 study include:

-- The number of major embezzlements dropped only a slight 2% from 2010;

-- Vermont topped the list of states with highest risk for loss due to embezzlement in 2011. Vermont was followed by Connecticut, Pennsylvania, Montana, Virginia, Iowa and Idaho;

-- In 2011, non-profits, including religious organizations, experienced the most embezzlement cases of all industry categories, behind only financial institutions;

-- The average loss was about $750,000 for 2011;

-- The most common embezzlement scheme in 2011 involved the forgery or unauthorized issuance of company checks;

-- Nearly three-quarters of the incidents in 2011 were committed by employees who held finance & accounting positions;

-- The average scheme lasted nearly 5 years;

-- Gambling continues to appear to be a motivating factor in some embezzlement cases; and,

-- Nearly two-thirds of all incidents involved female perpetrators in 2011.

"Unfortunately, 2011 was another banner year for employee theft in the United States, experiencing only a slight drop in frequency from the frenetic pace set in 2010," said Christopher T. Marquet, CEO of Marquet International. "Employee theft is not going away any time soon." The study also reported some conclusions Marquet has derived by combining the data from past four years:

-- Perpetrators typically begin their embezzlement schemes in their early 40s;

-- By a significant margin, embezzlers are most likely to be individuals who hold financial positions within organizations;

-- The Financial Services industry suffers the greatest losses from major embezzlements;

-- Vermont, Virginia and Florida are among the states with the highest risk for loss due to embezzlement;

-- Women are more likely to embezzle on a large scale than men;

-- Men embezzle significantly more than women per scheme;

-- Gambling is a clear motivating factor in driving some major embezzlement cases; and,

-- Only about 5 percent of major embezzlers have a prior criminal history.

Continued in article

Jensen Comment
Vermonters avoid the highest taxes among states by not reporting embezzlement income.

New Hampshirers avoid taxes by voting for 300+ state legislators with only a one-word vocabulary --- "No!"

Mainers avoid taxes by going on tax free welfare.

"Welfare recipients outnumber taxpayers: That's the situation Maine faces, and perhaps other states as well," Charleston Daily Mail, December 21, 2011 ---
http://www.dailymail.com/Opinion/Editorials/201112220151

Paul LePage, the Republican governor of Maine, mentioned an uncomfortable truth in a radio address this month: Maine has more welfare recipients than income tax payers.

Democrats challenged the accuracy of this assertion.

The Bangor Daily News fact-checked LePage and discovered that 445,074 Mainers paid state income tax, while 453,194 received some sort of state aid.

In Maine, Medicaid, welfare, food stamps and subsidies for education have a combined enrollment of 660,000.

Adjusting for overlap reduces the number to 453,194 - or 8,120 more people on state assistance than there are state income taxpayers in Maine.

What is situation in West Virginia?

Nationally, only 53 percent of the nation lives in a household that pays federal income tax.

While just about every worker has taxes withheld, many people have the entire amount refunded at tax time. With child tax credits and earned income tax credits, some people get more money from filing a return than they paid in.

But 30 percent of Americans live in households that receive some sort of public assistance that is means tested, meaning a person must have an income low enough to qualify for the aid.

Another depressing thought is that nearly half the "taxpayers" in the United States pay no federal or state income taxes.

Ernst & Young

To the Point: PCAOB seeks comment on expanded audit committee communication

The Public Company Accounting Oversight Board (PCAOB) is seeking comment on a proposal that would require auditors to modify and expand their communications with audit committees beyond what the PCAOB and the Securities and Exchange Commission currently require.

Our To the Point publication summarizes the proposal and provides some questions for audit committees to consider in commenting to the PCAOB.
http://www.ey.com/Publication/vwLUAssets/TothePoint_EE0897_ACCommunication_19January2012/%24FILE/TothePoint_EE0897_ACCommunication_19January2012.pdf

"Are Independent Audit-Committee Members Objective?" The Harvard Law School, July 6, 2009 --- http://blogs.law.harvard.edu/corpgov/2009/07/06/are-independent-audit-committee-members-objective/
Based upon a forthcoming Accounting Review article by Matthew Magilke of the University of Utah, Brian W. Mayhew of the University of Wisconsin-Madison, and Joel Pike of the University of Illinois at Urbana-Champaign.)
The working paper can be downloaded from SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1097714

Abstract:
We use experimental markets to examine stock-based compensation's impact on the objectivity of participants serving as audit committee members. We compare audit committee member reporting objectivity under three regimes: no stock-based compensation, stock-based compensation linked to current shareholders, and stock-based compensation linked to future shareholders. Our experiments show that student participants serving as audit committee members prefer biased reporting when compensated with stock-based compensation. Audit committee members compensated with current stock-based compensation prefer aggressive reporting, and audit committee members compensated with future stock-based compensation prefer overly conservative reporting. We find that audit committee members who do not receive stock-based compensation are the most objective. Our study suggests that stock-based compensation impacts audit committee member preferences for biased reporting, suggesting the need for additional research in this area.

Keywords: Audit Committee, Stock Compensation, Independence

Jensen Comment
I hate to keep repeating myself, but this will probably go down as one of those student experiments that have dubious extrapolations to the real world. The student compensation is nowhere near the possible compensations of real board members of real corporations. My traditional example here is the banker that gambles for relatively large stakes with his poker-playing friends, but never gambles big time with his local small bank.

Even more discouraging is that following decades of publications of empirical academic research, the findings will simply be accepted as truth without ever replicating the outcomes as would be required in real science. In science, its the replications that are more eagerly anticipated than the original studies. But this is not the case in accounting research --- http://www.trinity.edu/rjensen/theory01.htm#Replication

Probably the most fascinating study of an audit committee is the history of the infamous Audit Committee of Enron. Evidence in retrospect seems to point to the fact that the Audit Committee and the Board of Directors (Bob Jaedicke was on both Boards) were truly deceived by clever and unscrupulous Enron executives. Probably the most penetrating study of what happened was the after-the-fact Powers' Study conducted by the Board itself --- http://www.trinity.edu/rjensen/FraudEnron.htm
There are times when I'm more impressed by a sample of one than a sample of students in an artificial experiment that is never replicated.

Also see Question 7 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

July 8, 2009 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

Bob,

I read the first 25 or so pages of the paper. As an actual audit committee member, I feel comfortable in saying that the assumptions going into the experiment design make no sense whatsoever. And using students to "compete to be hired" as audit committee members is preposterous.

I have served on five audit committees of large public companies, all as chairman. My compensation has included cash, stock options, restricted stock, and unrestricted stock. The value of those options has gone from zero to seven figures and back to zero and there have been similar fluctuations in the value of the stock. In no case did I ever sell a share or exercise an option prior to leaving a board. And in every case my *only *objective as an audit committee member was to do my best to insure that the company followed GAAP to the best of its abilities and that the auditors did the very best audit possible.

No system is perfect and not all audit committee members are perfect (certainly not me!). But I believe that the vast majority of directors want to do the right thing. Audit committee members take their responsibilities extremely seriously as evidenced by the very large number of seminars, newsletters, etc. to keep us up to date. It's too bad that accounting researchers can't find ways to actually measure what is going on in practice rather than revert to silly exercises like this paper. To have it published in the leading accounting journal shows how out of touch the academy truly is, I'm afraid.

Denny Beresford

July 8, 2009 reply from Bob Jensen

Hi Denny,

It's clear why TAR didn't send you this manuscript to referee. It would be dangerous to have experienced audit committee members have an input to this type of accountics research that takes place in the academy's sandbox.

Bob Jensen

Bob Jensen's threads on professionalism and independence are at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

New York's CPA Examination Performance
Once again those high SAT/ACT/GMAT scores tell a familiar tale ---
http://goingconcern.com/post/last-here-are-top-and-bottom-cpa-exam-performers-among-new-york-schools

"Five things accounting educators need to know," CPA Success, January 6, 2012 ---
http://www.cpasuccess.com/2012/01/top-five-things-accounting-educators-need-to-know.html
Thank you Tom Hood for the heads up.

Five things accounting educators need to know

The top trends facing the CPA profession (almost none are technical).

The profession has a vision (and students like it).

There are more career opportunities than just the Big Four (business and industry, not-for-profits, government, and 40,000 firms).

Students want to understand the expectations and realities of the workplace.

Data (XBRL) is the new plastics -- career advice for students and young professionals.

This post is for our accounting educators who are responsible for laying a strong foundation for the CPA profession's future, and it is no easy job!

Today I am delivering a keynote on the latest issues facing the CPA profession at our annual educator's conference while attending the CPA-SEA (State CPA Society Executives) meeting with the AICPA senior leadership at our annual mid-winter meeting. Thanks to video and webcasting capabilities, I can actually be in two places at one time!

My presentation is not the typical PIU (professional issues update). This one is about the future -- the future of the CPA profession and the top trends identified by the CPA Horizons 2025 Project.

Here are some resources:

The CPA Horizons 2025 Report (downloadable), which captures the major trends and what CPAs should be thinking about.

The in-person Future Forum process designed and facilitated by MACPA's Business Learning Institute.

Perspectives from educators, young professionals, students, and CPAs in short video interviews.

Background and research from the AICPA and leading futurists about future trends.

Our whitepaper from our Leadership Academy about what leadership in the CPA profession will look like in 2023.

Here are three videos you may want to use in the classroom for talking about the future of the CPA profession:

AICPA's Global Forces Video -- the short trip to the future based on the research from AICPA.

Futurist David Pearce Snyder talking about the future, change, and the future CPA.

The Future Forum video -- giving insights from grassroots particpants.

Interview with Steve King of Emergent Research, who was lead futurist for Intuit's 2020 Project.

Downloadable documents you can use in class:

The PIU slidedeck from our 2012 Educator's Conference.

Our young professionals' whitepaper on leadership in the future.

The CPA Horizons 2025 project on a page.

The CPA Vision 2011 on a page.

The CPA Horizons 2025 report.

The CPA Vision 2011 report.

So for all you accounting educators, this post is for you.

Accounting professors avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals

Many practitioners are now lurkers on the AECM, including some from each of the Big Four who frequently send me private messages but do not want their messages forwarded in their own names.

I think there are many ways for getting practitioners more involved in academic research.

A consideration in this "debate" about top accountics science research journal refereeing is the inbreeding that has taken in a very large stable of referees that virtually excludes practitioners. Ostensibly this is because practitioners more often than not cannot read the requisite equations in submitted manuscripts. But I often suspect that this is also because of fear about questions and objections that practitioner scholars might raise in the refereeing process.

Sets of accountics science referees are very inbred largely because editors do not invite practitioner "evaluators" into the gene pool. Think of how things might've been different if practitioner scholars suggested more ideas to accountics science authors and, horrors, demanded something that some submissions be more relevant to the professions.

The argument that practitioners cannot read all the requisite equations in some AAA journals like TAR is a hollow argument to me. Scholarly practitioners can penetrate the professional value of most articles that contain equations.

The problem is that scholarly practitioners are usually very busy professionals who hesitate to giving free time pro bono to AAA journal refereeing. To get more practitioners into the refereeing process it will take appeals (pressures?) from their supervisors.

One thing the largest accounting firm CEOs want is great relations with the AAA, which is often the reason they help fund many AAA programs, meetings, and publications. What it will take to get more practitioner scholars on AAA journal editorial boards is an appeal from the Executive Committee of the AAA to the CEOs of accounting firms and some leading corporations to encourage their leading employee scholars to volunteer to be on editorial boards of AAA journals.

This is what it will take to diversify the gene pool of AAA journal editorial boards.

And I can hear accountics scientists groaning already at this idea. Many of them shake in fear that practitioners will have a say in judging the relevance of their research. The best accountics science researchers, however, have no such fears and have confidence that their research is relevant to the profession of accountancy.

Bob Jensen

January 22, 2012 reply from Jagdish Gangolly

Bob,

In the early days, there was a thriving collaboration between the accountants in practice and academicians, accounting or otherwise. A classic example is the cllaborative work of Kenneth Stringer (Deloitte) and Professor Frederick F. Stephan of Princeton University Institute for Advanced Study that led to the development of what is today called dollar-unit sampling, which implements a procedure that does not depend on assumptions of normal approximation of sampling distribution and yet provides "a reasonable inference of population error when al items in the sample are error free" (See http://www.nap.edu/openbook.php?record_id=1363&page=9; the US National Academy Commission on Physical Sciences, Mathematics, and Applications was alerted to the possibility of such applications not by academic accountants but by an IRS employee!). This glorious tradition of practitioners contributing to the academia was continued in: Leslie, Donald A., Albert D. Teitlebaum, and Rodney J. Anderson, DOLLAR-UNIT SAMPLING: A PRACTICAL GUIDE FOR AUDITORS (1979) (Teitelbaum is a statistician at McGill, Leslie and Anderson are practitioners.

Somewhere along the way, we lost our way and accounting academia became insular, almost xenophobic, introverted (except for Economics and Finance), and regimented philosophically.

If the practitioners can not understand the equations, then the fault lies in US academicians and not practice. If Einstein could explain the complexities of relativity in terms that even a high school student can understand, and JBS Haldane could explain the marvelous complexities of genetics and evolution that even uneducated working classes in England in the thirties could understand, there is no reason that we academicians can not make simple equations used in most accounting journals intelligible to educated intelligent practitioners of accounting. Parsimony is a very good idea when it comes to the use of mathematics in a field like accounting. Mathematics should not be used like the lamppost that a drunk leans on for support.

Let alone the practitioners, it would not be a bad idea to have some grandmas on the panel of reviewers for submissions.

Jagdish

Bob Jensen's threads on
Accounting professors avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

Tax Analysts society names as its 2011 Person of the Year
Grover Norquist, head of Americans for Tax Reform, and notes the other individuals who were considered for the title ---
http://taxprof.typepad.com/files/tax-notes-1.pdf

Financial Instruments: Perhaps auditing courses could make use of some of the IAASB resources in
International Auditing Practice Note (IAPN) 1000, Special Considerations in Auditing Financial Instruments
|http://www.ifac.org/publications-resources/international-auditing-practice-note-iapn-1000-special-considerations-auditin

"IFAC Offers Alerts on Tough Audit Issues," by Tammy Whitehouse, Compliance Week, December 29, 2011 ---
http://www.complianceweek.com/ifac-offers-alerts-on-tough-audit-issues/article/221235/

Guidance emerging from the International Federation of Accountants might prove useful even in the United States in the coming weeks as companies close the books on 2011 and plan for the year ahead.

IFAC's International Auditing and Assurance Standards Board has issued a practice note on special considerations that should be taken into account when auditing financial instruments. The alert, titled International Auditing Practice Note 1000, provide some practical assistance to auditors when dealing with valuation and other issues related to financial statement assertions, a touchy and complex area in any entity's financial statements in light of economic pressures and an increasing focus on fair value.

According to IAASB Chairman Arnold Schilder, the practice note can help auditors understand the nature of and risks associated with financial instruments as well as the different valuation techniques and types of controls entities may use in relation to them. The guidance also highlights audit considerations that should be taken into account throughout the audit process. IAASB Technical Director James Gunn said through a statement that the exercise of developing the guidance was informative even to the board, which will further inform the board's work as it develops future auditing standards.

In a separate release, IFAC's Professional Accountants in Business Committee has proposed some best practices guidance on evaluating and improving internal controls to help organizations benchmark their work in maintaining effective controls. The committee says the guidance is intended to be useful to any organization, regardless of the internal control framework it uses, to help deal with internal control issues that are often problematic because of poor design or implementation.

Vincent Topoff, the committee's senior technical manager, says the guidance would be meaningful even to U.S. companies where internal controls are more closely scrutinized because it was developed in part by U.S. experts who have spent many years working to improve internal controls. “Together, they have identified in this guidance those areas where the application of good practice guidance often goes wrong,” he says. “This guidance considers the areas organizations need to continuously improve and the issues they need to address.” The guidance is not meant to replace any existing framework that is in use, he says.

Finally, the IAASB also refreshed its warnings to auditors to keep economic conditions and pressures in mind as they consider whether disclosures are adequate and whether there is reason to doubt an entity can continue as a going concern. Companies continue to face volatility in capital markets and exposure to debt in distressed countries, leading to uncertainty that puts pressure on cash flow and access to credit, the board advises. Those factors complicate the audit process, and therefore must be considered closely, the board says.

Continued in artilce

Bob Jensen's threads on auditing professionalism are at
http://www.trinity.edu/rjensen/Fraud001c.htm

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

The sad part about going into business apart from writing books is that having such a huge vested interest in that business creates moral hazard in terms of independence as on of the leading personal finance commentators in the world. The champion of the poor and troubled may be trying to increase her 1% at the expense of the poor and troubled.

Suze Orman --- http://en.wikipedia.org/wiki/Suze_Orman

"Suze Orman, Debit-Card Dealer: The money guru introduces her first financial product—and vexes some fans," by Karen Weise, Bloomberg Business Week, January 19, 2012 ---
http://www.businessweek.com/magazine/suze-orman-debitcard-dealer-01182012.html

“I love you!” a woman yells as personal finance guru Suze Orman enters the drab conference room at a Barnes & Noble (BKS) in suburban New Jersey. Fans cheer and clap while a man in the front row tears up from excitement. Orman is here to preach the tough-love brand of financial advice that she’s been peddling for more than a decade through nine bestselling books, a highly rated CNBC show, and regular appearances on the old Oprah Winfrey Show. “You have got to be the masters of your own financial future,” she tells the 200-strong crowd. While the event coincides with a new paperback edition of her 10th book, The Money Class, that’s not the main focus of her talk. “You need more than books,” she says. “Now you need the tools.”

Orman has a particular tool in mind. Just a few days earlier she introduced her first financial product: a prepaid debit card emblazoned with her name. She sees her Approved Card as an alternative way for people who are fed up with—or don’t have—traditional checking accounts and credit cards to manage their cash. And if the most ambitious part of her plan succeeds, the card may eventually help users improve their credit scores.

Orman’s Approved Card, issued by Wilmington (Del.)-based Bancorp Bank (TBBK), is in part designed to play the role of pestering mom. The basics are simple: People use electronic transfers or cash to load money onto their cards, then use them like regular debit cards, buying groceries or shopping online. The Orman touch comes in such features as automatic text message alerts sent to mobile phones that note the balance remaining on the card after each purchase. The card’s website has Orman issuing such sharply worded reminders as, “Before you make a purchase, you’d better be able to afford it—do you hear me?!”

Prepaid cards are the fastest-growing payment method, Federal Reserve data show. In 2010 people used them for $65 billion in transactions, compared with $48 billion in 2009, the industry newsletter Nilson Report says. Part of the cards’ appeal is that you can’t get into debt with them. “I think it’s a good idea to have a prepaid card rather than going out willy-nilly with a credit card,” says Glinda Kidd at the book signing.

Still, prepaid cards often come loaded with fees—and Orman’s is no exception. It has a standard $3 monthly charge. While there’s no cost to reload the card with direct deposits or automatic transfers from a checking account, people must pay up to $4.95 to put cash on the card at Western Union (WU) or MoneyGram (MGI) locations. And if they load with cash rather than electronically, all ATM withdrawals cost $2. One free call to a customer service rep is included each month; extra calls are $2 each.

“What people don’t understand is the cost to do business,” says Orman in an interview. “If I could have given this to you for free, I would have.” Orman, who says she invested $1 million in the venture, declines to discuss how much money she might make from it. And she vows to train customers to keep their costs down. In videos on the card’s website, she explains the fees, warning that people who load their cards electronically can get cash from one of the 35,000 ATMs in the Allpoint network for free but will incur a $2 charge for using other ATMs—plus whatever fee the ATM operator imposes. “Why would you want to waste money like that?” she says in the video. “Don’t be lazy, and go to an Allpoint ATM.”

Orman says if she finds people are incurring fees to put cash on the card, only to spend another $2 to get cash at an ATM, she will ask them to turn in their plastic. If you’re going to squander money that way, “just keep it in cash! You don’t need the damn card,” she tells the audience at the book signing.

Michael Collins, an assistant professor at the University of Wisconsin who studies the financial decision-making of low-income families, says people will eventually figure out the costs of any product. “The question is how long will it take” and how much in fees they will have racked up by then, he says. Collins adds that if Orman’s messages help people control their spending impulses, the card could be beneficial: “Anything that gets people to think harder about their financial security and take some responsibility is a good thing.”

Some personal finance bloggers have complained about the fees and charged that Orman is using her influence to bilk her fans. On Twitter, the Blog Finanza website said: “You are taking your authority figure to make a $$ from your audience. #DENIED”—echoing a catchphrase from Orman’s TV show. Others, such as MSNBC.com consumer finance columnist Herb Weisbaum, said many people would be better served by building their credit immediately with a secured credit card.

Orman dismisses the criticisms, saying the card reflects her understanding of people’s financial habits and needs. “I am the personal financial expert of the world,” she says. “I know what I am talking about.” Publicly, Orman lashed out on Twitter against the naysayers, calling them “small thinkers,” “idiots,” and “Suze haters.” After New York Times personal finance columnist Ron Lieber and others protested the harsh words, she issued a blanket apology: “For anyone I called an idiot, I too am sorry.”

Continued in article

"Does Suze Orman's Prepaid Debit Card Make Sense for You?" by Sarah Gilbert, Get Rich Slowly, January 17, 2012 ---
http://www.getrichslowly.org/blog/2012/01/17/does-suze-ormans-prepaid-debit-card-make-sense-for-you/?WT.qs_osrc=fxb-48064510

Suze Orman is famous for her personal, easy-to-digest, and friendly personal finance advice. Many of us less famous (far less famous, in the case of this writer) finance writers admire her general approach, which boils down to “spend less than you earn.” Who can argue with that? So imagine my amazement at the news this week that Suze will be offering a branded prepaid debit card.

Prepaid debit cards have a star-crossed reputation
You know about branded prepaid debit cards, but they're usually not connected with individuals known for their sensible finance advice. Think Russell Simmons. Think the Kardashians. See? Sample words and phrases from our collective wisdom on those topics include “skeptical” and “reprehensible” and “urge to scream” and “hit cash-strapped consumers over the head with nickel-and-dime charges.”

Suze Orman is famous for her personal, easy-to-digest, and friendly personal finance advice. Many of us less famous (far less famous, in the case of this writer) finance writers admire her general approach, which boils down to “spend less than you earn.” Who can argue with that? So imagine my amazement at the news this week that Suze will be offering a branded prepaid debit card.

Prepaid debit cards have a star-crossed reputation You know about branded prepaid debit cards, but they're usually not connected with individuals known for their sensible finance advice. Think Russell Simmons. Think the Kardashians. See? Sample words and phrases from our collective wisdom on those topics include “skeptical” and “reprehensible” and “urge to scream” and “hit cash-strapped consumers over the head with nickel-and-dime charges.”

The biggest problems with prepaid debit cards are, really, threefold:

While they are cards that are available to consumers with bad credit, they don't help consumers build credit, though they are advertised as doing so (any help would be mild at best - the reporting they do is only to smaller credit reporting agencies, not the “big three” that man the velvet rope for most consumer debt in America). They're punishingly expensive and seem more directed toward association with the personality branding the card than any financial benefit. Russell's “Rush” Card costs between $4 and $15 upfront, with $10 monthly fees and $1 per-transaction fees. They're accused of using celebrities to take advantage of both the hopes and difficult situations of the “unbanked,” mostly-lower-class, often minority consumers whose financial situation is so bad that banks won't take the risk of giving them checking accounts.

Suze Orman wants to make a difference (but, is it a fool's errand?) Orman has a different idea. She, too, wants to convince the unbanked to use her prepaid debit card, but she wants to charge less. Her “Approved Card” is far cheaper than Rush or the K thingy - only $3 to purchase the card and a $3 monthly fee. ATM transactions from the Allpoint network (found in 7-Eleven, Costco, Kroger, CVS, and Walgreens) are $2 per withdrawal, and point of sale transactions, such as purchases at the grocery store or coffee shop or online, are free. Balance inquiries and some declined transactions are $1 , but it's free to be declined at the register for a regular PIN/signature transaction. Many of these transactions, especially ATM withdrawals, are free for 30 days with a direct deposit or bank transfer into the Approved Card account, making them a great product for customers with some sort of automatically-deposited income (even, for instance, unemployment).

Notably, electronic debit bill paying is free. Many competing products charge for this service, from $1 to $3 per transaction, and it's the service that customers without a regular bank account need. Often, discounts and special deals are available to customers who allow vendors to debit their account each month.

The great credit score kerfuffle
The concept that sells many prepaid debit cards - the quasi-justification for how expensive they are - is that they might help in the quest to raise a credit score. If a credit score is low enough so that a mainstream bank isn't part of your personal finance portfolio, can a prepaid debit card even help? Probably not.

The problem that Suze Orman has mentioned in public statements about the Approved Card is that credit bureaus, beyond even knowing about the transactions made by the millions of unbanked consumers, don't care about sensible use of money. They just care about sensible use of credit. A New York Times piece quotes Orman as saying, “There is something radically wrong here. We are rewarding people for having credit and punishing people who pay in cash. I want to change that paradigm.”

Wanting to change credit score calculation is easy. Changing is hard.
Orman has done the near-impossible and convinced TransUnion, one of the big three credit bureaus, to collect the data about spending habits from her customers. But what that will do to credit scores is another thing entirely. The answer, probably, is nothing.
The problem that Suze Orman has mentioned in public statements about the Approved Card is that credit bureaus, beyond even knowing about the transactions made by the millions of unbanked consumers, don't care about sensible use of money. They just care about sensible use of credit. A New York Times piece quotes Orman as saying, “There is something radically wrong here. We are rewarding people for having credit and punishing people who pay in cash. I want to change that paradigm.”
Wanting to change credit score calculation is easy. Changing is hard.
Orman has done the near-impossible and convinced TransUnion, one of the big three credit bureaus, to collect the data about spending habits from her customers. But what that will do to credit scores is another thing entirely. The answer, probably, is nothing.

The problem is that TransUnion has only been persuaded to evaluate the data Orman will collect with her Approved Card; it has not promised to include that in credit reports nor in the calculation of scores. If, after two years, it finds the data meaningful, it's still unlikely to have much of an effect on the resultant calculations. Responsible use of a prepaid debit card, after all, hasn't had much impact on the financial institutions that sponsor the card - in this case, Orman's own company - so the patterns of data don't have much meaning.

What kind of debit card use could demonstrate the sort of behavior creditors want to see, such as:

On-time delivery of minimum payments

A history of purchasing high-value assets and then paying them off quickly

Regular income and a comfortable ratio of debt-to-income

These all can be shown far more reliably through existing reporting. A consumer who pays rent on time each month in cash won't differ, to the eyes of TransUnion, from a consumer who pays rent on time each month by automatic debit from her Approved Card. Similarly, failing to overdraw an Approved Card account (that is impossible to overdraw from, except perhaps for a few $1/$2 ATM transaction declined fees) is very different from failing to overdraw a bank account.

Why would you use a prepaid debit card?
There are two groups of people I can see benefiting from using a prepaid debit card, as well as one group I would caution to avoid it. All of them could achieve higher credit scores, but not in the way you think. Let me explain.

Continued in article

Jensen Comment
The sad part about going into business apart from writing books is that having such a huge vested interest in that business creates moral hazard in terms of independence as on of the leading personal finance commentators in the world. The champion of the poor and troubled may be trying to increase her 1% at the expense of the poor and troubled.

Bob Jensen's personal finance helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

"Feed the Pig: Great Time to Save Money [INFOGRAPHIC]," AICPA, January 2012 ---
http://blog.aicpa.org/2012/01/feed-the-pig-great-time-to-save-money-infographic.html

Jensen Comment
I know that the AICPA's "pig" depicts a piggie bank, but I still think "Feed the Pig" is a bad name for a personal finance helper site. A better name would be "Feed Your Piggie Bank: Helpers for Saving and Investment"

"My Financial Mis-Education," by Lee Bessette, Inside Higher Ed, January 16, 2012 ---
http://www.insidehighered.com/blogs/my-financial-mis-education

Jensen Comment
This reminds me of when I gave my daughter a credit card (the billings came to me) when she left home as a first-year student at the University of Texas. As I recall I did say this card was for "emergencies," but then she started discovering all sorts of emergencies to the tune of nearly $1,000 per month even though I was directly paying for her tuition, room and board, car insurance, etc. One type of "emergency" was rather amusing until I put an end to such amusement. At Christmas time she lavished me with rather expensive gifts that, of course, she'd charged on her credit card.

The need for financial literacy and elementary tax accounting in the common core of both high school and college ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#FinancialLiteracy

Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

"Five Deadly Business Sins: Two avoidable mistakes were enough to trip up Eastman Kodak, once one of America's mightiest companies," by Rick Wartzman, Bloomberg Business Week, January 13, 2012 ---
http://www.businessweek.com/management/five-deadly-business-sins-01132012.html

Just how lethal are Peter Drucker’s “five deadly business sins”? You might ask Eastman Kodak (EK), which has committed at least a couple of them and now finds itself on the verge of bankruptcy.

Word emerged last week that Kodak, founded in 1892 and for many decades widely celebrated as one of the world’s greatest companies, may soon file for Chapter 11 protection if it can’t raise enough cash by selling off pieces of its patent portfolio. The news was a sharp reminder of how incredibly challenging it is to sustain any organization, even the most iconic.

How did it come to this? In certain respects, Kodak has been on the defensive since it began facing heightened competition from its arch rival Fuji (8278:JP) some 30 years ago. But fundamentally the company has slipped because it fell prey to two of what Drucker identified in a 1993 essay as a quintet of “avoidable mistakes that will harm the mightiest business.”

The first is a preoccupation with high profit margins. The second: “slaughtering tomorrow’s opportunity on the altar of yesterday.” (The three other deadly business sins, according to Drucker, are “mispricing a new product by charging ‘what the market will bear’; “cost-driven pricing” in which you merely add up your expenses and then stick a profit margin on top—a subject I’ve explored previously; and “feeding problems” while “starving opportunities.”

Continued in article

Question
What is the difference between "replacement cost" and "factor replacement cost?"

Answer
It is much like a make versus buy decision. As an illustration, the "replacement cost" of a computer is the price one would pay for a computer in the market to replace an existing computer. That presumably includes the mark up profits of vendors in the supply chain. The "factor replacement cost" excludes such mark up profits to the extent possible by estimating what it would cost in the "transformation process" to purchase the components for transformation of those components into a computer. The "factor replacement cost" adds in labor and manufacturing overhead. It excludes vendor profits in the computer supply chain but not necessarily vendor profits in the purchase price of components. It becomes very complicated in practice, however, because computer vendors do such things as include warranty costs in the pricing of computers. Assembled computers in house probably have no such warranties. A more detailed account of factor replacement costing is provided in Chapters 3 and 4 of Edwards and Bell.
Edgar O. Edwards and Philip W. Bell, The Theory and Measurement of Business Income (Berkeley: University of California Press, 1961).

Of course this does not solve the fundamental problem of replacement cost accounting that arises when there are no current assets or component parts of assets that map directly into older assets still being used by the company. For example, old computers and parts for those computers are probably no longer available. Newer computers have many more enhancements that make them virtually impossible to compare with older computers such using prices of current computers is a huge stretch when estimating replacement costs of older computers that, for example, may not even have had the ability to connect to local networks and the Internet.

Zeff writes as follows on Page 623:

Edwards and Bell, in their provocative volume, propound a measure called "business profit," which is predicated on what might be termed "factor replacement cost." "Business profit" is the sum of (1) the excess of current revenues over the factor replacement cost of that portion of assets that can be said to have expired currently, and (2) the enhancement during the current period of the factor replacement cost.

Advantages and disadvantages of replacement cost (entry value, current cost) accounting are discussed in greater detail are listed below.

Advantages of Entry Value (Current Cost, Replacement Cost) Accounting

· Conforms to capital maintenance theory that argues in favor of matching current revenues with what the current costs are of generating those revenues. For example, if historical cost depreciation is $100 and current cost depreciation is $120, current cost theory argues that an excess of $20 may be wrongly classified as profit and distributed as a dividend. When it comes time to replace the asset, the firm may have mistakenly eaten its seed corn.

· If the accurate replacement cost is known and can be matched with current selling prices, the problems of finding indices for price level adjustments are avoided.

· Avoids to some extent booking the spread between selling price and the wholesale "cost" of an item. Recording a securities “inventory” or any other inventory at exit values rather than entry values tends to book unrealized sales profits before they’re actually earned. There may also be considerably variability in exit values vis-à-vis replacement costs.

Although I am not in general a current cost (replacement cost, entry-value) advocate, I think you and Tom are missing the main theory behind the passage of the now defunct FAS 33 that leaned toward replacement cost valuation as opposed to exit valuation.

The best illustration in favor of replacement cost accounting is the infamous Blue Book used by automobile and truck dealers that lists composite wholesale trading for each make and model of vehicle in recent years. The Blue Book illustration is relevant with respect to business equipment currently in use in a company since virtually all that equipment is now in the “used” category, although most of it will not have a complete Blue Book per se.

The theory of Blue Book pricing in accounting is that each used vehicle is unique to a point that exit valuation in particular instances is very difficult since no two used vehicles have the same exit value in a particular instances. But the Blue Book is a market-composite hundreds of dealer transactions of each make and model in recent months and years on the wholesale market.

Hence I don’t have any idea about what my 1999 Jeep Cherokee in particular is worth, and any exit value estimate of my vehicle is pretty much a wild guess relative to what it most likely would cost me to replace it with another 1999 Jeep Cherokee from a random sample selection among 2,000 Jeep dealers across the United States. I merely have to look up the Blue Book price and then estimate what the dealer charges as a mark up if I want to replace my 1999 Jeep Cherokee.

Since Blue Book pricing is based upon actual trades that take place, it’s far more reliable than exit value sticker prices of vehicles in the sales lots.

Conclusion
It is sometimes the replacement market of actual transactions that makes a Blue Book composite replacement cost more reliable than an exit value estimate of what I will pay for a particular car from a particular dealer at retail. Of course this argument is not as crucial to financial assets and liabilities that are not as unique as a particular used vehicle. Replacement cost valuation for accounting becomes more defensible for non-financial assets.

Hi Tom,

My recent stay in the Concord Holiday Inn and your replies prompted me to write an online document called
"Holiday Inn Case Seeds and Questions About Tobin's Q"
Two Ideas for Hotel Replacement Cost Cases in Accounting"
http://www.cs.trinity.edu/~rjensen/temp/HolidayInnCaseSeeds.htm

If you are willing to counter my arguments, I would really like to see why investors and creditors would be interested in the 2011 Replacement Cost financial statements for the Concord, NH and Brookline, MA Holiday Inn hotels. To me it seems that such statements would be more misleading than historical cost financial statements given the fact that neither historical costs nor replacement costs are valuation-based financial statements.

Thanks,
Bob

January 17, 2012 Update

Tom Selling has what I consider to be a much more reasonable posting on replacement costing:
"What I Mean by "Replacement Cost" is not Literally Replacement Cost," by Tom Selling, The Accounting Onion, January 17, 2012 --- Click Here
http://accountingonion.typepad.com/theaccountingonion/2012/01/what-i-mean-by-replacement-cost-is-not-literally-replacement-cost.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

Jensen Comment
His latest posting remains, however, disappointing to me in that he does not delve into how traditional replacement (current) cost accounting of operating assets like factories, stores, hotels, airliners, can be more misleading than helpful if it is not accompanied by traditional historical cost financial statements and possibly exit value statements (although exit value is not very relevant for going concerns with lots of synergy covariances of asset values "in use."

Some of his statements do not adequately stress that replacement cost accounting is not value accounting since it has identical accrual issues of depreciation, depletion, amortization, bad debt estimation, etc. that plagues historical cost accounting. For example, he states:

"First, replacement cost measures are the only possible way for accounting to reflect wealth invested by shareholders in an enterprise; and consequently, changes in invested wealth."
Tom Selling as cited above

Firstly, I almost always advise against sweeping generalization such as the "only possible way to reflect wealth invested by shareholders ..."
Such sweeping generalizations should be avoided in the Academy, especially when when our accounting history research literature is brimming articles from scholars who do not share Tom's view about replacement cost accounting (even in theory). Kenneth McNeal would not call replacement cost accounting "Truth in Accounting" or even being the best of asset measurement alternatives ---
http://www.trinity.edu/rjensen/Theory02.htm#BasesAccounting

Secondly, he still is speaking of "flowers in spring" to Julie Andrews without giving her the "show me" she's demanding. He still has not made a convincing case on how even his hybrid version of replacement cost accounting would be relevant to my two Holiday Inn case seeds at
http://www.cs.trinity.edu/~rjensen/temp/HolidayInnCaseSeeds.htm

To his credit, in his latest posting Tom does not mention Tobin's Q. Perhaps I convinced him that Tobin's Q is just not relevant to this analysis since the value of a firm is affected by so many factors other than items accountants book into the ledgers. I discuss this problem with Tobin's Q at
http://www.cs.trinity.edu/~rjensen/temp/HolidayInnCaseSeeds.htm

In any case I hope Tom will continue our debate on replacement costs. My challenge to him remains to take my two Holiday Inn case seeds and show how replacement cost measures are the only possible way for accounting to reflect wealth invested by shareholders in an enterprise; and consequently, changes in invested wealth" in these two hotels.

http://www.cs.trinity.edu/~rjensen/temp/HolidayInnCaseSeeds.htm

"FASB's impairment testing proposal deviates from IFRS," IAS Plus, January 26, 2012 ---
http://www.iasplus.com/index.htm

The United States Financial Accounting Standards Board (FASB) has published a proposal in which an entity testing indefinite-lived intangible assets for impairment would have the option of performing a qualitative assessment to determine whether it is more likely than not that the asset is impaired.

Under current US GAAP, assets with indefinite useful lives are similar to those under IAS 36 Impairment of Assets; they are reviewed at least annually for impairment. Under the proposal, certain assets such as trademarks, licenses and distribution rights could be exempt from this requirement, if the asset is determined to be more likely than not less than its fair value. In their proposal, the FASB acknowledges that this new guidance does not converge US GAAP and IFRS.

Click for:

Proposal on the FASB website

Press release on the FASB website

Deloitte (United States) Heads Up newsletter on the proposed changes (107 KB)

Bob Jensen's threads on intangible assets are at
Intangibles and Contingencies: Theory Disputes Focus Mainly on the Tip of the Iceberg
Go to http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

Ernst & Young
To the Point: FASB tries to simplify impairment test for indefinite-lived intangibles

Based on concerns raised by financial statement preparers about recurring costs and complexity of calculating the fair value of indefinite-lived assets for impairment testing, the FASB today issued a proposed ASU to simplify the impairment test. The proposal would give companies the option to perform a qualitative assessment (similar to the one introduced by ASU 2011-08 for goodwill) to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Comments are due by 24 April 2012.

The attached To the Point publication summarizes what you need to know about the proposal. It is also available online.
http://lyris.ey.com/t/584039/1613618/4093/0/

Bob Jensen's threads on intangibles ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

From Paul Caron's TaxProf Blog on January 26, 2012 ---
http://taxprof.typepad.com/

The Tax Foundation yesterday released the 2012 State Business Tax Climate Index (9th ed.) which ranks the fifty states according to five indices: corporate tax, individual income tax, sales tax, unemployment insurance tax, and property tax. Here are the ten states with the best and worst business tax climates:

1

Wyoming

41

Iowa

2

South Dakota

42

Maryland

3

Nevada

43

Wisconsin

4

Alaska

44

North Carolina

5

Florida

45

Minnesota

6

New Hampshire

46

Rhode Island

7

Washington

47

Vermont

8

Montana

48

California

9

Texas

49

New York

10

Utah

50

New Jersey

Interestingly, all ten of the states with the worst business tax climates voted for Barack Obama in the 2008 presidential election, and five of the ten states with the best business tax climates voted for John McCain (and eight of the ten voted for George Bush in 2004).

Jensen Comment
But we're only operating in the narrow range of 6.3% (Alaska) to 12.2% (New Jersey) for state and local taxes, including property taxes. One would hope that, by adding to a state's tax burden, the quality of education would be the result of higher taxes. This, however, is not the case for most states. For example, South Dakota comes in at Rank 3 with a very low 7.6% tax burden and manages to have one of the very best K-12 rural and urban education systems among the 50 states. Unfortunately, this does not extend to higher education in South Dakota. New Jersey has the highest taxation rate of 12.2% but does not get a whole lot of K-12 bang for the buck in terms of education compared with the low taxation states of South Dakota, New Hampshire, and Tennessee.

The largest cities in the U.S. face the most daunting problems in K-12 education. Problems with rural versus urban may be greater than problems with high state taxation versus low state taxation. For example, rural New York has some very nice rural K-12 schools that exist apart from troubled NYC schools. On the other hand, rural Texas has some of the worst rural K-12 schools in the nation. Mississippi has some of the worst urban and rural schools in the nation, but Mississippi is neither a high nor a low taxation state total state and local taxation rankings. However, in terms of local property taxation, Mississippi has low property tax burdens. Quality of schools in rural communities correlates highly and negatively with degree of poverty in those communities. Quality of urban schools is more complicated. New York City and Chicago are quite wealthy and prosperous in ways that do not translate in to quality of K-12 inner city public schools. Minneapolis is less prosperous and wealthy but probably has somewhat better public schools. although in every large U.S. city the inner city schools are lower in quality than schools in their suburbs.

Bob Jensen's threads on taxation are at
http://www.trinity.edu/rjensen/BookBob1.htm#010304Taxation

From Ernst & Young on January 20, 2012

Financial reporting alert: Highly inflationary economies

The Center for Audit Quality (CAQ) SEC Regulations Committee’s International Practices Task Force (the Task Force) today posted highlights from its recently finalized 22 November 2011 discussions, which indicate that based on available economic data, the Belarus three-year cumulative inflation rate exceeded 100 percent as of 30 September 2011.

An economy whose cumulative inflation rate is 100 percent or more over a three-year period is highly inflationary for US GAAP reporting purposes. Generally, highly inflationary accounting is applied as of the first day of the reporting period immediately following the reporting period (including interim reporting periods) in which an economy is assessed to be highly inflationary. However, for reasons noted in the Task Force’s highlights, the SEC staff would not object to registrants treating the economy of Belarus as highly inflationary no later than the first reporting period beginning after 15 December 2011.

Separately, the SEC staff expects registrants to continue to treat the economies of the Democratic Republic of Congo and Venezuela as highly inflationary.

There may be other countries with cumulative inflation rates of 100 percent or more or that should be monitored that are not mentioned above because the sources used by the Task Force do not include inflation data for all countries. Accordingly, companies should closely monitor the inflation rates in economies in which they operate.

For further information, including SEC disclosure considerations related to the events in Belarus, see the Task Force Highlights Excerpt.
http://thecaq.org/iptf/pdfs/highlights/2011_November22_IPTF_JointMeetingHLs.pdf

One of the most popular Excel spreadsheets that Bob Jensen ever provided to his students ---
www.cs.trinity.edu/~rjensen/Excel/wtdcase2a.xls

Bob Jensen's threads on price-level adjustments ---
http://www.trinity.edu/rjensen/Theory02.htm#BasesAccounting

Bisk CPA Examination Review Sites
Bisk Education would like to provide you similar information with a link for our 2 accounting resources which are www.cpaexam.com and www.cpeasy.com

"Turning risk into advantage: A case study," by John Michael Farrell, KPMG Institute, June 20, 2011 ---
http://www.kpmginstitutes.com/404-institute/insights/2011/pdf/turning-risk-into-advantage-case-study.pdf
Thank you Jerry Trites for the heads up.

Building a Search Engine at Udacity ---
http://www.udacity.com/
Thank you Joe Hoyle for the heads ups

Learn programming in seven weeks. We'll teach you enough about computer science that you can build a web search engine like Google or Yahoo!

"So you want to learn to program?" by Robert Talbert, Chronicle of Higher Education, January 16, 2012 ---
http://chronicle.com/blognetwork/castingoutnines/2012/01/16/so-you-want-to-learn-to-program/?sid=wc&utm_source=wc&utm_medium=en

Jensen Comment
Having taught both Fortran and COBOL at one point in my career, I will pass on this opportunity to upgrade my programming skills. However, these sound like valuable free resources for the younger generation headed for college or that generation of unemployable history majors seeking new skills.

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

"Here Are the Colleges with the Best CPA Exam Performance," by by Adrienne Gonzalz, Going Concern, January 9, 2012 ---
http://goingconcern.com/post/here-are-colleges-best-cpa-exam-performance

"And Now, We're Going to Judge Florida Colleges' Performance on the CPA Exam," by Adrienne Gonzalz, Going Concern, January 6, 2012 ---
http://goingconcern.com/post/and-now-were-going-judge-florida-colleges-performance-cpa-exam

Jensen Comment
I think Adrienne is running a series of tidbits on CPA examination performance by state --- starting with a previous article on California. This is can be a very misleading thing to do unless we're careful about how to mislead with statistics.

For example, Florida A&M is a predominantly African American university that annually comes out at or near the bottom on the CPA examination passage rate. Based upon my experience when I was across town at Florida State University, however, Florida A&M across town had a program that was not very well geared to CPA examination passage. At least in those days, Florida A&M was closely tied to large corporations like IBM and had quite a few practicum (internship) courses and managerial accounting courses in each student's curriculum. In other words, the goal from get go for an accounting major was corporate accounting and not CPA firm accounting. Hence an African American student bent on becoming a CPA would be advised to strongly consider one of the other top state universities in Florida. This may have changed over the years since I left Florida.

Also Florida A&M typically has a very small number of graduates sitting for the CPA examination. After leaving FSU I joined the faculty of Trinity University. Trinity is a small university (about 2,200 students) with a huge endowment that enables it to attract high SAT/ACT performing students, and the accounting program typically attracts some of the top students admitted to the university. However, Trinity's performance on the CPA examination is somewhat of a yo-yo. For example, last year Trinity scored 5th in the nation on the CPA examination. But there are years in which Trinity will perform much lower because the number of exam takers (sometimes less than ten) leads to all sorts of variability common in small samples in general.

There is also bias on examination performance in terms of admission standards vis-a-vis quality of teaching. We might assume that this year's top performing schools in California (US Berkeley) and Florida (UF in Gainesville) also had the best accounting teachers. This is ipso facto not necessarily true when the students are the top SAT/ACT accounting students in those states. The best teachers may actually be the ones who stretch the students further that have lower incoming credentials.

Top-performing accounting programs like Notre Dame, BYU, UC Berkeley, University of Texas, University of Michigan, University of Wisconsin, University of Tennessee, Texas A&M etc. are greatly challenged by having large numbers of accounting students. The challenge is how to keep upper division accounting classes relatively small with tightened budgets. Those schools with high SAT/ACT accounting majors might well consider the BYU approach of pushing more faculty resources into the upper division courses by teaching basic accounting via video courses that rarely meet in classrooms ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo

This BYU approach, however, probably will not work as well where accounting majors need more push, inspiration, and live teaching.

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

Although Apple's popular iPad tablet has been able to replace laptops for many tasks, it isn't a big hit with folks who'd like to use it to create or edit long Microsoft Office documents.

While Microsoft has released a number of apps for the iPad, it hasn't yet released an iPad version of Office. There are a number of valuable apps that can create or edit Office documents, such as Quickoffice Pro, Documents To Go and the iPad version of Apple's own iWork suite. But their fidelity with Office documents created on a Windows PC or a Mac isn't perfect.

This week, Onlive Inc., in Palo Alto, Calif., is releasing an app that brings the full, genuine Windows versions of the key Office productivity apps—Word, Excel and PowerPoint—to the iPad. And it's free. These are the real programs. They look and work just like they do on a real Windows PC. They let you create or edit genuine Word documents, Excel spreadsheets and PowerPoint presentations.

I've been testing a pre-release version of this new app, called OnLive Desktop, which the company says will be available in the next few days in Apple's app store. More information is at desktop.onlive.com.

My verdict is that it works, but with some caveats, limitations and rough edges. Some of these downsides are inherent in the product, while others have to do with the mismatch between the iPad's touch interface and the fact that Office for Windows was primarily designed for a physical keyboard and mouse.

Creating or editing long documents on a tablet with a virtual on-screen keyboard is a chore, no matter what Office-type app you choose. So, although it isn't a requirement, I strongly recommend that users of OnLive Desktop employ one of the many add-on wireless keyboards for the iPad.

OnLive Desktop is a cloud-based app. That means it doesn't actually install Office on your iPad. It acts as a gateway to a remote server where Windows 7, and the three Office apps, are actually running. You create an account, sign in, and Windows pops up on your iPad, with icons allowing you to launch Word, Excel or PowerPoint. (There are also a few other, minor Windows programs included, like Notepad, Calculator and Paint.)

In my tests, the Office apps launched and worked smoothly and quickly, without any noticeable lag, despite the fact that they were operating remotely. Although this worked better for me on my fast home Internet connection, it also worked pretty well on a much slower hotel connection.

Like Office itself, the documents you create or modify don't live on the iPad. Instead, they go to a cloud-based repository, a sort of virtual hard disk. When you sign into OnLive Desktop, you see your documents in the standard Windows documents folder, which is actually on the remote server. The company says that this document storage won't be available until a few days after the app becomes available.

To get files into and out of OnLive Desktop, you log into a Web site on your PC or Mac, where you see all the documents you've saved to your cloud repository. You can use this Web site to upload and download files to your OnLive Desktop account. Any changes made will be automatically synced, the company says, though I wasn't able to test that capability in my pre-release version.

Because it's a cloud-based service, OnLive Desktop won't work offline, such as in planes without Wi-Fi. And it can be finicky about network speeds. It requires a wireless network with at least 1 megabit per second of download speed, and works best with at least 1.5 to 2.0 megabits. Many hotels have trouble delivering those speeds, and, in my tests, the app refused to start in a hotel twice, claiming insufficient network speed when the hotel Wi-Fi was overloaded.

The free version of the app has some other limitations. You get just 2 gigabytes of file storage, there's no Web browser or email program like Outlook included, and you can't install additional software. If many users are trying to log onto the OnLive Desktop servers at once, you may have to wait your turn to use Office.

In the coming weeks, the company plans to launch a Pro version, which will cost $10 a month. It will offer 50 GB of cloud document storage, "priority" access to the servers, a Web browser, and the ability to install some added programs. It will also allow you to collaborate on documents with other users, or even to chat with, and present material to, groups of other OnLive Desktop users.

The company also plans to offer OnLive Desktop on Android tablets, PCs and Macs, and iPhones.

In my tests, I was able to create documents on an iPad in each of the three cloud-based Office programs. I was able to download them to a computer, and alter them on both the iPad and computer. I was also able to upload files from the computer for use in OnLive Desktop.

OnLive Desktop can't use the iPad's built-in virtual keyboard, but it can use the virtual keyboard built into Windows 7 and Windows' limited touch features and handwriting recognition. As noted above, I recommend using a wireless physical keyboard. But even these aren't a perfect solution, because the ones that work with the iPad can't send common Windows keyboard commands to OnLive Desktop, so you wind up moving between the keyboard and the touch screen, which can be frustrating. And you can't use a mouse.

Another drawback is that OnLive Desktop is entirely isolated from the rest of the iPad. Unlike Office-compatible apps that install directly on the tablet, this cloud-based service can't, for instance, be used to open Office documents you receive via email on the iPad. And, at least at first, the only way you can get files into and out of OnLive Desktop is through its Web-accessible cloud-storage service. The free version has no email capability, and the app doesn't support common file-transfer services like Dropbox or SugarSync. The company says it hopes to add those.

OnLive Desktop competes not only with the iPad's Office clones, but with iPad apps that let you remotely access and control your own PCs and Macs, and thus use Office and other computer software on those.

Continued in article

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

"Flex or Break? Extensions in XBRL Disclosures to the SEC," Roger S. Debreceny, Stephanie M. Farewell, Maciej Piechocki, Carsten Felden, Andre Gräning, and Alessandro d'Eri, Accounting Horizons, December 2011, pp.631-658

The Securities and Exchange Commission (SEC) has adopted the eXtensible Business Reporting Language (XBRL) in a multi-year program to enhance the functionality of the Commission's EDGAR database. Filers tag their financial statements with elements from a taxonomy that defines the reporting concepts so that the XBRL files can be understood by information consumers. The U.S. GAAP taxonomy was designed to represent common reporting practices and support the disclosure requirements of U.S. GAAP. If taxonomy elements for each disclosure concept are not present, the filer creates an extension element. Extensions, when used appropriately, provide decision-relevant information. When used inappropriately, particularly when a semantically equivalent element already exists in the foundation taxonomy, extensions add no information content. This research analyzes extensions made in a subset of XBRL filings made to the SEC between April 2009 and June 2010. Forty percent of these extensions were unnecessary, as semantically equivalent elements were already in the U.S. GAAP taxonomy. Extensions that aggregated or disaggregated existing elements comprised 21 percent of the extensions. New concepts accounted for 30 percent of the extensions, although many were variants of existing elements, rather than significantly new concepts.

Continued in article

XBRL
"Exposure Draft of the IFRS Taxonomy 2012," IAS Plus, January 18, 2012 ---
http://www.ifrs.org/Alerts/XBRL/Exposure+Draft++IFRS+Taxonomy+2012.htm

The IFRS Foundation has published for public comment an exposure draft of the International Financial Reporting Standards (IFRS) Taxonomy 2012. The proposed Taxonomy is a translation of IFRSs and interpretations as issued at 1 January 2012 into XBRL (eXtensible Business Reporting Language).

The 2012 Taxonomy consolidates all IFRS Taxonomy interim releases that were published in 2011.

In addition, the proposed IFRS Taxonomy 2012 will be the first IFRS Taxonomy to include common practice extensions to the IFRS XBRL Taxonomy. These extensions were derived from an analysis of approximately 200 IFRS financial statements and will diminish the need for preparers to customize the taxonomy to fit their individual business when filing IFRS compliant financial statements online.

The exposure draft IFRS Taxonomy 2012 is open for comment until 17 March 2012. IFRSs issued by the International Accounting Standards Board (IASB) from 1 January 2012 onwards will be published as interim releases to the Taxonomy.

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

Question
Do you want to teach XBRL in some of your courses?

Hi Bill,

I think many financial statement analysis courses around the world now have XBRL modules. These are not well documented and are probably more focused on how to use available XBRL-tagged financial statements than on how to do the tagging.

Universities in Singapore and South Korea are probably ahead of the U.S. in teaching XBRL. The South Korean stock exchange was certainly a wonderful leader in XBRL adoption which I demo on video ---
http://www.cs.trinity.edu/~rjensen/video/Tutorials/
Note that my videos may not work with Windows 7 since Microsoft dropped an audio codec that Camtasia used before Windows 7,.

Go to YouTube and search on XBRL ---
http://www.youtube.com/

Clinton (Skip) Whte at the University of Delaware has a book on XBRL and teaches XBRL
http://www.lerner.udel.edu/faculty-staff/faculty/clinton-white
See The Guide & Workbook for Understanding XBRL (4th edition), SkipWhite.com, 2010

You might check
Zane Swanson's XBRL Blog --- http://blog.askaref.com/
I think Zane teaches some modules on XBRL.

Zane Swanson's Website --- www.askaref.com

Also go to the XBRL International home page at
http://www.xbrl.org/

A helpful list of contacts is provided at
http://www.xbrl.org/StandardsBoard
Some of these people like Ray Lam may be able to suggest some college instructors to contact.

Some teachers to contact suggested by the SEC are listed at
http://www.sec.gov/news/otherwebcasts/2010/xbrlseminar032310-transcript.pdf

Our XBRL actives on the AECM may provide other suggestions. These include Neal Hannon, Saeed Roohani, Bill Richardson, Zane Swanson, and Glen Gray. I would also suggest Roger Debreceny, although Roger has been inactive on the AECM for a long time. Bill Richardson in Australia is a great foreign contact and technical expert.

You might check with Rivet Software for a listing of academic users of their product. My old contact in Rivet was Jaci Schneider Rivet Software jschneid@ischool.utexas.edu
I'm not certain that Jaci is still with Rivet.

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

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

Respectfully,
Bob Jensen

"U.S. Charges 3 Swiss Bankers in Tax Case," by Chad Bray, The Wall Street Journal, January 3, 2011 ---
http://online.wsj.com/article/SB10001424052970204368104577139043222716600.html

Jensen Comment
These Swiss bankers were indicted for helping U.S. taxpayers hide $1.2 billion from the IRS in offshore accounts

Purportedly their defense is full of holes (sorry about that).

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

Grammar Girl traces the @ symbol back to the middle ages ---
http://grammar.quickanddirtytips.com/where-did-the-at-symbol-come-from.aspx?WT.mc_id=0

.. .

Scribes used to use it to list prices on invoices and accounting sheets, as in 12 eggs AT one pence per egg.

Continued in article

American spelling -- traveled
* British spelling -- travelled

But we see "modelled" and modeled use somewhat interchangeably with "modeled" being more popular.

Frequently Asked Questions in Corporate Finance
By Pascal Quiry, Yann Le Fur, Antonio Salvi, Maurizio Dallochio
http://www.wiley.com/WileyCDA/WileyTitle/productCd-111997755X.html
Thanks to SmartPros for the heads up.

"CONGRESS THE CORRUPT," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, January 9, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/474

The Christmas and New Year’s break allows university faculty not only to enjoy family and friends, but also it supplies a moment to do some nontechnical reading. After all, we don’t need that much time to look over our teaching notes. Faculty need something constructive to do during the three or four weeks we have off, and catching up on our reading fits in marvelously.

We read two interesting books during this break. The first is Throw Them All Out by Peter Schweizer. The subtitle tells it all: “How politicians and their friends get rich off insider stock tips, land deals, and cronyism that would send the rest of us to prison.” For example, the author discusses how Speaker Nancy Pelossi (Democrat) and her husband garnered Visa IPO shares in 2008 after intimating that she would introduce legislation which would prove very costly to Visa. Of course, Pelosi backed off her threat once she and her husband received those IPO shares. Schweizer also gives the example of Speaker Dennis Hastert (Republican), who used his knowledge of a proposed interchange for Interstate 88 to buy acreage on the cheap and sell it for its new market value. Hastert realized millions in profits.

Worse, the ethics rules of the House and the Senate allow these things to occur. In some twisted logic, Congress permits its members to engage in insider trading and land deals and regulatory intimidation. It has legalized what is criminal for the rest of us.

We also read China in Ten Words by Yu Hua. The text is part autobiographical, part historical, and part social commentary. Mr. Hua describes China in ten chapters, each titled with a single word. The words he chooses are people, leader, reading, writing, Lu Xun, revolution, disparity, grassroots, copycat, and bamboozle. With these words, he describes the incredible social and economic changes in China during his life-time, starting with the Cultural Revolution from 1966 until late 1970s, which was followed by the economic revolution to the present.

The description records incredible changes in China, such as the nation’s becoming the second largest economic power in the world. It also traces the failings of this transformation, such as ranking about 100^th in the world in per capita income. The contradiction between these two measures foreshadows social conflict that must be dealt with sooner or later.

What proved serendipitous, even ironic, in this reading is to note the connection between the books. In certain ways the two countries show similar contradictions and shortcomings. Yu Hua discusses “today’s large-scale, multifarious corruption” in China; but the U.S. Congress engages in similar dishonesty.

Continued in article

The Wonk (Professor) Who Slays Washington

Insider trading is an asymmetry of information between a buyer and a seller where one party can exploit relevant information that is withheld from the other party to the trade. It typically refers to a situation where only one party has access to secret information while the other party has access to only information released to the public. Financial markets and real estate markets are usually very efficient in that public information is impounded pricing the instant information is made public. Markets are highly inefficient if traders are allowed to trade on private information, which is why the SEC and Justice Department track corporate insider trades very closely in an attempt to punish those that violate the law. For example, the former wife of a partner in the auditing firm Deloitte & Touche was recently sentenced to 11 months exploiting inside information extracted from him about her husband's clients. He apparently did was not aware she was using this inside information illegally. In another recent case, hedge fund manager Raj Rajaratnam was sentenced to 11 years for insider trading.

Even more commonly traders who are damaged by insiders typically win enormous lawsuits later on for themselves and their attorneys, including enormous punitive damages. You can read more about insider trading at
http://en.wikipedia.org/wiki/Insider_trading

Corporate executives like Bill Gates often announce future buying and selling of shares of their companies years in advance to avoid even a hint of scandal about exploiting current insider information that arises in the meantime. More resources of the SEC are spent in tracking possible insider information trades than any other activity of the SEC. Efforts are made to track trades of executive family and friends and whistle blowing is generously rewarded.

Question
Trading on insider information is against U.S. law for every segment of society except for one privileged segment that legally exploits investors for personal gains by trading on insider information. What is that privileged segment of U.S. society legally trades on inside information for personal gains?

Hints:
Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

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

Answer (Please share this with your students):
Over the years I've been a loyal viewer of the top news show on television --- CBS Sixty Minutes
On November 13, 2011 the show entitled "Insider" is the most depressing segment I've ever watched on television ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok
Also see http://financeprofessorblog.blogspot.com/2011/11/congress-trading-stock-on-inside.html

Jensen Comment

It came as no surprise that many (most?) members of the U.S. House of Representatives and the U.S. Senate that writes the laws of the land made it illegal for to trade in financial and real estate market by profiting personally on insider information not yet available, including pending legislation that they will decide, wrote themselves out of the law making it legal for them to personally profit from trading on insider information. What came as a surprise is how leaders at the very top of Congress make millions trading on inside information with impunity and well as immunity.
The Congressional leader that comes off the worst in this Sixty Minutes "Insider" segment is former House Speaker and current Minority leader Nancy Pelosi. When confronted with specific facts on how she and her husband made some of their insider trading millions she fired back at reporter Steve Kroft with an evil glint saying what is tantamount to: "How dare you question me about insider trades that are perfectly legal for members of Congress. Who are you to question my ethics about exploiting our insider trading privileges. Back off Steve or else!" Her manner can be extremely scary. Other Democratic Party members of Congress come off almost as bad in terms of insider trading for personal gain.
Current Speaker of the House, John Boehner, is more subtle. He denies making any of his personal portfolio investment decisions and denies communicating with the person he hires to make such decision. However, that trust investor mysteriously makes money for Rep. Boehner using insider information obtained mysteriously. Other Republican members of Congress some off even worse in terms of insider trading.
Members of Congress on powerful committees regularly make insider profits on legislation currently being written into the law that is still being held secret from the public. One of my heroes, former Senator Judd Gregg, is no longer my hero.
Everybody knows that influence peddling in Congress by lobbyists, many of them being former members of Congress, is a dirty business of showering gifts on current members of Congress. What is made clear, however, is that these lobbyists are personally getting something in return from friendly members of Congress who pass along insider information to lobbyists. The lobbyists, in turn, peddle this insider information back to the private sector, such as hedge fund managers, for a commission. Moral of story: Voters do not stop insider trading by a member of Congress by voting him or her out of office if they become peddlers of insider information obtained, as lobbyists, from their old friends still in the Congress.
Five out of 435 members of the House of Representatives are seeking to sponsor a bill to make it illegal for representatives and senators to profit from trading on inside information. The Sixty Minutes show demonstrates how Nancy Pelosi, John Boehner, and other House leaders have buried that effort so deep in the bowels of the legislative process that there's no chance in hell of stopping insider trading by members of Congress. Insider trading is a privilege that attracts unethical people to run for Congress.

Watch the "Insider" Video Now While It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody

Bob Jensen's threads on the Sad State of Government Accounting and Accountability ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

"What the Heck is Research Anyway?" by Brent Roberts, The Hardest Science, December 20, 2011 ---
http://hardsci.wordpress.com/2011/12/20/what-the-heck-is-research-anyway-a-guest-post-by-brent-roberts/

Jensen Comment
This is pretty much what we teach students about research if we're both practical and idealists. But it's a nice summary.

If I were to add something to this it would be examples of how some of the greatest discoveries in the world came about by accident. It might also be nice to compare the lazy Aristotle with the ambitious Galileo.

Followed by an upskirt fantasy video that got my attention.

"The Dumbest Idea In The World: Maximizing Shareholder Value," by Steve Denning, Forbes, November 28, 2011 ---
http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/

“Imagine an NFL coach,” writes Roger Martin, Dean of the Rotman School of Management at the University of Toronto, in his important new book, Fixing the Game, “holding a press conference on Wednesday to announce that he predicts a win by 9 points on Sunday, and that bettors should recognize that the current spread of 6 points is too low. Or picture the team’s quarterback standing up in the postgame press conference and apologizing for having only won by 3 points when the final betting spread was 9 points in his team’s favor. While it’s laughable to imagine coaches or quarterbacks doing so, CEOs are expected to do both of these things.”

Imagine also, to extrapolate Martin’s analogy, that the coach and his top assistants were hugely compensated, not on whether they won games, but rather by whether they covered the point spread. If they beat the point spread, they would receive massive bonuses. But if they missed covering the point spread a couple of times, the salary cap of the team could be cut and key players would have to be released, regardless of whether the team won or lost its games.

Suppose also that in order to manage the expectations implicit in the point spread, the coach had to spend most of his time talking with analysts and sports writers about the prospects of the coming games and “managing” the point spread, instead of actually coaching the team. It would hardly be a surprise that the most esteemed coach in this world would be a coach who met or beat the point spread in forty-six of forty-eight games—a 96 percent hit rate. Looking at these forty-eight games, one would be tempted to conclude: “Surely those scores are being ‘managed’?”

Suppose moreover that the whole league was rife with scandals of coaches “managing the score”, for instance, by deliberately losing games (“tanking”), players deliberately sacrificing points in order not to exceed the point spread (“point shaving”), “buying” key players on the opposing team or gaining access to their game plan. If this were the situation in the NFL, then everyone would realize that the “real game” of football had become utterly corrupted by the “expectations game” of gambling. Everyone would be calling on the NFL Commissioner to intervene and ban the coaches and players from ever being involved directly or indirectly in any form of gambling on the outcome of games, and get back to playing the game.

Which is precisely what the NFL Commissioner did in 1962 when some players were found to be involved betting small sums of money on the outcome of games. In that season, Paul Hornung, the Green Bay Packers halfback and the league’s most valuable player (MVP), and Alex Karras, a star defensive tackle for the Detroit Lions, were accused of betting on NFL games, including games in which they played. Pete Rozelle, just a few years into his thirty-year tenure as league commissioner, responded swiftly. Hornung and Karras were suspended for a season. As a result, the “real game” of football in the NFL has remained quite separate from the “expectations game” of gambling. The coaches and players spend all of their time trying to win games, not gaming the games.

The real market vs the expectations market

In today’s paradoxical world of maximizing shareholder value, which Jack Welch himself has called “the dumbest idea in the world”, the situation is the reverse. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services.

The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control—at least to some extent.

The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company.

“What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”

In fact, a CEO has little choice but to pay careful attention to the expectations market, because if the stock price falls markedly, the application of accounting rules (regulation FASB 142) classify it as a “goodwill impairment”. Auditors may then force the write-down of real assets based on the company’s share price in the expectations market. As a result, executives must concern themselves with managing expectations if they want to avoid write-downs of their capital.

In this world, the best managers are those who meet expectations. “During the heart of the Jack Welch era,” writes Martin, “GE met or beat analysts’ forecasts in forty-six of forty-eight quarters between December 31, 1989, and September 30, 2001—a 96 percent hit rate. Even more impressively, in forty-one of those forty-six quarters, GE hit the analyst forecast to the exact penny—89 percent perfection. And in the remaining seven imperfect quarters, the tolerance was startlingly narrow: four times GE beat the projection by 2 cents, once it beat it by 1 cent, once it missed by 1 cent, and once by 2 cents. Looking at these twelve years of unnatural precision, Jensen asks rhetorically: ‘What is the chance that could happen if earnings were not being “managed’?”’ Martin replies: infinitesimal.

In such a world, it is therefore hardly surprising, says Martin, that the corporate world is plagued by continuing scandals, such as the accounting scandals in 2001-2002 with Enron, WorldCom, Tyco International, Global Crossing, and Adelphia, the options backdating scandals of 2005-2006, and the subprime meltdown of 2007-2008. The recent demise of MF Global Holdings and the related ongoing criminal investigation are further reminders that we have not put these matters behind us.

“It isn’t just about the money for shareholders,” writes Martin, “or even the dubious CEO behavior that our theories encourage. It’s much bigger than that. Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism. These theories underpin regulatory fixes instituted after each market bubble and crash. Because the fixes begin from the wrong premise, they will be ineffectual; until we change the theories, future crashes are inevitable.”

“A pervasive emphasis on the expectations market,” writes Martin, “has reduced shareholder value, created misplaced and ill-advised incentives, generated inauthenticity in our executives, and introduced parasitic market players. The moral authority of business diminishes with each passing year, as customers, employees, and average citizens grow increasingly appalled by the behavior of business and the seeming greed of its leaders. At the same time, the period between market meltdowns is shrinking, Capital markets—and the whole of the American capitalist system—hang in the balance.”

How did capitalism get into this mess?

Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”

The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created. The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i.e., they own it and benefit from its prosperity, while the executives are agents who are hired by the principals to work on their behalf.

The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals. Ignoring Peter Drucker’s foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders.

To achieve that goal, they academics argued, the company should give executives a compelling reason to place shareholder value maximization ahead of their own nest-feathering. Unfortunately, as often happens with bad ideas that make some people a lot of money, the idea caught on and has even become the conventional wisdom.

Continued in a long article

Jensen Comment
It's a good thing my friend Al Rappaport made it big on book royalties and consulting before this word leaked out ---
http://en.wikipedia.org/wiki/Shareholder_value

More pension funds adopt mark-to-market accounting in anticipation of IFRS deadline

"More pension plans count down to year-end mark," by Nanette Byrnes, Reuters, December 30, 2011 ---
http://www.reuters.com/article/2011/12/30/us-pension-accounting-mark-idUSTRE7BT0TL20111230

Note that IFRS 9 implementation was recently delayed by the IASB and will not go into effect until the beginning of 2015.

"IAS 32 Financial Instruments: Presentation — Put options written over non-controlling interests," IAS Plus, January 17, 2012 ---
http://www.iasplus.com/ifric/1201.htm#ias32

Throughout 2010 and 2011, the Committee considered a request for guidance on how an entity should account for changes in the carrying amount of a financial liability for a put option, written over shares held by a non-controlling interest shareholder (NCI put), in the consolidated financial statements of a parent entity. The request is the result of perceived diversity in accounting for the subsequent measurement of the financial liability that is recognised for those NCI puts. The issue arises because of potential inconsistencies between the requirements for measuring financial liabilities and the requirements for accounting for transactions with owners in their capacity as owners, whereby some believe that subsequent changes in the liability that is recognised for the NCI put should be recognised in profit or loss while others believe the change in the liability should be recognised in equity.

Given that the IASB rejected the Committee's initial recommendation for a possible scope exclusion to IAS 32 Financial Instruments: Presentation for put options written over the non-controlling interest in the consolidated financial statements of a group, the Committee considered possible paths forward on this project.

The Committee was directed by the IASB to specifically consider whether changes in the measurement of the NCI put should be recognised in profit or loss or equity and whether the scope of the recognition decision should be applied only to NCI puts or extended to include both NCI puts and NCI forwards. While the Committee was asked to consider these two focused questions, they quickly expanded the scope of the discussion by considering broader concerns surrounding the project including the counterintuitive result of recognising a 'gross' liability when reflecting subsequent changes in the liability in profit or loss (as opposed to reflection on a 'net' basis), the treatment of the purchase of a NCI put with variable consideration and the timing of transaction recognition; acknowledging that these were the same concerns expressed when they made their initial recommendation to the IASB to exclude from the scope of IAS 32 put options written over the non-controlling interest in the consolidated financial statements of a group.

One Committee member expressed a preference that application guidance be drafted which specifies that paragraph 30 of IAS 27 Consolidated and Separate Financial Statements does not apply to NCI puts because the change in ownership interest has not yet occurred. Put another way, only transactions with owners are recognised in equity, and remeasuring an NCI put is not a transaction with an owner (thus should be reflected in profit or loss). Paragraph 30 in IAS 27 is describing a circumstance in which the controlling shareholder's and the non-controlling interest shareholder's relative ownership of the subsidiary changes, and this is not the case when the NCI put is remeasured. This was seen as a clarification of the literature for subsequent measurement (to avoid diversity), albeit without addressing some of the larger issues in the Committee's minds.

Many Committee members supported the view expressed by this Committee member. However, other Committee members continued to express concerns over the scope of this decision in resolving underlying concerns previously discussed by the Committee.

When put to a vote, the Committee elected to move forward with the application guidance proposal. However, the Committee asked the staff to consider certain issues offline including any potential knock-on implication to the consolidation analysis, specific principle concerns raised by Committee members (including accounting for the premium on warrants, accounting for the debit side of the transaction in IAS 32 and when to derecognise the non-controlling interest) and whether the above application guidance recommendation should be included in the body of IAS 27 as an amendment or interpretation or as application guidance.

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

United Kingdom Financial Reporting Council
"FRC issues an update responding to country and currency risk in financial reporting," FRC, January 2012 ---
http://www.frc.org.uk/images/uploaded/documents/Update for Directors Jan 12 FINAL2.pdf

Executive Summary

This Update for Directors has been prompted by the current economic uncertainties facing a number of countries around the world. This Update aims to draw together a number of the more significant issues directors may reflect when considering how best to provide a balanced and understandable assessment of a company’s position and prospects in the context of increased country and currency risk. The issues Directors could consider include, where relevant:

 The company’s exposure to country risk, direct or to the extent practical indirect1, through financial instruments but also in terms of exposure to trading counterparties (customers and suppliers);

 The impact of austerity measures being adopted in a number of countries on the company’s forecasts, impairment testing, going concern considerations, etc.;

 Possible consequences of currency events that are not factored into forecasts but may impact reported exposures and sensitivity testing of impairment or going concern considerations; and

 A post balance sheet date event requiring enhanced disclosures to avoid misleading investors.

The examples referred to in this Update are not intended to be comprehensive but to provide a stimulus to Directors and Audit Committees, who are better able to judge the relevance of these and other related issues to the company’s particular circumstances.

Similar guidance has also been issued by other regulators in recent months, including ESMA’s November 2011 public statement “Sovereign Debt in IFRS Financial Statements”2 which Directors may also want to consider.

Bob Jensen's threads on accounting for foreign exchange (FX) risk ---
http://www.trinity.edu/rjensen/caseans/000index.htm

"Have We Got a Convention Center to Sell You! From Boston to Austin, politicians spend money on fancy white elephants," by Steven Malanga, The Wall Street Journal, December 31, 2011 ---
http://online.wsj.com/article/SB10001424052970204720204577126603702369654.html#mod=djemEditorialPage_t

. . .

Then there's Boston, perhaps the quintessential example of a city that interprets failure in the convention business as a license to spend more on it. Massachusetts officials shelled out $230 million to renovate Hynes Convention Center in the late 1980s. When the makeover produced virtually no economic bounce, officials decided that the city needed a new, $800 million center financed by a hotel occupancy excise tax, a rental-car surcharge, and the sale of taxi medallions. Opened in 2004, that new Boston Convention and Exhibition Center was projected (by consultants hired by the state) to have Boston renting some 670,000 additional hotel rooms annually within five years. Instead, Beantown saw just 310,000 additional hotel room rentals in 2009.

Now Massachusetts officials want to spend $2 billion to double the size of the Boston Convention Center and add a hotel. Of course, they predict that the expanded facilities would bring an additional $222 million into the local economy each year, including 140,000 hotel room rentals. Even with these bullish projections, officials claim that the hotel would need $200 million in public subsidies.

"The whole thing is a racket," Boston Globe columnist Jeff Jacoby recently observed. "Once again the politicos will expand their empire. Once again crony capitalism will enrich a handful of wired business operators. And once again Joe and Jane Taxpayer will pay through the nose. How many times must we see this movie before we finally shut it off?"

Many times, if officials in Baltimore have their way. Several years ago they built a $300 million city-owned hotel, (the Hilton Baltimore Convention Center Hotel) to boost the fortunes of the city's struggling convention center. Having opened in 2008, the hotel lost $11 million last year. Now the city is considering a public-private expansion plan that would add a downtown arena, an additional convention hotel, and 400,000 feet of new convention space at the cost of $400 million in public money.

The list goes on—everywhere from Columbus, Ohio, to Dallas, Austin, Phoenix and places in between. One problem is that optimistic projections about new facilities fail to account for how other cities are expanding, too. Why did Minneapolis struggle to hit projected targets after it enlarged its convention center in 2002? "Other cities expanded right along with us,'' Minneapolis's convention center director, Jeff Johnson, said this year.

The surest sign that taxpayers should be leery of such public investments is that officials have changed their sales pitch. Convention and meeting centers shouldn't be judged, they now say, by how many hotel rooms, restaurants, and local attractions they help fill. That's "narrow-minded thinking," said James Rooney of the Massachusetts Convention Center Authority this year. Instead, as Boston Mayor Thomas Menino has said, expanding a convention center can "demonstrate to the world that we have unlimited confidence in our city and what it can do, not only as a convention destination but as the center of the most important trends in hospitality, science, health and education."

Continued in article

Jensen Comment
When I still lived in San Antonio, taxpayers went on the hook for an Alamo Dome Convention Center that cost nearly $300 million intended to also be the home of the NBA San Antonio Spurs. Almost the instant the ribbon was cut on the the Alamo Dome, the San Antonio Spurs asked taxpayers to fund their own new arena. These things sell because the promoters say that the funding will come for taxes on visitors to the city rather than local taxpayers. What they don't tell you is that the new taxes event revenues do not pay millions of dollars in operating and vacancy losses. Those losses are then quietly billed to local taxpayers. Welcome to the world of urban crony business fraud

"Tracing the L.A. Coliseum's fiscal decay As the landmark stadium's finances nose-dived, commissioners took little notice," by Paul Pringle and Rong-Gong Lin II, Los Angeles Times, December
http://www.latimes.com/news/local/la-me-coliseum-commission-20111231,0,338108.story
Thank you Glen Gray for the heads up.

Month after month, the financial forecasts for the Los Angeles Memorial Coliseum seemed as sunny as could be.

General Manager Patrick Lynch would tell his bosses on the Coliseum Commission that the box office from rave concerts was brisk and a lucrative deal for naming rights to the stadium could be just around the corner, records show.

For the most part, the nine-member commission took the affable Lynch at his word. And why not? As L.A. County Supervisor Don Knabe, who si

Despite Lynch's assurances, there was a different reality: The Coliseum had become mired in conflicts of interest, spending irregularities and loose accounting that eroded its fiscal foundation and had all but bankrupted its future as one of the nation's most-storied public landmarks.

Lynch resigned in February after The Times began a series of reports on the Coliseum's finances. He and his former events manager, Todd DeStefano, who quit shortly before the first story appeared, are the subjects of a criminal investigation by county prosecutors involving alleged kickbacks and self-dealing. State regulators and the Los Angeles city controller's office have also launched inquiries.

Three other Coliseum managers and employees have gone on leave or left the stadium's employment after The Times' investigation questioned the propriety of their financial dealings. All deny wrongdoing.

How a multimillion-dollar scandal at such a high-profile venue could go undetected for so long is not entirely clear. But the groundwork for alleged abuse lay in a history of clumsy stewardship, inattentiveness by commission members and a cozy relationship between Lynch and his overseers.

The commission was empowered to safeguard the interests of the state, county and city. But it became more of a sportsmen's club than a watchdog.

"The place was on autopilot," said mall developer Rick Caruso, who resigned as a commissioner earlier this year. He was often a lone voice in challenging Lynch, with scant results. "There was no accountability."

The Coliseum is now so broke that it is unable to make upgrades promised in its lease with USC, whose football Trojans are the stadium's main tenant. As a result, the panel is about to turn over day-to-day control of the taxpayer-owned property to the private school.

Jessica Levinson, a Loyola Law School professor who studies public corruption, described the commission's failure to spot warning signs of the scandal as a "great tragedy."

"This was below the standards of how you would run a neighborhood lemonade stand," she said.

The Coliseum, completed in 1923 when Warren G. Harding was in the White House, was heralded as a symbol of a burgeoning metropolis' ambitions to play on the global stage.

Continued in article

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

"How to Write a Lot for the Sciences," by Heather M. Whitney, Chronicle of Higher Education, January 17, 2012 ---
http://chronicle.com/blogs/profhacker/how-to-write-a-lot-for-the-sciences/37966?sid=wc&utm_source=wc&utm_medium=en

I’ve often been frustrated by the how-to-succeed-in-academia advice that’s out there. To be honest, a sizable portion of it is not applicable to my work in science. Grad school was an especially dim time. Most of the advice doled out online and in other venues was along the lines of “just write! write! write!” and I would sigh and ask myself, “but what about getting productive at planning and doing experiments?”

But lately I’ve had a bit of a change of heart. Maybe there is something I can glean from the advice on writing. I read a fascinating post by Holly Tucker, a historian of science and medicine, in which she details the practice of her writing group. Tucker describes how the book How to Write a Lot: A Practical Guide to Productive Academic Writing changed her point of view on writing and has led to a greater productivity in this slice of her job.

I figured, if a historian of science can get something out of this, maybe so can I. So I purposed with a faculty friend of mine and we both read the book over the holiday break.

I won’t give all the details of the book here, but in short, the author, Paul Silvia, advises that you write and meet with an accountability group regularly. He claims that if you make appointments with yourself to write, and give these appointments the level of importance that you give other items in your schedule (such as teaching a class), you will see productivity.

Continued in article

Jensen Comment
I plan to post this to the AAA Commons Writing Forum commenced by our AECM friend Zane Swanson ---
http://commons.aaahq.org/posts/c5fdcaace5

Bob Jensen's helpers for writers ---
http://www.trinity.edu/rjensen/Bookbob3.htm#Dictionaries

"When They Are Wrong, Analysts May Dig in Their Heels," by John L. Beshears and Katherine L. Milkman, Stanford Graduate School of Business, August 2011 ---
http://www.gsb.stanford.edu/news/research/beshears_analysts_2011.html?cmpid=alumni

When they are wrong about quarterly earnings forecasts, analysts may stubbornly stick to their erroneous views, a tendency that might contribute to market bubbles and busts, according to research coauthored by John Beshears of the Stanford Graduate School of Business.

Continued in article

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

What is a good formula for balancing creative license with historical accuracy?
Case in Point: A woman with a tattoo on her chin
"She's a Character Who Could Have Stepped Out of Melville or Hawthorne" by Michael Stratford, Chronicle of Higher Education, January 15, 2012 ---
http://chronicle.com/article/An-English-Professor-Explores/130344/

Jensen Comment
I added this link to Zane's AAA Commons Writing Forum ---
http://commons.aaahq.org/posts/c5fdcaace5#13893

There are some hurdles that have to be passed before we’re going to be comfortable making the ultimate decision about whether to incorporate IFRS into the U.S. reporting regime. Sticking points include the independence of the International Accounting Standards Board and “the quality and enforceability of standards.
Mary Shapiro, U.S. Securities and Exchange Commission Chairman, January 5, 2012 ---
http://www.businessweek.com/news/2012-01-06/sec-s-schapiro-says-she-regrets-loss-in-investor-access-battle.html

Perspectives and priorities: On Motherhood and Apple Pie
An introduction from Michel Prada, the newly appointed Chairman of the IFRS Foundation Trustees, January 4, 2012
http://www.ifrs.org/Features/perspectives+priorities.htm

"Best of 2011: Accounting: After predicting that a decision on whether U.S. GAAP would converge with global standards would come sometime in 2011, SEC officials have punted until well into 2012," by David M. Katz, CFO.com, January 3, 2012 ---
http://www3.cfo.com/article/2011/12/gaap-ifrs_gaapifrsaicpasecfasbiasb
Thank you Glen Gray for the heads up.

After much brooding about whether the United States would fully meld its financial reporting with international financial reporting standards (IFRS), the Securities and Exchange Commission ended 2011 without making its long-awaited, long-delayed decision on the issue.

In fact, after predicting that the decision would likely come sometime in 2011, the SEC doesn't appear likely to opine on the matter until far into 2012. In a December 5 speech before the American Institute of Certified Public Accountants (AICPA), James Kroeker, the SEC's chief accountant, said that the U.S. Financial Accounting Standards Board and the International Accounting Standards Board were "many months away from finalization of even the small group of key . . . projects" essential for convergence.

While FASB and the IASB had made good progress on converging leasing and revenue-recognition standards, "the prospect for a converged solution" on accounting for financial instruments "has not been as encouraging," said Kroeker, noting that it has been particularly tough for the two boards to agree on a single standard for hedging transactions. Further, the SEC's staff will need "a measure of a few additional months" to complete its own final assessment of how it "could or should proceed with a decision to incorporate IFRS for U.S. issuers," he said.

In the course of working on that assessment last year, the commission's staff did, however, manage to spawn one of the ugliest verbal coinages in recent memory: “condorsement.” Melding “convergence” with “endorsement,” the SEC’s staff proposed that FASB could continue to hold sway in this country over a convergence of U.S. GAAP and IFRS during a transition period of five to seven years. But once convergence has been achieved, FASB would merely endorse the standards the IASB developed.

That proposal kindled a furious debate in 2011 on the future role of FASB. Firing back against the condorsement plan, the Financial Accounting Foundation, FASB's parent organization, proposed a system that puts the standards board still squarely at the helm of U.S. accounting standards.

Another hotly debated issue: the role of FASB in setting private-company accounting standards. A group spearheaded by Barry Melancon, president and CEO of the AICPA, called for "a separate private-company standards board" that would be overseen by the FAF and would "work closely" with FASB. But the board, not FASB, "would have final authority" over changes and exceptions to U.S. GAAP targeted to private companies. The FAF then returned the volley, proposing a system that would make FASB the rule-maker for nonpublic companies. Below are the biggest stories of last year.

Continued in article

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

IFRS Convergence is not the only thing the SEC has been putting on hold
"SEC Delays Rulemaking on Executive Compensation Yet Again," by Reese Darragh, Compliance Week, January 5, 2012 ---
http://www.complianceweek.com/sec-delays-rulemaking-on-executive-compensation-yet-again/article/221898/

Here's a gift from the Securities and Exchange Commission to compliance officers and executive compensation committees to usher in the new year:
The SEC recently updated its schedule for Dodd-Frank Act rulemaking for the year, and it has pushed back the deadline to propose and implement some of the rules on executive compensation, including the disclosure of pay-for-performance, pay ratios, the compensation clawback provision, and hedging activities by employees and directors.

The original deadline set by the SEC to propose these rules was between April and July 2011 while the adoption of the final rules was targeted to occur in the second half of the year. On July 29 last year, the Commission pushed back the proposal date to the second half of last year and was expecting to adopt the final rules in the first half of the year.

For some companies, however, the postponement brings little cheer. They'd rather have the certainty of the rules in place so they can begin planning for complying with them, especially for the Dodd-Frank provisions that are still fairly nebulous.

Compensation experts have cumulatively expressed their skepticism over the Commission's ability to meet the tight deadlines it had set for 2011. Of concern to them is the rule that will require companies to disclose the pay ratios of executives and employees as prescribed under Section 953 and 955. Many companies, compensation consultants, and others say the requirement to disclose chief executive officer pay as a ratio of total employee pay leaves much still to be settled. In order to meet the requirement, companies will need to gather wage information from all employees—a task that can be overwhelming for those companies with a global presence.

Attached below are excerpts of the new corporate governance and disclosure rulemaking timeline published by the SEC for 2012.

January – June 2012 (planned)
§951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
§952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts
§§953 & 955: Propose rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
§954: Propose rules regarding recovery of executive compensation

July – December 2012 (planned)
§§953 & 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
§954: Adopt rules regarding recovery of executive compensation
§956: Adopt rules (jointly with others) regarding disclosure of, and prohibitions of certain executive compensation structures and arrangements for financial institutions
§952: Report to Congress on study and review of the use of compensation consultants and the effects of such use

Jensen Comment
The timing won't matter much. Rule breakers only get slapped on the hand with Mary's SEC feather.

Jim Martin is a retired accounting professor who maintains one of the largest and most useful reference sites for academic accountants ---
http://maaw.info/

January 8, 2012 message from Jim Martin

I have been playing around with the Pearler for several days. It allows you
to collect web pages, place them in Pearltrees and add Pearls or links to
the pages you like. You can use it on the Pearler site, or place your root
tree, or individual Pearltrees on different pages on your own site. You can
also work on your Pearltrees with team members. It's fun to play with, but
somewhat addictive. For what it's worth, I organized MAAW's hundred + topics
into 14 Pearltrees.

MAAW's Pearltrees on the Pearler site -
http://www.pearltrees.com/#/N-reveal=5&N-fa=4029796&N-u=1_484552&N-p=32411065&N-s=1_4074700&N-f=1_4074700

MAAW's Pearltrees on the MAAW site -
http://maaw.info/MAAWsPearltrees/MAAWsPearltreesMain.htm

A single Pearltree for MAAW's Journal bibliographies -
http://maaw.info/MAAWsPearltrees/JournalBibsPearltree.htm

January 8, 2012 reply from Bob Jensen

You are a tremendous open sharing accounting professor!

Respectfully ten times over,
Bob Jensen

How one of my favorite technology commentators discovered, as a kid, what we in accounting call CPV, CVP, PCV or whatever analysis

"A Gadget Is More Than the Sum of Its Parts," by David Pogue, The New York Times, January 5, 2012 ---
http://pogue.blogs.nytimes.com/2012/01/05/a-gadget-is-more-than-the-sum-of-its-parts/

As a teenager growing up in the Cleveland suburbs, my first real job was at a Chick-fil-A restaurant in a local mall. I did everything: manned the cash register, made sandwiches and cleaned up.

. . .

It’d be fun to report that that job taught me important skills and precepts that followed me for the rest of my life, but that’d be pushing it.

¶That job did teach me, however, one important thing about the business world. My best friend, John, worked next door at a watch shop. He told me he could get incredible discounts on the watches — all I had to do was ask. I needed a watch, in fact, so I picked out a $200 model and asked what I’d have to pay. He said $60.

¶I was appalled. “You mean to tell me that your shop pays $60 for that watch, and then jacks up the price to $200 for the consumer? That’s outrageous! That’s practically robbery! You should be ashamed to work there!”

¶John was amused, and he proceeded to teach me a lesson. “Oh, really? That’s a big ripoff, huh? Well, let me ask you this: How much do you think Chick-fil-A pays for each of the chicken breasts?”

¶I calculated that in the massive quantities this chain purchased, it was maybe 40 cents.

¶“And the bun?” Maybe 4 cents. “The pickle?” One-tenth of a cent. “O.K., and how much do you sell the sandwich for?” $2.40.

¶Now, it’s been 30 years. All of the numbers in this story are vague recollections — I don’t need e-mail from chicken-farm vendors setting me straight. But I’m quite sure of the result: By the time I’d done the math, John had made me realize that my sandwich shop was marking up its product more than his watch shop. I was the one who should be ashamed.

¶Right?

¶I think of this transaction every time somebody does a “teardown analysis” of an iPhone, a Kindle Fire or some other hot new product. These companies buy a unit, take it apart, photograph the components and then calculate the price of each. Then they tally those component costs and try to make you outraged that you’ve paid so much markup.

Continued in article

Jensen Comment
I eat three or more (usually more) times per day. But I've not bought a new Timex watch in the past ten years.

Bob Jensen's threads and cases on CVP analysis ---
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting
CVP analysis becomes more interesting when we extend it to multiple products, operating leverage, and pricing (with demand functions). David Pogue adds complications when the sum is not equal to the summation of its parts.

An appeaser is one who feeds a crocodile—hoping it will eat him last.
Winston Churchill

If you have ten thousand regulations, you destroy all respect for the law.
Winston Churchill

You can always count on Americans to do the right thing—after they’ve tried everything else.
Winston Churchill

On Regulation and Rules
"The Trojan Horse of cost benefit analysis," by John Kemp, Reuters, January 3, 2012 ---
http://af.reuters.com/article/metalsNews/idAFL6E8C31UN20120103

Ernst & Young

To the Point: Surprises lurk in the proposed revenue recognition model

In conjunction with its November 2011 re-exposure of the joint revenue recognition proposal, the FASB issued a draft of the proposed consequential amendments to the Accounting Standards Codification. The proposed amendments include not only the proposed changes to Topic 605, Revenue Recognition, but also the changes to the guidance that resides outside of Topic 605. Our To the Point publication highlights some proposed changes to current guidance that companies may not have expected. Technical Line: Respondents to PCAOB overwhelmingly oppose mandatory audit firm rotation
http://www.ey.com/Publication/vwLUAssets/TothePoint_BB2245_RevRecAmendments_5January2012/%24FILE/TothePoint_BB2245_RevRecAmendments_5January2012.pdf

About 94% of the roughly 600 letters the PCAOB received on its concept release on possible ways to enhance auditor independence oppose mandatory audit firm rotation. It was the second-largest number of responses the Board has received on a rule-making project since it was created by the Sarbanes-Oxley Act of 2002. The PCAOB plans to hold a roundtable to gather more feedback in March 2012. Our Technical Line publication summarizes the responses.
http://www.ey.com/Publication/vwLUAssets/TechnicalLine_BB2256_AuditFirmRotation_5January2012/%24FILE/TechnicalLine_BB2256_AuditFirmRotation_5January2012.pdf

In Letters to PCAOB, EU, Australian and Japanese Accounting Groups Oppose Mandatory Audit Firm Rotation ---
January 9, 2011 ---
http://jimhamiltonblog.blogspot.com/2012/01/in-letters-to-pcaob-eu-australian-and.html

One of the better (albeit older) articles I've seen on the issue of whether or not standard setters should require mandatory audit firm rotation is by the following interesting set of authors (including the very respected long-time research professor Kurt Pany).

Barbara Arel, CPA, is a doctoral student at the W.P. Carey School of Business, Arizona State University, Tempe, Ariz.
Richard G. Brody, PhD, CPA, is an associate professor at the College of Business, University of South Florida, St. Petersburg.
Kurt Pany, PhD, CPA, is a professor at the W.P. Carey School of Business.

"Audit Firm Rotation and Audit Quality," by Barbara Arel, Richard G. Brody, and Kurt Pany, The CPA Journal, January 2005 ---
http://www.nysscpa.org/cpajournal/2005/105/essentials/p36.htm

. . .

Unanswered Questions

The net effect of audit firm rotation is uncertain. On the one hand, it is bothersome that auditors placed in a situation where no rotation is expected are more likely to agree with a client on a difficult accounting issue. Logically, an expected long-term stream of audit fees could also result in different decisions, due to either conscious or subconscious reasons. Despite these considerations, the research indicating high first-year audit failure rates suggests that rotations might result in auditors with higher perceived independence performing lower-quality audits. Many other potential effects of mandatory audit firm rotation remain unmeasured. For example, how will a much larger annual supply of possible new audit clients affect auditors? Will marketing ability trump technical competence in winning new engagements? Would CPAs staff their audits differently toward the end of the rotation period? In addition, there is no information on likely changes in the costs of audits due to rotation.

Even the high audit failure rates in the early years of an engagement are uncertain. Under mandatory rotation, would the increased number of first- and second-year audits lead to a higher level of auditor skill in these circumstances and to a lower level of audit failure? Or, could a closer working relationship with the predecessor auditor limit early-year audit failures?

Another issue relates to audit firms themselves. Given that the Big Four handle the bulk of the large publicly held corporations, will rotation involve only these four firms? Are non–Big Four firms able or willing to handle large SEC audits? Will audit firm incentives to specialize in specific industries be diminished because the possible future benefits do not outweigh the current costs of training auditors? Anecdotal evidence suggests that the Big Four will gain greater market share if rotation is mandatory, which will lead to a less competitive environment without addressing the related policy issues. Less competition will probably lead to substantially higher audit fees—firms estimate that first-year fees would increase by more than 20%—and significantly higher costs for companies. (Estimates are that the additional costs associated with selecting and assisting new auditors are at least 17% of a company’s current audit fee.)

The idea of enhancing auditor independence through mandatory audit firm rotation appeals superficially to many, yet the net effects of rotation are far from certain. The impact of SOA reforms is not yet known. Safeguards are now in place to address many of the key concerns relating to the independence and objectivity of the audit firms. In addition, companies and their top management are taking a more active role in oversight of the system in place to prepare accurate financial statements and prevent abuse. Experience and further research related to both audit firm rotation and these changes may lead to a more informed decision on mandatory audit firm rotation than is now possible.

"Mandatory Auditor Rotation: Evidence from Restatements," December 2003
James N. Myers University of Illinois at Urbana-Champaign
Linda A. Myers University of Illinois at Urbana-Champaign
Zoe-Vonna Palmrose University of Southern California and
Susan Scholz University of Kansas
http://aaahq.org/audit/midyear/04midyear/papers/Myers.pdf

Jensen Comment
It would be interesting to know how these same authors feel about the current raging debate over mandatory audit firm rotation following the bigger audit firm scandals following the subprime loan disasters and failure of the large auditing firms to provide going concern doubts to thousands of failed banks.

"Opinion: Market Transparency Demands Audit Rotation," by Lynn Turner, The Wall Street Journal, December 12, 2011 ---
http://blogs.wsj.com/cfo/2011/12/12/opinion-market-transparency-demands-audit-rotation/

Jensen Comment
Normally I buy into Lynn Turner's opinions. But not this time.

Bob Jensen's threads on the scandals of large auditing firms ---
http://www.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's threads on audit firm professionalism and independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Please note that IFRSs in Russia do not replace national financial reporting standards – preparing consolidated financial statements under IFRSs does not lift the requirement to prepare standalone financial statements under the Russian statutory rules.
Links from Deloitte's IAS Plus:

Click for more information:

25 November Russia's Ministry of Finance Statement (in Russian, DOC 42k)

Amended Russian Law on Securities Markets (in Russian, DOC 688k)

Our Russia country page.

I wonder the SEC might adopt the same strategy for the United States.
"The Russians are Coming; The Russians are Coming"

An Enormous Amount of Free Open Sharing Accounting Course Material from Jim Peters

January 8, 2012 message from Jim Peters

A year of so ago, I make the texts that I write for my classes and the in-class exercises I use available to the public and notified this list. I have just completed revising those materials and bringing them up to date. If you are interested, the URL is http://petersfamily.us/Courses.htm. Feel free to use anything you want and to contact me if you have questions or want more materials. For example, I am a heavy user of cases and have developed a lot of cases for each class. I did not post all those supporting materials to the website. Just not enough time in the day to do everything. The four classes involved are Auditing, Accounting Information Systems, Financial Statement Analysis, and Managerial Accounting for MBAs.

I have my own approach to education, which is why I do stupid things like maintaining my own texts for the these classes. But, I starting doing this over 20 years ago when my students found my materials more accessible than published texts. For example, as apposed to published texts, my texts are informally worded (e.g., lots of first person pronouns), but I have found students identify with the material more effectively if I write as if I am have a conversation with the reader.

OK, enough defending my approach. The materials are there for anyone who wants to review and/or use them.

Jim

January 8, 2012 reply from Bob Jensen

Thank you for both revising and open sharing Jim. This is a huge task for some of your topics as important content changes so quickly in some of the topics that you cover.

I especially commend you for sharing a free casebook for financial statement analysis. This is a huge amount of material.

One suggestion for the future is to build in some modules on XBRL since that will become an enormous part of financial statement analysis and auditing in the future for our accounting students.

I added your message to my links to free textbooks and other materials contained at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm

The problem is when the model created to represent reality takes on a life of its own completely detached from the reality that it is supposed to model that nonsense can easily ensue.

Was it Mark Twain who wrote: "The criterion of understanding is a simple explanation."?
As quoted by Martin Weiss in a comment to the article below.

But a lie gets halfway around the world while the truth is still tying its shoes
Mark Twain as quoted by PKB (in Mankato, MN) in a comment to the article below.

"US Net Investment Income," by Paul Krugman, The New York Times, December 31, 2011 ---
http://krugman.blogs.nytimes.com/2011/12/31/us-net-investment-income/
Especially note the cute picture.

December 31, 2011 Comment by Wendell Murray
http://krugman.blogs.nytimes.com/2011/12/31/i-like-math/#postComment

Mathematics, like word-oriented languages, uses symbols to represent concepts, so it is essentially the same as word-oriented languages that everyone is comfortable with.

Because mathematics is much more precise and in most ways much simpler than word-oriented languages, it is useful for modeling (abstraction from) of the messiness of the real world.

The problem, as Prof. Krugman notes, is when the model created to represent reality takes on a life of its own completely detached from the reality that it is supposed to model that nonsense can easily ensue.

This is what has happened in the absurd conclusions often reached by those who blindly believe in the infallibility of hypotheses such as the rational expectations theory or even worse the completely peripheral concept of so-called Ricardian equivalence. These abstractions from reality have value only to the extent that they capture the key features of reality. Otherwise they are worse than useless.

I think some academics and/or knowledgeless distorters of academic theories in fact just like to use terms such as "Ricardian equivalence theorem" because that term, for example, sounds so esoteric whereas the theorem itself is not much of anything.

Ricardian Equivalence --- http://en.wikipedia.org/wiki/Ricardian_equivalence

Jensen Comment
One of the saddest flaws of accountics science archival studies is the repeated acceptance of the CAPM mathematics allowing the CAPM to "represent reality on a life of its own" when in fact the CAPM is a seriously flawed representation of investing reality ---
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious

At the same time one of the things I dislike about the exceedingly left-wing biased, albeit brilliant, Paul Krugman is his playing down of trillion dollar deficit spending and his flippant lack of concern about $80 trillion in unfunded entitlements. He just turns a blind eye toward risks of Zimbabwe-like inflation. As noted below, he has a Nobel Prize in Economics but "doesn't command respect in the profession". Put another way, he's more of a liberal preacher than an economics teacher.

Paul Krugman --- http://en.wikipedia.org/wiki/Paul_Krugman

Economics and policy recommendations

Economist and former United States Secretary of the Treasury Larry Summers has stated Krugman has a tendency to favor more extreme policy recommendations because "it’s much more interesting than agreement when you’re involved in commenting on rather than making policy."

According to Harvard professor of economics Robert Barro, Krugman "has never done any work in Keynesian macroeconomics" and makes arguments that are politically convenient for him.Nobel laureate Edward Prescott has charged that Krugman "doesn't command respect in the profession", as "no respectable macroeconomist" believes that economic stimulus works, though the number of economists who support such stimulus is "probably a majority".

Bob Jensen's critique of analytical models in accountics science (Plato's Cave) can be found at
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics

Fabricated Data at Least 145 times
"UConn Investigation Finds That Health Researcher Fabricated Data." by Tom Bartlett, Inside Higher Ed, January 11, 2012 ---
http://chronicle.com/blogs/percolator/uconn-investigation-finds-that-health-researcher-fabricated-data/28291

Jensen Comment
I knew of a few instances of plagiarism, but not once has it been discovered that an accountics scientist fabricated data. This could, however, be due to accountics scientists shielding each other from validity testing ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

However, we disagree with the proposal that a non-investment entity parent of an investment entity should consolidate all entities it controls through its consolidated investment entity subsidiary.
Deloitte comment letter on investment entities, January 5, 2012 ---
http://www.iasplus.com/dttletr/1201investent.pdf

What's Right and What's Wrong With (SPEs), SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

"Investment strategist: 'Big banks make their money from optimism'," by Joris Luyenduc, The Guardian, January 3, 2012 ---
http://www.guardian.co.uk/commentisfree/joris-luyendijk-banking-blog/2012/jan/03/investment-strategist-emerging-markets

. . .

"If you take an honest look at the financial sector today, you see banks can borrow money almost for free on what is called the short-term market, then lend that money to governments for 2% or 3%. Now why would they lend to small businesses if they can make money so easily? This is what 'zero interest rates' are doing to our economy, as well as taxing savers with inflation at over 5%. You take on new debt to pay off your old debt. It's like drinking your hangover away with ever more drinks. You are destroying your liver. That's what's currently happening."

Continued in article

Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

When browsing some of my 8,000+ comments on the AAA Commons, I ran across this old tidbit that relates to our more current AECM messaging on journal refereeing.

I even liked the "Dear Sir, Madame, or Other" beginning.

I assume that "Other" is for the benefit of Senator Boxer from California.

Letter From Frustrated Authors, by R.L. Glass, Chronicle of Higher Education, May 21, 2009 ---
http://chronicle.com/forums/index.php?topic=60573.0
This heads up was sent to me by Ed Scribner at New Mexico State

Dear Sir, Madame, or Other:

Enclosed is our latest version of Ms. #1996-02-22-RRRRR, that is the re-re-re-revised revision of our paper. Choke on it. We have again rewritten the entire manuscript from start to finish. We even changed the g-d-running head! Hopefully, we have suffered enough now to satisfy even you and the bloodthirsty reviewers.

I shall skip the usual point-by-point description of every single change we made in response to the critiques. After all, it is fairly clear that your anonymous reviewers are less interested in the details of scientific procedure than in working out their personality problems and sexual frustrations by seeking some kind of demented glee in the sadistic and arbitrary exercise of tyrannical power over hapless authors like ourselves who happen to fall into their clutches. We do understand that, in view of the misanthropic psychopaths you have on your editorial board, you need to keep sending them papers, for if they were not reviewing manuscripts they would probably be out mugging little old ladies or clubbing baby seals to death. Still, from this batch of reviewers, C was clearly the most hostile, and we request that you not ask him to review this revision. Indeed, we have mailed letter bombs to four or five people we suspected of being reviewer C, so if you send the manuscript back to them, the review process could be unduly delayed.

Some of the reviewers’ comments we could not do anything about. For example, if (as C suggested) several of my recent ancestors were indeed drawn from other species, it is too late to change that. Other suggestions were implemented, however, and the paper has been improved and benefited. Plus, you suggested that we shorten the manuscript by five pages, and we were able to accomplish this very effectively by altering the margins and printing the paper in a different font with a smaller typeface. We agree with you that the paper is much better this way.

One perplexing problem was dealing with suggestions 13–28 by reviewer B. As you may recall (that is, if you even bother reading the reviews before sending your decision letter), that reviewer listed 16 works that he/she felt we should cite in this paper. These were on a variety of different topics, none of which had any relevance to our work that we could see. Indeed, one was an essay on the Spanish–American war from a high school literary magazine. The only common thread was that all 16 were by the same author, presumably someone whom reviewer B greatly admires and feels should be more widely cited. To handle this, we have modified the Introduction and added, after the review of the relevant literature, a subsection entitled “Review of Irrelevant Literature” that discusses these articles and also duly addresses some of the more asinine suggestions from other reviewers.

We hope you will be pleased with this revision and will finally recognize how urgently deserving of publication this work is. If not, then you are an unscrupulous, depraved monster with no shred of human decency. You ought to be in a cage. May whatever heritage you come from be the butt of the next round of ethnic jokes. If you do accept it, however, we wish to thank you for your patience and wisdom throughout this process, and to express our appreciation for your scholarly insights. To repay you, we would be happy to review some manuscripts for you; please send us the next manuscript that any of these reviewers submits to this journal.

Assuming you accept this paper, we would also like to add a footnote acknowledging your help with this manuscript and to point out that we liked the paper much better the way we originally submitted it, but you held the editorial shotgun to our heads and forced us to chop, reshuffle, hedge, expand, shorten, and in general convert a meaty paper into stir-fried vegetables. We could not – or would not – have done it without your input.

-- R.L. Glass
Computing Trends,
1416 Sare Road Bloomington, IN 47401 USA
E-mail address: rglass@acm.org

December 30, 2011 reply from Steve Kachelmeir

This letter perpetuates the sense that "reviewers" are malicious outsiders who stand in the way of good scholarship. It fails to recognize that reviewers are simply peers who have experience and expertise in the area of the submission. The Accounting Review asks about 600 such experts to review each year -- hardly a small set.

While I have seen plenty of bad reviews in my editorial experience, I also sense that it is human nature to impose a self-serving double standard about reviewing. Too many times when we receive a negative review, the author concludes that this is because the reviewer does not have the willingness or intelligence to appreciate good scholarship or even read the paper carefully. But when the same author is asked to evaluate a different manuscript and writes a negative review, it is because the manuscript is obviously flawed. Psychologists have long studied self-attributions, including the persistent sense that when one experiences a good thing, it is because one is good, and when one experiences a bad thing, it is because others are being malicious. My general sense is that manucripts are not as good as we sense they are as authors and are not as bad as we sense they are as reviewers. I vented on these thoughts in a 2004 JATA Supplement commentary. It was good therapy for me at the time.

The reviewers are us.

Steve

December 31, 2011 reply from Bob Jensen

Hi Steve,

Thank you for that sobering reply.

I will repeat a tidbit that I posted some years back --- it might've been in reply to a message from you.

When I was a relatively young PhD and still full of myself, the Senior Editor, Charlie Griffin, of The Accounting Review sent me a rather large number of accountics science papers to referee (there weren't many accountics science referees available 1968-1970). I think it was at a 1970 AAA Annual Meeting that I inadvertently overheard Charlie tell somebody else that he was not sending any more TAR submissions to Bob Jensen because "Jensen rejects every submission." My point in telling you this is that having only one or two referees can really be unfair if the referees are still full of themselves.

Bob Jensen

December 31, 2011 reply from Jim Peters

The attribution bias to which Steve refers also creates an upward (I would say vicious) cycle for research standards. Here is how it works. When an author gets a negative review, because of the attribution problem, they also infer that the standards for publication have gone up (because, they must have since their work is solid). Then, when that same author is asked to review a paper, they tend to apply the new, higher standards that they miss-attributed to the recent review they received. A sort of "they did it to me, I am going to do it to them," but not vindictively, just in an effort to apply current standards. Of course, the author of the paper they are reviewing makes their own miss-attribution to higher standards and, when that author is asked to review a paper, the cycle repeats. The other psychological phenomena at work here is lack of self-insight. Most humans have very poor self-insight as to why they do things. They make emotional decisions and then rationalize them. Thus, the reviewers involved are probably unaware of what they are doing. Although a few may indeed be vindictive. The blind review process isn't very blind given that most papers are shopped at seminars and other outlets before they are submitted for publication and there tend to some self-serving patterns in citations. Thus, a certain level of vindictiveness is possible.

When I was a PhD student, I asked Harry Evans to define the attributes of a good paper in an effort to establish some form of objective standard I could shoot for. His response was similar to the old response about pornography. In essence, I know a good paper when I see it, but I cannot define attributes of a good paper in advance. I may have missed something in my 20+ years, but I have never seen any effort to establish written, objective standards for publishability of academic research. So, we all still are stuck with the cycle where authors try to infer what they standards are from reviews.

Jim

January 1, 2012 reply from Dan Stone

I've given lots of thought to why peer review, as now exists in many disciplines (including accounting), so frequently fails to improve research, and generates so extensive a waste of authorial resources. After almost thirty years of working within this system, as an editor, author and reviewer, I offer 10 reasons why peer review, as is often constructed, frequently fails to improve manuscripts, and often diminishes their contribution:

1. authors devote thousands of hours to thoroughly understanding an issue,

2. most reviewers devote a few hours to understanding the authors' manuscript,

3. most reviewers are asked to review outside of their primary areas of expertise. For example, today, I am reviewing a paper that integrates two areas of theory. I know one and not the other. Hence, reviewers, relative to authors, are almost universally ignorant relative to the manuscript,

4. reviewers are anonymous, meaning unaccountable for their frequently idiotic, moronic comments. Editors generally know less about topical areas than do reviewers, hence idiotic reviewers comments are generally allowed to stand as fact and truth.

5. reviewers are rewarded for publishing (as AUTHORS) but receive only the most minimal of rewards for reviewing (sometimes an acknowledgement from the editor),

6. editors are too busy to review papers, hence they spend even fewer hours than authors on manuscripts,

7. most editors are deeply entrenched in the status quo, that is one reason they are selected to be editors. Hence, change to this deeply flaws systems is glacial if at all

8. reviewers are (often erroneously) told that they are experts by editors,

9. humans naturally overestimate their own competence, (called the overconfidence bias),

10 hence, reviewers generally overestimate their own knowledge of the manuscript.

The result is the wasteful system that is now in place at most (though certainly not all) journals. There are many easy suggestions for improving this deeply flawed system -- most importantly to demand reviewer accountability. I've given citations earlier to this list of articles citing the deeply flaws state of peer review and suggesting improvements. But see point #7.

In short, when I speak as a reviewer, where I am comparatively ignorant, my words are granted the status of absolute truth but when I speak as an author, where I am comparatively knowledgable, I must often listen to babbling fools, whose words are granted the status of absolute truth.

That's a very bad system -- which could be easily reformed -- but for the entrenched interests of those who benefit from the status quo. (see the research cited in "The Social Construction of Research Advice: The American Accounting Association Plays Miss Lonelyhearts" for more about those entrenched interests).

Best,

Dan S.

January 1, 2011 reply from Bob Jensen

Thanks Dan for such a nice summary. Personal anecdote - my respect for Dan went way up years ago when he was the editor and overrode my rejection of a paper. While I stand by my critique of the paper, Dan had the courtesy to make his case to me and I respected his judgment. What constitutes "publishable" is highly subjective and in some cases, we need to lower the rigor bar a little to expose new approaches. As I recall, I did work with the author of the paper after Dan accepted it to help clean it up a bit.

Dan - you state that the fixes are relatively easy, but don't provide details. In my little hyper-optimistic world, a fix would create an air of cooperation between editors, authors, and reviewers to work together to extract the best from research and expose it to the general public. This is about 180 degrees from what I perceive is the current gatekeeper emphasis on "what can I find to hang a rejection on?"

I saw a study years ago, the reference for I would have a hell of a time finding again, that tracked the publications in major journals per PhD in different disciplines in business and over time. For all disciplines, the rate steady fell over time and accounting had by far the lowest rate. It would be simple math to calculate the number of articles published in top journals each year over time, which doesn't seem to increase, and the number of PhDs in accounting, which does. Simple math may indicate we have a problem of suppressing good work simply because of a lack of space.

Jim

January 1, 2011 reply from Steve Kachelmeir

Dan has listed 10 reasons why peer review fails to improve manuscripts. To the contrary, in my experience, at least for those manuscripts that get published, I can honestly say that, on average, they are discernably better after the review process than before. So, warts and all, I am not nearly as critical of the process in general as are some others. I will attempt to offer constructive, well-intended replies to each of Dan's 10 criticisms.

Dan's point 1.: Authors devote thousands of hours to thoroughly understanding an issue,

SK's counterpoint: I guess I don't understand why this observation is a reason why reviews fail to improve manuscripts. Is the implication that, because authors spend so much time understanding an issue, the author's work cannot possibly be improved by mere reviewers?

2. Most reviewers devote a few hours to understanding the authors' manuscript,

SK's counterpont: This seems a corollary to the oft-heard "lazy reviewer" complaint. Let us concede that reviewers sometimes (or even often) do not spend as much time on a manuscript as we would like to see. Even if this is true, I would submit that the reviewer spends more time on the paper than does the typical reader, post publication. So if the reviewer "doesn't get it," chances are that the casual reader won't get it either.

3. Most reviewers are asked to review outside of their primary areas of expertise. For example, today, I am reviewing a paper that integrates two areas of theory. I know one and not the other. Hence, reviewers, relative to authors, are almost universally ignorant relative to the manuscript,

SK's counterpoint: As I see it, the editor's primary responsibility is to avoid this criticism. I can honestly say that we did our best at The Accounting Review during my editorship to choose qualified reviewers. It is easier said than done, but I employed a 20-hour RA (and my understanding is that Harry Evans does the same) simply to research submissions in a dispassionate manner and suggest names of well-qualified potential reviewers with no obvious axes to grind. In a literal sense, it is of course true that the author knows the most about the author's research. But that, to me, does not justifiy the assertion that "most reviewrs are asked to review outside of their primary areas of expertise." That is, Dan's anecdote notwithstanding, I simply disagree with the assertion. Also, a somewhat inconvenient truth I have uncovered as editor is that too much reviewer expertise is not necessarily a good thing for the author. As in most things, moderation is the key.

4. reviewers are anonymous, meaning unaccountable for their frequently idiotic, moronic comments. Editors generally know less about topical areas than do reviewers, hence idiotic reviewers comments are generally allowed to stand as fact and truth.

SK's counterpoint: To say that reviewers are "idiotic" and "moronic" is to say that professors in general are idiotic and moronic. After all, who do you think does the reviews? To be sure, authors often perceive a reviewer's comments as "idiotic and moronic." Similarly, have you ever reviewed a manuscript that you perceived as "idiotic and moronic"? This is self-serving bias on self-attributions, plain as simple. As I've said before, my general sense is that the reviews we receive are not as bad as we think, and the manuscripts we submit are not as good as we think. As to the assertion that "editors generally know less about topical areas than do reviewers," of course that is true (in general), which is why we have a peer review system!

5. Reviewers are rewarded for publishing (as AUTHORS) but receive only the most minimal of rewards for reviewing (sometimes an acknowledgement from the editor),

SK's counterpoint: I'm reluctant to tag the word "counterpoint" on this one, because I agree that the reward system is somewhat warped when it comes to reviewing. Bad reviewers get off the hook (because editors wise-up and stop asking them), so they can then sometimes free-ride on the system. Conversely, good reviewers get rewarded with many more review requests, proving that no good deed goes unpunished. At least I tried to take baby steps to remedy this problem by publishing the names of the nearly 500 ad hoc reviewers TAR asks each year, and in addition, starting in November 2011, I started publishing an "honor roll" of our most prolific and timely reviewers.

6. Editors are too busy to review papers, hence they spend even fewer hours than authors on manuscripts,

SK's counterpoint: Why is this a criticisim of the review process? It is precisely because editors have limited time that the editor delegates much of the evalation process to experts in the area of the submission. Consider the alternatives. An alternative that is not on the table is for the editor to pour in many hours/days/weeks on each submission, as there are only 24 hours in the day. So that leaves the alternative of a dictatorial editor who accepts whatever fits the editor's taste and rejects whatever is inconsistent with that taste, reviewers be damned. This is the "benevolent dictator" model to those who like the editor's tastes, but as I said in my November 2011 TAR editorial, the editorial dictator who is benevolent to some will surely be malevolent to others. Surely there is a critical role for editorial judgment, particularly when the reviewers are split, but a wholesale substitution of the editor's tastes in lieu of evaluations by experts would make things worse, in my opinion. More precisely, some would clearly be better off under such a system, but many others would be worse off.

7. Most editors are deeply entrenched in the status quo, that is one reason they are selected to be editors. Hence, change to this deeply flaws systems is glacial if at all

SK's counterpoint: Is the implication here that editors are more entrenched in the "status quo" than are professors in general? If that is true, then a peer review system that forces the editor's hand by holding the editor accountable to the peer reviewers would serve as a check and balance on the editor's "entrenchment," right? So I really don't see why this point is a criticism of the review process. If we dispensed with peer review and gave editors full power, then "entrenched" editors could perpetuate their entrenched tastes forever.

8. Reviewers are (often erroneously) told that they are experts by editors,

SK's counterpoint: Sometimes, as TAR editor, I really wished I could reveal reviewer names to a disgruntled author, if only to prove to the person that the two reviewers were chosen for their expertise and sympathy to both the topic and the method of the submission. But of course I could not do that. A system without reviewer anonymity could solve that problem, but would undoutedly introduce deeper problems of strategic behavior and tit-for-tat rewards and retaliations. So reviews are anonymous, and authors can persist in their belief that the reviewer must be incompetent, because otherwise how could the reviewer possibly not like my submission. But let me back off here and add that many reviews are less constructive and less helpful than an editor would like to see. Point taken. That is why, in my opinon, a well-functioning peer review system must solicit two expert opinions. When the reviewers disagree, that is when the editor must step in and exercise reasoned judgment, often on the side of the more positive reviewer. Let's just say that if I rejected every manuscript with split reviews over the past three years, TAR would have had some very thin issues.

9. Humans naturally overestimate their own competence, (called the overconfidence bias),

SK's counterpoint: Yes, and this is why we tend to be so impressed with our own research and so critical of review reports.

10 Hence, reviewers generally overestimate their own knowledge of the manuscript.

SK's counterpoint: Let's grant this one. But, if I may borrow from Winston Churchill, "Democracy is the worst form of government except for all those other forms that have been tried from time to time." Is a peer review system noisy? Absolutely! Are peer reviews always of high quality? No way! Are reviews sometimes petty and overly harsh? You bet! But is a peer review system better than other forms of journal governance, such as editorial dictatorship or a "power" system that lets the most powerful authors bully their way in? I think so. Editors have very important responsibilities to choose reviewers wisely and to make tough judgment calls at the margin, especially when two reviewers disagree. But dispensing with the system would only make things worse, in my opinion. I again return to the most fundamental truism of this process -- the reviewers are us. If you are asking that we dispense with these "idiotic, moronic" reports, than what you are really asking is that professors have less control over the process to which professors submit. Now that I'm back to being a regular professor again, I'm unwilling to cede that authority.

Just my two cents. Happy New Year to all,

Steve K.

January 1, 2012 reply from Bob Jensen

Hi Dan,

My biggest complaint with the refereeing process as we know it is that anonymous referees are not accountable for their decisions. I always find it odd that in modern times we deplore tenure black balling where senior faculty can vote secretly and anonymously to deny tenure to a candidate without having to justify their reasons. And yet when it comes to rejecting a candidate's attempt to publish, we willingly accept a black ball system in the refereeing processes.

Granted, we hope that referees will communicate reasons for rejection, but there's no requirement to do so, and many of the reasons given are vague statements such as "this does not meet the quality standards of the journal."

More importantly, the referees are anonymous which allows them to be superficial or just plain wrong without having to be accountable.

On the other side of the coin I can see reasons for anonymity. Otherwise the best qualified reviewers may reject invitations to become referees because they don't want to be personally judged for doing the journal a favor by lending their expertise to the refereeing process. Referees should not be forced into endless debates about the research of somebody else.

I've long advocated a compromise. I think that referee reports should be anonymous. I also think referee reports along with author responses should be made available in electronic form in an effort to make the entire refereeing process more transparent (without necessarily naming the referees). For example, each published Accounting Review paper could be linked to the electronic file of referee, author, and editor comments leading up to the publication of the article.

Rejected manuscripts are more problematic. Authors should have discretion about publishing their working papers along with referee and editor communications. However, I think the practice of electronic publishing of rejected papers along with referee communications should become a more common practice. One of the benefits might be to make referees be more careful when reviewing manuscripts even if their rejection reports do not mention names of the referees.

The AAA Executive Committee is usually looking for things that can be done to improve scholarship and research among AAA members. One thing I propose is that the AAA leadership take on the task of how to improve the refereeing process of all refereed AAA journals. One of the objectives concerns ways of making the refereeing process more transparent.

Lastly, I think the AAA leadership should work toward encouraging commentaries on published working papers that indirectly allow scholars to question the judgments of the referees and authors. As it stands today, AAA publications are not challenged like they are in many journals of other scholarly disciplines ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#TARversusAMR

Respectfully,
Bob Jensen

Hi Dan, Jim, and Steve and others,

One added consideration in this "debate" about top accountics science research journal refereeing is the inbreeding that has taken in a very large stable of referees that virtually excludes practitioners. Ostensibly this is because practitioners more often than not cannot read the requisite equations in submitted manuscripts. But I often suspect that this is also because of fear about questions and objections that practitioner scholars might raise in the refereeing process.

Think of how Kaplan's criticism of accounting science research publications might've changed if accountics science referees were not so inbred in having accountics science "faculty is as evaluators (referees) of, but not creators or originators of, business practice. (Pfeffer 2007, 1335)."

"Accounting Scholarship that Advances Professional Knowledge and Practice," AAA Presidential Scholar Address by Robert S. Kaplan, The Accounting Review, March 2011, pp. 372-373 (emphasis added)

I am less pessimistic than Schön about whether rigorous research can inform professional practice (witness the important practical significance of the Ohlson accounting-based valuation model and the Black-Merton-Scholes options pricing model), but I concur with the general point that academic scholars spend too much time at the top of Roethlisberger’s knowledge tree and too little time performing systematic observation, description, and classification, which are at the foundation of knowledge creation. Henderson 1970, 67–68 echoes the benefits from a more balanced approach based on the experience of medical professionals:

both theory and practice are necessary conditions of understanding, and the method of Hippocrates is the only method that has ever succeeded widely and generally. The first element of that method is hard, persistent, intelligent, responsible, unremitting labor in the sick room, not in the library … The second element of that method is accurate observation of things and events, selection, guided by judgment born of familiarity and experience, of the salient and the recurrent phenomena, and their classification and methodical exploitation. The third element of that method is the judicious construction of a theory … and the use thereof … [T]he physician must have, first, intimate, habitual, intuitive familiarity with things, secondly, systematic knowledge of things, and thirdly an effective way of thinking about things.

More recently, other observers of business school research have expressed concerns about the gap that has opened up in the past four decades between academic scholarship and professional practice.

Examples include: Historical role of business schools and their faculty is as evaluators of, but not creators or originators of, business practice. (Pfeffer 2007, 1335) Our journals are replete with an examination of issues that no manager would or should ever care about, while concerns that are important to practitioners are being ignored. (Miller et al. 2009, 273)

In summary, while much has been accomplished during the past four decades through the application of rigorous social science research methods to accounting issues, much has also been overlooked. As I will illustrate later in these remarks, we have missed big opportunities to both learn from innovative practice and to apply innovations from other disciplines to important accounting issues. By focusing on these opportunities, you will have the biggest potential for a highly successful and rewarding career.

Integrating Practice and Theory: The Experience of Other Professional Schools
Other professional schools, particularly medicine, do not disconnect scholarly activity from practice. Many scholars in medical and public health schools do perform large-scale statistical studies similar to those done by accounting scholars. They estimate reduced-form statistical models on cross-sectional and longitudinal data sets to discover correlations between behavior, nutrition, and health or sickness. Consider, for example, statistical research on the effects of smoking or obesity on health, and of the correlations between automobile accidents and drivers who have consumed significant quantities of alcoholic beverages. Such large-scale statistical studies are at the heart of the discipline of epidemiology.

Some scholars in public health schools also intervene in practice by conducting large-scale field experiments on real people in their natural habitats to assess the efficacy of new health and safety practices, such as the use of designated drivers to reduce alcohol-influenced accidents. Few academic accounting scholars, in contrast, conduct field experiments on real professionals working in their actual jobs (Hunton and Gold [2010] is an exception). The large-scale statistical studies and field experiments about health and sickness are invaluable, but, unlike in accounting scholarship, they represent only one component in the research repertoire of faculty employed in professional schools of medicine and health sciences.

Many faculty in medical schools (and also in schools of engineering and science) continually innovate. They develop new treatments, new surgeries, new drugs, new instruments, and new radiological procedures. Consider, for example, the angiogenesis innovation, now commercially represented by Genentech’s Avastin drug, done by Professor Judah Folkman at his laboratories in Boston Children’s Hospital (West et al. 2005). Consider also the dozens of commercial innovations and new companies that flowed from the laboratories of Robert Langer at MIT (Bowen et al. 2005) and George Whiteside at Harvard University (Bowen and Gino 2006). These academic scientists were intimately aware of gaps in practice that they could address and solve by applying contemporary engineering and science. They produced innovations that delivered better solutions in actual clinical practices. Beyond contributing through innovation, medical school faculty often become practice thought-leaders in their field of expertise. If you suffer from a serious, complex illness or injury, you will likely be referred to a physician with an appointment at a leading academic medical school. How often, other than for expert testimony, do leading accounting professors get asked for advice on difficult measurement and valuation issues arising in practice?

One study (Zucker and Darby 1996) found that life-science academics who partner with industry have higher academic productivity than scientists who work only in their laboratories in medical schools and universities. Those engaged in practice innovations work on more important problems and get more rapid feedback on where their ideas work or do not work.

These examples illustrate that some of the best academic faculty in schools of medicine, engineering, and science, attempt to improve practice, enabling their professionals to be more effective and valuable to society. Implications for Accounting Scholarship To my letter writer, just embarking on a career as an academic accounting professor, I hope you can contribute by attempting to become the accounting equivalent of an innovative, worldclass accounting surgeon, inventor, and thought-leader; someone capable of advancing professional practice, not just evaluating it. I do not want you to become a “JAE” Just Another Epidemiologist . My vision for the potential in your 40 year academic career at a professional school is to develop the knowledge, skills, and capabilities to be at the leading edge of practice. You, as an academic, can be more innovative than a consultant or a skilled practitioner. Unlike them, you can draw upon fundamental advances in your own and related disciplines and can integrate theory and generalizable conceptual frameworks with skilled practice. You can become the accounting practice leader, the “go-to” person, to whom others make referrals for answering a difficult accounting or measurement question arising in practice.

But enough preaching! My teaching is most effective when I illustrate ideas with actual cases, so let us explore several opportunities for academic scholarship that have the potential to make important and innovative contributions to professional practice.

Continued in article

Added Jensen Comment
Of course I'm not the first one to suggest that accountics science referees are inbred. This has been the theme of other AAA presidential scholars (especially Anthony Hopwood), Paul Williams, Steve Zeff, Joni Young, and many, many others that accountics scientists have refused to listen to over past decades.

"The Absence of Dissent," by Joni J. Young, Accounting and the Public Interest 9 (1), 2009 --- Click Here

ABSTRACT:
The persistent malaise in accounting research continues to resist remedy. Hopwood (2007) argues that revitalizing academic accounting cannot be accomplished by simply working more diligently within current paradigms. Based on an analysis of articles published in Auditing: A Journal of Practice & Theory, I show that this paradigm block is not confined to financial accounting research but extends beyond the work appearing in the so-called premier U.S. journals. Based on this demonstration I argue that accounting academics must tolerate (and even encourage) dissent for accounting to enjoy a vital research academy. ©2009 American Accounting Association

We could try to revitalize accountics scientists by expanding the gene pools of inbred referees.

Happy New Year!

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

Question About Bucking the Trends
What is an example of where a company does not change hedged risk when we expect them to do so?
Why not?
This happens to me all the time including those frequent times when I anticipated stock prices to go up/down when in fact they went down/up.

"U.S. Companies See Euro Drag Persisting in 2012," by Vipal Monger, The Wall Street Journal, January 20, 2012 ---
http://blogs.wsj.com/cfo/2012/01/20/u-s-companies-see-euro-drag-persisting-in-2012/?mod=wsjpro_hps_cforeport

Corporate executives expect the value of the euro to continue falling in 2012, which would continue pressuring earnings of companies exposed to currency risk in Europe. Still, many companies are inclined to stand pat on their currency hedging strategies, according to a new survey from J.P. Morgan.

Continued in article

Competitive Strategies: Options and Games by Benoit Chevalier-Roignant and Lenos Trigeorgis (MIT Press; 488 pages; $55). Combines the decision-making approaches of real options and game theory.

Amazon's reviews are strong but possibly biased
http://www.amazon.com/Competitive-Strategy-Options-Benoit-Chevalier-Roignant/dp/0262015994/ref=sr_1_1?s=books&ie=UTF8&qid=1327414652&sr=1-1

Real Options are mentioned in the FASB's "Special Report: Business and Financial Reporting, Challenges from the New Economy," by Wayne Upton, Financial Accounting Standards Board, Document 219-A, April 2000 --- http://accounting.rutgers.edu/raw/fasb/new_economy.html

Wayne Upton writes as follows on pp. 91-93:

Measurement and Real Options

Perhaps the most promising area for valuation of intangible assets is the developing literature in valuation techniques based on the concept of real options. Techniques using real options analysis are especially useful in estimating the value of intangible assets that are under development and may not prove to be commercially viable.

A real option is easier to describe than to define. A financial option is a contract that grants to the holder the right but not the obligation to buy or sell an asset at a fixed price within a fixed period (or on a fixed date). The word option in this context is consistent with its ordinary definition as “the power, right or liberty of choosing.” Real option approaches attempt to extend the intellectual rigor of option-pricing models to valuation of nonfinancial assets and liabilities. Instead of viewing an asset or project as a single set of expected cash flows, the asset is viewed as a series of compound options that, if exercised, generate another option and a cash flow. That’s a lot to pack into one sentence. In the opening pages of their recent book, consultant Martha Amram and Boston University professor Nalin Kulatilaka offer five examples of business situations that can be modeled as real options: 56

• Waiting to invest options, as in the case of a tradeoff between immediate plant expansion (and possible losses from decreased demand) and delayed expansion (and possible lost revenues)

• Growth options, as in the decision to invest in entry into a new market

• Flexibility options, as in the choice between building a single centrally located facility or building two facilities in different locations

• Exit options, as in the decision to develop a new product in an uncertain market

• Learning options, as in a staged investment in advertising.

Real-options approaches have captured the attention of both managers and consultants, but they remain unfamiliar to many.

Proponents argue that the application of option pricing to nonfinancial assets overcomes the shortfalls of traditional present value analysis, especially the subjectivity in developing risk-adjusted discount rates. They contend that a focus on the value of flexibility provides a better measure of projects in process that would otherwise appear uneconomical. A real-options approach is consistent with either fair value (as described in Concepts Statement 7) or an entity-specific value. The difference, as with more conventional present value, rests with the selection of assumptions. If a real option is available to any marketplace participant, then including it in the computation is consistent with fair value. If a real option is entity-specific, then a measurement that includes that option is not fair value, but may be a good estimate of entity-specific value.

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

Controversies in the anonymous blind review process of research journals
"Kill Peer Review or Reform It?" by Scott Jaschik, Inside Higher Ed, January 6, 2011 ---
http://www.insidehighered.com/news/2012/01/06/humanities-scholars-consider-role-peer-review
Thank you Ron Huefner for the heads up.

"Blind peer review is dead. It just doesn’t know it yet." That's the way Aaron J. Barlow, an associate professor of English at the College of Technology of the City University of New York, summed up his views here on the future of the traditional way of deciding whose work gets published in the humanities.

Barlow didn't dispute that most of the top journals in the humanities continue to select papers this way. But speaking at a session of the annual meeting of the Modern Language Association, he argued that technology has so changed the ability of scholars to share their findings that it's only a matter of time before people rise up against the conventions of traditional journal publishing.

While others on the panel and in the audience argued for a reformed peer review as preferable to Barlow's vision of smashing the enterprise, and some questioned the practicality of simply walking away from peer review immediately, the idea that the system needs radical change was not challenged. Barlow said that the system might have been justified once when old-style publishing put a significant limit on the quantity of scholarship that could be shared. But in a new era, he said, the justifications were gone. (Reflecting the new technology era, Barlow and one other panelist spoke via Skype, to an audience that included two tables and wireless for bloggers and Twitter users -- and this journalist -- to write about the proceedings as they were taking place.)

To many knowing nods in the room, Barlow argued that the traditional system of blind peer review -- in which submissions are sent off to reviewers, whose judgments then determine whether papers are accepted, with no direct communication with authors -- had serious problems with fairness. He said that the system rewards "conformity" and allows for considerable bias.

He described a recent experience in which he was recruited by "a prestigious venue" to review a paper that related in some ways to research he had done. Barlow's work wasn't mentioned anywhere in the piece. Barlow said he realized that the journal editor figured Barlow would be annoyed by the omission. And although he was, Barlow said he didn't feel assigning the piece to him was fair to the author. "It was a set-up. The editor didn't want a positive review, so the burden of rejection was passed on to someone the author would not know."

He refused to go along, and said he declined to review the paper when he realized what was going on. This sort of "corruption" is common, he said.

Barlow has a long publishing record, so his frustrations with the system can't be chalked up to being unable to get his ideas out there. But he said that when one of his papers was recently rejected, he simply published it on his blog directly, where comments have come in from fans and foes of his work.

"I love the editorial process" when comments result in a piece becoming better, he said, and digital publishing allows this to happen easily. But traditional peer review simply delays publication and leaves decision-making "in the dark." Peer review -- in the sense that people will comment on work and a consensus may emerge that a given paper is important or not -- doesn't need to take place prior to publication, he said.

"We don't need the bottleneck or the corruption," he said. The only reason blind peer review survives is that "we have made appearance in peer reviewed journals the standard" for tenure and promotion decisions. That will change over time, he predicted, and then the traditional system will collapse.

Peer Review Plus

While Barlow noted the ability of digital publishing to bypass peer review, the idea of an intense, collaborative process for selecting pieces and improving them came at the session from the editor of Kairos, an online journal on rhetoric and technology that publishes work prepared for the web. Kairos has become an influential journal, but Cheryl Ball, the editor and an associate professor of English at Illinois State University, discussed how frustrating it is that people assume that an online journal must not have peer review. "Ignorance about digital scholarship" means that she must constantly explain the journal, she said.

Kairos uses a three-stage review process. First, editors decide if a submission makes sense for a review. Then, the entire editorial board discusses the submission (online) for two weeks, and reaches a consensus that is communicated to the author with detailed letters from the board. (Board members' identities are public, so there is no secrecy about who reviews pieces.) Then, if appropriate, someone is assigned to work with the author to coach him or her on how to improve the piece prior to publication.

As Ball described the process, thousands of words are written about submissions, and lengthy discussions take place -- all to figure out the best content for the journal. But there are no secret reviewers, and the coaching process allows for a collaborative effort to prepare a final version, not someone guessing about how to handle a "revise and resubmit" letter.

The process is quite detailed, but also allows for individual consideration of editorial board members' concerns and of authors' approaches, Ball said. "Peer reviewers don't need rubrics. They need good ways to communicate," she said. Along those lines, Kairos is currently updating its tools for editorial board consideration of pieces, to allow for synchronous chat, the use of electronic "sticky notes" and other ways to help authors not only with words, but with digital graphics and illustrations.

Learning From Law Reviews

Allen Mendenhall, a Ph.D. student at Auburn University who is also a blogger and a lawyer, suggested that humanities journals could take some lessons from law reviews. Mendenhall is well aware of (and agrees with) many criticisms of law reviews, and in particular of the reliance for decisions on law students who may not know much about the areas of scholarship they are evaluating.

Continued in article

"Hear the One About the Rejected Mathematician? Call it a scholarly 'Island of Misfit Toys,'," Chronicle of Higher Education, August 12, 2009 --- Click Here

Rejecta Mathematica is an open-access online journal that publishes mathematical papers that have been rejected by others. Rejecta's motto is caveat emptor, which is to say that the journal has no technical peer-review process.

As The Economist notes in its article on the journal, there are plenty of examples of scholars who have suffered rejection, only to go on to become giants in their field. (OK, two.) Nonetheless, if you have lots of free time on your hands, by all means, check out the inaugural issue.

And if deciphering mathematical formulae isn't your thing, stand by: Rejecta says it may open the floodgates to other disciplines. Prospective franchisees are invited to contact the journal.

Next up: Rejecta Rejecta, a journal for articles too flawed for Rejects Mathematica, printed on single-ply toilet paper.

"Leading Humanities Journal Debuts 'Open' Peer Review, and Likes It," by Jennifer Howard, Chronicle of Higher Education, July 26, 2010 ---
http://chronicle.com/article/Leading-Humanities-Journal/123696/?sid=at&utm_source=at&utm_medium=en

A ‘Radical’ Rethinking of Scholarly Publishing
"Upgrading to Philosophy 2.0," by Andy Guess, Inside Higher Ed, December 31, 2007 --- http://www.insidehighered.com/news/2007/12/31/apa

There was no theorizing about ghosts in the machine at an annual meeting of philosophers last Friday. Instead, they embraced technology’s implications for their field, both within the classroom and beyond.

. . .

Harriet E. Baber of the University of San Diego thinks scholars should try to make their work as accessible as possible, forget about the financial rewards of publishing and find alternative ways to referee each other’s work. In short, they should ditch the current system of paper-based academic journals that persists, she said, by “creating scarcity,” “screening” valuable work and providing scholars with entries in their CVs.

“Now why would it be a bad thing if people didn’t pay for the information that we produce?” she asked, going over the traditional justifications for the current order — an incentive-based rationale she dubbed a “right wing, free marketeer, Republican argument.”

Instead, she argued, scholars (and in particular, philosophers) should accept that much of their work has little market value ("we’re lucky if we could give away this stuff for free") and embrace the intrinsic rewards of the work itself. After all, she said, they’re salaried, and “we don’t need incentives external [to] what we do.”

That doesn’t include only journal articles, she said; class notes fit into the paradigm just as easily. “I want any prospective student to see this and I want all the world to see” classroom materials, she added.

Responding to questions from the audience, she noted that journals’ current function of refereeing content wouldn’t get lost, since the “middlemen” merely provide a venue for peer review, which would still happen within her model.

“What’s going to happen pragmatically is the paper journals will morph into online journals,” she said.

Part of the purpose of holding the session, she implied, was to nudge the APA into playing a greater role in any such transition: “I’m hoping that the APA will organize things a little better.”

‘Scholarship Reconsidered’ as Tenure Policy," by Scott Jaschik, Inside Higher Ed, October 2, 2007 ---
http://www.insidehighered.com/news/2007/10/02/wcu

"Time's Up for Tenure," Laurie Fendrich, Chronicle of Higher Education's The Chronicle Review, April 18, 2008 --- http://chronicle.com/review/brainstorm/fendrich/times-up-for-tenure?utm_source=cr&utm_medium=en

"Survey Identifies Trends at U.S. Colleges That Appear to Undermine Productivity of Scholars," by Peter Schmidt, Chronicle of Higher Education, June 14, 2009 --- Click Here

College campuses display a striking uniformity of thought
Harvard professor Harvey Mansfield once famously advised a conservative colleague to wait until he had tenure and only then to "hoist the Jolly Roger." But few professors are getting around to hoisting the Jolly Roger at all. Either they don't have a viewpoint that is different from their colleagues, or they've decided that if they are going to remain at one place for several decades, they'd rather just get along. Is tenure to blame for the unanimity of thinking in American universities? It's hard to tell. But shouldn't the burden of proof be on the people who want jobs for life?
Naomi Schafer Riley, "Tenure and Academic Freedom: College campuses display a striking uniformity of thought," The Wall Street Journal, June 23, 2009 --- http://online.wsj.com/article/SB124571593663539265.html#mod=djemEditorialPage

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

Bob Jensen's threads on a rethinking of tenure and scholarship ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#MLA

"OECD Targets Tax Relief on Mortgages," The Wall Street Journal, January 23, 2012 ---
http://online.wsj.com/article/SB10001424052970203806504577179223659194122.html?mod=googlenews_wsj&mg=reno-wsj

Governments should eliminate tax relief on mortgage interest payments and pension contributions, and tax capital gains from the sale of residential property in order to boost growth and reduce inequality, the Organization for Economic Cooperation and Development said Monday.

In a chapter from its annual "Going for Growth" report, the OECD said that while economists don't agree on the link between inequality and growth, there are some policies that are clearly "win-win" options, which both boost growth and reduce income inequality.

"Income inequality has drifted up, and at the same time the recovery is very patchy and the outlook uncertain," said Peter Hoeller, head of the public economics division at the OECD. "But we can find policies that are good for inequality and raise growth."

The Paris-based think tank said a broad range of measures that it described as "tax expenditure," and are more popularly known as "tax breaks," were obvious candidates.

They include tax relief on interest paid on mortgage loans, relief on contributions to private pension funds, and exemptions from capital gains tax on the sale of primary or secondary residences.

The OECD argued that while reducing the gap between rich and poor, the money saved by eliminating breaks that largely benefit the wealthy could be used to cut income tax rates and thereby boost growth.

"Cutting back tax expenditures, which mainly benefit high-income groups, is likely to be beneficial both for long-term GDP per capita, allowing a reduction in marginal tax rates, and for a more equitable distribution of income," the OECD said.

The OECD also questioned the use of some tax relief measures that are justified as encouraging entrepreneurial activity, but show little sign of doing so.

"In particular, there is little justification for tax breaks for stock options and carried interest," it said. "Raising such taxes would increase equity and allow a growth-enhancing cut in marginal labor income tax rates."

The OECD's proposals come at a time of renewed focus on the perceived fairness of developed economies following the financial crisis and more than a decade-and-a-half of rising income inequality.

In the U.K., the junior partner in the government coalition campaigned on a promise to make the tax system fairer in the May 2010 election, and still hopes to introduce a so-called "Mansion Tax" on residential properties with a value of £2 million or more.

Jensen Comment

There are really three issues that should not be bundled into one. Firstly there is the issue of principal residence versus vacation homes. Secondly, there is the issue of whether or not to cap the interest rate deduction. Thirdly, there's the issue of minimum thresholds for deductions from adjusted gross income as is currently built into the U.S. tax rules and is probably hurting lower income tax payers more than its hurting higher income taxpayers when the minimum threshold cannot be reached by lower income taxpayers.

There's also an issue of abruptly hammering down on a real estate market that is already under water. The mortgage interest deduction most certainly impacts demand for and prices paid for real estate. In my opinion the deductibility of home mortgage interest and property taxes has greatly increased both the amount of housing built in the United States and the quality/maintenance of such housing.

There are externalities to consider. Home owners take more pride in maintaining and adding to homes that they own. If there are fewer tax breaks of home ownership more and more potential owners will instead opt for rentals. When Erika and I visit Germany we're amazed by the proportion of the population that appears to us to live in rental housing (although I've not researched this question). It also seems that those big apartment houses are run down relatively to what they would become as condos.

"Hatch to push pension legislation this year," by Bernie Becker, The Hill, January 10, 2011 ---
http://thehill.com/blogs/on-the-money/budget/203403-hatch-to-push-pension-legislation-this-year

Sen. Orrin Hatch (R-Utah) said Tuesday that he would push legislation this year to revamp pension systems for state and local government workers.

Hatch, ranking member of the Senate Finance Committee, noted in a statement and a newly released report that public pension programs are more than $4 trillion in debt, and said he would work to ensure that the federal government did not have to bail out state or local entities.

And while the Utah Republican did not offer many details on his planned legislation, or when it would be released, Hatch did suggest that state and local governments need to scrap their current use of defined-benefit plans.

Under that sort of plan, retirees are guaranteed a certain monthly payment, which often takes into account the length of their tenures and salaries before retirement.

“The public pension crisis plaguing our nation demands a real solution,” Hatch said in the statement. “Over the coming weeks, I will be putting forward ideas to reform public pension programs in a meaningful way that doesn’t leave taxpayers on the hook.”

The announcement from Hatch comes after groups on the left and right have spent months arguing over benefits for public workers, following pushes by Republican governors in places including Wisconsin to limit collective-bargaining rights.

In the report released Tuesday, Hatch declared that the current issues with public pensions were caused by more than just the 2008 financial crisis, as some analysts have said.

To bolster that claim, the report notes that, even before the 2008 crisis, roughly 40 percent of state and local pension plans could not fund 80 percent of their liabilities, a level experts generally consider healthy.

Hatch also used the example of his own state to underscore his point that governments need to move away from defined-benefit plans, saying that Utah had ably administered its program and still saw debt on its plan balloon to $3.45 billion in 2010.

“When a prudently managed pension plan can create a financial crisis for the taxpayers of a state or municipality, it is time to question whether the risk to taxpayers associated with the defined benefit pension structure is appropriate,” the report stated. “Defined benefit plans pose unacceptable financial and service degradation risks for taxpayers and retirees.”

But Dean Baker, co-director of the left-leaning Center for Economic and Policy Research (CEPR), took issue with both the argument from Hatch that states and localities need to move away from defined-benefit plans, and that blaming the fiscal crisis for the current pension issues understated the problems.

Baker told The Hill that, while states might in some cases be billions in the hole when it comes to pension liabilities, they will also likely be able to make that shortfall up over 20 or 30 years.

“It’s just cheap rhetoric,” Baker said about the Hatch report. “There are state and local governments where, at least on average, they’re not going to face a particularly big burden.”

Baker also noted that defined-benefit plans are less volatile for workers than other retirement plans.

Continued in article

Humanities Versus Accountancy Doctoral Programs in North America

"Dissing the Dissertation." by Scott Jaschik, Inside Higher Ed, January 9, 2011 ---
http://www.insidehighered.com/news/2012/01/09/mla-considers-radical-changes-dissertation

The average humanities doctoral student takes nine years to earn a Ph.D. That fact was cited frequently here (and not with pride) at the annual meeting of the Modern Language Association. Richard E. Miller, an English professor at Rutgers University's main campus in New Brunswick, said that the nine-year period means that those finishing dissertations today started them before Facebook, Twitter, YouTube, Kindles, iPads or streaming video had been invented.

So much has changed, he said, but dissertation norms haven't, to the detriment of English and other language programs. "Are we writing books for the 19th century or preparing people to work in the 21st?" he asked.

Leaders of the MLA -- in several sessions and discussions here -- indicated that they are afraid that too many dissertations are indeed governed by out-of-date conventions, leading to the production of "proto-books" that may do little to promote scholarship and may not even be advancing the careers of graduate students. During the process, the graduate students accumulate debt and frustrations. Russell A. Berman, a professor of comparative literature and German studies at Stanford University, used his presidential address at the MLA to call for departments to find ways to cut "time to degree" for doctorates in half.

And at a standing-room-only session, leaders of a task force studying possible changes in dissertation requirements discussed some of the ideas under consideration. There was a strong sense that the traditional model of producing a several-hundred-page literary analysis dominates English and other language doctoral programs -- even though many people feel that the genre is overused and frequently ineffective. People also talked about the value of digital projects, of a series of essays, or public scholarship. Others talked about ways to change the student-committee dynamic in ways that might expedite dissertation completion.

"We are at a defining moment in higher education," said Kathleen Woodward, director of the Simpson Center for the Humanities at the University of Washington. "We absolutely have to think outside the box that the dissertation is a book or a book-in-progress."

The MLA's discussion of the dissertation is in some ways an outgrowth of a much-discussed report issued by the association in 2006 about tenure and promotion practices. That report questioned the idea that producing monographs should be the determining factor in tenure decisions. When the report was released, many MLA leaders said that the ideas the association was endorsing also called for reconsideration of graduate education, and especially of the dissertation.

As part of the process of encouraging change, the MLA recently conducted a survey of its doctoral-granting departments. Among the findings:

62 percent of departments reported that their graduate schools have guidelines for dissertations, but most of those guidelines are general, dealing with issues such as timelines, composition of committees and so forth, and not dictating the form of a dissertation.

33 percent of departments have written descriptions of what kind of dissertation is expected of graduate students.

Minorities of departments have specific rules authorizing nontraditional formats for dissertations, and even smaller minorities of departments have approved a dissertation using one of those formats.

Of those with traditional dissertation length requirements, the range of minimums was 150 to 400 pages. Most maximums were 400 to 500 pages.

Continued in article
Read more: http://www.insidehighered.com/news/2012/01/09/mla-considers-radical-changes-dissertation#ixzz1ixhRrbus
Inside Higher Ed

Jensen Comment
I'm suspicious that the nine-year average time to completion of a humanities PhD program is not necessarily nine full-time years in residence. But I've really not researched this issue. The time to completion of an accounting PhD program averages five full-time years beyond the masters degree. However, these are typically five full-time years in residence with some lightened course loads giving time for earning money as research and teaching assistants. Accounting doctoral students who also work off campus often take longer than five years. Those students who take full-time jobs before finishing their theses also tend to take longer than five years ---
http://www.jrhasselback.com/AtgDoctInfo.html

Whereas large R1 research universities typically have large and growing numbers of doctoral students with poor employment prospects in higher education, those same universities have shrinking accounting doctoral programs facing wonderful employment and salary prospects in higher education. The reasons for this "paradox" are complicated. One complication is that accounting doctoral programs are often seeking older candidates who already have a masters degree and several full-time professional experience in accountancy. It is more common for humanities students to progress directly from undergraduate graduation directly into masters and then PhD programs. Humanities doctoral programs in top research universities frequently require masters degrees for admission but not years of full-time prior employment in a profession.

Because supply of new doctorates in humanities greatly exceeds demand for such graduates in the Academy, employment opportunities are much higher for graduates of prestigious universities with billion+ dollar endowments such as larger Ivy League universities. In accountancy, Cactus Gulch University PhD graduates face much better employment and salary opportunities as long as CGU has AACSB accreditation in North America. Most prestigious R1 research universities tend to incestuously trade their own accountancy PhD graduates. These graduates are later dispersed in part because some fail to earn tenure in their first academic job. Then again many of them never wanted to live under R1 university research and publication pressures after the first five years or so on their first high-pressured jobs.

FAQs about humanities doctoral programs ---
http://degreedirectory.org/articles/PhD_in_Humanities_Program_FAQs.html

Bob Jensen's threads on the sad state of accounting doctoral programs ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

"The Ph.D. Problem On the professionalization of faculty life, doctoral training, and the academy’s self-renewal," by Louis Menand, Harvard Magazine, November/December 2009 ---
http://harvardmagazine.com/2009/11/professionalization-in-academy

Bass professor of English Louis Menand is a literary critic and intellectual and cultural historian—author of the Pulitzer Prize-winning The Metaphysical Club and a regular contributor to the New Yorker. He is also a scholar of his discipline (he co-edited the modernism volume in the Cambridge History of Literary Criticism) and of the very notion of the academy itself (Menand edited The Future of Academic Freedom, 1997). His new book, The Marketplace of Ideas, to be published in December by W.W. Norton, is informed in part by his recent service as faculty co-leader in the development of Harvard College’s new General Education curriculum, introduced this fall (the book is dedicated to his colleagues in that protracted task).

In this work, Menand examines general education, the state of the humanities, the tensions between disciplinary and interdisciplinary work, and, in chapter four, “Why Do Professors All Think Alike?” The following excerpts, from the third and fourth chapters and his conclusion, probe the professionalization of a research-oriented professoriate and the practice and consequences of contemporary doctoral education, and the resulting implications for liberal-arts colleges, universities, and the wider society. ~The Editors

It is easy to see how the modern academic discipline reproduces all the salient features of the professionalized occupation. It is a self-governing and largely closed community of practitioners who have an almost absolute power to determine the standards for entry, promotion, and dismissal in their fields. The discipline relies on the principle of disinterestedness, according to which the production of new knowledge is regulated by measuring it against existing scholarship through a process of peer review, rather than by the extent to which it meets the needs of interests external to the field. The history department does not ask the mayor or the alumni or the physics department who is qualified to be a history professor. The academic credential is non-transferable (as every Ph.D. looking for work outside the academy quickly learns). And disciplines encourage—in fact, they more or less require—a high degree of specialization. The return to the disciplines for this method of organizing themselves is social authority: the product is guaranteed by the expertise the system is designed to create. Incompetent practitioners are not admitted to practice, and incompetent scholarship is not disseminated.

Since it is the system that ratifies the product—ipso facto, no one outside the community of experts is qualified to rate the value of the work produced within it—the most important function of the system is not the production of knowledge. It is the reproduction of the system. To put it another way, the most important function of the system, both for purposes of its continued survival and for purposes of controlling the market for its products, is the production of the producers. The academic disciplines effectively monopolize (or attempt to monopolize) the production of knowledge in their fields, and they monopolize the production of knowledge producers as well. This is why, for example, you cannot take a course in the law (apart from legal history) outside a law school. In fact, law schools urge applicants to major in areas outside the law. They say that this makes lawyers well-rounded, but it also helps to ensure that future lawyers will be trained only by other lawyers. It helps lawyers retain a monopoly on knowledge of the law.

Weirdly, the less social authority a profession enjoys, the more restrictive the barriers to entry and the more rigid the process of producing new producers tend to become. You can become a lawyer in three years, an M.D. in four years, and an M.D.-Ph.D. in six years, but the median time to a doctoral degree in the humanities disciplines is nine years. And the more self-limiting the profession, the harder it is to acquire the credential and enter into practice, and the tighter the identification between the individual practitioner and the discipline.

Disciplines are self-regulating in this way for good academic freedom reasons. The system of credentialing and specialization maintains quality and protects people within the field from being interfered with by external forces. The system has enormous benefits, but only for the professionals. The weakest professional, because he or she is backed by the collective authority of the group, has an almost unassailable advantage over the strongest non-professional (the so-called independent scholar) operating alone, since the non-professional must build a reputation by his or her own toil, while the professional’s credibility is given by the institution. That is one of the reasons that people are willing to pay the enormous price in time and income forgone it takes to get the degree: the credential gives them access to the resources of scholarship and to the networks of scholars that circulate their work around the world. The non-academic writer or scholar is largely deprived of those things. This double motive—ensuring quality by restricting access—is reflected in the argument all professions offer as their justification: in order to serve the needs of others properly, professions must be accountable only to themselves.

A national conversation about the condition and future of the Ph.D. has been going on for about 10 years. The conversation has been greatly helped by two major studies: “Re-envisioning the Ph.D.,” which was conducted by researchers at the University of Washington, and “Ph.D.s—Ten Years Later,” which was carried out at Berkeley. Both studies identified roughly the same areas where the investigators thought that reform is desirable in doctoral education. These are: interdisciplinarity, practical training, and time to degree.

The studies were necessary in part because data on graduate education are notoriously difficult to come by. Until very recently, departments tended not to track their graduate students very assiduously. Departments knew how many students they admitted, and they knew how many they graduated; but they did not have a handle on what happened in between—that is, on where students were in their progress through the program. This was partly because of the pattern of benign neglect that is historically an aspect of the culture of graduate education in the United States, and it was partly because when some students finish in four years and other students in the same program finish in 12 years, there is really no meaningful way to quantify what is going on. “Are you still here?” is a thought that often pops into a professor’s head when she sees a vaguely familiar face in the hall. “Yes, I am still here,” is the usual answer, “and I’m working on that Incomplete for you.” There was also, traditionally, very little hard information about where students went after they graduated. Graduate programs today are increasingly asked to provide reports on job placement—although, for understandable reasons, these reports tend to emit an unnatural glow. An employed graduate, wherever he or she happens to be working, is ipso facto a successfully placed graduate, and, at that moment, departmental attention relaxes. What happens to people after their initial placement is largely a matter of rumor and self-report.

English was one of the fields surveyed in the two studies of the Ph.D. It is useful to look at, in part because it is a large field where employment practices have a significance that goes beyond courses for English majors. What the surveys suggest is that if doctoral education in English were a cartoon character, then about 30 years ago, it zoomed straight off a cliff, went into a terrifying fall, grabbed a branch on the way down, and has been clinging to that branch ever since. Things went south very quickly, not gradually, and then they stabilized. Statistically, the state of the discipline has been fairly steady for about 25 years, and the result of this is a kind of normalization of what in any other context would seem to be a plainly inefficient and intolerable process. The profession has just gotten used to a serious imbalance between supply and demand.

Up to half of all doctoral students in English drop out before getting their degrees (something that appears to be the case in doctoral education generally), and only about half of the rest end up with the jobs they entered graduate school to get—that is, tenured professorships. Over the three decades since the branch was grabbed, a kind of protective shell has grown up around this process, a culture of “realism,” in which exogenous constraints are internalized, and the very conditions that make doctoral education problematic are turned into elements of that education. Students are told from the very start, almost from the minute they apply to graduate school, that they are effectively entering a lottery. This has to have an effect on professional self-conception.

The hinge whereby things swung into their present alignment, the ledge of the cliff, is located somewhere around 1970. That is when a shift in the nature of the Ph.D. occurred. The shift was the consequence of a bad synchronicity, one of those historical pincer effects where one trend intersects with its opposite, when an upward curve meets a downward curve. One arm of the pincer has to do with the increased professionalization of academic work, the conversion of the professoriate into a group of people who were more likely to identify with their disciplines than with their campuses. This had two, contradictory effects on the Ph.D.: it raised and lowered the value of the degree at the same time. The value was raised because when institutions began prizing research above teaching and service, the dissertation changed from a kind of final term paper into the first draft of a scholarly monograph. The dissertation became more difficult to write because more hung on its success, and the increased pressure to produce an ultimately publishable work increased, in turn, the time to achieving a degree. That was a change from the faculty point of view. It enhanced the selectivity of the profession.

The change from the institutional point of view, though, had the opposite effect. In order to raise the prominence of research in their institutional profile, schools began adding doctoral programs. Between 1945 and 1975, the number of American undergraduates increased 500 percent, but the number of graduate students increased by nearly 900 percent. On the one hand, a doctorate was harder to get; on the other, it became less valuable because the market began to be flooded with Ph.D.s.

This fact registered after 1970, when the rapid expansion of American higher education abruptly slowed to a crawl, depositing on generational shores a huge tenured faculty and too many doctoral programs churning out Ph.D.s. The year 1970 is also the point from which we can trace the decline in the proportion of students majoring in liberal-arts fields, and, within that decline, a proportionally larger decline in undergraduates majoring in the humanities. In 1970-71, English departments awarded 64,342 bachelor’s degrees; that represented 7.6 percent of all bachelor’s degrees, including those awarded in non-liberal-arts fields, such as business. The only liberal-arts category that awarded more degrees than English was history and social science, a category that combines several disciplines. Thirty years later, in 2000-01, the number of bachelor’s degrees awarded in all fields was 50 percent higher than in 1970-71, but the number of degrees in English was down both in absolute numbers—from 64,342 to 51,419—and as a percentage of all bachelor’s degrees, from 7.6 percent to around 4 percent.

Fewer students major in English. This means that the demand for English literature specialists has declined. Even if a department requires, say, a course in eighteenth-century literature of its majors, the fact that there are fewer majors means that there is less demand for eighteenth-century specialists. But although the average number of credit hours devoted to courses in English literature has gone down over the last 20 years, the number-one subject, measured by the credit hours that students devote to it, has remained the same. That subject is English composition. Who teaches that? Not, mainly, English Ph.D.s. Mainly, ABDs—graduate students who have completed all but their dissertations. There is a sense in which the system is now designed to produce ABDs.

The same trend can be observed in most of the liberal-arts fields. In 1971, 24,801 students received bachelor’s degrees in mathematics and statistics, about 3 percent of all bachelor’s degrees. In 2001, there were 11,171 undergraduate degrees in those fields, less than 1 percent of the total number. Again, it is not that students do not take math; it is that fewer students need specialized courses in mathematics, which are the courses that graduate students are trained to teach. There was a similar fall-off in bachelor’s degrees awarded in the social sciences and history. There was upward movement in only two major liberal-arts areas: psychology and the life sciences. American higher education has been expanding, but the liberal arts part of the system has been shrinking.

The Berkeley study, “Ph.D.s—Ten Years Later,” was based on lengthy questionnaires sent to just under 6,000 people, in six fields, who received Ph.D.s between 1982 and 1985. One of those fields was English. People who received their Ph.D.s in English between 1982 and 1985 had a median time to degree of 10 years. A third of them took more than 11 years to finish, and the median age at the time of completion was 35. By 1995, 53 percent of those with Ph.D.s that had been awarded from 10 to 15 years earlier had tenure; another 5 percent were in tenure-track positions. This means that about two-fifths of English Ph.D.s were effectively out of the profession as it is usually understood. (Some of these people were non-tenure-track faculty, and some were educational administrators. Most of the rest worked in what is called BGN—business, government, and NGOs.) Of those who had tenure, less than a fifth had positions in the kind of research universities in which they had been trained—that is, about 5 percent of all English Ph.D.s. Ph.D.s who began in a tenure-track position took an average of 6.1 years to get tenure. Ph.D.s who began in non-tenure track positions but who eventually received tenure, which about half did, took an average of 8.1 years to get tenure.

The placement rate for Ph.D.s has fluctuated. Between 1989 and 1996, the number of starting positions advertised in history dropped 11 percent; in art and art history, 26 percent; in foreign languages, 35 percent; and in political science, 37 percent. Yet every year during that period, universities gave out more Ph.D.s than they had the year before. It was plain that the supply curve had completely lost touch with the demand curve in American academic life. That meant if not quite a lost generation of scholars, a lost cohort. This was a period that coincided with attacks on the university for “political correctness,” and it is not a coincidence that many of the most prominent critics of academia were themselves graduate-school dropouts: Dinesh D’Souza, Roger Kimball, Richard Bernstein, David Lehman. Apart from their specific criticisms and their politics, they articulated a mood of disenchantment with the university as a congenial place to work.

There were efforts after 1996 to cut down the size of doctoral programs, with apparently some positive effect on the job market. But time-to-degree numbers did not improve. In the sixties, the time-to-degree as a registered student was about 4.5 years in the natural sciences and about six years in the humanities. The current median time to degree in the humanities is nine years. That does not include what is called stop-time, which is when students take a leave or drop out for a semester or longer. And it obviously does not take into account students who never finish. It is not nine years from the receipt of the bachelor’s degree, either; it is nine years as a registered student in a graduate program. The median total time it takes to achieve a degree in the humanities including stop-time is 11.3 years. In the social sciences, it is 10 years, or 7.8 as a registered student. In the natural sciences, time-to-degree as a registered student is just under seven years. If we put all these numbers together, we get the following composite: only about half of the people who enter doctoral programs in English finish them, and only about half of those who finish end up as tenured faculty, the majority of them at institutions that are not research universities. An estimate of the total elapsed time from college graduation to tenure would be somewhere between 15 and 20 years. It is a lengthy apprenticeship.

That it takes longer to get a Ph.D. in the humanities than it does in the social or natural sciences (although those fields also have longer times-to-degree than they once did) seems anomalous, since normally a dissertation in the humanities does not require extensive archival, field, or laboratory work. William Bowen and Neil Rudenstine, in their landmark study In Pursuit of the Ph.D., suggested that one reason for this might be that the paradigms for scholarship in the humanities have become less clear. People are uncertain just what research in the humanities is supposed to constitute, and graduate students therefore spend an inordinate amount of time trying to come up with a novel theoretical twist on canonical texts or an unusual contextualization. Inquiry in the humanities has become quite eclectic without becoming contentious. This makes it a challenge for entering scholars to know where to make their mark.

The conclusion of the researchers who compiled the statistics on English Ph.D.s for the Berkeley study was, See? It’s not so bad! The reason they give for this is the reason that is often heard when the issues of time-to-degree and job placement are raised, which is that most people who get Ph.D.s, whether they end up teaching or not, report high job satisfaction. (Job satisfaction is actually higher among Ph.D.s with non-academic careers than it is among academics, partly because spousal problems—commuting marriages—are not as great outside academia.) And the majority say that they do not regret the time they spent in graduate school (although they have a lot of complaints about the quality of the mentorship they received). Students continue to check into the doctoral motel, and they don’t seem terribly eager to check out. They like being in a university, and, since there is usually plenty of demand for their quite inexpensive teaching, universities like having them. Business is good. Where is the problem?

The effort to reinvent the Ph.D. as a degree qualifying people for non-academic as well as academic employment, to make the degree more practical, was an initiative of the Woodrow Wilson Foundation when it was headed by Robert Weisbuch. These efforts are a worthy form of humanitarianism; but there is no obvious efficiency in requiring people to devote 10 or more years to the mastery of a specialized area of scholarship on the theory that they are developing skills in research, or critical thinking, or communication. Professors are not themselves, for the most part, terribly practical people, and practical skills are not what they are trained to teach. They are trained to teach people to do what they do and to know what they know. Those skills and that knowledge are not self-evidently transferable. The ability to analyze Finnegans Wake does not translate into an ability to analyze a stock offering. If a person wanted to analyze stock offerings, he should not waste his time with Joyce. He should go to business school. Or get a job analyzing stock offerings.

It may be that the increased time-to-degree, combined with the weakening job market for liberal arts Ph.D.s, is what is responsible for squeezing the profession into a single ideological box. It takes three years to become a lawyer. It takes four years to become a doctor. But it takes from six to nine years, and sometimes longer, to be eligible to teach college students for a living. Tightening up the oversight on student progress might reduce the time-to-degree by a little, but as long as the requirements remain, as long as students in most fields have general exams, field (or oral) exams, and monograph-length dissertations, it is not easy to see how the reduction will be significant. What is clear is that students who spend eight or nine years in graduate school are being seriously over-trained for the jobs that are available. The argument that they need the training to be qualified to teach undergraduates is belied by the fact that they are already teaching undergraduates. Undergraduate teaching is part of doctoral education; at many institutions, graduate students begin teaching classes the year they arrive. And the idea that the doctoral thesis is a rigorous requirement is belied by the quality of most doctoral theses. If every graduate student were required to publish a single peer-reviewed article instead of writing a thesis, the net result would probably be a plus for scholarship.

One pressure on universities to reduce radically the time-to-degree is simple humanitarianism. Lives are warped because of the length and uncertainty of the doctoral education process. Many people drop in and drop out and then drop in again; a large proportion of students never finish; and some people have to retool at relatively advanced ages. Put in less personal terms, there is a huge social inefficiency in taking people of high intelligence and devoting resources to training them in programs that half will never complete and for jobs that most will not get. Unfortunately, there is an institutional efficiency, which is that graduate students constitute a cheap labor force. There are not even search costs involved in appointing a graduate student to teach. The system works well from the institutional point of view not when it is producing Ph.D.s, but when it is producing ABDs. It is mainly ABDs who run sections for lecture courses and often offer courses of their own. The longer students remain in graduate school, the more people are available to staff undergraduate classes. Of course, overproduction of Ph.D.s also creates a buyer’s advantage in the market for academic labor. These circumstances explain the graduate-student union movement that has been going on in higher education since the mid 1990s.

But the main reason for academics to be concerned about the time it takes to get a degree has to do with the barrier this represents to admission to the profession. The obstacles to entering the academic profession are now so well known that the students who brave them are already self-sorted before they apply to graduate school. A college student who has some interest in further education, but who is unsure whether she wants a career as a professor, is not going to risk investing eight or more years finding out. The result is a narrowing of the intellectual range and diversity of those entering the field, and a widening of the philosophical and attitudinal gap that separates academic from non-academic intellectuals. Students who go to graduate school already talk the talk, and they learn to walk the walk as well. There is less ferment from the bottom than is healthy in a field of intellectual inquiry. Liberalism needs conservatism, and orthodoxy needs heterodoxy, if only in order to keep on its toes.

And the obstacles at the other end of the process, the anxieties over placement and tenure, do not encourage iconoclasm either. The academic profession in some areas is not reproducing itself so much as cloning itself. If it were easier and cheaper to get in and out of the doctoral motel, the disciplines would have a chance to get oxygenated by people who are much less invested in their paradigms. And the gap between inside and outside academia, which is partly created by the self-sorting, increases the hostility of the non-academic world toward what goes on in university departments, especially in the humanities. The hostility makes some disciplines less attractive to college students, and the cycle continues.

The moral of the story that the numbers tell once seemed straightforward: if there are fewer jobs for people with Ph.D.s, then universities should stop giving so many Ph.D.s—by making it harder to get into a Ph.D. program (reducing the number of entrants) or harder to get through (reducing the number of graduates). But this has not worked. Possibly the story has a different moral, which is that there should be a lot more Ph.D.s, and they should be much easier to get. The non-academic world would be enriched if more people in it had exposure to academic modes of thought, and had thereby acquired a little understanding of the issues that scare terms like “deconstruction” and “postmodernism” are attempts to deal with. And the academic world would be livelier if it conceived of its purpose as something larger and more various than professional reproduction—and also if it had to deal with students who were not so neurotically invested in the academic intellectual status quo. If Ph.D. programs were determinate in length—if getting a Ph.D. were like getting a law degree—then graduate education might acquire additional focus and efficiency. It might also attract more of the many students who, after completing college, yearn for deeper immersion in academic inquiry, but who cannot envision spending six years or more struggling through a graduate program and then finding themselves virtually disqualified for anything but a teaching career that they cannot count on having.

It is unlikely that the opinions of the professoriate will ever be a true reflection of the opinions of the public; and, in any case, that would be in itself an unworthy goal. Fostering a greater diversity of views within the professoriate is a worthy goal, however. The evidence suggests that American higher education is going in the opposite direction. Professors tend increasingly to think alike because the profession is increasingly self-selected. The university may not explicitly require conformity on more than scholarly matters, but the existing system implicitly demands and constructs it.

My aim has been to throw some light from history on a few problems in contemporary higher education. If there is a conclusion to be drawn from this exercise, it might be that the academic system is a deeply internalized one. The key to reform of almost any kind in higher education lies not in the way that knowledge is produced. It lies in the way that the producers of knowledge are produced. Despite transformational changes in the scale, missions, and constituencies of American higher education, professional reproduction remains almost exactly as it was a hundred years ago. Doctoral education is the horse that the university is riding to the mall. People are taught—more accurately, people are socialized, since the process selects for other attributes in addition to scholarly ability—to become expert in a field of specialized study; and then, at the end of a long, expensive, and highly single-minded process of credentialization, they are asked to perform tasks for which they have had no training whatsoever: to teach their fields to non-specialists, to connect what they teach to issues that students are likely to confront in the world outside the university, to be interdisciplinary, to write for a general audience, to justify their work to people outside their discipline and outside the academy. If we want professors to be better at these things, then we ought to train them differently.

Still, as is the case with every potential reform in academic life, there are perils. The world of knowledge production is a marketplace, but it is a very special marketplace, with its own practices, its own values, and its own rules. A lot has changed in higher education in the last 50 years. What has not changed is the delicate and somewhat paradoxical relation in which the university stands to the general culture. It is important for research and teaching to be relevant, for the university to engage with the public culture and to design its investigative paradigms with actual social and cultural life in view. That is, in fact, what most professors try to do—even when they feel inhibited from saying so by the taboo against instrumentalist and presentist talk. Professors teach what they teach because they believe that it makes a difference. To continue to do this, academic inquiry, at least in some fields, may need to become less exclusionary and more holistic. That may be the road down which the debates I have been describing are taking higher education.

But at the end of this road there is a danger, which is that the culture of the university will become just an echo of the public culture. That would be a catastrophe. It is the academic’s job in a free society to serve the public culture by asking questions the public doesn’t want to ask, investigating subjects it cannot or will not investigate, and accommodating voices it fails or refuses to accommodate. Academics need to look to the world to see what kind of teaching and research needs to be done, and how they might better train and organize themselves to do it. But they need to ignore the world’s demand that they reproduce its self-image.

Reprinted from The Marketplace of Ideas by Louis Menand. Copyright © 2009 by Louis Menand. With the permission of the publisher, W.W. Norton & Company, Inc.

This material may not be reproduced, rewritten, or redistributed without the prior written permission of the publisher.

Fewer students major in English. This means that the demand for English literature specialists has declined. Even if a department requires, say, a course in eighteenth-century literature of its majors, the fact that there are fewer majors means that there is less demand for eighteenth-century specialists. But although the average number of credit hours devoted to courses in English literature has gone down over the last 20 years, the number-one subject, measured by the credit hours that students devote to it, has remained the same. That subject is English composition. Who teaches that? Not, mainly, English Ph.D.s. Mainly, ABDs—graduate students who have completed all but their dissertations. There is a sense in which the system is now designed to produce ABDs.

The same trend can be observed in most of the liberal-arts fields. In 1971, 24,801 students received bachelor’s degrees in mathematics and statistics, about 3 percent of all bachelor’s degrees. In 2001, there were 11,171 undergraduate degrees in those fields, less than 1 percent of the total number. Again, it is not that students do not take math; it is that fewer students need specialized courses in mathematics, which are the courses that graduate students are trained to teach. There was a similar fall-off in bachelor’s degrees awarded in the social sciences and history. There was upward movement in only two major liberal-arts areas: psychology and the life sciences. American higher education has been expanding, but the liberal arts part of the system has been shrinking.

The Berkeley study, “Ph.D.s—Ten Years Later,” was based on lengthy questionnaires sent to just under 6,000 people, in six fields, who received Ph.D.s between 1982 and 1985. One of those fields was English. People who received their Ph.D.s in English between 1982 and 1985 had a median time to degree of 10 years. A third of them took more than 11 years to finish, and the median age at the time of completion was 35. By 1995, 53 percent of those with Ph.D.s that had been awarded from 10 to 15 years earlier had tenure; another 5 percent were in tenure-track positions. This means that about two-fifths of English Ph.D.s were effectively out of the profession as it is usually understood. (Some of these people were non-tenure-track faculty, and some were educational administrators. Most of the rest worked in what is called BGN—business, government, and NGOs.) Of those who had tenure, less than a fifth had positions in the kind of research universities in which they had been trained—that is, about 5 percent of all English Ph.D.s. Ph.D.s who began in a tenure-track position took an average of 6.1 years to get tenure. Ph.D.s who began in non-tenure track positions but who eventually received tenure, which about half did, took an average of 8.1 years to get tenure.

The placement rate for Ph.D.s has fluctuated. Between 1989 and 1996, the number of starting positions advertised in history dropped 11 percent; in art and art history, 26 percent; in foreign languages, 35 percent; and in political science, 37 percent. Yet every year during that period, universities gave out more Ph.D.s than they had the year before. It was plain that the supply curve had completely lost touch with the demand curve in American academic life. That meant if not quite a lost generation of scholars, a lost cohort. This was a period that coincided with attacks on the university for “political correctness,” and it is not a coincidence that many of the most prominent critics of academia were themselves graduate-school dropouts: Dinesh D’Souza, Roger Kimball, Richard Bernstein, David Lehman. Apart from their specific criticisms and their politics, they articulated a mood of disenchantment with the university as a congenial place to work.

There were efforts after 1996 to cut down the size of doctoral programs, with apparently some positive effect on the job market. But time-to-degree numbers did not improve. In the sixties, the time-to-degree as a registered student was about 4.5 years in the natural sciences and about six years in the humanities. The current median time to degree in the humanities is nine years. That does not include what is called stop-time, which is when students take a leave or drop out for a semester or longer. And it obviously does not take into account students who never finish. It is not nine years from the receipt of the bachelor’s degree, either; it is nine years as a registered student in a graduate program. The median total time it takes to achieve a degree in the humanities including stop-time is 11.3 years. In the social sciences, it is 10 years, or 7.8 as a registered student. In the natural sciences, time-to-degree as a registered student is just under seven years. If we put all these numbers together, we get the following composite: only about half of the people who enter doctoral programs in English finish them, and only about half of those who finish end up as tenured faculty, the majority of them at institutions that are not research universities. An estimate of the total elapsed time from college graduation to tenure would be somewhere between 15 and 20 years. It is a lengthy apprenticeship.

That it takes longer to get a Ph.D. in the humanities than it does in the social or natural sciences (although those fields also have longer times-to-degree than they once did) seems anomalous, since normally a dissertation in the humanities does not require extensive archival, field, or laboratory work. William Bowen and Neil Rudenstine, in their landmark study In Pursuit of the Ph.D., suggested that one reason for this might be that the paradigms for scholarship in the humanities have become less clear. People are uncertain just what research in the humanities is supposed to constitute, and graduate students therefore spend an inordinate amount of time trying to come up with a novel theoretical twist on canonical texts or an unusual contextualization. Inquiry in the humanities has become quite eclectic without becoming contentious. This makes it a challenge for entering scholars to know where to make their mark.

The conclusion of the researchers who compiled the statistics on English Ph.D.s for the Berkeley study was, See? It’s not so bad! The reason they give for this is the reason that is often heard when the issues of time-to-degree and job placement are raised, which is that most people who get Ph.D.s, whether they end up teaching or not, report high job satisfaction. (Job satisfaction is actually higher among Ph.D.s with non-academic careers than it is among academics, partly because spousal problems—commuting marriages—are not as great outside academia.) And the majority say that they do not regret the time they spent in graduate school (although they have a lot of complaints about the quality of the mentorship they received). Students continue to check into the doctoral motel, and they don’t seem terribly eager to check out. They like being in a university, and, since there is usually plenty of demand for their quite inexpensive teaching, universities like having them. Business is good. Where is the problem?

The effort to reinvent the Ph.D. as a degree qualifying people for non-academic as well as academic employment, to make the degree more practical, was an initiative of the Woodrow Wilson Foundation when it was headed by Robert Weisbuch. These efforts are a worthy form of humanitarianism; but there is no obvious efficiency in requiring people to devote 10 or more years to the mastery of a specialized area of scholarship on the theory that they are developing skills in research, or critical thinking, or communication. Professors are not themselves, for the most part, terribly practical people, and practical skills are not what they are trained to teach. They are trained to teach people to do what they do and to know what they know. Those skills and that knowledge are not self-evidently transferable. The ability to analyze Finnegans Wake does not translate into an ability to analyze a stock offering. If a person wanted to analyze stock offerings, he should not waste his time with Joyce. He should go to business school. Or get a job analyzing stock offerings.

It may be that the increased time-to-degree, combined with the weakening job market for liberal arts Ph.D.s, is what is responsible for squeezing the profession into a single ideological box. It takes three years to become a lawyer. It takes four years to become a doctor. But it takes from six to nine years, and sometimes longer, to be eligible to teach college students for a living. Tightening up the oversight on student progress might reduce the time-to-degree by a little, but as long as the requirements remain, as long as students in most fields have general exams, field (or oral) exams, and monograph-length dissertations, it is not easy to see how the reduction will be significant. What is clear is that students who spend eight or nine years in graduate school are being seriously over-trained for the jobs that are available. The argument that they need the training to be qualified to teach undergraduates is belied by the fact that they are already teaching undergraduates. Undergraduate teaching is part of doctoral education; at many institutions, graduate students begin teaching classes the year they arrive. And the idea that the doctoral thesis is a rigorous requirement is belied by the quality of most doctoral theses. If every graduate student were required to publish a single peer-reviewed article instead of writing a thesis, the net result would probably be a plus for scholarship.

One pressure on universities to reduce radically the time-to-degree is simple humanitarianism. Lives are warped because of the length and uncertainty of the doctoral education process. Many people drop in and drop out and then drop in again; a large proportion of students never finish; and some people have to retool at relatively advanced ages. Put in less personal terms, there is a huge social inefficiency in taking people of high intelligence and devoting resources to training them in programs that half will never complete and for jobs that most will not get. Unfortunately, there is an institutional efficiency, which is that graduate students constitute a cheap labor force. There are not even search costs involved in appointing a graduate student to teach. The system works well from the institutional point of view not when it is producing Ph.D.s, but when it is producing ABDs. It is mainly ABDs who run sections for lecture courses and often offer courses of their own. The longer students remain in graduate school, the more people are available to staff undergraduate classes. Of course, overproduction of Ph.D.s also creates a buyer’s advantage in the market for academic labor. These circumstances explain the graduate-student union movement that has been going on in higher education since the mid 1990s.

But the main reason for academics to be concerned about the time it takes to get a degree has to do with the barrier this represents to admission to the profession. The obstacles to entering the academic profession are now so well known that the students who brave them are already self-sorted before they apply to graduate school. A college student who has some interest in further education, but who is unsure whether she wants a career as a professor, is not going to risk investing eight or more years finding out. The result is a narrowing of the intellectual range and diversity of those entering the field, and a widening of the philosophical and attitudinal gap that separates academic from non-academic intellectuals. Students who go to graduate school already talk the talk, and they learn to walk the walk as well. There is less ferment from the bottom than is healthy in a field of intellectual inquiry. Liberalism needs conservatism, and orthodoxy needs heterodoxy, if only in order to keep on its toes.

And the obstacles at the other end of the process, the anxieties over placement and tenure, do not encourage iconoclasm either. The academic profession in some areas is not reproducing itself so much as cloning itself. If it were easier and cheaper to get in and out of the doctoral motel, the disciplines would have a chance to get oxygenated by people who are much less invested in their paradigms. And the gap between inside and outside academia, which is partly created by the self-sorting, increases the hostility of the non-academic world toward what goes on in university departments, especially in the humanities. The hostility makes some disciplines less attractive to college students, and the cycle continues.

The moral of the story that the numbers tell once seemed straightforward: if there are fewer jobs for people with Ph.D.s, then universities should stop giving so many Ph.D.s—by making it harder to get into a Ph.D. program (reducing the number of entrants) or harder to get through (reducing the number of graduates). But this has not worked. Possibly the story has a different moral, which is that there should be a lot more Ph.D.s, and they should be much easier to get. The non-academic world would be enriched if more people in it had exposure to academic modes of thought, and had thereby acquired a little understanding of the issues that scare terms like “deconstruction” and “postmodernism” are attempts to deal with. And the academic world would be livelier if it conceived of its purpose as something larger and more various than professional reproduction—and also if it had to deal with students who were not so neurotically invested in the academic intellectual status quo. If Ph.D. programs were determinate in length—if getting a Ph.D. were like getting a law degree—then graduate education might acquire additional focus and efficiency. It might also attract more of the many students who, after completing college, yearn for deeper immersion in academic inquiry, but who cannot envision spending six years or more struggling through a graduate program and then finding themselves virtually disqualified for anything but a teaching career that they cannot count on having.

It is unlikely that the opinions of the professoriate will ever be a true reflection of the opinions of the public; and, in any case, that would be in itself an unworthy goal. Fostering a greater diversity of views within the professoriate is a worthy goal, however. The evidence suggests that American higher education is going in the opposite direction. Professors tend increasingly to think alike because the profession is increasingly self-selected. The university may not explicitly require conformity on more than scholarly matters, but the existing system implicitly demands and constructs it.

My aim has been to throw some light from history on a few problems in contemporary higher education. If there is a conclusion to be drawn from this exercise, it might be that the academic system is a deeply internalized one. The key to reform of almost any kind in higher education lies not in the way that knowledge is produced. It lies in the way that the producers of knowledge are produced. Despite transformational changes in the scale, missions, and constituencies of American higher education, professional reproduction remains almost exactly as it was a hundred years ago. Doctoral education is the horse that the university is riding to the mall. People are taught—more accurately, people are socialized, since the process selects for other attributes in addition to scholarly ability—to become expert in a field of specialized study; and then, at the end of a long, expensive, and highly single-minded process of credentialization, they are asked to perform tasks for which they have had no training whatsoever: to teach their fields to non-specialists, to connect what they teach to issues that students are likely to confront in the world outside the university, to be interdisciplinary, to write for a general audience, to justify their work to people outside their discipline and outside the academy. If we want professors to be better at these things, then we ought to train them differently.

Still, as is the case with every potential reform in academic life, there are perils. The world of knowledge production is a marketplace, but it is a very special marketplace, with its own practices, its own values, and its own rules. A lot has changed in higher education in the last 50 years. What has not changed is the delicate and somewhat paradoxical relation in which the university stands to the general culture. It is important for research and teaching to be relevant, for the university to engage with the public culture and to design its investigative paradigms with actual social and cultural life in view. That is, in fact, what most professors try to do—even when they feel inhibited from saying so by the taboo against instrumentalist and presentist talk. Professors teach what they teach because they believe that it makes a difference. To continue to do this, academic inquiry, at least in some fields, may need to become less exclusionary and more holistic. That may be the road down which the debates I have been describing are taking higher education.

But at the end of this road there is a danger, which is that the culture of the university will become just an echo of the public culture. That would be a catastrophe. It is the academic’s job in a free society to serve the public culture by asking questions the public doesn’t want to ask, investigating subjects it cannot or will not investigate, and accommodating voices it fails or refuses to accommodate. Academics need to look to the world to see what kind of teaching and research needs to be done, and how they might better train and organize themselves to do it. But they need to ignore the world’s demand that they reproduce its self-image.

Reprinted from The Marketplace of Ideas by Louis Menand. Copyright © 2009 by Louis Menand. With the permission of the publisher, W.W. Norton & Company, Inc.

This material may not be reproduced, rewritten, or redistributed without the prior written permission of the publisher.

. . .

Still, as is the case with every potential reform in academic life, there are perils. The world of knowledge production is a marketplace, but it is a very special marketplace, with its own practices, its own values, and its own rules. A lot has changed in higher education in the last 50 years. What has not changed is the delicate and somewhat paradoxical relation in which the university stands to the general culture. It is important for research and teaching to be relevant, for the university to engage with the public culture and to design its investigative paradigms with actual social and cultural life in view. That is, in fact, what most professors try to do—even when they feel inhibited from saying so by the taboo against instrumentalist and presentist talk. Professors teach what they teach because they believe that it makes a difference. To continue to do this, academic inquiry, at least in some fields, may need to become less exclusionary and more holistic. That may be the road down which the debates I have been describing are taking higher education.

But at the end of this road there is a danger, which is that the culture of the university will become just an echo of the public culture. That would be a catastrophe. It is the academic’s job in a free society to serve the public culture by asking questions the public doesn’t want to ask, investigating subjects it cannot or will not investigate, and accommodating voices it fails or refuses to accommodate. Academics need to look to the world to see what kind of teaching and research needs to be done, and how they might better train and organize themselves to do it. But they need to ignore the world’s demand that they reproduce its self-image.

Continued in article

Bob Jensen's threads on the Need for Change in Doctoral Programs ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#DoctoralProgramChange

"Ernst & Young Told to Pay $16 Million in Superior Bank Case," by Susannah Nesmith and Jef Feeley, Bloomberg News, January 13, 2012 ---
http://www.businessweek.com/news/2012-01-13/ernst-young-told-to-pay-16-million-in-superior-bank-case.html

Ernst & Young already has put into effect changes to the way it audits savings-and-loan associations that comply with the OTS consent order, the firm said. "And we are voluntarily taking the extra step of implementing these changes throughout our bank audit practice," said Charles Perkins, a spokesman in New York.

"Ernst & Young Settles Charges For $125 Million," The Wall Street Journal, December 27, 2004, Page B3 --- http://online.wsj.com/article/0,,SB110411348322509799,00.html?mod=todays_us_marketplace

Ernst & Young LLP, one of the four largest U.S. accounting firms, agreed to pay a total of $125 million to settle U.S. claims arising from its audits of a failed Illinois savings bank.

Under a consent order agreed to with the Office of Thrift Supervision, the New York-based partnership will pay the Federal Deposit Insurance Corp. $85 million as receiver for the failed Superior Bank FSB. In addition, Ernst & Young will pay $40 million in restitution to the FDIC, which insures deposits at the 9,025 U.S. banks and savings-and-loan associations, said an FDIC spokesman.

Superior was declared insolvent in July 2001 after running into trouble over its loans to borrowers with spotty credit records. At the time of its failure, Superior had assets of about $2 billion. The FDIC sued Ernst & Young in 2002, contending that it delayed alerting regulators to improper accounting practices at the thrift out of concern that negative publicity could disrupt the sale of its consulting unit.

In April 2003, a federal judge dismissed the suit, saying the FDIC wasn't able to sue in its capacity as administrator for the government's Bank Insurance Fund and Savings Association Fund. The FDIC appealed the decision.

Ernst has disputed allegations that it was to blame for the bank's failure, citing testimony in 2002 before the Senate by the FDIC's inspector general that Superior Bank's failure was "directly attributable" to "the bank's board of directors and executives ignoring sound risk-management principles."

In settling, Ernst & Young didn't admit or deny that its audits failed to comply with any professional accounting standards. It said the decision to settle underscored a commitment to work cooperatively with regulators and to make sure the firm had "the strongest policies and procedures to serve our clients and the public interest."

Ernst & Young already has put into effect changes to the way it audits savings-and-loan associations that comply with the OTS consent order, the firm said. "And we are voluntarily taking the extra step of implementing these changes throughout our bank audit practice," said Charles Perkins, a spokesman in New York.

Bob Jensen's threads on Ernst & Young settlements ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Lockdown: The coming war on general-purpose computing," by Cory Doctorow,
http://boingboing.net/2012/01/10/lockdown.html
This article is based on a keynote speech to the Chaos Computer Congress in Berlin, Dec. 2011.

"FASB won’t require management to make going-concern assessments," by Ken Tysiac, Journal of Accountancy, January 13, 2012 ---
http://journalofaccountancy.com/Web/20124999.htm

FASB will not require management to assess whether there is substantial doubt about an entity’s ability to continue as a going concern.

After its board meeting Thursday, FASB announced that a majority of board members determined that such a requirement would be difficult to apply. Board members decided that users of financial statements would benefit more from ongoing disclosures about risks and uncertainties.

Disclosures made only after management concludes there is substantial doubt about an entity’s ability to continue as a going concern would be less beneficial to users of financial statements, according to the board.

The next step in the project is developing a principle for an entity to determine the adequacy of its disclosures about risks and uncertainties, and to evaluate how the content of those disclosures could be improved. The board directed the FASB staff to develop such a principle.

FASB first issued a Proposed Statement of Financial Accounting Standards, Going Concern, on Oct. 9, 2008, for a 60-day comment period. The proposal would have required an entity to assess its ability to continue as a going concern, preparing financial statements on a going-concern basis unless liquidating or ceasing operations was the entity’s intention or only realistic alternative.

Management would have been required to take into account all available information about the future, which was defined as at least, but not limited to, 12 months from the end of the reporting period.

The proposal would have required management to disclose uncertainties that cast substantial doubt upon the entity’s ability to continue as a going concern.

FASB’s summary of the comment letters indicated that a large majority of the 29 respondents generally supported FASB’s initial decision to include guidance on going-concern assessments in accounting literature. But respondents also had concerns. According to FASB’s Comment Letter Summary, a few respondents said the wording “all available information about the future” was too broad and could require management to consider an endless amount of information “regardless of its quality or relevance.”

A few respondents questioned how much time and money management should devote to considering all available information about the future. A few observed that the purpose of a going-concern assessment is to address the viability of an entity over the next 12 months, not assess the viability of a business model in general.

Currently, AICPA Statement on Auditing Standards (SAS) no. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern (AICPA, Professional Standards, vol. 1, AU sec. 341), provides the U.S. guidance on this topic. It states that the auditor is responsible for evaluating whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period not more than one year beyond the date of the financial statements’ being audited. Information obtained during a financial statement audit is the basis for this evaluation.

In October 2011, the board decided that improving disclosures to serve as an early warning of an entity’s potential inability to continue as a going concern would not be an objective of the project, which was renamed Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting. That decision was partly a result of the board’s recent decision to add incremental disclosures about liquidity risk in the separate project on accounting for financial instruments, according to FASB’s report from the board meeting.

That left the board to decide whether management or outside accountants of an entity should have the primary responsibility for performing the going-concern assessment.

Continued in article

Jensen Comment
It seems to me that this leaves a tremendous gap between accounting and auditing standards. Auditing standards require a fundamental shift in the basis of accounting from accrual accounting to exit value accounting. It's not at all clear if and when auditors will ever make that shift until clients have actually declared intent to go out of business.

This FASB decision makes it even more likely that thousands of companies will go out of business while getting clean going concern opinions from their auditors who allow failing companies to continue accrual accounting rather than exit value accounting. In the bailout crisis of 2008 thousands of that failed had clean going concern audit opinions --- what a farce!
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

January 16, 2012 reply from Edith Orenstein

Bob,

Disclaimer first: This is entirely my opinion, not that of my employer or any of its officers or employees.

Re: your comment “This FASB decision makes it even more likely that thousands of companies will go out of business while getting clean going concern opinions from their auditors who allow failing companies to continue accrual accounting rather than exit value accounting,” my take on what was expressly stated – and implied - during the FASB board’s discussion on ‘going concern’ last week (detailed further in FEI Blog) is that:

1. Stakeholder views on the actual meaning and interpretation of ‘going concern’ is more dire than how that term is defined in the auditing literature. (The aforementioned was essentially stated in para. #5 of the FASB board handout summarizing results of FASB staff outreach)

a. Therefore, stakeholder’s resulting actions could cause an undue further downturn in a company’s financial condition than was/would have been the case, even at the time of the going concern opinion. (I thought this was strongly implied, if not directly stated in the board members discussion, that the going concern opinion itself could be the ‘death knell’)

b. This ‘gap’ between the definition of going concern in auditing literature and stakeholder interpretation thereof creates even further tension over a significant auditing decision.

c. Thus, I believe the FASB board decided, along the lines of what was stated by board member Tom Linsmeier, that if there is a problem with what is stated in the auditing literature as to the definition of going concern, or any related expectation gap related thereto, that any such action should be taken by the auditing rule-writers themselves. Board member Russ Golden asked if there would be coordination between the auditing rule-makers and FASB as appropriate (he may have also said SEC too, I am not sure), Board Chairman Leslie Seidman replied there would be.

2. I don’t personally view FASB’s decision so much as closing the door on further clarification of going concern in the literature (for now, based on FASB’s decision, the auditing literature) or as to dealing with any related ‘expectation gap,’ but moreso that with all the potential complexities of that very exercise, in my view, FASB decided it’s time would be better spent focusing on more early warning risk and liquidity disclosures, without being boxed into the lightning rod/potentially self-fulfilling prophecy around the term ‘going concern’.

Thank you,

Edith

Hi Edith,

I foresee a number of problems and inconsistencies in the decision not to require a client's management to make a going concern assessment.

Firstly, management's going concern assessment above an beyond auditor risk assessments is supposed to affect the scope of the audit --- at least in terms of international auditing standards not affected (at least not yet) by FASB actions.
See ISA 570, Going Concern ---
http://www.iasplus.com/ifac/0703edisa570.pdf

Secondly, a U.S. client that elects or is required to use international accounting and auditing standards faces a different set of requirements regarding management assessment of going concerns ---
http://www.iasplus.com/ifac/0703edisa570.pdf

PCAOB
AU Section 341 The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern
http://pcaobus.org/Standards/Auditing/Pages/AU341.aspx
Jensen Comment
It seems to me now that the auditing firms have to now evaluate going concern with less input from management. This makes little sense to me, because the weight of a going concern decision falls four square on the shoulders of the audit firm.

Respectfully,
Bob Jensen

ALL TIME HITS (for all papers in SSRN eLibrary)
TOP 10 Papers for Tax Law & Policy eJournals
January 2, 1997 to January 15, 2012
http://papers.ssrn.com/sol3/topten/topTenResults.cfm?groupingId=305496&netorjrnl=ntwk

Rank Downloads  
1           4577 
Understanding the U.S. News Law School Rankings 
Theodore P. Seto, 
Loyola Law School Los Angeles, 
Date posted to database: October 13, 2006 
Last Revised: April 18, 2007

2            4316 
Two and Twenty: Taxing Partnership Profits in Private Equity Funds 
Victor Fleischer, 
University of Colorado at Boulder - School of Law, 
Date posted to database: March 23, 2006 
Last Revised: September 26, 2007

3            3996 
Taxes and Corporate Finance 
John R. Graham, 
Duke University - Fuqua School of Business, 
Date posted to database: April 10, 2001 
Last Revised: June 26, 2003

4            3770 
Herman Cain's 9-9-9 Tax Plan 
Edward D. Kleinbard, 
University of Southern California - Law School, 
Date posted to database: October 10, 2011 
Last Revised: November 1, 2011

5            2481 
Pursuing a Tax LLM Degree: Where? 
Paul L. Caron, Jennifer M. Kowal, Katherine Pratt, Theodore P. Seto, 
University of Cincinnati - College of Law, Loyola Marymount University - Loyola Law School Los Angeles, Loyola Marymount University - Loyola Law School Los Angeles, Loyola Law School Los Angeles, 
Date posted to database: April 28, 2010 
Last Revised: May 25, 2010

6            3941 
Pursuing a Tax LLM Degree: Why and When? 
Paul L. Caron, Jennifer M. Kowal, Katherine Pratt, 
University of Cincinnati - College of Law, Loyola Marymount University - Loyola Law School Los Angeles, Loyola Marymount University - Loyola Law School Los Angeles, 
Date posted to database: March 25, 2010 
Last Revised: November 12, 2010 7 3282

7             3282
Firm Value and Marketability Discounts 
Mukesh Bajaj, David J. Denis, Stephen P. Ferris, Atulya Sarin, 
LECG, LLC, Purdue University - Department of Management, University of Missouri at Columbia - Department of Finance, Santa Clara University - Department of Finance, 
Date posted to database: April 13, 2001 
Last Revised: November 1, 2009 8 3027

8             3027
Taxing Undocumented Immigrants: Separate, Unequal and Without Representation 
Francine J. Lipman, 
University of Nevada, Las Vegas - William S. Boyd School of Law, 
Date posted to database: February 15, 2006 
Last Revised: May 30, 2008 9 2648

9             2648 
Understanding Venture Capital Structure: A Tax Explanation for Convertible Preferred Stock 
Ronald J. Gilson, David Schizer, 
Stanford Law School, Columbia Law School, 
Date posted to database: February 28, 2002 
Last Revised: March 26, 2002 10 2588

10            2588
Tax Evasion and Tax Compliance 
Luigi A. Franzoni, 
University of Bologna - Faculty of Economics, 
Date posted to database: November 11, 1998 
Last Revised: February 3, 2010

Up for tenure, promotion, or accreditation?
"Nominating Your Evaluators," by Elizabeth H. Simmons, Inside Higher Ed, January 6, 2012 ---
http://www.insidehighered.com/advice/2012/01/06/essay-simmons-nominating-evaluators-faculty-tenure-process

Jensen Comment
I don't think some (most?) of the R1 universities allow candidates to nominate evaluators. Or they may allow candidates to nominate evaluators while insisting that not all evaluators be nominated by the candidate.

I was active in varying degrees in obtaining accreditation for two universities (University of Maine and Trinity University) while being on the faculty of those universities. At UMO I was put in charge of the entire process and, as a result, learned more about the AACSB than ever before.

One of the things that surprised me somewhat is that the AACSB allowed us to nominate what deans would make a visit to our campus as part of the accreditation review process. One of my long-time friends, a dean and former accounting professor, who was very active in the AACSB for over two decades. When I proposed to our local faculty that he be one of our AACSB nominees, another faculty member objected saying that my friend was a known hard ass in the accreditation review process. After a bit of research into this, even I agreed that we sould never nominate my friend as an evaluator.

I must admit that the deans we eventually nominated were pretty easy on us, although in each instance I thought we had a good case for accreditation.

And when asked to evaluate a faculty member for tenure or promotion by another university, I recall how much I dreaded receiving those requests in big brown envelopes that contained ten or more papers to read and evaluate. It especially made me uncomfortable when having to be critical of a friend's published research. However, I don't think I killed the quest for tenure or promotion of any candidate even though I tried to be professional in every one of my evaluations.

Now that I'm retired, I enjoy using retirement as an excuse turn down evaluation requests since moving to the mountains.

"Guidance provided on electronic health record incentives," by Ken Tysiac, Journal of Accountancy, January 6, 2012 ---
http://journalofaccountancy.com/Web/20124972.htm

"Where There's Smoke, There's Fraud: Sarbanes-Oxley has done little to curb corporate malfeasance. Therefore, CFOs should implement a range of fraud-prevention measures," by Laton McCartney, CFO.com, March 1, 2011 ---
http://www3.cfo.com/article/2011/3/regulation_where-theres-smoke-theres-fraud

As a convicted felon, Sam E. Antar, the former CFO for the now-defunct consumer-electronics chain Crazy Eddie, no doubt has regrets. Among them: he is no longer in the game at a time when corporate fraud is experiencing a resurgence. "If I were out of retirement today, I'd be bigger than Bernie Madoff," he boasts.

In conjunction with CEO Eddie Antar (his cousin), Sam Antar helped mastermind one of the largest corporate frauds in the 1980s, bilking investors and creditors out of hundreds of millions of dollars. Today, he makes a living lecturing about corporate fraud (and shorting the stocks of companies he thinks may have inflated earnings).

Antar says that despite the antifraud provisions of the Sarbanes-Oxley Act of 2002 and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, it remains as easy today for bad guys, both internal and external, to loot corporate coffers as it was during the Enron and WorldCom days. "Nothing's changed," he says. "Wall Street analysts are just as gullible, internal controls remain weak, and the SEC is underfunded and, at best, ineffective. Madoff only got caught because the economy tanked."

Antar won't get much of an argument from organizations that monitor corporate fraud. In fact, the consensus today is that financial shenanigans are markedly on the increase. "There's a lot more employee fraud and embezzlement today then there was 10 years ago, and this past year there was much more than a year ago," says Steve Pedneault of Forensic Accounting Services. "People blame the economy, but much of the fraud and embezzlement that's coming to the surface now was in the works for 4 or 5 years before the recession hit."

Last year, the Committee of Sponsoring Organizations of the Treadway Commission's report on corporate fraud concluded that fraud continues to increase in depth and breadth despite Sarbanes-Oxley; the methods of committing financial fraud have not materially changed; and traditional measures of corporate governance have limited impact on predicting fraud. Median loss due to fraud, based on presence of antifraud controls, 2010No. of fraud cases, based on perpetrator's dept. (2010)

In other words, same old same old, only worse: in its 2010/2011 Global Fraud Report, risk consulting firm Kroll found that business losses due to fraud increased 20% in the last 12 months, from $1.4 million to $1.7 million per billion dollars of sales. The report, based on a survey of more than 800 senior executives from 760 companies around the world, also found that 88% of the respondents reported being victims of corporate fraud over the past 12 months. If fraud were the flu, this would qualify as a pandemic.

The most likely targets by industry are financial services, media, technology, manufacturing, and health care. Small and midsize companies are also more vulnerable. "Many of these organizations typically rely on a small accounting department, especially in today's economy," says Pedneault. They simply don't have the resources to catch fraudsters.

That challenge becomes all the more daunting when one considers the many varieties of fraud that exist. Aside from various forms of embezzlement and outright theft, and the growing risk of information theft (think hackers), two other kinds of corporate malfeasance have come to the fore in recent years: fraud in the business model and fraud in the business process.

The former is defined by a company selling illegal or worthless wares. "If the pharmaceutical industry sells alleged off-label drugs that have not been approved by the FDA, or the financial-services industry is offering worthless subprime mortgages, that can constitute business-model fraud," says Toby J. F. Bishop, director of the Deloitte Forensic Center for Deloitte Financial Advisory Services.

Fraud of the business-practice variety, Bishop explains, can range from corporations ignoring or turning a blind eye to environmental or safety laws to the ever-popular practice of engaging in "window dressing" at the end of the quarter.

An Action Plan With fraud on the rise, and with all parties that could possibly be tempted feeling more pressure to cross the line, how should companies respond? First, the bad news: "Most fraud today is uncovered by whistle-blowers, or by accident — a tip, a rogue piece of mail, or by happenstance," says Tracy L. Coenen, a forensic accountant and fraud investigator who heads up Sequence, a forensic accounting firm.

In a sense, companies (at least those that are publicly traded) were supposed to self-insure against fraud by implementing, at great expense, the controls framework included in Sarbanes-Oxley. But a framework still requires an enforcer, and at many companies there is none. "There's often no single entity for oversight," says Deloitte's Bishop. "Many companies have no compliance or risk management at all."

Even when they do, there's the issue of how effective it can be. It's not a job that wins friends and influences fellow workers. "The compliance officer is the most hated person in the company," notes Thomas Quilty, CEO of BD Consulting and Investigations. "Companies often retaliate against them," adds Antar.

"Compliance staff frequently end up pushing paper [just] so it looks like the company has tried to do the right thing in case there's an investigation," says Coenen. "They're not effective."

As for what to do, while no one has yet come up with a silver bullet, experts point to seven useful steps that all companies can take:

Continued in a long article

"ACCOUNTANTS BEHAVING BADLY," by Anthony H. Catanach, Jr. and J. Edward Ketz, Grumpy Old Accountants, October 3, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/332

Bob Jensen's fraud updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's threads on professionalism in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Question
Are current American Accounting Association journal articles free?
Can AAA Commons modules be accessed free by anyone in the world?

Hints
Go to Google Advanced Search and write in "Clickers" in the top box and "American Accounting Association" in the Exact Phrase box.
Leads to the full November 2011 Issues in Accounting Education article by Premurosa et al.
Note that this free link may time out in a matter of days or even hours on Google. I don't know about this!

Go to Google Advanced Search and write in "Premurosa" in the top box and "American Accounting Association" in the Exact Phrase box.
Does not lead to the November 2011 Issues in Accounting Education article by Premurosa et al.

Go to Google Advanced Search and write in "Close Encounters" in the top box and "American Accounting Association" in the Exact Phrase box.
Does not lead to the full article but leads to the free abstract of a Doyle Williams Issues in Accounting Education article in the November 2011 TAR article
"A Half Century of Close Encounters with the First Course in Accounting," by Doyle Z, Williams, Issues in Accounting Education, November 2011, pp. 759-776

Go to Google Advanced Search and write in "Monitoring" in the top box and "American Accounting Association" in the Exact Phrase box.
Does not lead to the full article but leads to the free abstract of the Campbell, Epstein, and Jerez article in the November 2011 TAR article

Conclusion
Searching Google for full articles or abstracts of American Accounting Association articles is a hit or miss proposition, but more likely than not Google will miss both the full article (usually not free) and the abstract (free if you know how to search the AAA publications site).
http://aaahq.org/pubs/electpubs.htm

Bonus Comment
For the recent AAA Commons searches, Google is now leading to some (random?) AAA Commons modules.
The search success is very unpredictable.

Go to Google Advanced Search and write in "Accountics" in the top box and "American Accounting Association" in the Exact Phrase box.
This eads to some (random?) AAA Commons modules from the Commons but fails to provide links to articles that use the word "accountics".

Only AAA members have full access (by signing in) to the AAA Commons, but visitors increasingly can find links to some modules without signing in --- .
http://commons.aaahq.org/pages/home
The Commons search engine works well for members, but I would not yet rely on Google to find AAA Commons modules.

Over 24 years ago, Barry Rice believed in the learning power of classroom electronic response pads (clickers).
He was right if they are used correctly ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#ResponsePads

"Does Using Clickers in the Classroom Matter to Student Performance and Satisfaction When Taking the Introductory Financial Accounting Course?" by Ronald F. Premuroso, Lei Tong, and Teresa K. Beed, Issues in Accounting Education, November 2011, pp. 701-724
http://aaajournals.org/doi/abs/10.2308/iace-50066
There is a fee for the full text version

ABSTRACT:

Teaching and student success in the classroom involve incorporating various sound pedagogy and technologies that improve and enhance student learning and understanding. Before entering their major field of study, business and accounting majors generally must take a rigorous introductory course in financial accounting. Technological innovations utilized in the classroom to teach this course include Audience Response Systems (ARS), whereby the instructor poses questions related to the course material to students who each respond by using a clicker and receiving immediate feedback. In a highly controlled experimental situation, we find significant improvements in the overall student examination performance when teaching this course using clickers as compared to traditional classroom teaching techniques. Finally, using a survey at the end of the introductory financial accounting course taught with the use of clickers, we add to the growing literature supporting student satisfaction with use of this type of technology in the classroom. As universities look for ways to restrain operating costs without compromising the pedagogy of core requirement classes such as the introductory financial accounting course, our results should be of interest to educators, administrators, and student retention offices, as well as to the developers and manufacturers of these classroom support technologies.

"Some interesting findings and unanswered questions about clicker implementations," by Robert Talbert, Chronicle of Higher Education, January 4, 2012 ---
Click Here
http://chronicle.com/blognetwork/castingoutnines/2012/01/04/some-interesting-findings-and-unanswered-questions-about-clicker-implementations/?sid=wc&utm_source=wc&utm_medium=en

I have been using clickers in my classes for three years now, and for me, there’s no going back. The “agile teaching” model that clickers enable suits my teaching style very well and helps my students learn. But I have to say that until reading this Educause article on the flight out to Boston on Sunday, I hadn’t given much thought to how the clicker implementation model chosen by the institution might affect how my students learn.

Different institutions implement clickers differently, of course. The article studies three different implementation models: the students-pay-without-incentive (SPWOI) approach, where students buy the clickers for class but the class has no graded component for clicker use; the the students-pay-with-incentive (SPWI) approach, where students purchase clickers and there’s some grade incentive in class for using them (usually participation credit, but this can vary too); and the institution-pays-clicker-kit (IPCK) approach, where the institution purchases a box of clickers (a “clicker kit”) for an instructor, and the instructor brings them to class.

For me, the most interesting finding in the study was that there appears to be a threshhold for the perceived usefulness of clickers among students. The study found that in the SPWOI approach, 72% of student respondents said they would buy a clicker if it was used in at least three courses they were taking per semester. But drop that number to “at least two courses” and the percentage drops to 24%! So once the saturation level of clicker use reaches something like 50–75% of a student’s course load, they start seeing the devices as worth the money, even with no grade attached to its use. (Only a depressing 13% of students said they would pay $50 for a clicker based solely on its value as a learning tool. We have some P.R. to do, it seems.)

In the SPWI approach, 65% of respondents said they would buy a clicker if the contribution of clicker use toward their course grades was between 3% and 5%. (This is sort of mystifying. What do the other 35% do? Steal one? Just forfeit that portion of their grade?) The study doesn’t say explicitly, but it implies that if the grade contribution is less than 3%, the percentage would drop — how precipitously, we don’t know.

The study goes on to give a decision tree to help institutions figure out which implementation model to choose. Interestingly, if it gets down to choosing between the SPWI and SPWOI models, the deciding factor is whether the institution can manage cheating with the clickers. If so, then go with SPWI. Otherwise, go SPWOI — that is, if you can’t control cheating, don’t offer incentives.

Here at GVSU, I use the SPWI approach. Students have to pay for the clickers, but they get 5% of their course grade for participation. I take attendance at each class using the Attendance app for the iPhone. Then, once or twice a week, I’ll cross-check the attendance records with the clicker records for the day. If a student is present but doesn’t respond to all the clicker questions, they lose participation credit for the day. This method also mitigates cheating; if a student is absent for the day but has records of clicker response, then I hold the student guilty of cheating, because someone else is entering data for them. (Putting the burden on the absent student makes it less likely they’ll give their clicker to someone else to cheat for them.).

Continued in article

January 10, 2012 reply from Steve Hornik

Late reply to this thread, but my memory is pretty bad and I was trying to remember a "clicker" alternative. I finally did, its Pollanywhere and works the same way as clickers. I've used for presentations at AAA meetings a few years ago, here's a link if anyone is interested in finding out more:

http://www.polleverywhere.com/

_________________________
Dr. Steven Hornik
University of Central Florida
Dixon School of Accounting
407-823-5739
http://about.me/shornik

Bob Jensen's threads on clickers are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#ResponsePads

Joe Hoyle writes a letter to students, January 15, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/01/note-to-my-students.html

"The Risky Business of Being A Bank Chief Risk Officer," by Francine McKenna, re:TheAuditors, January 22, 2012 ---
http://retheauditors.com/2012/01/22/the-risky-business-of-being-a-bank-chief-risk-officer/

My column at American Banker this past Friday, “The Riskiest Careers in Financial Services, Finally Rewarded,” included a couple of obvious examples of high risk, high reward for this hot new job title. The largest four US banks have examples of big winners. MF Global and UBS provide recent downside arguments.

It’s difficult for me to imagine a new generation of systemically important financial services company CEOs without strong risk management experience. Independent board members with risk management experience will also be in demand. The current generation of CROs is gaining the experience to lead as CEOs and board members in today’s challenging market and regulatory environment.

Stewart Goldman, a senior client partner at executive search firm Korn/Ferry International, tells me there’s a ‘’scarcity” of candidates with the ”ideal skill set” to be chief risk officers, so institutions are considering people with a broader range of backgrounds to fill the post.

A Chief Risk Officer who does a good job mitigating risk while optimizing opportunities can now have significant stature and sway. But, conversely, that new prominence gives shareholders, regulators, and the media an easy target for ridicule after a corporate stumble or failure.

I’ve written quite a bit about some additional cases of Chief Risk Officers getting the heave-ho when something goes wrong. These additional examples – all outside of the US – didn’t make it to the American Banker column. It was a case of space as well as an “American” banker focus. But, I wonder out loud if there’s something different going on in Europe – something that forces accountability – or if the executives given the shove-off in Europe were just easy scapegoats.

Société Générale had its own “rogue trader” scandal in January 2008. Société Générale lost $7 billion in spite of service from dual auditors under French law, Ernst and Young and Deloitte, and myriad policies, procedures, organizations and systems they, theoretically, had in place to manage risk.

However, words alone do not insure sufficient risk management. In 2009 Benoît Ottenwaelter replaced Group Chief Risk Officer Didier Hauguel. Hauguel had served as Group CRO and a member of the Executive Committee and Group Management Committee of Société Générale since 2000.

Paul Moore, HBOS’ former head of regulatory risk and a former KPMG partner told the Treasury Committee of the UK’s Parliament that Sir James Crosby, HBOS former chief executive, fired him after he warned the HBOS board in 2004 about its potentially dangerous “sales culture”. KPMG, external auditors for HBOS, ended up front and center in the 2004 controversy because the audit firm “independently” investigated Moore’s firing at the request of the Board after Moore blew the whistle. KPMG got the job in spite of its long and very lucrative relationship with HBOS management including significant fees for work done for the bank’s bid for Abbey National that same year.

Continued in article

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

Visa recently set aside some cash to fund future litigation payouts. This is an interesting announcement because it may portend the booking of some litigation losses not already recognized by the firm.

Specifically, Visa issued a press release on December 23, 2011, in which it stated that the firm:

announced it had decided to deposit $1.565 billion (the “Loss Funds”) into the litigation escrow account previously established under the Company’s retrospective responsibility plan (the “Plan”). Under the terms of the Plan, when the Company funds the litigation escrow account, the value of the Company’s Class B shares – which are held exclusively by U.S. financial institutions and their affiliates and successors – is correspondingly adjusted via a reduction in the Class B shareholders’ as-converted share count. This has the same effect on earnings per share as repurchasing the Company’s class A common stock, by reducing the as-converted class B common stock share count. The Company will make this deposit by using funds previously allocated to its current $2 billion class A repurchase program, which was announced on July 27 and October 26, 2011, and which will exhaust all funds available under that program.

We checked those two announcements. On July 27, the business enterprise did announce the authorization of a new $1 billion share repurchase program. On October 26, Visa increased this authorization by $1 billion.

We also took a look at the 10-K for fiscal year ended September 30, 2011. We note that restricted cash, restricted for this litigation escrow account, increased from $1,866 million to $2,857 million. For fiscal 2011, the company injected cash of $1,200 million and disbursed $280 million in its American Express settlement.

Next we trotted to footnote 21, dealing with legal matters. Visa said the beginning of year 2011 balance in its litigation reserves was $697 million. The provision for settled legal matters was $7 million, reclassification of settled matters $12, and interest accretion $11. It made payments of $302, giving a balance on September 30, 2011 of $425 million.

This footnote also sketches out the details of the complaint by American Express in 2004 and the settlement reached between the corporations on November 9, 2007. Under this agreement, American Express would receive a maximum of $2.07 billion from Visa. Visa booked this loss for $1.9 billion, the present value of the future cash payments, using a rate of 4.72 percent.

. . .

ASC 450-20-05-6, however, adds some confusion. Visa might take a fair value approach and estimate what an entity would require it to pay to assume the obligation. This gets us into the mess of valuing liabilities using a firm’s own credit risk to determine the appropriate discount rate. Still, this credit risk would have to be very high to make up the approximately $1.1 billion discrepancy between the September 30 liability balance and the additional funding.

We hope Visa explains this to us in some straight-forward language in its next 10-Q. Better yet, we hope to see an appropriate accrual that ties the accounts together.

Continued in article

Bob Jensen's threads on fair value accounting controversies are at
http://www.trinity.edu/rjensen/Theory02.htm#FairValue

"Newt Gingrich Used 'John Edwards Sub S Tax Shelter' to Save $50k in Medicare Taxes," by Janet Novack, Forbes, January 22, 2012 ---
http://www.forbes.com/sites/janetnovack/2012/01/22/gingrich-used-payroll-tax-ploy-often-attacked-by-irs/
Thank you Paul Caron for the heads up.

Jensen Comment
Rich People generally do not develop their own tax avoidance and deferral strategies. This is why tax consultants, some of them former IRS agents, are in demand in the upper parts of town. John Edwards and Newt had more fun things to do than read the tax code and do their own Turbo Tax returns..

"Romney’s Other Tax Break," by Martin A. Sullivan, News and Analysis ---
http://taxprof.typepad.com/files/romney-tax-notes.pdf

Was it creative destruction or vulture capitalism? Whatever you call what Mitt Romney did at Bain Capital, it is now a multi-pronged challenge to his presidential aspirations. Just the mention of investment shops like Bain can stir up resentment with the voters still looking for jobs and seething over the collapse of 2008.

Then there is the tax angle. When he left Bain in 1999, Romney negotiated a retirement package that gave him a share of the company’s skyrocketing profits for at least a decade after his departure (‘‘Buyout Profits Keep Flowing to Romney,’’ The New York Times, Dec. 18, 2011). The bulk of those profits were carried interest — consulting fees paid to managing partners conditioned on upside gain for investors. The payouts were likely taxed at 15 percent. For a man with an estimated net worth of a quarter-billion dollars, a tax rate lower than middle-income families’ does not sit well with voters who are daily reminded of increasing inequality, especially when Romney is proposing a plan that cuts taxes on the rich and raises taxes on the poor (Tax Policy Center, ‘‘The Romney Tax Plan,’’ Jan. 5, 2012, Doc 2012-249, 2012 TNT 4-28).

Bain profited from a dangerous flaw in our corporate tax that subsidizes destabilizing financial structures.

Just as many Wall Streeters feared, Romney’s rising presidential fortunes are threatening their monetary fortunes. The long-simmering debate about the tax treatment of carried interest is being reignited. On January 18 House Ways and Means Committee ranking minority member Sander M. Levin, D-Mich., announced his plans to reintroduce legislation to treat carried interest as ordinary income rather than capital gains. (For related coverage, see p. 405.) This is just the opening salvo. If Romney wins the Republican nomination, the president’s populist reelection campaign will ensure that the carried interest controversy goes prime time.

Continued in article

Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Fair value accounting, often referred to as mark-to-market accounting, has been the subject of much discussion and controversy, and the fact that various ways of measuring fair value were spread among different International Financial Reporting Standards (IFRS) has contributed to many questions regarding fair value accounting.

To create a uniform framework for fair value measurements that consolidates into one single standard the various ways of measuring fair value, the International Accounting Standards Board (IASB) issued IFRS 13, Fair Value Measurements to reduce complexity and improve consistency in the application of fair value measurements. IFRS 13 also aims to enhance fair value disclosures to help users assess the valuation techniques and inputs used to measure fair value. IFRS 13 was published last May 12, 2011 and will become effective by January 1, 2013. It is applied prospectively, and early adoption is allowed.

IFRS 13 clarifies how to measure fair value when it is required or permitted in IFRS. It does not change when an entity is required to use fair value. Furthermore, IFRS 13 covers both financial and non-financial assets and liabilities.

Key principles of IFRS 13

IFRS 13 applies when another IFRS standard requires or permits fair value measurements or disclosures. It does not, however, apply to transactions within the scope of:

• International Accounting Standards (IAS) 17, Leases;

• IFRS 2 Share-Based Payments; and,

• Certain other measurements that are similar but are not fair value, that are required by other standards, such as value in use in IAS 36, Impairment of Assets and net realizable value in IAS 2, Inventories.

Fair value defined

IFRS 13 now defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Therefore, the focus now is on exit price as against entry price.

Market participant assumptions

When measuring fair value, IFRS 13 requires an entity to consider the characteristics of the asset or liability as market participants would. Hence, fair value is not an entity-specific measurement; it is market-based.

Principal or most advantageous market

A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place in the “principal market” for the asset or liability or, in the absence of a principal market, in the “most advantageous market” for the asset or liability.

The principal market is the market with the greatest volume and level of activity for the asset or liability to which the entity has access to. On the other hand, the most advantageous market is the market that maximizes the amount that would be received for the sale of the asset or minimizes the cost to transfer the liability, after considering transaction and transport costs.

Highest and best use

The concept of “highest and best use” applies to non-financial assets only. Fair value considers a market participant’s ability to generate economic benefits by using the asset in its highest and best use. Highest and best use is always considered when measuring fair value, even if the entity intends a different use of the asset.

Fair value hierarchy

Fair value measurements are classified into three levels which prioritize the observable inputs to the valuation techniques used and minimize the use of unobservable data.

• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

• Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

• Level 3: Unobservable inputs for the asset or liability.

Valuation techniques and inputs

IFRS 13 describes the valuation approaches to be used to measure fair value: the market approach, income approach and cost approach. IFRS 13 does not specify a valuation technique in any particular circumstance; it is up to the entity to determine the most appropriate valuation technique.

• Market approach: Uses prices and other relevant information from market transactions involving identical or similar assets or liabilities. A commonly-used technique is the use of market multiples derived from “comparables.”

• Income approach: Converts future amounts (e.g., cash flows or income and expenses) to a single current (discounted) amount. Valuation techniques may include a discounted cash flows approach, option-pricing models, or other present-value techniques.

• Cost approach: Reflects the amount currently needed to replace the service capacity of an asset (also known as the current replacement cost)

Disclosure requirements

IFRS 13 expanded required disclosures to help the users understand the valuation techniques and inputs used to measure fair value and the impact of fair value measurements on profit and loss. The required disclosures include:

• Information about the level of fair value hierarchy;

• Transfers between levels 1 and 2;

• Methods and inputs to the fair value measurements and changes in valuation techniques; and

For level 3 disclosures, quantitative information about the significant unobservable inputs and assumptions used, and qualitative information about the sensitivity of recurring level 3 measurements.

Business impact and next steps

Practically all entities using fair value measurements will be subject to IFRS 13, which will require certain fair value principles and disclosures that will significantly impact application and practice. Therefore, management should:

• Begin to assess the effect of IFRS 13 on valuation policies and procedures;

• Have competent knowledge when making judgments in fair value measurements;

• Consider whether it has appropriate expertise, processes, controls and systems to meet the new requirements in determining fair value and disclosures;

• Revisit loan covenants, compensation plans, shareholder communications and analyst expectations;

• Have discussions with systems vendors, appraisers, investment advisors and/or investment custodians; and,

• Be able to demonstrate to regulators and its external auditors that it understands the requirements of IFRS 13. This will greatly assist both regulators and external auditors in their annual examination and audit.

The mandatory implementation of this new standard is less than a year away. The clock is ticking; the time to act is now.

The Controversy Over Fair Value (Mark-to-Market) Financial Reporting ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue

Teaching Case on Fair Value Measurement and Financial Statement Analysis

Here's a pop quiz: Bank of America in the third quarter generated:
a) 56 cents a share in earnings,
b) 27 cents,
c) a loss of two cents, or
d) all of the above.

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

Wall Street Reaps Profit Volatility It Sowed
by: David Reilly
Oct 31, 2011
Click here to view the full article on WSJ.com

TOPICS: Banking, Fair Value Accounting, Fair-Value Accounting Rules, Financial Accounting Standards Board, SEC, Securities and Exchange Commission

SUMMARY: Author David Reilly uses Bank of America's recent disclosures highlighting the impact of special items to say that analysts and others cannot clearly identify what results banks are achieving. He highlights the bank's use of the fair value option for structured notes-bank debt that was issue with an embedded derivative so that "the ultimate payout to the holder typically depends on changes in some other instrument such as the S&P 500...." Mr. Reilly expresses concern with comparability across bank financial statements because of differing disclosures about the effects of using the fair value option to account for structured debt. He calls for the SEC to "issue guidance so that all banks label these changes similarly and present them in the same way."

CLASSROOM APPLICATION: The article is useful in advanced undergraduate or graduate level financial reporting classes to cover the qualitative characteristic of comparability and to discuss the fair value option banks are using in accounting for their own debt.

QUESTIONS:
1. (Introductory) On what basis does the author of this article, David Reilly, argue that Bank of America's fourth quarter results could be measured in three ways?

2. (Advanced) Define the terms "mark-to-market accounting" and "fair value option". What authoritative accounting guidance defines how to use these accounting methods?

3. (Introductory) Why are banks opting to use fair value reporting for their structured notes even when not being required to do so? In your answer, define the term "structured notes" on the basis of the description in the article.

4. (Advanced) What are the primary and supporting qualitative characteristics of financial information? Where are they found in authoritative accounting literature?

5. (Advanced) Which qualitative characteristic does Mr. Reilly indicate is being violated in reporting by from big banks such as Citigroup, J.P. Morgan Chase, Morgan Stanley, and Goldman Sachs Group?

6. (Introductory) What entity does Mr. Reilly indicate should solve the reporting issues highlighted in the article? Is this the only entity responsible for establishing financial reporting standards in this U.S.?

Reviewed By: Judy Beckman, University of Rhode Island

"Wall Street Reaps Profit Volatility It Sowed," by: David Reilly, The Wall Street Journal, October 31, 2011 ---
http://online.wsj.com/article/SB10001424052970204505304577004223202476152.html?mod=djem_jiewr_AC_domainid

Here's a pop quiz: Bank of America in the third quarter generated:
a) 56 cents a share in earnings,
b) 27 cents,
c) a loss of two cents, or
d) all of the above.

The answer is "d," thanks to a dozen special items investors can include or exclude when trying to figure out how the bank actually performed. Chief among them were $6.2 billion in gains due to falls in the value of the bank's own debt.

And investors may have to brace for more of the same in the current quarter. With the European crisis off the boil, debt values for big banks have regained some ground. The cost of protecting against default at Bank of America has fallen about 26% since Sept. 30, following a 170% increase in the third quarter. If the decline continues, last quarter's gains could reverse, resulting in fourth-quarter hits to profit.

Confused? Plenty of investors are. Even analysts and bankers have had a tough time figuring out how to compare results at big banks like Bank of America, Citigroup, J.P. Morgan Chase, Morgan Stanley and Goldman Sachs Group. That's due to the counterintuitive nature of these gains. Since banks book them as their own debt loses value, a firm would theoretically mint money while going bankrupt. Making matters worse, individual banks often use different terms to describe these gains—and disclose them in different ways.

This is spurring debate about whether accounting-rule changes are needed. But there's a little-known irony: The problem is largely of Wall Street's own making. And it highlights how big banks repeatedly play for short-term advantages that often end up working against them.

To understand why, consider that banks aren't actually required to record most gains or losses due to changes in the value of their debt. (Unlike with derivatives, which must be marked.) They choose to do so. And when banks do mark debt, it tends to affect only small portions of their total liabilities. In the second quarter, Bank of America marked to market $60.7 billion out of $427 billion in long-term debt. That was equal to only about 3% of the bank's total liabilities, which totaled $2.04 trillion.

Plus, banks that mark portions of their debt often do so because they issue so-called structured notes. These notes are bonds with a twist—the ultimate payout to the holder typically depends on changes in some other instrument such as the S&P 500 index or a basket of commodities.

Big banks like these instruments because they generally result in a cheaper cost of funding. By embedding a derivative in the instrument, they can also generates fees and may lead to more trading business. There was a catch, though. For accounting purposes, banks couldn't hedge that embedded derivative.

So in the mid-2000s, Wall Street pushed for an accounting-rule change that allowed them to use market prices for almost anything on their balance sheet. This made it easier to avoid accounting mismatches. But it also meant Wall Street could mark these structured notes to market prices, allowing them to hedge the derivative for accounting purposes.

At the time, banks weren't worried about big changes in the value of their own debt coming into play. Bonds were pretty stable, and the credit-default-swap market was nascent. The financial crisis changed that. As banks teetered, their bonds and default swaps moved sharply. This led to the kind of outsize gains and losses now whipsawing bank results.

Continued in article

Jensen Comment
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 fair value accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue

Bob Jensen's threads on financial statement analysis ---
http://www.trinity.edu/rjensen/roi.htm

Judging the Relevance of Fair Values for Financial Statements

Since fair value accounting is arguably the hottest accounting theory/practice topic among accounting standard setters and financial analysts these days, I was naturally attracted to the following accountics science research article:
"Judging the Relevance of Fair Values for Financial Statements," by Lisa Koonce, Karen K. Nelson, and Catherine M. Shakespeare, The Accounting Review, Volume 86, 2075-2098.November 2011, pp. 2075-2098

ABSTRACT:

We conduct three experiments to test if investors' views about fair value are contingent on whether the financial instrument in question is an asset or liability, whether fair values produce gains or losses, and whether the item will or will not be sold/settled soon. We draw on counterfactual reasoning theory from psychology, which suggests that these factors are likely to influence whether investors consider fair value as providing information about forgone opportunities. The latter, in turn, is predicted to influence investors' fair value relevance judgments. Results are generally supportive of the notion that judgments about the relevance of fair value are contingent. Attempts to influence investors' fair value relevance judgments by providing them with information about forgone opportunities are met with mixed success. In particular, our results are sensitive to the type of information provided and indicate the difficulty of overcoming investors' (apparent) strong beliefs about fair value.

. . .

Fair value proponents maintain that, no matter the circumstance, fair value provides information about forgone opportunities that affect the economics of the firm (Hague and Willis 1999). That is, proponents of fair value would argue that such information is always relevant to evaluating a firm.

To be concrete, consider the following example. Company X issues bonds payable at par in the amount of $1,000,000. Two years after issuing the bonds, interest rates fall and so the fair value of the bonds is $1,200,000. From a discounted cash flow perspective, although the cash outflows have not changed, the discount rate has decreased. This denominator change leads to a greater negative present value associated with Company X having debt with fixed cash outflows—that is, it leads to a fair value loss. A fair value advocate would argue that the $200,000 loss is always relevant to the evaluation of the firm as it represents a forgone opportunity—that is, the present value of the additional interest cost (i.e., above current market rates) that Company X will pay over the remaining term of the bond, essentially because Company X did not refinance before rates changed (Hague and Willis 1999). Accordingly, fair value advocates would maintain that Company X's valuation should decrease as its cash flows are higher than an otherwise identical company (say, Company Y) that financed after the rate decrease. Stated differently, at the end of the financing period, Company X's cash balance will be lower than Company Y's (because X is paying a higher interest rate) and, thus, each firm's valuation should reflect this real economic difference.4

If investors follow the logic of the fair value advocate and consider fair value gains and losses as representing forgone opportunities, they are essentially engaging in a process that psychologists call counterfactual reasoning (Roese 1997). In this type of reasoning, individuals “undo” outcomes by changing (or mutating) the cause that led to them. For example, if only the driver had not taken an unusual route home late at night, he would not have gotten into an accident. In the fair value domain, the calculation of fair value is based on the same type of simulation as counterfactual reasoning—“undoing” the actual contractual interest rate and replacing it with the current market rate of interest that the company would be paying if management had undertaken an alternative set of actions (i.e., the forgone opportunity). As the above numerical example illustrates, determining the amount of the fair value gain or loss is fairly mechanical once an interest (or discount) rate change occurs. The more subtle effect is whether the investor considers the fair value gain or loss as a forgone opportunity and thus relevant to evaluating the firm. If investors do (do not) follow a process similar to counterfactual reasoning, they are more (are less) likely to judge fair value measurements as relevant.

Thinking about fair value in terms of counterfactual reasoning is helpful, as this theory suggests when investors' fair value judgments are likely to depend on context. Prior research in psychology indicates that counterfactual thinking is more likely when events are seen as abnormal versus normal, when negative rather than positive events occur, when the outcome or antecedent is mutable or changeable, or when the outcome is close versus more distant in time (Roese and Olson 1995). Drawing on this research, we identify three fair value contexts for financial instruments—namely, assets versus liabilities, gains versus losses, and held to maturity versus sold/settled soon—that we posit will cause investors to change their fair value relevance judgments.5 That is, we predict that investors' views about the relevance of fair value will not be unwavering, as proponents of fair value would maintain, but rather will be contingent on context. Relevance of Fair Value Depending on Context

Fair value accounting is currently being used for financial instruments that are either assets or liabilities (but not for equity items). In addition, fair value accounting produces both gains and losses. Accordingly, a natural question is whether investors reason differently about the relevance of fair value for assets versus liabilities and for gains versus losses. Counterfactual reasoning theory suggests that investors treat these situations differently.

Turning first to gains and losses, prior literature (e.g., Roese 1997) indicates that counterfactual reasoning is more likely when undesirable outcomes occur. Here, individuals tend to evaluate the undesirable outcome by determining how easy it is to mentally undo it. In the fair value context, this would entail reasoning about how the fair value loss could have been avoided. In contrast, counterfactual reasoning is less likely with desirable outcomes like fair value gains. In the case of such desirable outcomes, individuals have less need to understand the cause of the gain and are unlikely to mentally undo the outcome (Roese 1997). Accordingly, we hypothesize: H1:

Individuals will judge fair value losses as more relevant than fair value gains.

In the context of assets versus liabilities, counterfactual reasoning theory suggests that the more mutable an item is (i.e., the easier an outcome can be undone), the more likely an individual will engage in counterfactual reasoning (McGill and Tenbrunsel 2000). For example, if a parachuter falls to his death, individuals are more likely to consider mutable factors in considering how he could have avoided death. That is, “if only he had rechecked the safety cord before jumping” is more likely to be considered (i.e., it is more mutable) than “if only gravity were not at work.”

We predict that, in the eyes of investors, financial assets are perceived to be more mutable than financial liabilities. In other words, it is easier to consider an alternative set of actions for assets than for liabilities. This idea comes from the line of reasoning that individuals generally think they can more easily sell, for example, a bond investment than they can settle a home loan. That is, it is easier for them to simulate an alternative set of actions for (i.e., counterfactually reason about) assets than liabilities.6 Accordingly, we hypothesize: H2:

Individuals will judge the fair value of financial assets as more relevant than the fair value of financial liabilities.

Finally, we posit that management's intent likely influences investors' judgments about fair value relevance. Research shows that perceived closeness to an outcome affects whether individuals engage in counterfactual reasoning (Meyers-Levy and Maheswaran 1992). For example, a traveler who misses his/her flight by five minutes is more likely to engage in counterfactual reasoning (i.e., “if only I had run the yellow stop light, I'd have made it to the gate on time”) than a traveler who misses the flight by one hour. Drawing on this idea, we maintain that individuals will be more inclined to think about “if only” when the financial instrument is to be sold/settled soon as compared to when it is to be held to maturity. Counterfactual reasoning seems particularly likely here, particularly in the case of loss outcomes. Individuals will likely think, for example, “if only the company had sold the investment before the fair value decreased, they would not be in this position today.” Accordingly, we hypothesize: H3:

Individuals will judge the fair value of financial instruments that are to be sold/settled soon as more relevant than those that are to be held to maturity. Changing Investor Judgments about Fair Value Relevance

Because we conjecture that investors' judgments about fair value relevance will depend on the context, we believe it is possible to desensitize their judgments to context (Arkes 1991). In particular, we surmise that providing information about forgone opportunities should influence investors' understanding of the fair value change and, ultimately, will influence their fair value relevance judgments. This approach of providing individuals with a summary of the information that they may not normally consider is frequently employed as a “fix” in various decision settings (Arkes 1991). We summarize our expectations in the following hypothesis. H4:

Individuals will judge the relevance of fair value for financial instruments as greater when they are given information about forgone alternatives.

Continued in article

Jensen Comment
I like this paper in terms of it's originality and clever ideas in terms of accounting theory, especially the concept of counterfactual reasoning.

But like nearly all accountics behavioral experiments reported over the past four decades, I'm disappointed in how the hypotheses were actually tested. I'm also disappointed in the virtual lack of validity testing and replication of behavioral accounting studies, but it's too early to speculate on future replication studies of this particular November 2011 article.

To their credit, Professors Koonce, Nelson, and Shakespeare conducted three experiments rather than just one experiment, although from a picky point of view these would not constitute independent replications in science ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Also to their credit the sample sizes are large enough to almost make statistical inference testing superfluous.

But I just cannot get excited about extrapolating research findings form students as surrogates for investors and analysts in the real world. This is a typical example of where accountics researchers tried to do their research without having to set foot off campus.

Even if these researchers had stepped off campus to conduct their experiments on real-world investors and analysts, I have difficulty with assigning the research subjects artificial/hypothetical tasks even though my own doctoral thesis entailed submitting hypothetical proxy reports to real-world security analysts. My favorite criticism is an anecdotal experience with one banker who was an extremely close friend when I lived in Bangor, Maine while on the faculty of the University of Maine. I played poker or bridge with this banker at least once a week. With relatively small stakes in a card game he was a reckless fool in his betting and nearly always came up a money loser at the end of the night. But in real life he was a Yankee banker who was known in the area for his tight-fisted conservatism.

And thus I have a dilemma. Even if there are ten replications of these experiments using real world investors and analysts I cannot get excited about the accountics science outcomes. I would place much more faith in a protocol analysis of one randomly selected CFA, but protocol researchers are not allowed to publish their small sample studies in TAR, JAR, or JAE. They can, however, find publishing outlets in social science research journals.
http://en.wikipedia.org/wiki/Protocol_analysis

The best known protocol analysis in accounting and finance was the award-winning doctoral thesis research of Geoffrey Clarkson at Carnegie-Mellon, although the integrity of his research was later challenged.

Protocol Analysis

"Can thinking aloud make you smarter?" Barking Up the Wrong Tree, August 12, 2010 ---
http://www.bakadesuyo.com/can-thinking-aloud-make-you-smarter

Few studies have examined the impact of age on reactivity to concurrent think-aloud (TA) verbal reports. An initial study with 30 younger and 31 older adults revealed that thinking aloud improves older adult performance on a short form of the Raven's Matrices (Bors & Stokes, 1998, Educational and Psychological Measurement, 58, p. 382) but did not affect other tasks. In the replication experiment, 30 older adults (mean age = 73.0) performed the Raven's Matrices and three other tasks to replicate and extend the findings of the initial study. Once again older adults performed significantly better only on the Raven's Matrices while thinking aloud. Performance gains on this task were substantial (d = 0.73 and 0.92 in Experiments 1 and 2, respectively), corresponding to a fluid intelligence increase of nearly one standard deviation.

Source: "How to Gain Eleven IQ Points in Ten Minutes: Thinking Aloud Improves Raven's Matrices Performance in Older Adults" from Aging, Neuropsychology, and Cognition, Volume 17, Issue 2 March 2010 , pages 191 - 204

Here's an explanation of what Raven's Matrices are.

Speaking of smarts and genius, if you haven't read it, Dave Eggers' book A Heartbreaking Work of Staggering Genius is a lot of fun. I highly recommend the introduction, oddly enough.

Jensen Comment
Protocol Analysis --- http://en.wikipedia.org/wiki/Protocol_analysis

This takes me back to long ago to "Protocol Analysis" when having subjects think aloud was documented in an effort to examine what information was used and how it was used in decision making. One of the first Protocol Analysis studies that I can recall was at Carnegie-Mellon when Geoffrey Clarkson wrote a doctoral thesis on a bank's portfolio manager thinking aloud while making portfolio investment decisions for clients. Although there were belated questions about the integrity of Jeff's study, one thing that stuck out in my mind is how accounting choices (LIFO vs. FIFO, straight-line vs. accelerated depreciation) were ignored entirely when the decision maker analyzed financial statements. This is one of those now rare books that I still have in some pile in my studio:
Geoffrey Clarkson, Portfolio Selection-A Simulation of. Trust Investment (Englewood Cliffs, N. J.: Prentice-Hall,. Inc., 1962)
Clarkson reached a controversial conclusion that his model could choose the same portfolios as the live decision maker. That was the part that was later questioned by researchers.

Another application of Protocol Analysis was the doctoral thesis of Stan Biggs.
As cited in The Accounting Review in January, 1988 --- http://www.jstor.org/pss/247685
By the way, this one one of those former years when TAR had a section for "Small Sample Studies" (those fell by the board in later years)

Also see http://onlinelibrary.wiley.com/doi/10.1002/bdm.3960060303/abstract

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

Added Jensen Comment
An early precursor of the concept of "counterfactual reasoning" is "functional fixation"

Accounting History Trivia
What accounting professors coined the phrase "functional fixation" in 1966 and in what particular accounting context?

Hint 1
One of the professors was also one of my professors, a former Dean of the Graduate School of Business at Stanford University, and the last Chairman of Enron's Audit Committee.

Hint 2
Bob Ashton did some cognitive experimentation of functional fixation that was published in the Journal of Accounting Research a decade later in 1976.

I stumbled upon the following tidbit posted by Jim Martin to the AAA Commons ---
http://commons.aaahq.org/posts/bfcbd47776#13842

"Stock taking"

suggestion posted March 25, 2010 by James R. Martin , tagged suggestion

663 Views, 4 Comments

topic:

"Stock taking"

details:

I ran across the following article while updating the JSTOR links for the ASQ and it occurred to me that all those connected with the scholarly accounting journals should do a "stock taking" from time to time. I suspect some have and some have not, but this note is directed to all who are involved in scholarly endeavors, or who aspire to get involved.
Palmer, D. 2006. Taking stock of the criteria we use to evaluate one another's work: ASQ 50 years out. Administrative Science Quarterly 51(4): 535-559. (http://www.jstor.org/stable/20109887). (Palmer embraces Weick's definition of stock taking as "a complex mixture of appreciation, wariness, anticipation, regret, and pride, all fused into thoughts of renewal." Palmer reviews the vision of organization studies established when the ASQ was first published in 1956, identifies seven controversies related to whether ASQ scholars have clung too closely to, or strayed to far from, the founder's vision for the journal, and offers his own thoughts on the concerns and challenges that ASQ scholars might do well to contemplate. The seven controversies relate to concerns about the field's: 1) object of inquiry, 2) devotion to theory building, 3) paradigmatic heterogeneity, 4) mode of building theory and conducting research, 5) disciplinary status and foundation, 6) relevance to practitioners, and 7) Anglocentrism). The issues facing accounting scholars and scholarly journals are perhaps somewhat different, but the theme of "stock taking" is certainly applicable. A link to MAAW's ASQ bibliography is: http://maaw.info/ManagementJournals/AdministrativeScienceQuarterly.htm

It seems to me that AAA Commons would be the appropriate place for a "stock taking" discussion since many of our scholarly journals are published by the AAA. For MAAW's AAA journal bibliographies see: http://maaw.info/AAAMain.htm

"JSTOR Tests Free, Read-Only Access to Some Articles," by Jennifer Howard, Chronicle of Higher Education, January 13, 2012 ---
http://chronicle.com/blogs/wiredcampus/JSTOR-tests-free-read-only-access-to-some-articles/34908?sid=wc&utm_source=wc&utm_medium=en

It’s about to get a little easier—emphasis on “a little”—for users without subscriptions to tap JSTOR’s enormous digital archive of journal articles. In the coming weeks, JSTOR will make available the beta version of a new program, Register & Read, which will give researchers read-only access to some journal articles, no payment required. All users have to do is to sign up for a free “MyJSTOR” account, which will create a virtual shelf on which to store the desired articles.

But there are limits. Users won’t be able to download the articles; they will be able to access only three at a time, and there will be a minimum viewing time frame of 14 days per article, which means that a user can’t consume lots of content in a short period. Depending on the journal and the publisher, users may have an option to pay for and download an article if they choose.

To start, the program will feature articles from 70 journals. Included in the beta phase are American Anthropologist, the American Historical Review, Ecology, Modern Language Review, PMLA, College English, the Journal of Geology, the Journal of Political Economy, Film Quarterly, Representations, and the American Journal of Psychology .

The 7o journals chosen “represent approximately 18 percent of the annual turn-away traffic on JSTOR,” the organization said in an announcement previewing Register & Read. “Once we evaluate how the beta is going, including any impact on publishers’ sales of single articles, and make any needed initial adjustments to the approach, we expect to release hundreds more journals into the program.”

Every year, JSTOR said, it turns away almost 150 million individual attempts to gain access to articles. “We are committed to expanding access to scholarly content to all those who need it,” the group said. Register & Read is one attempt to do that.

In September 2011, JSTOR also opened up global access to its Early Journal Content. According to Heidi McGregor, a spokeswoman for the Ithaka group, JSTOR’s parent organization, there have been 2.35 million accesses of the Early Journal Content from September 2011 through December 2011. “About 50% of this usage is coming from users we know are at institutions that participate in JSTOR (e.g. we recognize their IP address), and the other 50% is not,” she said in an e-mail. ”We absolutely consider this to be a success. In the first four months after launch, we are seeing over 1 million accesses to this content by people who would not have had access previously. This is at the core of our mission, and we’re thrilled with this result. The Register & Read beta is an exciting next step that we are taking, working closely with our publisher partners who own this content.”

Continued in article

Jensen Comment
Most colleges pay for library subscription access to JSTOR by students, faculty, and staff. As an emeritus professor at Trinity University I've been able to access JSTOR since I retired in 2006.

One search route I commonly take is to first find a reference to an article in MAAW ---
http://maaw.info/
Thank you Jim Martin for this tremendous open sharing MAAW site.

Then most often I download the article from JSTOR unless the publisher provides access either for free or because I subscribe to the journal in question. But even if I have a current subscription to a journal such as The Accounting Review, the publisher of TAR does not have online archives going back nearly as far as JSTOR. So if I want a 1971 TAR article I will go to JSTOR. TAR only has online archives going back to 1999. TAR commenced publishing journal articles in 1925.

It's worthwhile to first check the publisher's site before going to JSTOR. For example, the free archived files (since 1974) for the Accounting Historians Journal are better at the AHJ site than at the JSTOR site ---
http://www.olemiss.edu/depts/general_library/dac/files/ahj.html

Bob Jensen's search helpers are at
http://www.trinity.edu/rjensen/Searchh.htm

"CPA Exam Prep Innovator Newton D. Becker Dies at 83," Journal of Accountancy, January 5, 2012 ---
http://www.journalofaccountancy.com/Web/20124964.htm

Jensen Comment
Becker CPA Review Courses early on made more use of video learning than most competitors. These days all the competitors use various types of multimedia.

Bob Jensen's helpers for CPA Examination candidates ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

Question
Will shareholder new increased democratic powers be dysfunctional?

From The Wall Street Journal Accounting Weekly Review on January 13, 2012

Will New Tools Help Small Shareholders Topple Giants?
by: Jason Zweig
Jan 07, 2012
Click here to view the full article on WSJ.com

TOPICS: Corporate Governance, SEC, Securities and Exchange Commission

SUMMARY: The article describes the SEC's recent change to rules "...under which investors can nominate candidates to serve on boards of directors." This rule change allows individual investors to propose amendments to corporations' bylaws and for certain groups of small investors to propose members to boards of directors. The proposals must be included in proxy statements sent in preparation for annual meetings. These potential improvements to corporate governance should provide better access for shareholders to exercise their rights to "throw the bums out" when they think that "corporate managers and directors are overpaid and underperforming...." For instructors: introductory information about the SEC is available on the web at http://www.sec.gov/about/whatwedo.shtml; requirements for a proxy statement is available on the web at http://www.sec.gov/answers/proxy.htm

CLASSROOM APPLICATION: This is the second of two articles this week on the corporate form of organization that should be useful in introductory level undergraduate or MBA financial accounting and reporting courses.

QUESTIONS:
1. (Advanced) Describe the corporate form of business organization in comparison to two other forms, partnership and sole proprietorship.

2. (Advanced) Are all U.S. corporations publicly traded? Explain your answer.

3. (Advanced) In general, what is the role of the Securities and Exchange Commission (SEC)?

4. (Advanced) What is a proxy statement? State your source for this answer.

5. (Introductory) What significant change has recently been introduced by the SEC in rules related to nominating boards of directors? In your answer, define how these changes are meant to improve corporate governance, including a definition of that term.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
The Case Against Shareholder Rights
by Jason Zweig
Jan 12, 2012
Online Exclusive

"Will New Tools Help Small Shareholders Topple Giants?" by: Jason Zweig, The Wall Street Journal, January 7, 2012 ---
http://online.wsj.com/article/SB10001424052970204331304577144920619220332.html?mod=djem_jiewr_AC_domainid

Goliath hasn't been hit hard yet, but David is getting new slingshots.

The unending struggle between the managers who control America's corporations and the investors who own them is about to become more interesting. It might even become a fairer fight.

Last fall, the Securities and Exchange Commission clarified the rules under which investors can nominate candidates to serve on boards of directors.

In the waning weeks of 2011, just in time to meet the 120-day advance notice typically required to get onto the proxy ballot ahead of springtime annual meetings, investors in 16 major companies—including Goldman Sachs, Hewlett-Packard and Wells Fargo—filed petitions to amend corporate bylaws to open up the nominating process under the revised SEC rule.

Meanwhile, networks are springing up online to rally investors large and small. These websites could enable investors—anyone from a dogcatcher in Dubuque with 100 shares to giant pension funds holding tens of millions of shares—to mingle online and pool their dispersed power as never before.

"Mechanisms like these," says James McRitchie, who runs CorpGov.net, a shareholder-activism site, "will eventually lead to the revolution in corporate governance that people have been talking about for many years."

Make that "dreaming about." In theory, whenever corporate managers and directors are overpaid and underperforming, investors should exercise their rights and throw the bums out.

In practice, most investors have long responded to bad management either by sitting on their hands or by voting with their feet. Breaking decades of inertia won't be easy.

If change does come, it might be led by people like Kenneth Steiner and Argus Cunningham.

Mr. Steiner, 45 years old, is a private investor from New York's Long Island who filed petitions at five companies late last year under the new SEC rule. Over the past decade or so, Mr. Steiner estimates, he has formally made several hundred proposals to improve how companies are run—including simplifying the election of directors, giving more say over how top executives are paid and eliminating "poison pills" that can entrench management.

"It's up to the small shareholders to get these things on the agenda," Mr. Steiner says. "Institutional investors have been horribly negligent in what I consider their fiduciary duty to the people who invest with them and to the country in general. They don't want to ruffle feathers, and they're cowards."

After all, professional investors want to manage—or to keep managing—the pension and 401(k) plans at the very companies whose stocks they invest in. These folks aren't going to throw bombs at board members.

Using a form he downloaded from proxyexchange.org, Mr. Steiner late last year requested that the boards at Bank of America, Textron, Ferro, Sprint Nextel and MEMC Electronic Materials amend their companies' bylaws to permit any group of 100 or more shareholders who have held at least $2,000 in stock for at least one year—or any holder of 1% or more for at least two years—to nominate directors.

In recent years, many of Mr. Steiner's proposals have been approved by a majority of investors at companies' annual meetings. "It's sort of a David and Goliath situation," he says, "but sometimes David wins."

Mr. Cunningham, 36, is a former Navy pilot whose portfolio crash-landed in 2008. "Losing a lot of money will cause you to re-evaluate your role," he says. "You feel disempowered and disconnected even though you are the owner of your companies, and I started thinking about what I didn't like about the system."

Frustrated by how hard it is to find other investors willing to shake up moribund companies, Mr. Cunningham founded Sharegate. Likely to launch later this year, the website will join others that seek to rally shareholders, including United States Proxy Exchange, ProxyDemocracy.org and Moxy Vote.

If you think the directors at XYZ Corp. should be fired, you will be able to circulate a throw-the-bums-out proposal on Sharegate with the click of a mouse. Every other XYZ shareholder on the site will see it immediately; you will promptly be able to tell whether they agree with you.

Contrast that with the status quo, in which you can't know what actions other investors are prepared to take until your annual proxy statement arrives—assuming that any grievances haven't already been quashed by the company.

Continued in the article

Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance

"New lending (and hedging) practices and related accounting concerns," by Ira G. Kawaller, AFP Exchange, December 2011 ---
http://library.constantcontact.com/download/get/file/1101660130918-18/AFP+-+New+Lending+practices+%28embedded+Floors%29.pdf

I’ve been seeing a relatively new lending design with increasing frequency: Many banks are making variable-rate loans with embedding interest rate floors. In light of the low level of interest rates, this practice is neither ill-logical nor unwarranted; but at the same time, these bankers may also be creating an accounting land mine that could later explode for the borrower.

The problem arises if the borrowing company chooses to hedge the loan’s variable interest rate exposure. For most such companies, qualifying for hedge accounting is of critical concern, in that this accounting treatment allows effective unrealized gains or losses on the derivative to be recorded in AOCI, rather than earnings. Unfortunately, if the hedge isn’t structured correctly, much of these unrealized results could end up being considered to be ineffective, and therefore the intended deferred income recognition won’t happen.

Pitfall to avoid
The first pitfall to avoid is using a standard pay-fixed/receive-floating interest rate swap in conjunction with this loan. This plain-vanilla swap design fails on its face because the exposure is one-sided, while the swap’s result is symmetric. That is, the swap’s value (and/or settlements) will be sensitive to movements in interest rates at all interest rate levels, but the exposure exists only for rate movements above the floor rate. Hedge accounting is simply disallowed if the asymmetric interest rate sensitivity of the loan isn’t matched by a similar asymmetry in the interest rate sensitivity of the derivative.

Continued in article

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

Are portable scanners all that they claim?
"Another Take on Doxie Go," by Konrad Lawson, Chronicle of Higher Education, January 5, 2012 ---
http://chronicle.com/blogs/profhacker/another-take-on-doxie-go/37811?sid=wc&utm_source=wc&utm_medium=en

Moral Hazard: Hedge Fund Shorts

Hi Dean,

Thank you for the kind words.

Hedge fund shorts are often used in expectations to re-buy. You might take a look at the following:
"Subprime crisis: the lay-out of a puzzle: An empirical investigation into the worldwide financial consequences of the U.S. subprime crisis" ---
http://oaithesis.eur.nl/ir/repub/asset/5163/0509ma281597wm.pdf

. . .

Market neutral strategy: This strategy focusses on profits made either by arbitrage in a market neutral investment or by arbitrage over time, for instance investing in futures and shorting the underlying. This strategy was obtained by the Long-Term Capital Management fund of Nobel Prize laureates Myron Scholes and Robert C. Merton.

Short selling strategy: The hedge fund shorts securities in expectation of a rebuy at a lower price at a future date. This lower price is a result of overconfidence of the other party, who thought they had bought an undervalued asset.

Special situations: A popular and probably the most well-known strategy is the behaviour of hedge fund in special situations like mergers, hostile takeovers, reorganisations or leveraged buy-outs. Hedge funds often buy stocks from the distressed company, thereby trying to profit from a difference in the initial offering price and the price that ultimately has to be paid for the stock of the company.

Timing strategy: The manager of the hedge fund tries to time his entrance to or exit from a market as good as possible. High returns can be generated when investing at the start of a bull market or exiting at the start of a bear market.

Continued in article

Money for Nothing How CEOs and Boards Enrich Themselves While Bankrupting America
by John Gillespie and David Zweig
Simon and Schuster
http://books.simonandschuster.ca/Money-for-Nothing/John-Gillespie/9781416559931/excerpt_with_id/13802

All eyes are on the CEO, who has gone without sleep for several days while desperately scrambling to pull a rabbit out of an empty hat. Staffers, lawyers, advisors, accountants, and consultants scurry around the company headquarters with news and rumors: the stock price fell 20 percent in the last hour, another of the private equity firms considering a bid has pulled out, stock traders are passing on obscene jokes about the company's impending death, the sovereign wealth fund that agreed to put in $1 billion last fall is screaming at the CFO, hedge fund shorts are whispering that the commercial paper dealers won't renew the debt tomorrow, the Treasury and the Fed aren't returning the CEO's calls about bailout money, six satellite trucks—no, seven now—are parked in front of the building, and reporters with camera crews are ambushing any passing employee for sound bites about the prospects of losing their jobs.

Chaos.

In the midst of this, the board of directors—the supposedly well-informed, responsible, experienced, accountable group of leaders elected by the shareholders, who are legally and ethically required to protect the thousands of people who own the company—are . . . where? You would expect to them to be at the center of the action, but they are merely spectators with great seats. Some huddle together over a computer screen in a corner of the boardroom, watching cable news feeds and stock market reports that amplify the company's death rattles around the world; others sit beside a speakerphone, giving updates to board colleagues who couldn't make it in person. Meetings are scheduled, canceled, and rescheduled as the directors wait, hoping for good news but anticipating the worst.

The atmosphere is a little like that of a family waiting room outside an intensive care unit—a quiet, intense churning of dread and resignation. There will be some reminiscing about how well things seemed to be going not so long ago, some private recriminations about questions never asked or risks poorly understood, a general feeling of helplessness, a touch of anger at the senior executives for letting it come to this, and anticipation of the embarrassment they'll feel when people whisper about them at the club. Surprisingly, though, there's not a lot of fear. Few of the directors are likely to have a significant part of their wealth tied up in the company; legal precedents and insurance policies insulate them from personal liability. Between 1980 and 2006, there were only thirteen cases in which outside directors—almost all, other than Enron and WorldCom, for tiny companies—had to settle shareholder lawsuits with their own money. (Ten of the Enron outside directors who settled—without admitting wrongdoing—paid only 10 percent of their prior net gains from selling Enron stock; eight other directors paid nothing. A number of them have remained on other boards.) More significant, the CEO who over shadowed the board will hardly hurt at all, and will probably leave with the tens or even hundreds of millions of dollars that the directors guaranteed in an employment contract.

So they sit and wait—the board of directors of this giant company, who were charged with steering it along the road to profit and prosperity. In the middle of the biggest crisis in the life of the company, they are essentially backseat passengers. The controls, which they never truly used, are of no help as the company hurtles over a cliff, taking with it the directors' reputations and the shareholders' money. What they are waiting for is the dull thud signaling the end: a final meeting with the lawyers and investment bankers, and at last, the formality of signing the corporate death certificate—a bankruptcy filing, a forced sale for cents on the dollar, or a government takeover that wipes out the shareholders. The CEO and the lawyers, as usual, will tell the directors what they must do.

THIS IS NOT JUST A GLOOMY, hypothetical fable about how an American business might possibly fail, with investors unprotected, company value squandered, and the governance of enormous and important companies breaking down. This is, unfortunately, a real scenario that has been repeated time and again during the recent economic meltdown, as companies have exploded like a string of one-inch firecrackers. When the spark runs up the spine of the tangled, interconnected fuses, they blow up one by one.

Something is wrong here. As Warren Buffett observed in his 2008 letter to Berkshire Hathaway shareholders, "You only learn who has been swimming naked when the tide goes out—and what we are witnessing at some of our largest financial institutions is an ugly sight."

Just look at some of the uglier sights. Merrill Lynch, General Motors, and Lehman Brothers, three stalwart American companies, are only a few examples of corporate collapses in which shareholders were burned. The sleepy complicity and carelessness of their boards have been especially devastating. Yet almost all the public attention has focused on the greed or recklessness or incompetence of the CEOs rather than the negligence of the directors who were supposed to protect the shareholders and who ought to be held equally, if not more, accountable because the CEOs theoretically work for them.

Why have boards of directors escaped blame? Probably because boards are opaque entities to most people, even to many corporate executives and institutional investors. Individual shareholders, who might have small positions in a number of companies, know very little about who these board members are and what they are supposed to be doing. Their names appear on the generic, straight-to-the-wastebasket proxy forms that shareholders receive; beyond that, they're ciphers. Directors rarely talk in public, maintaining a code of silence and confidentiality; communications with shareholders and journalists are invariably delegated to corporate PR or investor relations departments. They are protected by a vast array of lawyers, auditors, investment bankers, and other professional services gatekeepers who keep them out of trouble for a price. At most, shareholders might catch a glimpse of the nonexecutive board members if they bother to attend the annual meeting. Boards work behind closed doors, leave few footprints, and maintain an aura of power and prestige symbolized by the grand and imposing boardrooms found in most large companies. Much of this lack of transparency is deliberate because it reduces accountability and permits a kind of Wizard of Oz "pay no attention to the man behind the curtain" effect. (It is very likely to be a man. Only 15.2 percent of the directors of our five hundred largest companies are women.) The opacity also serves to hide a key problem: despite many directors being intelligent, experienced, well-qualified, and decent people who are tough in other aspects of their professional lives, too many of them become meek, collegial cheerleaders when they enter the boardroom. They fail to represent shareholders' interests because they are beholden to the CEOs who brought them aboard. It's a dangerous arrangement.

On behalf of the shareholders who actually own the company and are risking their money in anticipation of a commensurate return on their investments, boards are elected to monitor, advise, and direct the managers hired to run the company. They have a fiduciary duty to protect the interests of shareholders. Yet, too often, boards have become enabling lapdogs rather than trust-worthy watchdogs and guides.

There are, unfortunately, dozens of cases to choose from to illustrate the seriousness of the situation. Merrill, GM, and Lehman are instructive because they were companies no one could imagine failing, although, in truth, they fostered such dysfunctional and conflicted corporate leadership that their collapses should have been foretold. As you read their obituaries, viewer discretion is advised. You should think of the money paid to the executives and directors, as well as the losses in stock value, not as the company's money, as it is so often portrayed in news accounts, but as your money—because it is, in fact, coming from your mutual funds, your 401(k)s, your insurance premiums, your savings account interest, your mortgage rates, your paychecks, and your costs for goods and services. Also, think of the impact on ordinary people losing their retirement savings, their jobs, their homes, or even just the bank or factory or car dealership in their towns. Then add the trillions of taxpayers' dollars spent to prop up some of the companies' remains and, finally, consider the legacy of debt we're leaving for the next generation.

———

DURING MOST OF HIS nearly six years at the top of Merrill Lynch, Stanley O'Neal simultaneously held the titles of chairman, CEO, and president. He required such a high degree of loyalty that insiders referred to his senior staff as the Taliban. O'Neal had hand-picked eight of the firm's ten outside board members. One of them, John Finnegan, had been a friend of O'Neal's for more than twenty years and had worked with him in the General Motors treasury department; he headed Merrill's compensation committee, which set O'Neal's pay. Another director on the committee was Alberto Cribiore, a private equity executive who had once tried to hire O'Neal.

Executives who worked closely with O'Neal say that he was ruthless in silencing opposition within Merrill and singleminded in seeking to beat Goldman Sachs in its profitability and Lehman Brothers in the risky business of packaging and selling mortgage-backed securities. "The board had absolutely no idea how much of this risky stuff was actually on the books; it multiplied so fast," one O'Neal colleague said. The colleague also noted that the directors, despite having impressive rÉsumÉs, were chosen in part because they had little financial services experience and were kept under tight control. O'Neal "clearly didn't want anybody asking questions."

For a while, the arrangement seemed to work. In a triumphal letter to shareholders in the annual report issued in February 2007, titled "The Real Measure of Success." O'Neal proclaimed 2006 "the most successful year in [the company's] history—financially, operationally and strategically," while pointing out that "a lot of this comes down to leadership." The cocky message ended on a note of pure hubris: "[W]e can and will continue to grow our business, lead this incredible force of global capitalism and validate the tremendous confidence that you, our shareholders, have placed in this organization and each of us."

The board paid O'Neal $48 million in salary and bonuses for 2006—one of the highest compensation packages in corporate America. But only ten months later, after suffering a third-quarter loss of $2.3 billion and an $8.4 billion writedown on failed investments—the largest loss in the company's ninety-three-year history, exceeding the net earnings for all of 2006—the board began to understand the real measure of failure. The directors discovered, seemingly for the first time, just how much risk Merrill had undertaken in becoming the industry leader in subprime mortgage bonds and how overleveraged it had become to achieve its targets. They also caught O'Neal initiating merger talks without their knowledge with Wachovia Bank, a deal that would have resulted in a personal payout of as much as $274 million for O'Neal if he had left after its completion—part of his board-approved employment agreement. During August and September 2007, as Merrill was losing more than $100 million a day, O'Neal managed to play at least twenty rounds of golf and lowered his handicap from 10.2 to 9.1.

Apparently due to sheer embarrassment as the company's failures made headlines, the board finally ousted O'Neal in October but allowed him to "retire" with an exit package worth $161.5 million on top of the $70 million he'd received during his time as CEO and chairman. The board then began a frantic search for a new CEO, because, as one insider confirmed to us, it "had done absolutely no succession planning" and O'Neal had gotten rid of anyone among the 64,000 employees who might have been a credible candidate. For the first time since the company's founding, the board had to look outside for a CEO. In spite of having shown a disregard for shareholders and a distaste for balanced governance, O'Neal was back in a boardroom within three months, this time as a director of Alcoa, serving on the audit committee and charged with overseeing the aluminum company's risk management and financial disclosure.

At the Merrill Lynch annual meeting in April 2008, Ann Reese, the head of the board's audit committee, fielded a question from a shareholder about how the board could have missed the massive risks Merrill was undertaking in the subprime mortgage-backed securities and collateralized debt obligations (CDOs) that had ballooned from $1 billion to $40 billion in exposure for the firm in just eighteen months. Amazingly, since it is almost unheard of for a director of a company to answer questions in public, Reese was willing to talk. This was refreshing and might have provided some insight for shareholders, except that what she said was curiously detached and unabashed. "The CDO position did not come to the board's attention until late in the process," she said, adding that initially the board hadn't been aware that the most troublesome securities were, in fact, backed by mortgages.

Merrill's new CEO and chairman, John Thain, jumped in after Reese, saying that the board shouldn't be criticized based on "20/20 hindsight" even though he had earlier admitted in an interview with the Wall Street Journal that "Merrill had a risk committee. It just didn't function." As it happens, Reese, over a cup of English tea, had helped recruit Thain, who lived near her in Rye, New York. Thain had received a $15 million signing bonus upon joining Merrill and by the time of the shareholders' meeting was just completing the $1.2 million refurnishing of his office suite that was revealed after the company was sold.

Lynn Turner, who served as the SEC's chief accountant from 1998 to 2001 and later as a board member for several large public companies, recalled that he spoke about this period to a friend who was a director at Merrill Lynch in August 2008. "This is a very well-known, intelligent person," Turner said, "and they tell me, 'You know, Lynn, I've gone back through all this stuff and I can't think of one thing I'd have done differently.' My God, I can guarantee you that person wasn't qualified to be a director! They don't press on the issues. They get into the boardroom—and I've been in these boardrooms—and they're all too chummy and no one likes to create confrontation. So they get together five times a year or so, break bread, all have a good conversation for a day and a half, and then go home. How in the hell could you be a director at Merrill Lynch and not know that you had a gargantuan portfolio of toxic assets? If people on the outside could see the problem, then why couldn't the directors?"

The board was so disconnected from the company that when Merrill shareholders met in December 2008 to approve the company's sale to Bank of America after five straight quarterly losses totaling $24 billion and a near-brush with bankruptcy, not a single one of the nine nonexecutive directors even attended the meeting. Finance committee chair and former IRS commissioner Charles Rossotti, reached at home in Virginia by a reporter, wouldn't say why he wasn't there: "I'm just a director, and I think any questions you want to have, you should direct to the company." The board missed an emotional statement by Winthrop Smith, Jr., a former Merrill banker and the son of a company founder. In a speech that used the word shame some fourteen times, he said, "Today is not the result of the subprime mess or synthetic CDOs. They are the symptoms. This is the story of failed leadership and the failure of a board of directors to understand what was happening to this great company, and its failure to take action soon enough . . . Shame on them for not resigning."

When Merrill Lynch first opened its doors in 1914, Charles E. Merrill announced its credo: "I have no fear of failure, provided I use my heart and head, hands and feet—and work like hell." The firm died as an independent company five days short of its ninety-fifth birthday. The Merrill Lynch shareholders, represented by the board, lost more than $60 billion.

AT A JUNE 6, 2000, stockholders annual meeting, General Motors wheeled out its newly appointed CEO, Richard Wagoner, who kicked off the proceedings with an upbeat speech. "I'm pleased to report that the state of the business at General Motors Corporation is strong," he proclaimed. "And as suggested by the baby on the cover of our 1999 annual report, we believe our company's future opportunities are virtually unlimited." Nine years later, the GM baby wasn't feeling so well, as the disastrous labor and health care costs and SUV-heavy product strategy caught up with the company in the midst of skyrocketing gasoline prices and a recession. GM's stock price fell some 95 percent during Wagoner's tenure; the company last earned a profit in 2004 and lost more than $85 billion while he was CEO. Nevertheless, the GM board consistently praised and rewarded Wagoner's performance. In 2003, it elected him to also chair the board, and in 2007—a year the company had lost $38.7 billion—it increased his compensation by 64 percent to $15.7 million.

GM's lead independent director was George M. C. Fisher, who himself presided over major strategic miscues as CEO and chairman at Motorola, where the Iridium satellite phone project he initiated was subsequently written off with a $2.6 billion loss, and later at Kodak, where he was blamed for botching the shift to digital photography. Fisher clearly had little use for shareholders. He once told an interviewer regarding criticism of his tenure at Kodak that "I wish I could get investors to sit down and ask good questions, but some people are just too stupid." More than half the GM board was composed of current or retired CEOs, including Stan O'Neal, who left in 2006, citing time constraints and concerns over potential conflicts with his role at Merrill that had somehow not been an issue during the previous five years.

Upon GM's announcement in August 2008 of another staggering quarterly loss—this time of $15.5 billion—Fisher told a reporter that "Rick has the unified support of the entire board to a person. We are absolutely convinced we have the right team under Rick Wagoner's leadership to get us through these difficult times and to a brighter future." Earlier that year, Fisher had repeatedly endorsed Wagoner's strategy and said that GM's stock price was not a major concern of the board. Given that all thirteen of GM's outside directors together owned less than six one-hundredths of one percent of the company's stock, that perhaps shouldn't have been much of a surprise.

Wagoner relished his carte blanche relationship with GM's directors: "I get good support from the board," he told a reporter. "We say, 'Here's what we're going to do and here's the time frame,' and they say, 'Let us know how it comes out.' They're not making the calls about what to do next. If they do that, they don't need me." What GM's leaders were doing with the shareholders' dwindling money was doubling their bet on gas-guzzling SUVs because they provided GM's highest profit margins at the time. As GM vice chairman Robert Lutz told the New York Times in 2005: "Everybody thinks high gas prices hurt sport utility sales. In fact they don't . . . Rich people don't care."

But what seemed good for GM no longer was good for the country—or for GM's shareholders.

Ironically, GM had been widely praised in the early 1990s for creating a model set of corporate governance reforms in the wake of major strategic blunders and failed leadership that had resulted in unprecedented earnings losses. In 1992, the board fired the CEO, appointed a nonexecutive chairman, and issued twenty-eight structural guidelines for insuring board independence from management and increasing oversight of long-term strategy. BusinessWeek hailed the GM document as a "Magna Carta for Directors" and the company's financial performance improved for a time. The reform initiatives, however, lasted about as long as the tailfin designs on a Cadillac. Within a few years, despite checking most of the good governance structural boxes, the CEO was once again also the board chairman, the directors had backslid fully to a subservient "let us know how it comes out" role, and the executives were back behind the wheel.

In November 2005, when GM's stock price was still in the mid-20s, Ric Marshall, the chief analyst of the Corporate Library, a governance rating service that focuses on board culture and CEO-board dynamics, wrote: "Despite its compliance with most of the best practices believed to comprise 'good governance,' the current General Motors board epitomizes the sad truth that compliance alone has very little to do with actual board effectiveness. The GM board has failed repeatedly to address the key strategic questions facing this onetime industrial giant, exposing the firm not only to a number of legal and regulatory worries but the very real threat of outright business failure. Is GM, like Chrysler some years ago, simply too big to fail? We're not sure, but it seems increasingly likely that GM shareholders will soon find out."

By the time Wagoner was fired in March 2009, at the instigation of the federal officials overseeing the massive bailout of the company, the stock had dropped to the $2 range and GM had already run through $13.4 billion in taxpayers' money. In spite of this, some directors still couldn't wean themselves from Wagoner, and were reportedly furious that his dismissal occurred without their consent. Others were mortified by what had happened to the company. One prominent director, who had diligently tried to help the company change course before it was too late, had eventually quit the board out of frustration with the "ridiculous bureaucracy and a thumb-sucking board that led to GM making cars that no one wanted to buy." Another director who left the board recalled asking Wagoner and his executive team in 2006 for a five-year plan and projections. "They said they didn't have that. And most of the guys in the room didn't seem to care."

The GM shareholders, represented by the board, lost more than $52 billion.

IN A COMPANY as large and complex as Lehman Brothers, you would expect the board to be seasoned, astute, dynamic, and up-to-date on risks it was undertaking with the shareholders' money. Yet the only nonexecutive director, out of ten, with any recent banking experience was Jerry Grundhofer, the retired head of U.S. Bancorp, who had joined the board exactly five months before Lehman's spectacular collapse into bankruptcy. Nine of the independent directors were retired, including five who were in their seventies and eighties. Their backgrounds hardly seemed suited to overseeing a sophisticated and complicated financial entity: the members included a theatrical producer, the former CEO of a Spanish-language television company, a retired art-auction company executive, a retired CEO of Halliburton, a former rear admiral who had headed the Girl Scouts and served on the board of Weight Watchers International, and, until two years before Lehman's downfall, the eighty-three-year-old actress and socialite Dina Merrill, who sat on the board for eighteen years and served on the compensation committee, which approved CEO Richard Fuld's $484 million in salary, stock, options, and bonuses from 2000 to 2007. Whatever their qualifications, the directors were well compensated, too. In 2007, each was paid between $325,038 and $397,538 for attending a total of eight full board meetings.

The average age of the Lehman board's risk committee was just under seventy. The committee was chaired by the eighty-one-year-old economist Henry Kaufman, who had last worked at a Wall Street investment bank some twenty years in the past and then started a consulting firm. He is exactly the type of director found on many boards—a person whose prestigious credentials are meant to reassure shareholders and regulators that the company is being well monitored and advised. Then they are ignored.

Kaufman had been on the Lehman board for thirteen years. Even in 2006 and 2007, as Lehman's borrowing skyrocketed and the firm was vastly increasing its holdings of very risky securities and commercial real estate, the risk committee met only twice each year. Kaufman was known as "Dr. Doom" back in the 1980s because of his consistently pessimistic forecasts as Salomon Brothers' chief economist, but he seems not to have been very persuasive with Lehman's executives in getting them to limit the massive borrowing and risks they were taking on as the mortgage bubble continued to over-inflate.

In an April 2008 interview, Kaufman offered an insight that might have been more timely and helpful a few years earlier in both the Lehman boardroom and Washington, D.C.: "If we don't improve the supervision and oversight over financial institutions, in another seven, eight, nine, or ten years, we may have a crisis that's bigger than the one we have today. . . . Usually what's happened is that financial markets move to the competitive edge of risk-taking unless there is some constraint." With little to no internal supervision, oversight, or constraint having been provided by its board, the bigger crisis for Lehman came sooner rather than later, and it collapsed just four and a half months later.

After Lehman's demise, Kaufman has continued to offer advice to others. Without a trace of irony or guilt, he said to another interviewer in July 2009, "If you want to take risks, you've got to have the capital to do it. But, you can't do it with other people's money where the other people are not well informed about the risk taking of that institution." In his recent book on financial system reform (which largely blames the Federal Reserve for the financial meltdown and has an entire section listing his own "prophetic" warnings about the economy), Kaufman neglects to mention either his role at Lehman or his missing the warning signs when he personally invested and lost millions in Bernie Madoff's Ponzi scheme. He does, however, note that "The shabby events of the recent past demonstrate that people in finance cannot and should not escape public scrutiny."

Dr. Doom did heed his own economic advice, while providing an instructive case of exquisite timing—as well as of having your cake, eating it too, and then patting yourself on the back for warning others of the caloric dangers of cake. Lehman securities filings show that about ten months before Lehman stock went to zero, Kaufman cashed in more than half of the remaining stock options that had been given to him for protecting shareholders' interests. He made nearly $2 million in profits.

"The Lehman board was a joke and a disgrace," said a former senior investment banker who now serves as a director for several S&P 500 companies. "Asleep at the switch doesn't begin to describe it." The autocratic Richard Fuld, whose nickname at the firm was "the Gorilla," had joined Lehman in 1969 when his air force career ended after he had a fistfight with a commanding officer. He served since 1994 as both CEO and chairman of the board, an inherent conflict in roles that still occurs at 61 percent of the largest U.S. companies.

A lawsuit filed in early 2009 by the New Jersey Department of Investment alleges that $118 million in losses to the state pension fund resulted from fraud and misrepresentation by Lehman's executives and the board. The role of the board is described in scathing terms:

The supine Board that defendant Fuld handpicked provided no backstop to Lehman's executives' zealous approach to the Company's risk profile, real estate portfolio, and their own compensation. The Director Defendants were considered inattentive, elderly, and woefully short on relevant structured finance background. The composition of the Board according to a recent filing in the Lehman bankruptcy allowed defendant "Fuld to marginalize the Directors, who tolerated an absence of checks and balances at Lehman." Due to his long tenure and ubiquity at Lehman, defendant Fuld has been able to consolidate his power to a remarkable degree. Defendant Fuld was both the Chairman of the Board and the CEO . . . The Director Defendants acted as a rubber stamp for the actions of Lehman's senior management. There was little turnover on the Board. By the date of Lehman's collapse, more than half of the Director Defendants had served for twelve or more years."

John Helyar is one of the authors of Barbarians at the Gate, which documents the fall of RJR Nabisco in the 1980s. He also cowrote a five-part series for Bloomberg.com on Lehman Brothers' collapse. Helyar was a keen observer of those companies' boards when they folded. "The few people on the Lehman board who actually had relevant experience were kind of like an all-star team from the 1980s back for an old-timers' game in which they weren't even up on the new rules and equipment," Helyar told us. "Fuld selected them because he didn't want to be challenged by anyone. Most of the top executives didn't understand the risks they were taking, so can you imagine a septuagenarian sitting in the boardroom getting a PowerPoint presentation on synthetic CDOs and credit default swaps?"

In a conference call announcing the firm's 2008 third-quarter loss of $3.9 billion, Fuld told analysts, "I must say the board's been wonderfully supportive." Four days later the 159-year-old company declared the largest bankruptcy in U.S. history. The Lehman shareholders, represented by the board, lost more than $45 billion.

THE DISASTERS at Merrill Lynch, GM, and Lehman were not isolated instances of hubris, incompetence, and negligence. Similar stories of boards and CEOs failing to do their jobs on behalf of the companies' owners can be told about Countrywide, Citigroup, AIG, Fannie Mae, Bank of America, Washington Mutual, Wachovia, Sovereign Bank, Bear Stearns, and most of the other companies directly involved in the recent financial meltdown, as well as many nonfinancial businesses whose governance-related troubles came to light in the resulting recession. In the short term, the result has been the loss of hundreds of billions of dollars for shareholders, and economic devastation for employees and others caught in the wake. In the long term, a growing crisis of confidence among investors could cripple our economy, as capital is diverted away from American corporate debt and equity markets and companies suffocate from lack of funding.

Investor mistrust takes hold fast and punishes instantly in the modern economy. Enron, once America's seventh-largest corporation, crashed in a mere three weeks once the scope of its failures and corruption was exposed and its investors and creditors began to withdraw their funds. Today's collapses can happen even faster. Because the companies are larger, their operations more interconnected, and their financing so complex and subject to hair-trigger reactions from institutional investors with enormous trading positions, the impacts are greatly magnified and reverberate globally. Bear Stearns went from its CEO claiming on CNBC that "our liquidity position has not changed at all" to being insolvent two days later.

Of the world's two hundred largest economies, more than half are corporations. They have more influence on our lives than any other institution—not just profound economic clout, but also enormous political, environmental, and civic power. As they have grown in influence, they have also become more concentrated: In 1950, the 100 largest industrial companies owned approximately 40 percent of total U.S. industrial assets; by the 1990s, they controlled 75 percent. Global corporations have assumed the authority and impact that formerly belonged to governments and churches. Boards of directors are supposed to be the most important element of corporate leadership—the ultimate power in this economic universe—and while some companies have made progress during the past decade in improving corporate governance, the recurring waves of scandals and the blatant victimization of shareholders that appear in the wake of economic crashes prove that our approach to leading corporations is badly in need of fundamental reform.

Ideally, a board of directors is informed, active, and advisory, and maintains an open but challenging relationship with the company's CEO. In reality, this rarely happens. In most cases, board members are beholden to CEOs for their very presence on the board, for their renominations, their compensation, their perquisites, their committee assignments, their agendas, and virtually all their information. Even well-intentioned directors find themselves hopelessly compromised, badly conflicted, and essentially powerless. Not that all blame can be put on bullying, manipulative CEOs; many boards simply fail to do their jobs. They allow themselves to be fooled by fraudulent accounting; they look away during the squandering of company resources; they miss obvious strategic shifts in the marketplace; they are blind to massive risks their firms assume; they approve excessive executive pay; they neglect to prepare for crises; they ignore blatant conflicts of interest; they condone a lax ethical tone. The head of one of the world's largest and most successful private equity firms told us that he considers the current model of corporate boards "fundamentally broken."

Continued in article

Hope this helps,
Bob Jensen

Fair Weather Friends
"Are Kodak's Outside Directors Wrong to Desert a Sinking Ship?" by Simon C.Y. Wong, Harvard Business Review Blog, January 5, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/01/protecting_boards_from_disrupt.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Jensen Comment
This reminds me of the scandal I followed in the San Antonio Express News when a young mother loved the income she made from being in the U.S. Army reserve. She was another type of fair weather "friend." When her unit was being shipped off to the Middle East in time of war, she promptly resigned from the U.S. Army reserves and argued that, as a single parent, she should not have to go to war because she was the mother of young children.

From The Wall Street Journal Accounting Weekly Review on January 13, 2012

Avoiding Innovation's Terrible Toll
by: Spencer E. Ante
Jan 07, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Managerial Accounting, Mergers and Acquisitions

SUMMARY: This is the first of two articles this week on corporate structures, this one focusing on innovation in corporate America. The article compares and contrasts IBM and Hewlett-Packard; it describes innovation, or lack thereof, at Google, Apple, Eastman Kodak, and Johnson & Johnson, as well as others. The video describes the recent demise of Eastman Kodak as a driver for this article which also refers to academic management research. The role of mergers and acquisitions in this process also is discussed.

CLASSROOM APPLICATION: The articles should be useful to introduce the corporate form of organization in undergraduate or MBA level financial accounting and reporting classes or in managerial accounting classes discussing managing change. Discussion of mergers and acquisitions also makes the article a candidate for use prior to discussing accounting for business combinations.

QUESTIONS:
1. (Advanced) What does it mean to say that "only a tiny fraction [of corporations] reach the age of 40"? In your answer, describe the inception, operation, and demise of a corporation.

2. (Introductory) Compare two of the corporations in the article, one described as successful in innovation and one described as unsuccessful. What factors differ between the two examples?

3. (Advanced) What does Todd Chaffee mean when he says "a good M&A program can help a lot"? What did the companies in the article acquire through M&A transactions?

Reviewed By: Judy Beckman, University of Rhode Island

"Avoiding Innovation's Terrible Toll," by Spencer E. Ante, The Wall Street Journal, January 7, 2012 ---
http://online.wsj.com/article/SB10001424052970204331304577144980247499346.html?mod=djem_jiewr_AC_domainid

In fact, only a tiny fraction reach the age of 40, according to a study of more than six million firms by management professors Charles I. Stubbart and Michael B. Knight.

"Despite their size, their vast financial and human resources, average large firms do not 'live' as long as ordinary Americans," the authors concluded. The History of Kodak

Given today's increased pace of technological change, even 40 years is going to start to seem like a really long time.

The wave of creative destruction looming over companies like Eastman Kodak Co., Blockbuster Inc., Barnes & Noble Inc. and the record labels has been focusing the minds of American executives on two questions: Are large companies able to innovate quickly enough in an age of rapid disruption? And if they can, how do they do it? Related Video

Eastman Kodak is preparing for a Chapter 11 bankruptcy-protection filing in the coming weeks should efforts to sell a trove of digital patents fall through. Dana Mattioli has details on The News Hub. Photo: AP

Business leaders, academics and venture capitalists say the large companies that do manage to survive are ruthless about change. The most successful ones aren't afraid to cannibalize their big revenue generators to build new businesses.

They often make frequent—but, crucially, small—acquisitions that bring in new technologies and open new markets. And there's always the unpredictable role of luck in business—both good and bad.

Johnson & Johnson, founded in 1886, and International Business Machines Corp., which just celebrated its 100th birthday, have defied the 40-year corporate life span.

More recently, 35-year-old Apple Inc. has transformed itself from a small PC maker into a kingpin of mobile devices. Google Corp., founded in 1998, is finding new ways to grow beyond its core search engine advertising business.

Companies felled by creative destruction, on the other hand, tend to be bureaucratic, play too much defense, and try to catch up too late by lurching into huge acquisitions.

Top executives at successful big companies are a lot like those at small companies, said James W. Breyer, a partner at Facebook Inc. investor Accel Partners and a director at Wal-Mart Stores Inc. and Dell Inc.

Mr. Breyer described these executives as very smart, and able to diversify into new businesses while staying focused on a company's core.

He said people ask him how Wal-Mart's board meetings differ from Facebook's.

"I see far more similarities than differences between the top visionary executives," he said. Related Video

A comparison of Hewlett-Packard Co. and IBM illustrates the challenge. When Louis V. Gerstner took over IBM, he wanted to know why the company consistently missed the emergence of new industries. IBM developed the first commercial router, for instance, but Cisco Systems Inc. ended up dominating that market.

An internal study found that IBM's success in mature markets made it difficult to explore new ones, and that it lacked the proper organizational structure to identify and build new ventures.

So in 2000, Mr. Gerstner launched a program called the emerging business organization to find and nurture growth opportunities under the direction of top executives. Over the next five years, EBO businesses such as life sciences, Linux software and pervasive computing added more than $15 billion to IBM's revenue, according to a 2010 study published in the Harvard Business Review.

Under Chief Executive Samuel J. Palmisano, who stepped down at the end of 2011, IBM supplemented its internal efforts with an aggressive acquisition strategy, picking up dozens of small companies that expanded IBM's high-margin software and consulting businesses.

At the same time, Mr. Palmisano wasn't afraid to make hard choices, selling off the company's vaunted personal computer business in 2004 before PCs had been largely commoditized.

"We've lasted 100 years, because we never limited ourselves to a view of a particular product," Mr. Palmisano said in an interview last year.

By contrast, H-P decided to get bigger in PCs, spending $25 billion to buy rival Compaq Computer in 2002. With the threats to that business now clear, the company last year clumsily said it might spin it off or sell its PC unit, before investors forced it to retreat.

H-P also was slow to catch on to the growing importance of business software and has spent dearly to try to catch up. When H-P spent $11 billion last fall to acquire software maker Autonomy Corp., many analysts said the deal's rich price would destroy shareholder value.

"H-P has been trying to do everything IBM is doing but five years late," said Harvard Business School professor Rosabeth Kanter.

In the last few years, Apple has provided a case study in how to avoid being snared by the innovator's dilemma. After former Chief Executive Steve Jobs returned to the company in the early 1990s, he refreshed its PC line and carved out a dominating position in digital music with the iPod.

But he readily put both of those businesses at risk with new products several years later.

Mr. Jobs began cannibalizing Apple's iPod when he introduced the iPhone. The tradeoff was worth it. In the quarter that ended in September, iPhones and related products and services accounted for 39% of Apple's revenue and have positioned it as a leader in the fast-growing mobile space.

Apple later risked cannibalizing its PC and notebook business by launching its new iPad tablet computer, a device that now accounts for 24% of company revenue.

Google is only 13 years old, and Internet search advertising remains the backbone of its business. But the company has used modest acquisitions to dominate new markets that threatened its dominance.

Google's most prominent new businesses—YouTube and its Android smartphone franchise—were both built on the back of acquisitions. After buying the companies, Google let them operate with considerable independence under their passionate founders, then beefed them up later.

The company took a bigger plunge with its proposed $12.5 billion acquisition of Motorola Mobility Holdings Inc., a deal still being reviewed by regulators.

"A good M&A program can help a lot," said Todd Chaffee, a general partner with Institutional Venture Partners. "If some company is threatening [Google's] business, they buy it and augment it."

Continued in article

It may also interest some financial accounting professors to study the very complex FAS 138 amendment to FAS 133 with respect to benchmark interest rate hedging. Because of the technical complexity of benchmark interest fate hedging, I think most accounting teachers and researchers avoid this topic.

I have a technical illustration of benchmark interest rate hedging (with journal entries) at
http://www.cs.trinity.edu/~rjensen/138bench.htm

One place to begin is to look up "Benchmark Interest Rate" at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Some of the links below are broken because the FASB changed many of its links and (sadly) took some illustrations off line.

Benchmark = the designated risk being hedged. In FAS 133/138, the term applies to interest rate risk.

In FAS 133, the FASB did not take into account how interest rate risk is generally hedged in practice. FAS 133 based the hedging rules upon hedging of sector spreads for which there are no hedging instruments in practice. The is one of the main reasons why FAS 138 amendments to FAS 133 were soon issued. Components of interest rate risk are shown below:
Risk-free rate u(0) =
LIBOR spread l(0)-u(0) =
LIBOR(0) rate l(0) =
Unhedged credit sector spread s(0)-l(0) =
Total systematic interest rate risk s(0) =
Unhedged unsystematic risk v(0)-s(0) =
Full value effective rate v(0) =
Premium (discount) on the debt issue f(0)-v(0)=
Nominal (coupon) rate f(0) =

In FAS 138, the FASB moved away from sector spread hedging and defined benchmarked interest rate hedging based upon only two allowed interest rate spreads (i.e., the U.S. Treasury risk-free rate with no spread or the LIBOR rate with only the LIBOR spread. Sector spread hedging can no longer receive hedge accounting.

For an extensive numerical example of benchmark hedging, go to http://www.cs.trinity.edu/~rjensen/000overview/138bench.htm

FAS 138 Introduces Benchmarking

Examples Illustrating Application of FASB Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB Statement No. 133 --- http://www.fasb.org/derivatives/examplespg.shtml
or try clicking here.

FAS 138 Amendments expand the eligibility of many derivative instrument hedges to qualify FAS 133/138 hedge. Such qualifications in accounting treatment that reduces earnings volatility when the derivatives are adjusted for fair value.

It is very popular in practice to have a hedging instrument and the hedged item be based upon two different indices. In particular, the hedged item may be impacted by credit factors. For example, interest rates commonly viewed as having three components noted below:

·        Risk-free risk that the level of interest rates in risk-free financial instruments such as U.S. treasury T-bill rates will vary system-side over time.

·        Credit sector spread risk that interest rates for particular economic sectors will vary over and above the risk-free interest rate movements. For example, when automobiles replaced horses as the primary means of open road transportation, the horse industry’s credit worthiness suffered independently of other sectors of the economy. In more recent times, the dot.com sector’s sector spread has suffered some setbacks.

·        Unsystematic spread risk of a particular borrower that varies over and above risk-free and credit sector spreads. The credit of a particular firm may move independently of more system-wide (systematic) risk-free rates and sector spreads.

Suppose that a hedge only pays at the T-Bill rate for hedged item based on some variable index having credit components. FAS 133 prohibited “treasury locks” that hedged only the risk-free rates but not credit-sector spreads or unsystematic risk. This was upsetting many firms that commonly hedge with treasury locks. There is a market for treasury lock derivatives that is available, whereas hedges for entire interest rate risk are more difficult to obtain in practice. It is also common to hedge with London’s LIBOR that has a spread apart from a risk-free component.

The DIG confused the issue by allowing both risk-free and credit sector spread to receive hedge accounting in its DIG Issue E1 ruling. Paragraph 14 of FAS 138 states the following:

Comments received by the Board on Implementation Issue E1 indicated (a) that the concept of market interest rate risk as set forth in Statement 133 differed from the common understanding of interest rate risk by market participants, (b) that the guidance in the Implementation Issue was inconsistent with present hedging activities, and (c) that measuring the change in fair value of the hedged item attributable to changes in credit sector spreads would be difficult because consistent sector spread data are not readily available in the market.

In FAS 138, the board sought to reduce confusion by reducing all components risk into just two components called “interest rate risk” and “credit risk.” Credit risk includes all risk other than the “benchmarked” component in a hedged item’s index. A benchmark index can include somewhat more than movements in risk-free rates. FAS 138 allows the popular LIBOR hedging rate that is not viewed as being entirely a risk-free rate. Paragraph 16 introduces the concept of “benchmark interest rate” as follows:

Because the Board decided to permit a rate that is not fully risk-free to be the designated risk in a hedge of interest rate risk, it developed the general notion of benchmark interest rate to encompass both risk-free rates and rates based on the LIBOR swap curve in the United States.

FAS 133 thus allows benchmarking on LIBOR. It is not possible to benchmark on such rates as commercial paper rates, Fed Fund rates, or FNMA par mortgage rates.

Readers might then ask what the big deal is since some of the FAS 133 examples (e.g., Example 5 beginning in Paragraph 133) hedged on the basis of LIBOR. It is important to note that in those original examples, the hedging instrument (e.g., a swap) and the hedged item (e.g., a bond) both used LIBOR in defining a variable rate? If the hedging instrument used LIBOR and the hedged item interest rate was based upon an index poorly correlated with LIBOR, the hedge would not qualify (prior to FAS 138) for FAS 133 hedge accounting treatment even though the derivative itself would have to be adjusted for fair value each quarter. Recall that LIBOR is a short-term European rate that may not correlate with various interest indices in the U.S. FAS 133 now allows a properly benchmarked hedge (e.g., a swap rate based on LIBOR or T-bills) to hedge an item having non-benchmarked components.

The short-cut method of relieving hedge ineffectiveness testing may no longer be available. Paragraph 23 of FAS 138 states the following:

For cash flow hedges of an existing variable-rate financial asset or liability, the designated risk being hedged cannot be the risk of changes in its cash flows attributable to changes in the benchmark interest rate if the cash flows of the hedged item are explicitly based on a different index. In those situations, because the risk of changes in the benchmark interest rate (that is, interest rate risk) cannot be the designated risk being hedged, the shortcut method cannot be applied. The Board’s decision to require that the index on which the variable leg of the swap is based match the benchmark interest rate designated as the interest rate risk being hedged for the hedging relationship also ensures that the shortcut method is applied only to interest rate risk hedges. The Board’s decision precludes use of the shortcut method in situations in which the cash flows of the hedged item and the hedging instrument are based on the same index but that index is not the designated benchmark interest rate. The Board noted, however, that in some of those situations, an entity easily could determine that the hedge is perfectly effective. The shortcut method would be permitted for cash flow hedges in situations in which the cash flows of the hedged item and the hedging instrument are based on the same index and that index is the designated benchmark interest rate.

In other words, any hedge item that is not based upon only a benchmarked component will force hedge effectiveness testing at least quarterly. Thus FAS 138 broadened the scope of qualifying hedges, but it made the accounting more difficult by forcing more frequent effectiveness testing.

FAS 138 also permits the hedge derivative to have more risk than the hedged item. For example, a LIBOR-based interest rate swap might be used to hedge an AAA corporate bond or even a note rate based upon T-Bills.

There are restrictions noted in Paragraph 24 of FAS 138:

This Statement provides limited guidance on how the change in a hedged item’s fair value attributable to changes in the designated benchmark interest rate should be determined. The Board decided that in calculating the change in the hedged item’s fair value attributable to changes in the designated benchmark interest rate, the estimated cash flows used must be based on all of the contractual cash flows of the entire hedged item. That guidance does not mandate the use of any one method, but it precludes the use of a method that excludes some of the hedged item’s contractual cash flows (such as the portion of interest payments attributable to the obligor’s credit risk above the benchmark rate) from the calculation. The Board concluded that excluding some of the hedged item’s contractual cash flows would introduce a new approach to bifurcation of a hedged item that does not currently exist in the Statement 133 hedging model.

The FASB provides some new examples illustrating the FAS 138 Amendments to FAS 133 at http://www.rutgers.edu/Accounting/raw/fasb/derivatives/examplespg.html
Example 1 on interest rate benchmarking begins as follows:

Example: Fair Value Hedge of the LIBOR Swap Rate in a $100 Million A1-Quality 5-Year Fixed-Rate Noncallable Debt On April 3, 20X0, Global Tech issues at par a $100 million A1-quality 5-year fixed-rate noncallable debt instrument with an annual 8 percent interest coupon payable semiannually. On that date, Global Tech enters into a 5-year interest rate swap based on the LIBOR swap rate and designates it as the hedging instrument in a fair value hedge of the $100 million liability. Under the terms of the swap, Global Tech will receive a fixed interest rate at 8 percent and pay variable interest at LIBOR plus 78.5 basis points (current LIBOR 6.29%) on a notional amount of $101,970,000 (semiannual settlement and interest reset dates). A duration-weighted hedge ratio was used to calculate the notional amount of the swap necessary to offset the debt's fair value changes attributable to changes in the LIBOR swap rate.

An extensive analysis of the above illustration is provided at http://www.cs.trinity.edu/~rjensen/000overview/138bench.htm

Some DIG Issues Affecting Interest Rate Hedging

Issue E1—Hedging the Risk-Free Interest Rate
http://www.fasb.org/derivatives/
(Cleared 02/17/99)
Issue E1 heavily influenced FAS 138 as noted above.

*Issue G6—Impact of Implementation Issue E1 on Cash Flow Hedges of Market Interest Rate Risk
(Cleared 5/17/00)

With regard to a cash flow hedge of the variability in interest payments on an existing floating-rate financial asset or liability, the distinction in Issue E1 between the risk-free interest rate and credit sector spreads over the base Treasury rate is not necessarily directly relevant to assessing whether the cash flow hedging relationship is effective in achieving offsetting cash flows attributable to the hedged risk. The effectiveness of a cash flow hedge of the variability in interest payments on an existing floating-rate financial asset or liability is affected by the interest rate index on which that variability is based and the extent to which the hedging instrument provides offsetting cash flows.

If the variability of the hedged cash flows of the existing floating-rate financial asset or liability is based solely on changes in a floating interest rate index (for example, LIBOR, Fed Funds, Treasury Bill rates), any changes in credit sector spreads over that interest rate index for the issuer's particular credit sector should not be considered in the assessment and measurement of hedge effectiveness. In addition, any changes in credit sector spreads inherent in the interest rate index itself do not impact the assessment and measurement of hedge effectiveness if the cash flows on both the hedging instrument and the hedged cash flows of the existing floating-rate financial asset or liability are based on the same index. However, if the cash flows on the hedging instrument and the hedged cash flows of the existing floating-rate financial asset or liability are based on different indices, the basis difference between those indices would impact the assessment and measurement of hedge effectiveness.

*Issue E6—The Shortcut Method and the Provisions That Permit the Debtor or Creditor to Require Prepayment
http://www.rutgers.edu/Accounting/raw/fasb/derivatives/issueg6.html
(Cleared 5/17/00)

An interest-bearing asset or liability should be considered prepayable under the provisions of paragraph 68(d) when one party to the contract has the right to cause the payment of principal prior to the scheduled payment dates unless (1) the debtor has the right to cause settlement of the entire contract before its stated maturity at an amount that is always greater than the then fair value of the contract absent that right or (2) the creditor has the right to cause settlement of the entire contract before its stated maturity at an amount that is always less than the then fair value of the contract absent that right. A right to cause a contract to be prepaid at its then fair value would not cause the interest-bearing asset or liability to be considered prepayable under paragraph 68(d) since that right would have a fair value of zero at all times and essentially would provide only liquidity to the holder. Notwithstanding the above, any term, clause, or other provision in a debt instrument that gives the debtor or creditor the right to cause prepayment of the debt contingent upon the occurrence of a specific event related to the debtor's credit deterioration or other change in the debtor's credit risk (for example, the debtor's failure to make timely payment, thus making it delinquent; its failure to meet specific covenant ratios; its disposition of specific significant assets (such as a factory); a declaration of cross-default; or a restructuring by the debtor) should not be considered a prepayment provision under the provisions of paragraph 68(d). Application of this guidance to specific debt instruments is provided below.

Issue E10—Application of the Shortcut Method to Hedges of a Portion of an Interest-Bearing Asset or Liability (or its Related Interest) or a Portfolio of Similar Interest-Bearing Assets or Liabilities   http://www.rutgers.edu/Accounting/raw/fasb/derivatives/issuee10.html
(Released 4/00)

1.        May the shortcut method be applied to fair value hedges of a proportion of the principal amount of the interest-bearing asset or liability if the notional amount of the interest rate swap designated as the hedging instrument matches the portion of the asset or liability being hedged, and all other criteria for applying the shortcut method are satisfied? May the shortcut method similarly be applied to cash flow hedges of the interest payments on only a portion of the principal amount of the interest-bearing asset or liability if the notional amount of the interest rate swap designated as the hedging instrument matches the principal amount of the portion of the asset or liability on which the hedged interest payments are based? [Generally yes was the DIG’s answer.}

2.        May the shortcut method be applied to fair value hedges of portfolios (or proportions thereof) of similar interest-bearing assets or liabilities if the notional amount of the interest rate swap designated as the hedging instrument matches the notional amount of the aggregate portfolio? May the shortcut method be applied to a cash flow hedge in which the hedged forecasted transaction is a group of individual transactions if the notional amount of the interest rate swap designated as the hedging instrument matches the notional amount of the aggregate group that comprises the hedged transaction? [Generally no was the DIG’s answer.}

*Issue F2—Partial-Term Hedging http://www.rutgers.edu/Accounting/raw/fasb/derivatives/issuef2.html
(Cleared 07/28/99)

A company may not designate a 3-year interest rate swap with a notional amount equal to the principal amount of its nonamortizing debt as the hedging instrument in a hedge of the exposure to changes in fair value, attributable to changes in market interest rates, of the company’s obligation to make interest payments during the first 3 years of its 10-year fixed-rate debt instrument. There would be no basis for expecting that the change in that swap’s fair value would be highly effective in offsetting the change in fair value of the liability for only the interest payments to be made during the first three years. Even though under certain circumstances a partial-term fair value hedge can qualify for hedge accounting under Statement 133, the provisions of that Statement do not result in reporting a fixed-rate 10-year borrowing as having been effectively converted into a 3-year floating-rate and 7-year fixed-rate borrowing as was previously accomplished under synthetic instrument accounting prior to Statement 133. Synthetic instrument accounting is no longer acceptable under Statement 133, as discussed in paragraphs 349 and 350.

*Issue G7—Measuring the Ineffectiveness of a Cash Flow Hedge under Paragraph 30(b) When the Shortcut Method is Not Applied
http://www.rutgers.edu/Accounting/raw/fasb/derivatives/issueg7.html
(Cleared 5/17/00)

Three methods for calculating the ineffectiveness of a cash flow hedge that involves either (a) a receive-floating, pay-fixed interest rate swap designated as a hedge of the variable interest payments on an existing floating-rate liability or (b) a receive-fixed, pay-floating interest rate swap designated as a hedge of the variable interest receipts on an existing floating-rate asset are discussed below. As noted in the last section of the response, Method 1 (Change in Variable Cash Flows Method) may not be used in certain circumstances. Under all three methods, an entity must consider the risk of default by counterparties that are obligors with respect to the hedging instrument (the swap) or hedged transaction, pursuant to the guidance in Statement 133 Implementation Issue No. G10, "Need to Consider Possibility of Default by the Counterparty to the Hedging Derivative." An underlying assumption in this Response is that the likelihood of the obligor not defaulting is assessed as being probable.

Other DIG issues can be viewed at http://www.rutgers.edu/Accounting/raw/fasb/derivatives/issuindex.html

Also see the following summary of FAS 138
"Implementation of SFAS 138, Amendments to SFAS 133," The CPA Journal, November 2001. (With Angela L.J. Huang and John S. Putoubas), pp. 54-56 --- http://www.nysscpa.org/cpajournal/2001/1100/dept/d115401.htm

Added Jensen Comment
I have a technical illustration of benchmark interest rate hedging (with journal entries) at
http://www.cs.trinity.edu/~rjensen/138bench.htm

"The Seven Habits of Spectacularly Unsuccessful Executives," by Eric Jackson, Forbes, January 2, 2012 ---
http://www.forbes.com/sites/ericjackson/2012/01/02/the-seven-habits-of-spectacularly-unsuccessful-executives/

Sydney Finkelstein, the Steven Roth Professor of Management at the Tuck School of Business at Dartmouth College, published “Why Smart Executives Fail” 8 years ago.

In it, he shared some of his research on what over 50 former high-flying companies – like Enron, Tyco, WorldCom, Rubbermaid, and Schwinn – did to become complete failures. It turns out that the senior executives at the companies all had 7 Habits in common. Finkelstein calls them the Seven Habits of Spectacularly Unsuccessful Executives.

These traits can be found in the leaders of current failures like Research In Motion (RIMM), but they should be early-warning signs (cautionary tales) to currently unbeatable firms like Apple (AAPL), Google (GOOG), and Amazon.com (AMZN). Here are the habits, as Finkelstein described in a 2004 article:

Continued in article
Summary from The Unknown Professor on January 4, 2012
:http://financialrounds.blogspot.com/

They see themselves (and their organizations) dominating their environment

They identify so completely with the organization that there is no clear boundary between their personal interests and their corporation’s interests

They think they have all the answers

They ruthlessly eliminate anyone who isn’t completely behind them

They are consummate spokespersons, obsessed with the company image

They underestimate obstacles

They stubbornly rely on what worked for them in the past
"I've known deans that embody 2, 3, 4, and 6. How about you?"
The Unknown Professor

The Seven Habits of Spectacularly Unsuccessful Executives," by Eric Jackson, Forbes, January 2, 2012 ---
http://www.forbes.com/sites/ericjackson/2012/01/02/the-seven-habits-of-spectacularly-unsuccessful-executives/

Sydney Finkelstein, the Steven Roth Professor of Management at the Tuck School of Business at Dartmouth College, published “Why Smart Executives Fail” 8 years ago.

In it, he shared some of his research on what over 50 former high-flying companies – like Enron, Tyco, WorldCom, Rubbermaid, and Schwinn – did to become complete failures. It turns out that the senior executives at the companies all had 7 Habits in common. Finkelstein calls them the Seven Habits of Spectacularly Unsuccessful Executives.

These traits can be found in the leaders of current failures like Research In Motion (RIMM), but they should be early-warning signs (cautionary tales) to currently unbeatable firms like Apple (AAPL), Google (GOOG), and Amazon.com (AMZN). Here are the habits, as Finkelstein described in a 2004 article:

Continued in article
Summary from The Unknown Professor on January 4, 2012
:http://financialrounds.blogspot.com/

They see themselves (and their organizations) dominating their environment

They identify so completely with the organization that there is no clear boundary between their personal interests and their corporation’s interests

They think they have all the answers

They ruthlessly eliminate anyone who isn’t completely behind them

They are consummate spokespersons, obsessed with the company image

They underestimate obstacles

They stubbornly rely on what worked for them in the past
"I've known deans that embody 2, 3, 4, and 6. How about you?"
The Unknown Professor

Jensen Comment
This may be extending Sydney Finkelstein's observations about corporate executives a bridge too far (into the Academy) since there are so many differences between being a CEO of a corporation versus being a middle manager in a university. Firstly, the powers of deans has been greatly diminished over the past 50 years. When I was at Michigan State University in the late 1960s, our Dean met what he thought was a famous professor at a conference and hired him on the spot. It turned out that this was another (pretty good) professor with the same name. Such a mistake could not happen these days where since faculty have increased powers (in committee) regarding faculty hiring and firing.

Deans are only middle managers who must share authority with higher levels of university governance. The days of deans "ruthlessly eliminated anyone who is not completely behind them" certainly does not exist today and probably never existed under tenure protections. When I was on the faculty of Florida State University we had a real pain-in-the-ass in the Management Department who went so far as to haul our dean into state court for a mole-hill issue. The dean won the case in court but could not "ruthlessly fire" that tenured professor who continued to be a pain in the tail for both our dean and most of our faculty colleagues.

If a new dean was a previous corporate executive, she or he might "underestimate obstacles" for a short while, but my hunch is that they soon learn to respect obstacles that make the Academy different from Exxon. My experience with deans from industry are quite the opposite. Sometimes they have too much respect for obstacles that should be knocked down.

In industry, a corporate executive raises money from marketing, cost efficiencies, relations with bankers, etc. In the Academy a dean raises money from alumni, outside business fund raising, relations with the University's top brass, and having students and faculty blogging nice things about the college, their professors, and their deans. I don't think any dean who is a former corporate executive "stubbornly relies on what worked for them in the past." Deans just aren't that stupid.

I think Sydney Finkelstein made some great observations about corporate executives. I don't think these observations can be successfully extrapolated to any dean that I've had the pleasure to work for over the years.

There may be some causes of spectacularly unsuccessful deans, but these are most likely due to not being enough like successful corporate executives.

Ernst & Young --- http://en.wikipedia.org/wiki/Ernst_%26_Young

From The Wall Street Journal Accounting Weekly Review on January 27, 2012 ---
http://online.wsj.com/article/SB10001424052970204301404577171531838421366.html?mod=djemEditorialPage_t

Ernst Chief Seeks Balance as Industry's Woes Add Up
by: Leslie Kwoh
Jan 24, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Accounting, Audit Firms, Audit Quality, Auditing, Auditing Services, Fraudulent Financial Reporting, PCAOB, Sarbanes-Oxley Act

SUMMARY: The article covers an interview with Ernst & Young CEO James Turley. He comments on the change in the accounting profession from being self-regulated to highly regulated, E&Y's performance in regulatory reviews, the performance of the accounting profession following the financial crisis stemming from the burst housing bubble, and the situation E&Y faces through its client Olympus which has admitted to presenting fraudulent financial statements.

CLASSROOM APPLICATION: The article is useful in auditing classes or other classes covering ethics and prevention of fraudulent financial reporting.

QUESTIONS:
1. (Introductory) What are the accounting "industry's woes" indicated in the title of this article? Base your answer on the article, the related article, and other knowledge you have.

2. (Introductory) Who regulates the accounting profession? Describe the process of regulatory review of the accounting and auditing profession as you understand it. What have been the recent findings from those reviews at E&Y?

3. (Advanced) The interviewer asks whether "...accounting firms are scapegoats when clients get into trouble for irresponsible financial practices." Why do you think accounting firms could be considered "scapegoats" in these situations?

4. (Advanced) Consider Mr. Turley's response to the question above. Why do auditors have a responsibility to "lift confidence in financial reporting"?

5. (Advanced) In the related video, Mr. Turley states that few companies had to restate financial statements following the financial crises in contrast to the time period around the Enron collapse and resulting crisis. When are companies required to restate financial statements? How does this fact indicate that the accounting profession has functioned well within the time frame of the financial crisis following the burst housing bubble?

SMALL GROUP ASSIGNMENT:
E&Y CEO James Turley states that during the 35 years he has worked in accounting, the profession has gone from being self-regulated to being highly regulated. Prepare a timeline of that progress in the accounting profession. Properly cite your sources for this information. (Hint: begin at the web site of the Public Company Accounting Oversight Board (PCAOB) on the web at http://pcaobus.org/About/Pages/default.aspx)

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Olympus Casts Spotlight on Accounting
by Kana Inagaki
Nov 08, 2011
Online Exclusive

"Ernst Chief Seeks Balance as Industry's Woes Add Up," by: Leslie Kwoh, The Wall Street Journal, January 24, 2012 ---
http://online.wsj.com/article/SB10001424052970203750404577173373289374952.html?mod=djem_jiewr_AC_domainid

Ernst & Young LLP and its fellow auditors have spent some uncomfortable time in the spotlight.

The company has been under scrutiny since October for its role in the $1.7 billion accounting scandal at Olympus Corp. A panel appointed by Olympus cleared Ernst & Young and KPMG Azsa LLC of any wrongdoing last week, but Japanese regulators continue to investigate the matter.

Meanwhile, a U.S. watchdog said in December it found deficiencies in one-fifth of the audits it inspected at Ernst & Young as part of a broader inspection that found flaws at all the Big Four audit firms. The privately held company is also still fighting a 2010 lawsuit filed by the New York attorney general's office alleging it helped Lehman Brothers Holdings Inc. hide its financial woes before the bank's 2008 collapse.

Chairman and Chief Executive James Turley remains optimistic about Ernst & Young's global prospects. Last year, Mr. Turley steered the firm toward growth across its tax, assurance and advisory services, with strong results in Brazil, India, Africa and China. Global revenues for the privately owned partnership rose to $22.9 billion for the 2011 fiscal year ending last June, from $21.3 billion a year earlier.

It is a bittersweet end to a decade-long run for Mr. Turley, who plans to retire in June 2013 after joining the company 35 years ago as a fresh graduate of Rice University. He will be succeeded by Mark Weinberger, who runs Ernst & Young's global tax practice.

The 56-year-old CEO recently talked to The Wall Street Journal about the responsibility of accounting firms and what should be done to regulate the profession. Edited excerpts:

WSJ: Has the nature of the accounting profession changed in the last few years?

Mr. Turley: I've been in the profession some 35 years now, and it's changed a lot during those times, from capital market requirements, to the responsibility we have to investors, to how we work with independent audit committees. When I started, this was a self-regulated profession. Today, we're highly regulated.

WSJ: In December, the government's auditing-oversight board said it found 13 deficiencies in 63 audits at Ernst & Young, and identified flaws at all Big Four firms. Was this a matter of oversight?

Mr. Turley: This was a matter of execution. It's a matter of us now analyzing the root causes of [flawed audits] and figuring out how we continue to improve our performance in delivery of audits. It's a matter we take extraordinarily seriously and work closely with our regulator in this country, the PCAOB [Public Company Accounting Oversight Board], to continue to improve.

WSJ: Ernst & Young's Japanese arm, Ernst & Young ShinNihon LLC, is still being investigated over its role as an auditor in the Olympus accounting scandal. What's the latest?

Mr. Turley: I can't say much about a matter that's in the process of being analyzed. But you should understand that in this two-decades-long issue at Olympus, we arrived on the scene about a year ago. So we came in pretty late in the game.

WSJ: Ernst & Young has been caught up in a string of litigation involving clients including HealthSouth and Lehman Brothers. How do you maintain stability?

Mr. Turley: We're in a very litigious world, and inevitably, when a company of any type fails or has any problems, one of the Big Four accounting firms typically has been delivering that work. So we, like all our competitors, have matters of litigation. Our people understand that.

WSJ: Do you think accounting firms are scapegoats when clients get into trouble for irresponsible financial practices?

Mr. Turley: We have a responsibility to do everything we can to lift confidence in financial reporting. That doesn't mean we get it right every time. But in any kind of a crisis, like the world has gone through, they're trying to point fingers. We all wish—we in this profession, we in society—we could have seen around the corner and seen that housing prices were going to tumble, liquidity challenges were going to come. Unfortunately, no one saw that, and we couldn't see around the corner any better than anyone else.

WSJ: What else can be done to improve the quality and transparency of accounting?

Mr. Turley: More trend information, more qualitative information, more key performance indicators from companies. Right now, we're essentially asked to give an on-off switch on how we feel about a set of financial statements. Are there different ways to communicate with investors that would be more informative?

WSJ: Ernst & Young is now in more than 140 countries. In which markets do you see the most promise and growth?

Mr. Turley: Last year or so, our fastest-growing market was Brazil. We continue to see great growth in both China and Southeast Asia. India and Eastern Europe, especially Russia, continue to perform very well. We're seeing strong growth in actually all of our businesses now, and in most of our geographies. Europe is the most challenged, because of the aftermath of the ongoing crisis that you read about every day.

WSJ: What do you plan to do after you retire?

Mr. Turley: I haven't any idea at this point. Most people I talk with who are retired would say don't make any decisions too fast.

Continued in article

Bob Jensen's threads on Ernst & Young ---
http://www.trinity.edu/rjensen/Fraud001.htm

Teaching Case on CPV Analysis

From The Wall Street Journal Accounting Weekly Review on January 6, 2012

Starbucks to Raise Prices
by: Annie Gasparro
Jan 04, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: Commitments, Cost Accounting, Cost Management, Managerial Accounting, Product strategy

SUMMARY: Starbucks Corp. "said Tuesday it is raising prices an average of about 1% in the Northeast and Sunbelt regions...." Price increases will be posted for some but not all sizes of its brewed coffee products; the company "...isn't raising prices for packaged coffee sold at its cafes or at grocery stores." The article comments on pricing strategy, cost control, and profit margins. The related video discusses the company's purchase of a long term contract for coffee at high prices just before coffee prices fell overall.

CLASSROOM APPLICATION: The article is useful to introduce manufacturing cost components and cost behavior with a simple product with which most students should be familiar.

QUESTIONS:
1. (Introductory) Why is Starbucks raising the price of some of its locations for some of its products?

2. (Introductory) On which products will Starbucks raise prices? In which locations? Why will the company's pricing vary by product and region?

3. (Advanced) According to one statement in the article about Starbucks products, "...coffee represents a bigger portion of the cost of its packaged goods than of brewed coffee." What are the other cost components for a cup of brewed coffee that are not present in a package of whole coffee beans for sale in a grocery store?

4. (Advanced) What was the impact of a contract for coffee purchases on Starbucks's costs for its product?

5. (Advanced) Based on the discussion in the related online video, how does Starbucks expect coffee purchase costs to even out over the long term?

Reviewed By: Judy Beckman, University of Rhode Island

"Starbucks to Raise Prices," by: Annie Gasparro, The Wall Street Journal, January 4, 2012 ---
http://online.wsj.com/article/SB10001424052970203550304577138922045363052.html?mod=djem_jiewr_AC_domainid

Starbucks Corp. is raising brewed-coffee prices in some regions to offset its higher costs.

The Seattle chain said Tuesday it is raising prices an average of about 1% in the Northeast and Sunbelt regions, including such cities as Boston, New York, Washington, Atlanta, Dallas and Albuquerque, N.M.

Starbucks didn't give details on all the areas where prices will increase but said most southern states are included. Prices won't rise in California and Florida.

Starbucks has raised prices in its cafes annually since the recession began, though the company said its increases have been "far less" than those of its rivals.

Starbucks will face higher commodity costs than some of its competitors in the coming months. The chain made contracts to buy coffee for the fiscal year that began in October because prices were rising and Starbucks wanted to eliminate the volatility of buying on the spot market. But the market for coffee soon fell, and Starbucks was stuck paying more than it would have otherwise.

Over the past couple of years, Starbucks has topped the industry in sales and been able to manage commodity inflation, "not with pricing, but with a more efficient cost structure and strong traffic growth," Chief Financial Officer Troy Alstead said in November when the company reported earnings.

Because the chain's high-end consumer base is less sensitive to prices than that of some rivals, Starbucks has said it didn't think increases would affect customer purchases, even in a struggling economy. Some chains, especially fast-food restaurants that focus on low prices, risk losing customers when prices rise.

Starbucks shares rose 43% last year. The stock fell 73 cents, or 1.6%, to $45.29 in 4 p.m. composite trading Tuesday on the Nasdaq Stock Market.

The latest change, which was reported earlier by Reuters news service, raises the cost of a "tall," or 12-ounce, coffee in some New York City stores by 10 cents to $1.85. Not all sizes will see price increases.

Starbucks isn't raising prices for packaged coffee sold at its cafes or at grocery stores. That's where Starbucks faces the greater pressure on profit margins, largely because coffee represents a bigger portion of the cost of its packaged goods than of brewed coffee.

Continued in article

Bob Jensen's threads on CPV analysis ---
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting

"KPMG has stated that it plans to begin retuning $1.2 billion of frozen funds to (MF Global) clients this month," by Michael Foster, Reuters, January 5, 2012 ---
http://www.big4.com/kpmg/kpmg-promises-to-return-funds-to-mf-global-uk-clients

KPMG has stated that it plans to begin retuning $1.2 billion of frozen funds to clients this month.

Joint Special Administrator of MF Global UK Richard Heis said in an interview with Thomson Reuters on Thursday that the administration had already recovered the majority of client funds and most outstanding client assets. “At the end of December we had recovered some 82 per cent of client monies and substantially all of the client assets. We hope to commence the return of client assets and an interim distribution of monies as early as this month,” Heis said.

MF Global’s customers are planning to take a vote of confidence on the administrator and appointing a committee to sign off KPMG’s fee on Monday, after many clients expressed frustration at the slow progress of the bankruptcy and KPMG’s failure to retrieve their money. However, Heis insists that he has already begun discussing a return of client funds.

To date, no European customers have received funds since MF Global’s collapse.

The move comes after KPMG apologized to MF Global’s clients after inconsistencies in the administrator’s handling of live trades were discovered.

Continued in article

Jensen Question
Is that with or without interest?

Bob Jensen's threads on the two faces of KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm

Teaching Case on the MF Global Scandal

From The Wall Street Journal Weekly Accounting Review on January 6, 2012

The Unraveling of MF Global
by: Aaron Lucchetti and Mike Spector
Dec 31, 2011
Click here to view the full article on WSJ.com

TOPICS: Accounting Information Systems, Auditing, Disclosure

SUMMARY: "The article is based on interviews with traders, executives and other employees...as more details emerge about MF Global's ruin..." from the bankruptcy process, Congressional hearings, and other inquiries into the process behind the firm's demise. The article provides a description of the background of MF Global and the significant change effort led by John Corzine. MF Global had faced declining interest revenue it once earned as interest rates in the U.S. have fallen to near zero. "As soon as Mr. Corzine arrived in March 2010, Moody's Investors Service, Standard & Poor's and Fitch ratings told Mr. Corzine he needed to rev up profits or face downgrades on the securities firm's debt." Corzine increased revenues by executing trades in European sovereign debt, but structured the transactions as "repurchase to maturity." As a result, the investments in European sovereign debt totaling $6.3 billion were removed from the company's balance sheet; there was an obligation to repay under these agreements that was excluded from the balance sheet as well. The demise of the firm came after MF Global disclosed the huge $6.3 billion sum total of these trades; regulators asked for additional collateral, squeezing cash available and then a run on the bank began, securing the demise.

CLASSROOM APPLICATION: The article is useful to cover this case in an auditing or systems controls class.

QUESTIONS:
1. (Introductory) What was the background of MF Global prior to the arrival of Jon Corzine as the company's leader?

2. (Introductory) What operating changes occurred at MF Global during the time of Mr. Corzine's tenure there?

3. (Advanced) What is the significance of the statements in the article that Mr. Corzine roamed the company's trading floor encouraging "...traders to make larger bets...but...spent little time on the firm's back offices and record-keeping, several former employees say." Are these statements necessarily accurate because they are reported in this newspaper?

4. (Advanced) Refer again to the question above. Regardless of whether the statements are accurate in this case, would observing these behaviors influence your plan to audit MF Global? Explain your answer.

5. (Introductory) Refer to the graphic at the beginning of the article entitled "The Corzine Trade." Summarize in words the impact of the "estimated revenue from trade" on total net revenue. Based on discussion in the article, would these trades have increased costs at the firm? Explain your answer.

6. (Advanced) How large was the company's trading activity in European Sovereign debt? Was this an unprofitable series of transactions for the firm?

7. (Advanced) What was the reaction by creditors and regulators when MF Global disclosed its "sovereign-debt trades...on pages 77 and 78 of the company's annual report..."? In your answer, define the term "run on the bank."

8. (Advanced) Based on the activities described in this article, what are possible ways you would consider as an auditor to trace or recover the lost $1.2 billion in missing client funds? In your answer, comment on the propriety of trading with funds from customer accounts and goal of accounting controls you believe should be present in an operation such as MF Global's.

Reviewed By: Judy Beckman, University of Rhode Island

"The Unraveling of MF Global," by: Aaron Lucchetti and Mike Spector, The Wall Street Journal, December 31, 2011 ---
http://online.wsj.com/article/SB10001424052970203686204577117114075444418.html?mod=djem_jiewr_AC_domainid

In September, MF Global Holdings Ltd.'s management sent a memo to the securities firm's 2,800 employees: Start printing on both sides of paper.

The unusual request was a sign that executives at the New York company then led by Jon S. Corzine, a former New Jersey governor and Goldman Sachs Group Inc. chairman, saw tougher times ahead. They were right.

Less than two months later, MF Global collapsed into bankruptcy, undone by a huge bet by Mr. Corzine on European sovereign bonds that was part of his ambition to transform a sleepy commodities broker into a Goldman-like investment-banking powerhouse.

MF Global filed for Chapter 11 bankruptcy protection on Oct. 31. An estimated $1.2 billion in customer funds remain missing, according to the bankruptcy trustee of MF Global's brokerage unit, and there are few solid clues about where the money went. The shortfall has snarled the finances of thousands of traders, farmers and other commodities customers at MF Global.

Mr. Corzine, who turns 65 years old on Jan. 1, has testified before Congress that he never intended for anyone at MF Global to misuse customer funds. He and other MF Global executives face intensifying probes from regulators and law-enforcement officials into the firm's demise.

For employees who worked at MF Global after Mr. Corzine's tenure began in March 2010, the past two months have been filled with anger, sadness, confusion and reflection about how a Wall Street firm that seemed to have so much promise could unwind so quickly.

Some say they saw red flags that worried them as Mr. Corzine ramped up risk-taking and tried to return MF Global to profitability. This article is based on interviews with traders, executives and other employees, many of whom declined to be identified because they are looking for new jobs and are leery about being dragged into the investigations.

As more details emerge about MF Global's ruin, the reasons for Mr. Corzine's decision to bet $6.3 billion on bonds from shaky European countries are becoming clearer.

Some of those who saw Mr Corzine in action at the time reject the oft-repeated narrative that the bet was simply a reckless gamble by an overconfident trader. Instead, they say the unusual trade was driven as much by desperation as self-assurance. Read More

Weekend Investor: Are Brokerage Accounts Safe?

One big reason for the bet: It instantly boosted revenue at a time when Mr. Corzine wanted to appease anxious credit-rating firms and shareholders, said two executives familiar with his thinking. Mr. Corzine declined to comment for this article.

As soon as Mr. Corzine arrived in March 2010, Moody's Investors Service, Standard & Poor's and Fitch Ratings told Mr. Corzine he needed to rev up profits fast or face downgrades on the securities firm's debt.

The European bet was "a way to answer the...demands while buying time to transform the business," one MF Global executive recalls Mr. Corzine telling him.

In the end, he ran out of time. 1,100 New Faces

Mr. Corzine, a Democrat, wouldn't have gone back to work on Wall Street had he been re-elected as governor in 2009. But after his narrow loss to Republican Chris Christie, private-equity investor J. Christopher Flowers, an MF Global shareholder and close friend of Mr. Corzine, persuaded him to run the company. Mr. Corzine was intrigued by the opportunity to turn around the struggling firm, declining another job offer to be a high-ranking executive at a hedge fund.

Mr. Corzine arrived at MF Global with a plan to reinvigorate the firm by introducing the kind of risk-taking that made him a bond-trading star at Goldman in the 1980s and 1990s. He moved quickly at MF Global, cutting hundreds of employees and hiring 1,100 new traders and other employees.

In all, 1,400 employees, or 40% of the firm's work force, eventually left between his arrival and the company's bankruptcy filing, according to a company presentation shortly before the bankruptcy.

The move to become a full-fledged banking firm was an extraordinary change for MF Global, whose roots go back more than 225 years to a sugar broker in London. MF Global spent most of its history as a middleman between farmers, traders and companies that liked to hedge or bet on the direction of commodity prices. 'Take More Risk'

Roaming MF Global's trading floor, Mr. Corzine encouraged traders to make larger bets, without fear of losing money. He added new, riskier businesses that wagered the firm's own money, creating a proprietary-trading desk and increasing the emphasis on higher-risk products like mortgage-backed securities and stock-index derivatives.

Continued in article

"MF Global : 99 Problems And Auditor PwC Warned About None," by Francine McKenna, re:The Auditors, October 28, 2011 ---
http://retheauditors.com/2011/10/28/mf-global-99-problems-and-pwc-warned-about-none-of-them/

Update October 31: I’m putting updates over at Forbes.

My latest column is up at American Banker, “Are Cozy Ties Muzzling S&P on MF Global Downgrade?”

You may recall the last time I wrote about MF Global. That story was about the “rogue” trader that cost them $141 million. In the meantime we’ve seen another “rogue” trader scandal and PwC has given MF Global clean opinions on their financial statements and internal controls over financial reporting since the firm went public in mid-2007.

I’m sure PwC thought everything was peachy as recently as this past May when the annual report came out for their year end March 30. Instead we’re seeing another sudden, unexpected, calamitous, black-swan event that no one could have predicted let alone warn investors about.

Right….

Also see
http://www.forbes.com/sites/francinemckenna/2011/10/30/mf-global-99-problems-and-auditor-pwc-warned-about-none/

Jensen Comment
I prefer "Yeah right!" to just plain "Right!"
MF Global also has some ocean front property for sale in Arizona that's been attested to by PwC.

"MF Global Shares Halted; News Pending," The Wall Street Journal, October 31, 2011 ---
http://blogs.wsj.com/deals/2011/10/31/mf-global-shares-halted-news-pending/

As stock markets open in New York on Monday, MF Global shares remain halted. The only news the company has released so far is a one-line press release confirming the suspension from the Federal Reserve Bank of New York.

Pre-market trading in MF Global Holdings has been halted since about 6 a.m. ET as news is expected to be released about Jon Corzine’s ailing brokerage.

Meanwhile, the global exchange and trading community is moving to lock-down mode on MF Global as the U.S. broker continues efforts to forge a restructuring that could include a sale and bankruptcy filing.

The U.S. clearing unit of ICE said it is limiting MF Global to liquidation of transactions, while the Singapore Exchange won’t enter into new trades. Floor traders said Nymex has halted all MF Global-created trading. Some MF traders are restricted from the entering the floor of the Chicago Board of Trade, and the Federal Reserve Bank of New York said it had suspended doing business with MF Global.

The New York Fed said in its brief statement: “This suspension will continue until MF Global establishes, to the satisfaction of the New York Fed, that MF Global is fully capable of discharging the responsibilities set out in the New York Fed’s policy…or until the New York Fed decides to terminate MF Global’s status as a primary dealer.”

The Wall Street Journal reported Sunday night that MF Global is working on a deal to push its holding company into bankruptcy protection as soon as Monday, and to sell its assets to Interactive Brokers Group in a court-supervised auction.

Continued in article

Jensen Comment
Francine may be singing
'99 bottles of negligence on the wall, 99 bottles of negligence, if one of the bottles should happen to fall, 98 bottles of negligence on the wall, . . . "

"MF GLOBAL GOES BELLY UP, SO WHERE WAS THE GOING CONCERN OPINION?" by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, November 1, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/368

"MF Global: Where Is The Missing Money?" by Francine McKenna, re:TheAuditors, November 10, 2011 ---
http://retheauditors.com/2011/11/10/mf-global-where-is-the-missing-money/

"Deloitte: MF Global’s Former Clients Overstating Claims," by Michael Foster, Big Four Blog, November 13, 2011 ---
http://www.big4.com/deloitte/deloitte-mf-globals-former-clients-overstating-claims

Question
Where did the missing MF Global funds end up?

Hint:
The the word "repo" sound familiar?
http://en.wikipedia.org/wiki/Repurchase_agreement

.

"MF Global Mystery: The Beginning of the End or the End of The Beginning?" by Francine McKenna, re:TheAuditors, January 10, 2011 ---
http://retheauditors.com/2012/01/10/mf-global-mystery-the-beginning-of-the-end-or-the-end-of-the-beginning/

Yesterday I wrote a long and detailed column for Forbes about the conscious dodging by regulators and the trustees in the MF Global case.

Continued in article

Bob Jensen's threads on the Bankruptcy Examiner's Report in the Lehman Brothers Repo 105/108 scandals --- |
www.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's threads on MF Global ---
http://www.trinity.edu/rjensen/Fraud001.htm

Critical Thinking --- http://en.wikipedia.org/wiki/Critical_thinking

Critical Thinking: Why It's So Hard to Teach ---
file:///F:/WebJen/HigherEdControversies.htm#CriticalThinking

"Stanford Remakes Curriculum, Following Trend to Focus on Critical Thinking vs. Disciplinary Content," by Dan Berrett, Chronicle of Higher Education, January 26, 2012 ---
http://chronicle.com/article/Curriculum-Proposals-at/130461/

Stanford University is unveiling on Thursday a set of 55 recommendations to place a priority on teaching undergraduates a set of skills in addition to requiring them to take courses in specific disciplines.

The changes, which were drafted by a 17-member committee (chiefly from the faculty), are in a report that is being presented to the Faculty Senate for review.

It is the first top-to-bottom revision to Stanford's undergraduate curriculum since the 1993-94 academic year. The focus on core skills in addition to disciplinary content reflects the idea that Stanford should develop students' abilities to continue learning throughout their lives and adapt to a changing world after their formal education has ended.

The proposed changes, which the committee described as emphasizing "ways of thinking, ways of doing," are in keeping with a growing emphasis among colleges on core skills instead of specific disciplinary content.

The committee made its recommendations based on site visits to such peer institutions as Duke, Harvard, and Princeton Universities, and the University of Chicago. They did so "not to find some ready-made curriculum we might import to Stanford," the report's authors wrote, "but simply to draw on the accumulated knowledge and experience of our peers."

Stanford's committee identified seven skill areas as important for students: aesthetic and interpretive inquiry; social inquiry; scientific analysis; formal and quantitative reasoning (two courses in each); as well as one course in engaging difference, one in moral and ethical reasoning, and another in creative expression.

The recommendations also endorse the idea that freshmen should be exposed to a variety of learning environments, including lectures, discussion sessions, and intimate seminars. The recommendations would require first-year students to take seminar courses with senior faculty, which is now optional.

Perhaps a more significant change would add a collection of course offerings called "Thinking Matters" to the freshman curriculum. Some of these courses would be interdisciplinary and created by faculty from different departments, such as the "Art of Living," which bridges French and philosophy; "Freedom, Equality, Security," which combines political science and law; and "The Science of MythBusters," which spans biology and chemistry and would use the television program to teach aspects of the scientific method.

Other courses, such as "Brain, Behavior, and Evolution" and "Everyday Life: How History Happens," would be situated more squarely in one discipline.

Rosemary Knight, a professor of environmental geophysics and chair of the Faculty Senate, praised the report as "a call to action to find new ways of meeting the needs of our students," and lauded its focus on undergraduate education.

"It's really a chance to inspire and engage our faculty to think about new ways of thinking and new courses to teach," said Ms. Knight, who plans to teach a "Thinking Matters" course on fresh water.

Bob Jensen's threads on higher education controversies ---
file:///F:/WebJen/HigherEdControversies.htm

Udemy --- http://en.wikipedia.org/wiki/Udemy
Udemy Home Page --- http://www.udemy.com/

"Free Courses, Elite Colleges," by Steve Kolowich, Chronicle of Higher Education, January 27, 2012 ---
http://www.insidehighered.com/news/2012/01/27/company-unveils-line-free-online-courses-elite-college-faculty

Robert Garland, a professor of classics at Colgate University, is not accustomed to discussing Greek religion with the lifeless lens of his MacBook’s built-in video camera. But that was how Garland spent Wednesday afternoon: in his home study, recording lectures on his laptop in 20-minute chunks.

Garland, a novice to online teaching, says it is difficult to think of these solitary sessions as lectures. “I think of them more as chats,” he says. To keep things interesting, he delivers some of them in the second person, as if instructing a time-traveling tourist in ancient Greece how to pray, how to please the gods, how to upset the gods, and so on. Garland’s gear is lo-fi: just the laptop, which he owns, and a microphone mailed to him by Udemy, the company that roped him into this.

http://www.insidehighered.com/news/2012/01/24/stanford-open-course-instructors-spin-profit-company , a company that allows anyone to create and sell courses through its online platform, has announced a new area of its site, called The Faculty Project, devoted to courses by professors at a number of top institutions, such as Colgate, Duke University, Stanford University, Northwestern University, Vanderbilt University, the University of Virginia, Dartmouth College and Vassar College. While Udemy is a for-profit enterprise, the Faculty Project courses will be free.

The goal is to “elevate the brand,” according to Gagan Biyani, Udemy’s president and co-founder. The company says it has no immediate plans to monetize the Faculty Project, and would never do so without the input and permission of its faculty contributors.

The inaugural Faculty Project courses include many humanities electives normally reserved for small classrooms of undergraduates. Among them: “Elixir: A History of Water and Humans,” “Select Classics in Russian Literature” and “The Cognitive Neuroscience of Mindfulness.” Garland and the project’s other professorial recruits are developing, pro bono, mini-lecture-based versions of courses they offer on their home campuses. Udemy says it does not require the professors to relinquish ownership of the courses.

There are no caps on course enrollment. “It could be 10 people, it could be 100, it could be 1,000,” says Ben Ho, the Vassar College economics professor who is teaching the course on water and humans. But as far as interactivity, Udemy’s Faculty Project is more akin to Yale Open Courses -- where users can watch lectures and consult syllabuses for free -- than to Udacity, the venture launched this week by a team of former Stanford academics, which aspires to administer quizzes and grade its anticipated droves of students, which may number in the tens or hundreds of thousands.

“It’s certainly not a ‘course’ in the sense that people will send me essays — I hope,” says Garland. But he did say he is open to corresponding with students who take his Greek religion course, so long as it does not interfere with his on-campus duties. Ho says he might try to set up and moderate discussion groups online for students of his water course. “This is more just informational lectures,” he says, but “I will be answering questions and will encourage people to ask questions.”

Continued in article

Also see Stanford's open sharing ---
http://www.insidehighered.com/news/2012/01/24/stanford-open-course-instructors-spin-profit-company

Jensen Comment
Udemy has a "Business and Professional" category ---
http://www.udemy.com/

I could not find any accounting courses posted as of yet.

However, MIT and some other prestigious universities offer free accounting courses and/or course material in open sharing sites ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

US News Rankings --- http://www.usnews.com/rankings

US News Top Online Education Programs --- http://www.usnews.com/education/online-education
Do not confuse this with the US News project to evaluate for-profit universities --- a project hampered by refusal of many for-profit universiteis to provide data

Methodology: Online Bachelor's Degree Rankings ---
http://www.usnews.com/education/online-education/articles/2012/01/09/methodology-online-bachelors-degree-rankings

. . .

Data collection commenced on July 14, 2011, using a password-protected online system. Drawing from its Best Colleges universe of regionally accredited bachelor's granting institutions, U.S.News & World Report E-mailed surveys to the 1,765 regionally accredited institutions it determined had offered bachelor's degree programs in 2010.

Continued in article

"'U.S. News' Sizes Up Online-Degree Programs, Without Specifying Which Is No. 1," by Nick DeSantis, Chronicle of Higher Education, January 10, 2012 ---
http://chronicle.com/article/US-News-Sizes-Up/130274/?sid=wc&utm_source=wc&utm_medium=en

U.S. News & World Report has published its first-ever guide to online degree programs—but distance-education leaders looking to trumpet their high rankings may find it more difficult to brag about how they placed than do their colleagues at residential institutions.

Unlike the magazine's annual rankings of residential colleges, which cause consternation among many administrators for reducing the value of each program into a single headline-friendly number, the new guide does not provide lists based on overall program quality; no university can claim it hosts the top online bachelor's or online master's program. Instead, U.S. News produced "honor rolls" highlighting colleges that consistently performed well across the ranking criteria.

Eric Brooks, a U.S. News data research analyst, said the breakdown of the rankings into several categories was intentional; his team chose its categories based on areas with enough responses to make fair comparisons.

"We're only ranking things that we felt the response rates justified ranking this year," he said.

The rankings, which will be published today, represent a new chapter in the 28-year history of the U.S. News guide. The expansion was brought on by the rapid growth of online learning. More than six million students are now taking at least one course online, according to a recent survey of more than 2,500 academic leaders by the Babson Survey Research Group and the College Board.

U.S. News ranked colleges with bachelor's programs according to their performance in three categories: student services, student engagement, and faculty credentials. For programs at the master's level, U.S. News added a fourth category, admissions selectivity, to produce rankings of five different disciplines: business, nursing, education, engineering, and computer information technology.

To ensure that the inaugural rankings were reliable, Mr. Brooks said, U.S. News developed its ranking methodology after the survey data was collected. Doing so, he said, allowed researchers to be fair to institutions that interpreted questions differently.

Some distance-learning experts criticized that technique, however, arguing that the methodology should have been established before surveys were distributed.

Russell Poulin, deputy director of research and analysis for the WICHE Cooperative for Educational Technologies, which promotes online education as part of the Western Interstate Commission for Higher Education, said that approach allowed U.S. News to ask the wrong questions, resulting in an incomplete picture of distance-learning programs.

"It sort of makes me feel like I don't know who won the baseball game, but I'll give you the batting average and the number of steals and I'll tell you who won," he said. Mr. Poulin and other critics said any useful rankings of online programs should include information on outcomes like retention rates, employment prospects, and debt load—statistics, Mr. Brooks said, that few universities provided for this first edition of the U.S. News rankings. He noted that the surveys will evolve in future years as U.S. News learns to better tailor its questions to the unique characteristics of online programs.

W. Andrew McCollough, associate provost for information technology, e-learning, and distance education at the University of Florida, said he was "delighted" to discover that his institution's bachelor's program was among the four chosen for honor-roll inclusion. He noted that U.S. News would have to customize its questions in the future, since he found some of them didn't apply to online programs. He attributed that mismatch to the wide age distribution and other diverse demographic characteristics of the online student body.

The homogeneity that exists in many residential programs "just doesn't exist in the distance-learning environment," he said. Despite the survey's flaws, Mr. McCollough said, the effort to add to the body of information about online programs is helpful for prospective students.

Turnout for the surveys varied, from a 50 percent response rate among nursing programs to a 75 percent response rate among engineering programs. At for-profit institutions—which sometimes have a reputation for guarding their data closely—cooperation was mixed, said Mr. Brooks. Some, like the American Public University System, chose to participate. But Kaplan University, one of the largest providers of online education, decided to wait until the first rankings were published before deciding whether to join in, a spokesperson for the institution said.

Though this year's rankings do not make definitive statements about program quality, Mr. Brooks said the research team was cautious for a reason and hopes the new guide can help students make informed decisions about the quality of online degrees.

"We'd rather not produce something in its first year that's headline-grabbing for the wrong reasons," he said.

'Honor Roll' From 'U.S. News' of Online Graduate Programs in Business

Institution Teaching Practices and Student Engagement Student Services and Technology Faculty Credentials and Training Admissions Selectivity

Arizona State U., W.P. Carey School of Business 24 32 37 11

Arkansas State U. 9 21 1 36

Brandman U. (Part of the Chapman U. system) 40 24 29 n/a

Central Michigan U. 11 3 56 9

Clarkson U. 4 24 2 23

Florida Institute of Technology 43 16 23 n/a

Gardner-Webb U. 27 1 15 n/a

George Washington U. 20 9 7 n/a

Indiana U. at Bloomington, Kelley School of Business 29 19 40 3

Marist College 67 23 6 5

Quinnipiac U. 6 4 13 16

Temple U., Fox School of Business 39 8 17 34

U. of Houston-Clear Lake 8 21 18 n/a

U. of Mississippi 37 44 20 n/a

Source: U.S. News & World Report

Institution	Teaching Practices and Student Engagement	Student Services and Technology	Faculty Credentials and Training	Admissions Selectivity
Arizona State U., W.P. Carey School of Business	24	32	37	11
Arkansas State U.	9	21	1	36
Brandman U. (Part of the Chapman U. system)	40	24	29	n/a
Central Michigan U.	11	3	56	9
Clarkson U.	4	24	2	23
Florida Institute of Technology	43	16	23	n/a
Gardner-Webb U.	27	1	15	n/a
George Washington U.	20	9	7	n/a
Indiana U. at Bloomington, Kelley School of Business	29	19	40	3
Marist College	67	23	6	5
Quinnipiac U.	6	4	13	16
Temple U., Fox School of Business	39	8	17	34
U. of Houston-Clear Lake	8	21	18	n/a
U. of Mississippi	37	44	20	n/a

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

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

"Tenured Professor Departs Stanford U., Hoping to Teach 500,000 Students at Online Start-Up," by Nick DeSantis, Chronicle of Higher Education, January 23, 2012 ---
http://chronicle.com/blogs/wiredcampus/tenured-professor-departs-stanford-u-hoping-to-teach-500000-students-at-online-start-up/35135?sid=wc&utm_source=wc&utm_medium=en

The Stanford University professor who taught an online artificial intelligence course to more than 160,000 students has abandoned his tenured position to aim for an even bigger audience.

Sebastian Thrun, a professor of computer science at Stanford, revealed today that he has departed the institution to found Udacity, a start-up offering low-cost online classes. He made the surprising announcement during a presentation at the Digital – Life – Design conference in Munich, Germany. The development was first reported earlier today by Reuters.

During his talk, Mr. Thrun explored the origins of his popular online course at Stanford, which initially featured videos produced with nothing more than “a camera, a pen and a napkin.” Despite the low production quality, many of the 200 Stanford students taking the course in the classroom flocked to the videos because they could absorb the lectures at their own pace. Eventually, the 200 students taking the course in person dwindled to a group of 30. Meanwhile, the course’s popularity exploded online, drawing students from around the world. The experience taught the professor that he could craft a course with the interactive tools of the Web that recreated the intimacy of one-on-one tutoring, he said.

Mr. Thrun told the crowd his move was motivated in part by teaching practices that evolved too slowly to be effective. During the era when universities were born, “the lecture was the most effective way to convey information. We had the industrialization, we had the invention of celluloid, of digitial media, and, miraculously, professors today teach exactly the same way they taught a thousand years ago,” he said.

He concluded by telling the crowd that he couldn’t continue teaching in a traditional setting. “Having done this, I can’t teach at Stanford again,” he said.

One of Udacity’s first offerings will be a seven-week course called “Building a Search Engine.” It will be taught by David Evans, an associate professor of computer science at the University of Virginia and a Udacity partner. Mr. Thrun said it is designed to teach students with no prior programming experience how to build a search engine like Google. He hopes 500,000 students will enroll.

Continued in article

Jensen Comment (true story)
This reminds me of a time when possibly the most popular accounting teacher, Professor XXXXX, in the United States left the most prestigious accounting program (at the time) in the nation to teach at an almost unheard of small private college (that I don't think was even accredited) for an astronomical salary at the time. This particular professor had a genuine gift for teaching a capstone CPA examination review course to seniors just prior to taking the CPA examination (before the 150-hour requirement).

What Professor XXXXX discovered is that there's a real difference when teaching a CPA examination review course to low SAT scoring students having a lousy set of prerequisite accounting courses before taking the capstone CPA examination review course.

"Making Assessment Work," by Kaplan University, Chronicle of Higher Education, November 4, 2011 ---
http://chronicle.com/article/Making-Assessment-Work/129266/

Accreditors are increasingly requiring assessment of student learning to become a focus for post-secondary institutions. The increased importance placed on assessment is not without good reason. Student learning is an important outcome of higher education. With increasing accreditation and public pressure, student learning should be more important to colleges and universities than it ever has. What is important should be measured and what is measured can be improved.

Case in point, Kaplan University (KU) is a for-profit, career oriented university where learning is not just one of the important outcomes it is the most important outcome. More specifically, Kaplan University’s focus is student learning that will materialize into positive career outcomes for its students. With this mission in mind, Kaplan University spent four years planning, developing and implementing Course Level Assessment (CLA), a system specifically designed to close the loop between measurement and improved student outcomes.

CLA is multi-tiered assessment system mapping course level learning goals to program level learning goals. Each of the 1,000 courses contains an average of four to six learning goals that map to one or more of the program learning objectives. Assessment against these outcomes is comprehensive; every outcome is assessed for every student, every term in every course. The Learning outcomes and scoring rubrics that appear in the online grade book all come from a common data repository. The instructor scores the assessment directly in the online gradebook and the data automatically feed back into the data repository. By linking those objectives, rubrics, and assessment data, we can compare student achievement on any specific objective for a course across any number of instructors, sections, or terms with the confidence that the same assessment was used, addressing the same learning objective, graded with the same rubric.

The data mapping enables rapid and sophisticated analytics that supports a tight feedback loop. Another design element of CLA that enhances a short feedback cycle is the proximity of the assessment to the learning event. This is a key differentiator of Kaplan’s CLA. While other strategies can produce reliable evidence of student learning, they are far removed from the actual learning to pin-point any specific deficiency in curriculum or instruction. By combining assessments linked directly to specific learning and automated data analytics, CLA provides a platform to rapidly test and improve curriculum whether on-ground or on-line.

With the technology foundation for CLA fully in place, KU evaluated curricular changes in 221 courses with assessment data. The results showed that 44% of the revisions produced statistically significant improvements while only 23% led to decreases. The CLA system is the cornerstone of all programs to analyze these interventions and make evidence based decisions about course offerings that drive student outcomes.

Continued in article

Bob Jensen's threads on assessment (including competency-based assessment) ---
http://www.trinity.edu/rjensen/Assess.htm

"How Do You Hide A Multibillion Dollar Loss? Accounting For The Olympus Fraud," by Francine McKenna, re:TheAuditors, January 5, 2012 ---
http://retheauditors.com/2012/01/02/how-do-you-hide-a-multibillion-dollar-loss-accounting-for-the-olympus-fraud/

Jensen Comment
Violent mobsters are so tied to the public and private sectors in Japan that they can hide almost anything they choose.

"Olympus Probe Finds 5 Auditors Responsible," SmartPros, January 17, 2012 ---
http://accounting.smartpros.com/x73270.xml

How can such a panel have this much legal power?
"Ernst & Young, KPMG Cleared of Wrongdoing in Olympus Scandal," by Michael Foster, Big4.com, January 17, 2012 ---
http://www.big4.com/kpmg/breaking-ernst-young-kpmg-cleared-of-wrongdoing-in-olympus-scandal

An independent panel has determined that KPMG Azsa LLC and Ernst & Young ShinNihon LLC did not break the law and did not violate any legal obligations when auditing Olympus. The panel determined that both Big4 firms were not responsible for the accounting fraud scandal in which Olympus hid $1.7 billion in assets over a 13-year long period.

The panel’s decision clears KPMG and Ernst & Young from culpability, meaning that no party has grounds to file a suit against either accounting firm.

The panel also determined that five internal auditors, some of which are still with Olympus, were responsible for hiding the assets. The panel concluded that those auditors were responsible for 8.4 billion yen ($109 million) in damages.

Continued in article

Jensen Comment
I have no idea why this "panel" has the power "that no party has grounds to file a suit against either accounting firm."

If this were a lower court decision, there are generally routes of appeal in higher courts.

How does an appointed panel decide that shareholders and creditors have no right to sue in lower or higher courts?

Of course in the case of Olympus the guilty executives were purportedly tied to organized crime. Well now I'm beginning to understand. Organized crime members have their own ways of determining that no lawsuits will ever be filed.

Bob Jensen's threads on the Olympus scandal ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Government Accountability Auditor says Treasury keeping quiet on TARP money losers," by Bernie Becker, The Hill,January 9, 2012 ---
http://thehill.com/blogs/on-the-money/banking-financial-institutions/203245-auditor-treasury-keeps-quiet-on-tarp-money-losers

Greatest Swindle in the History of the World Your Money at Work, Fixing Others’ Mistakes (includes a great NPR public radio audio module) ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

The "road ahead" for changes in U.S. tax rules is fogged in, especially since President Obama pissed on John Wayne's boots over the holiday break.
Bob Jensen: "In a figurative sense, President Obama just pissed on the boots of John (The Duke) Wayne."
"Obama's Reckless Recess Ploy: No president has resorted to recess appointments when Congress is in session. Expect serious legal challenges to new financial regulations," by David Rivkin and Lee Casey, The Wall Street Journal, January 6, 2011 ---
http://online.wsj.com/article/SB10001424052970203471004577142540864703780.html?mod=djemEditorialPage_t

"The Road Ahead for Taxes: With Washington unlikely to address major tax questions soon, taxpayers are facing a lot of guesswork. Here's what to do now." The Wall Street Journal, January 7, 2012 ---
http://online.wsj.com/article/SB10001424052970204331304577140873013235652.html?KEYWORDS=laura+saunders

A slew of major tax cuts is set to expire at year's end—as was the case in 2010. Now, as then, Washington faces the choice of letting income, capital-gains, estate and other tax rates rise as scheduled, or coming up with an alternative.

Last time, lawmakers cobbled together a two-year extension, but it took them until mid-December to agree on the deal.

This year could be even more confusing. In the mix there is a presidential election, talk of major tax overhaul and lingering partisan bitterness over last year's fight to extend the two-percentage-point cut in Social Security taxes. That debate will be revisited when the stopgap extension passed on Dec. 23 expires at the end of February.

The upshot: Anyone trying to do tax planning in the coming months will find it nearly impossible.

"The combination of expiring tax cuts, deficit reduction needs, calls for tax reform and Congress's inability to find common ground on tough issues is producing a nearly intolerable level of uncertainty for taxpayers," says Clint Stretch, a principal with Deloitte Tax in Washington.

While the big questions remain unanswered, a number of smaller but definite tax changes are taking effect this year. There also are new rules to heed for the 2011 tax-filing season, which begins in a few weeks when companies start sending out W-2 tax forms. Here is a guide. New for Tax Year 2012

Several changes for this tax year pose traps for the unwary, notes Melissa Labant, a director at the American Institute of CPAs.

Cost-basis reporting. 2012 is the second year of the phase-in of a law requiring securities brokers to report to the IRS the "cost basis" of investments sold by customers, if the asset is held in a taxable account rather than an individual retirement account or 401(k).

Cost basis is the starting point for measuring taxable gain or loss. If you bought Exxon Mobil at $59 a share in mid-2010 and sold it for $83 in late 2011, the basis would be $59 and the taxable gain $24 a share.

Out of confusion or other motives, taxpayers often report basis incorrectly, so Congress asked firms to track and disclose it to the IRS.

This year, basis reporting kicks in for mutual-fund and dividend-reinvestment-plan holdings acquired in 2012. That could pose big problems for investors who reinvest dividends regularly but want to sell some of a position to harvest tax losses, says Stevie Conlon, a basis expert with WoltersKluwer Financial Services in Chicago.

The risk: triggering "wash-sale" provisions, Ms. Conlon says. Under the wash-sale rules, if an investor buys shares 30 days before or after selling shares in the same investment at a loss, he or she can't deduct the losses in the same year.

No charitable IRA donation. This popular provision expired at the end of 2011, but is likely to be reinstated in the future, experts say. IRA owners 70½ or older were able to donate up to $100,000 of assets per year to a tax-exempt charity.

Under this provision, there's no deduction, but the payout doesn't increase adjusted gross income in a way that could trigger higher taxes on Social Security payments or Medicare premiums. These gifts also may count as part of the owner's required IRA payout, if he or she hasn't taken one.

Would-be IRA donors, beware: A similar lapse in 2010 caused much grief. Congress reinstated the law retroactively in mid-December of that year, but by then many IRA owners had given up and made regular withdrawals. The law didn't allow them to put that money back into the account and then make donations counting toward their minimum payout.

"If you want an IRA donation to be all or part of your required withdrawal, wait for Congress to act," advises Ms. Labant.

No AMT patch. An inflation adjustment for the alternative minimum tax has expired, meaning the tax would apply to about 31 million taxpayers in 2012 instead of 4.3 million last year. Congress fixed a similar lapse in 2010 late in the year.

Lawmakers likely will do so again, but until that happens taxpayers making quarterly estimated payments must choose between paying higher amounts they may never owe and risking underpayment penalties if there isn't a fix.

Continued in article

From IAS Plus on January 9, 2012 --- http://www.iasplus.com/index.htm

9 January 2012: Outcomes from recent Capital Markets Advisory Committee meeting

The IASB has released a summary of the Capital Markets Advisory Committee (CMAC) meeting which was held in London on 12 October 2011. The CMAC was previously known as the Analyst Representative Group (ARG) and is a group of professional financial analysts who regularly meet with members of the IASB to provide the views of professional investors on financial reporting issues.

The topics discussed at the meeting included:

XBRL. The CMAC considered the IFRS taxonomy, custom tags and the Thomson Reuters taxonomy model

Risk free rate of return. There was a general view among the participants that the determination of the risk free rate was not the responsibility of the IASB, discussion also included when 'synthesised' risk free rates may be appropriate (e.g. entities operating in the Eurozone or multi-nationals)

Impairment of financial instruments. The CMAC considered the IASB's current impairment model ('three bucket approach') and considered matters such as 'day one losses', information needs, and the use of expected values

Transition disclosures. The CMAC discussed disclosures made when an IFRS is issued but is not yet mandatory, a preference for IFRS 1 type disclosures when a new standard is applied for the first time, and related matters

Other. The CMAC discussed the usefulness of project-specific case studies for accounting proposals, and the IASB's agenda consultation.

Click for more information (link to IASB website).

Using Google, Yahoo, or Bing to Surf for AAA Journal Articles

Hi Julie and Tracey,

I wrote an AECM suggestion and with a copy to Steve Kachelmeir in which he was all for my suggestion below. This really would entail an AAA administrative routine where AAA journal table of contents for all online AAA journals can be searched on the Web.

I'm not sure how this can be engineered by the AAA, but since Julie and Tracey performed miracles with the AECM, maybe you two can engineer another miracle.

The AECM thread that led up to the following message was a reply by Steve that informed us that the AAA hired a consultant for purposes of marketing more readership of AAA journals.

Hi Steve,

One way to get more readership of AAA journals would make it easier to hit them via Web crawlers such as Google, Yahoo, and Bing.

At the moment, if you search for an article you cannot find a link to the article in the AAA journal archives since these are not searchable by the Web crawlers. However, if the AAA had a constantly-updated Web document of Table of Contents of all AAA journals each article could have the following Web link:
http://aaajournals.org/
The AAA Commons is now searchable by Web crawlers.

Better yet a search "hit" would take you directly to the article in steps described below.

Step One
Suppose the AAA lists the Table of Contents for each and every online AAA journal in a document entitled:
"Table of Contents of All Online American Accounting Association Journals" at the AAA Commons

Step Two
Next suppose a Web surfer searches on the exact phrase "Discretionary Revenues" using Google, Yahoo, or Bing. Among the hits would be the following hit:

Discretionary Revenues as a Measure of Earnings Management

by Stephen R. Stubben
The Accounting Review
Volume 85, Issue 2 (March 2010
Abstract | Enhanced Abstract | PDF (265 KB)
The above links all take the Web surfer to the AAA journal archive for the above Stubben article.

In particular the Abstact link would lead to
http://aaajournals.org/doi/abs/10.2308/accr.2010.85.2.695

Step Three
The surfer can then read "Abstract" of the paper. This might also help the AAA, because if the surfer is really gung ho after reading the Abstract perhaps that surfer will click on the PDF link and pay to download the article

Google Advanced Scholar --- http://scholar.google.com/advanced_scholar_search
It is possible to find AAA journal articles in Google Advanced Scholar. But this has several drawbacks:

The major drawback of Google Advanced Scholar is that Web surfers don't think to use it even though they often use Google, Yahoo, and Bing.
Another drawback of Google Advanced Scholar is that I've not discovered where it takes a Web surfer into the AAA's archive for journals published by the AAA. More often than not it will instead take a surfer to JSTOR such that JSTOR gets the download fee rather than the AAA. Another drawback from the surfer's standpoint is that JSTOR does not keep up with the latest editions of the AAA journals. JSTOR is really better for searching older articles.
An advantage and disadvantage of Google Advanced Scholar is that it will often take a Web surfer to free downloads of the original working paper available from SSRN or from the author's university. The good news is that this download is generally free. The bad news is that this is often a version written before the article was refereed. For the finalized version of the paper after refereeing, the Web surfer must go to the fee-based JSTOR or if he knows how to thread his way through the AAA home page links he can download the article for a fee from the AAA archives.

Conclusion
As it stands at the moment, a Web surfer who is not familiar with the AAA's Website will probably go to JSTOR and pay JSTOR to download the above article. Why not pay the AAA?

Also as I mentioned above, JSTOR does not provide the most recent editions of AAA journals.

I think the AAA should somehow make the Table of Contents available for all archived AAA journals available in such a way that the articles can be found by Web surfers using Google, Yahoo, and Bing.

Respectfully,
Bob Jensen

"Investigating a Compliance Failure: How to determine the right mix of expertise for a fraud investigation," by Tracy L. Coenen, CFO.com, January 5, 2012 ---
http://www.cfo.com/article/2012/1/fraud_internal-investigations-fraud-compliance-failure

It’s every CFO’s worst nightmare: despite your best efforts, your company’s compliance program has failed. There are credible reports of fraud and corruption inside the company, and an initial analysis of the situation confirms a problem. An internal investigation is necessary to determine the magnitude of the fraud, the parties involved, and the company’s financial and reputational exposure under government regulations.

How should you proceed? These investigations are often high stakes, so it is important to do things the right way from the start. In-house counsel should be involved in any situation involving allegations or evidence of fraud. Once executives have sufficient reason to believe the allegations are credible, they should involve outside counsel as well. Executives’ responsibilities don’t end there: they can help find the proper consultants to investigate the fraud, influence the fee schedule of the outside work, and keep the investigators informed. Most important, executives can see to it that employees cooperate with the investigators and provide access to all relevant data and documents.

One group they will need to converse with regularly is outside counsel. These lawyers are more likely to have broad experience with fraud issues and related government regulations than lawyers who have worked for only one company at a time. A more important distinction is the clear attorney-client privilege between the company and outside counsel. This privilege will protect the investigation and its findings, at least to some extent.

Even when a company has done nothing wrong, the details of its internal investigation should be kept close to the vest. Depending on the approach government officials take to their investigation, the company may wish to hold back the results of its own investigation. The attorney-client privilege can provide a perfectly legal and ethical way to do so.

In-House or Independent? Companies are often inclined to have employees handle their fraud investigations. The advantage to using employees is the relatively low cost to investigate, the benefit of the employees’ knowledge of the company and its operations, and the ability to carefully control the investigation.

However, companies are often better off using independent investigators. Although the investigation will cost the company more in dollars, the independence that an outsider brings to the situation may impart more credibility to the findings, especially in the eyes of government investigators. In addition, outside investigators may have more experience and specialized knowledge in the area of fraud, making the investigation more effective.

Outside counsel should make this decision, although input from the board of directors may be important. The lawyers know the risks related to government actions and court activity, and will be in the best position to determine if an independent investigation is necessary.

Some of the best internal investigations I’ve seen have had the best of both worlds. An independent investigator with a fresh set of eyes led the investigation, while employees of the company were liberally available to provide documentation, answer questions, and analyze the work for additional areas of risk.

Further outside help may be needed if the apparent fraud involves specialized issues. For example, cases involving computer forensics should be handled by outside firms with the requisite expertise. Other specialized needs might include familiarity with a particular foreign jurisdiction, regulatory expertise, or knowledge of complicated accounting or tax rules.

Continued in article

Will Yancey's helpers for compliance testing (with a focus on stratified sampling) ---
http://www.willyancey.com/

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

"Time to junk income taxes?" by David Cay Johnston, Reuters, January 6, 2012 ---
http://blogs.reuters.com/david-cay-johnston/2012/01/06/time-to-junk-income-taxes/
There are a lot of comments following this article.

Amazon is beginning to cave in on sales taxes.
Will eBay follow suit? (I doubt it)
Will LL Bean follow suit? (I doubt it)
Ultimately the U.S. Supreme Court will make the final decision

"Amazon, Indiana strike state sales tax deal," Reuters via the Chicago Tribune, January 9, 2012 ---
http://www.chicagotribune.com/business/breaking/chi-amazon-indiana-strike-state-sales-tax-deal-20120109,0,5788598.story

Humor Between January 1 and January 31, 2012

Interesting and often humorous links --- http://twitter.com/millerbear77

NO FRILLS AIRLINES - Carol Burnett Show ---
http://www.youtube.com/v/QCz8he36hsk

Katharine Hepburn Rearranges the Furniture on The Dick Cavett Show --- Click Here
http://www.openculture.com/2012/01/katharine_hepburn_rearranges_the_furniture_on_the_dick_cavett_show.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Ormie the Pig Video Cartoon --- http://www.youtube.com/watch_popup?v=FrTbnczYAd4&feature=player_embedded

An actual add on Google
Meet 50+ Singles for Dating
Question: Does this refer to ages or numbers?

Forwarded by Auntie Bev

Three men, a Canadian farmer, an Arab terrorist and an American Biker are all walking together one day. They come across a lantern and a Genie pops out of it. 'I will give each of you one wish, which is three wishes in total', says the Genie..

The Canadian says, 'I am a farmer and my son will also farm. I want the land to be forever fertile in Canada '

POOF! With the blink of the Genie's eye, the land in Canada was forever fertile for farming.

The Arab terrorist was amazed, so he said, 'I want a wall around Afghanistan , Iraq and Iran so that no infidels, Americans or Canadians can come into our precious land.'

POOF! Again, with the blink of the Genie's eye, there was a huge wall around those countries.

The Biker says, 'I am very curious. Please tell me more about this wall.'

The Genie explains, 'Well, it's about 5,000 feet high, 500 feet thick and completely surrounds the country. Nothing can get in or out; it's virtually impenetrable. '

The Biker sits down on his Harley, cracks a beer, lights a cigar, smiles and says,

'Fill it with water.'

A Well Intended Blonde

The trucker lowers the window, and she says "Hi, my name is Heather and you are losing some of your load."

The trucker ignores her and proceeds down the street.

When the truck stops for another red light, the girl catches up again. She jumps out of her car, runs up and knocks on the door.

Again, the trucker lowers the window. As if they've never spoken, the blonde says brightly, "Hi my name is Heather, and you are losing some of your load!"

Shaking his head, the trucker ignores her again and continues down the street.

At the third red light, the same thing happens again.

All out of breath, the blonde gets out of her car, runs up, knocks on the truck door. The trucker rolls down the window. Again she says "Hi, my name is Heather, and you are losing some of your load!"

When the light turns green the trucker revs up and races to the next light.

When he stops this time, he hurriedly gets out of the truck, and runs back to the blonde.

He knocks on her window, and after she lowers it, he says...

"Hi, my name is Mark, it's winter in Minnesota, and I'm driving the SALT TRUCK!"

Forwarded by Auntie Bev

One buzz word in today's business world is MARKETING.

However, people often ask for a simple explanation of "Marketing."

Well, here it is:

1. You're a woman and you see a handsome guy at a party. You go up to him and say, "I'm fantastic in bed." That's Direct Marketing.

2. You're at a party with a bunch of friends and see a handsome guy.One of your friends goes up to him and, pointing at you, says, "She's fantastic in bed." That's Advertising.

3. You see a handsome guy at a party. You go up to him and get his telephone number. The next day you call and say, "Hi, I'm fantastic in bed." That's Telemarketing.

4. You see a guy at a party; you straighten your dress. You walk up to him and pour him a drink. You say, "May I?" and reach up to straighten his tie, brushing your breast lightly against his arm, and then say, "By the way, I'm fantastic in bed." That's Public Relations.

5. You're at a party and see a handsome guy. He walks up to you and says, "I hear you're fantastic in bed." That's Brand Recognition.

6. You're at a party and see a handsome guy. He fancies you, but you talk him into going home with your friend. That's a Sales Rep.

7. Your friend can't satisfy him so he calls you. That's Tech Support.

8. You're on your way to a party when you realize that there could be handsome men in all these houses you're passing, so you climb onto the roof of one situated towards the center and shout at the top of your lungs, "I'm fantastic in bed!" That's Junk Mail.

9. You are at a party, this attractive older man walks up to you and grabs your ass. That's former President Bill Clinton.

10. You like it, but twenty years later your attorney decides you were offended and you are awarded a settlement. That's America!

January 18, 2012 message from Rick Newmark

What if Jeff Foxworthy Was an Accountant? - a humorous video created by an accounting educator using a computer and a multimedia application :-)

I created this video--http://youtu.be/mBEVjTLIKgg--using Xtranormal. It is very easy to use. You can either use the on-line browser-based version or the desktop version. The desktop version has more advanced features than the online version.

They even have an education licensing program. Special tools allow you to create assignments, moderate, grade, and give feedback. All within the privacy of your class. The monthly fee is $10 + [$0.50 per student]. http://www.xtranormal.com/edu/

Here is another video entitled, ”Hitler works in public accounting” http://youtu.be/DkWH9AYsalI. It is a parody-subtitled video based on a pinnacle scene from Der Untergang (2004). Warning, may cause excessive laughter that can lead to suffocation!

Rick

----------------------------------------

Silence is golden. Duct tape is silver.

Richard Newmark
Professor, School of Accounting and Computer Information Systems
Kenneth W. Monfort College of Business
2004 Malcolm Baldrige National Quality Award Winner
University of Northern Colorado
Campus Box 128, Kepner Hall 2095D
Greeley, CO 80639

Forwarded by Gene and Joan,

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."

P.S. I know some of you are not over 50. I sent it to you to allow you to forward it to those who are.

Us senior citizens don't need anymore gadgets. The tv remote and the garage door remote are about all we can handle.

Forwarded by Paula (who is retired in San Antonio, Texas)

You can retire to Phoenix , Arizona where...

1. You are willing to park 3 blocks away because you found shade.
2. You've experienced condensation on your hiney from the hot water
in the
toilet bowl.
3. You can drive for 4 hours in one direction and never leave town.
4. You have over 100 recipes for Mexican food.
5. You know that "dry heat" is comparable to what hits you in the
face when you
open your oven door.
6. The 4 seasons are: tolerable, hot, really hot, and ARE YOU
KIDDING ME??!!

OR

You can retire to California where...

1. You make over $250,000 and you still can't afford to buy a house.
2. The fastest part of your commute is going down your driveway.
3. You know how to eat an artichoke.
4. You drive your rented Mercedes to your neighborhood block party.
5. When someone asks you how far something is, you tell them how
long it will
take to get there rather than how many miles away it is.
6. The 4 seasons are: Fire, Flood, Mud, and Drought.
7. You can make over $250,000 per year and still be eligible for food stamps after paying all of your state taxes

OR

You can retire to New York City where...

1. You say "the city" and expect everyone to know you mean Manhattan
.
2. You can get into a four-hour argument about how to get from
Columbus Circle
to Battery Park, but can't find Wisconsin on a map.

3. You think Central Park is "nature."
4. You believe that being able to swear at people in their own
language makes
you multi-lingual.
5. You've worn out a car horn. (Ed. Note: IF you have a car).
6. You think eye contact is an act of aggression.

OR

You can retire to Minnesota where...

1. You only have four spices: salt, pepper, ketchup, and Tabasco .
2. Halloween costumes fit over parkas.
3. You have more than one recipe for casserole.
4. Sexy lingerie is anything flannel with less than eight buttons.
5. The four seasons are: winter, still winter, almost winter, and
construction.

OR

You can retire to the Deep South where...

1. You can rent a movie and buy bait in the same store.
2. "Y'all" is singular and "all y'all" is plural.
3. "He needed killin" is a valid defense.
4. Everyone has 2 first names: Billy Bob, Jimmy Bob, Ellie May,
Betty Jean,
Cindy Lou, etc.
5. Everything is either "in yonder," "over yonder" or "out yonder."
It's
important to know the difference, too.

OR

You can retire to Colorado where...

1. You carry your $3,000 mountain bike atop your $500 car.
2. You tell your husband to pick up Granola on his way home and so he
stops at
the day care center.
3. A pass does not involve a football or dating.
4. The top of your head is bald, but you still have a pony tail.

OR

You can retire to the Midwest where...

1. You'll never meet any celebrities, but the mayor knows your name.
2. Your idea of a traffic jam is ten cars waiting to pass a tractor.
3. You have had to switch from "heat" to "A/C" on the same day.
4. You end sentences with a preposition: "Where's my coat at?"
5. When asked how your trip was to any exotic place, you say, "It was
different!"

OR

FINALLY You can retire to Florida where...

1. You eat dinner at 3:15 in the afternoon.
2.. All purchases include a coupon of some kind -- even houses and
cars.
3. Everyone can recommend an excellent dermatologist.
4. Road construction never ends anywhere in the state.
5. Cars in front of you often appear to be driven by headless people.

PS You can retire in the White Mountains of New Hampshire
But I can't imagine why.

Forwarded by James Don

When Insults Had Class

These glorious insults are from an era when cleverness with words was still valued.

The exchange between Churchill & Lady Astor: She said, "If you were my
husband I'd give you poison," and he said, "If you were my wife, I'd drink it."

A member of Parliament to Disraeli: "Sir, you will either die on the gallows
or of some unspeakable disease." "That depends, Sir," said Disraeli, "on
whether I embrace your policies or your mistress." - - -TOUCHE'

"He had delusions of adequacy." [GUILTY PERSON HERE]
- Walter Kerr

"He has all the virtues I dislike and none of the vices I admire."
- Winston Churchill

"A modest little person, with much to be modest about."
- Winston Churchill

"I have never killed a man, but I have read many obituaries with great pleasure."
- Clarence Darrow

"He has never been known to use a word that might send a reader to the dictionary."
William Faulkner... (about Ernest Hemingway).

"Poor Faulkner. Does he really think big emotions come from big words?"
- Ernest Hemingway... (about William Faulkner)

"Thank you for sending me a copy of your book; I'll waste no time reading it." - Moses Hadas

"He can compress the most words into the smallest idea of any man I know."
- Abraham Lincoln

"I didn't attend the funeral, but I sent a nice letter saying I approved of it." - Mark Twain

"He has no enemies, but is intensely disliked by his friends."
- Oscar Wilde

"I am enclosing two tickets to the first night of my new play;
bring a friend ... if you have one."
- George Bernard Shaw to Winston Churchill

"Cannot possibly attend first night, will attend second ... if there is one."
- Winston Churchill, in response.

"I feel so miserable without you; it's almost like having you here."
- Stephen Bishop

"He is a self-made man and worships his creator." HAVEN'T WE KNOWN A FEW OF THESE!!! - John Bright

"I've just learned about his illness. Let's hope it's nothing trivial."
- Irvin S. Cobb

"He is not only dull himself, he is the cause of dullness in others."
- Samuel Johnson

"He is simply a shiver looking for a spine to run up."
- Paul Keating

"There's nothing wrong with you that reincarnation won't cure."
- Jack E. Leonard

"He has the attention span of a lightning bolt."
- Robert Redford

"They never open their mouths without subtracting from the sum of human knowledge." - Thomas Brackett Reed

"In order to avoid being called a flirt, she always yielded easily."
- Charles, Count Talleyrand

"He loves nature in spite of what it did to him." GRIN!
- Forrest Tucker

"Why do you sit there looking like an envelope without any address on it?"
- Mark Twain

"His mother should have thrown him away and kept the stork."
- Mae West

"Some cause happiness wherever they go; others, whenever they go."
- Oscar Wilde

"He uses statistics as a drunken man uses lamp-posts... for support rather than illumination."
- Andrew Lang (1844-1912)

"He has Van Gogh's ear for music."
- Billy Wilder

"I've had a perfectly wonderful evening. But this wasn't it."
- Groucho Marx .

Forwarded by Gene and Joan

A group of 15-year - old boys discussed where they should meet for dinner. It was agreed they should meet at the Dairy Queen next to the Ocean View restaurant because they only had $6.00 between them and Janice Johnson, that cute girl in Social Studies, lives on that street and they might see her when they can ride their bikes there.

Ten years later, the same group of 25-year-old guys discussed where they should meet for dinner. It was agreed they should meet at the Ocean View restaurant because the beer was cheap, they had free snacks, the band was good, there was no cover and there were lots of cute girls.

Ten years later, at 35 years of age, the group once again discussed where they should meet for dinner. It was agreed they should meet at the Ocean View restaurant because the booze was good, it was right near the gym and if they went late enough, there wouldn't be too many whiny little kids.

Ten years later, at 45 years of age, the group once again discussed where they should meet for dinner. It was agreed they should meet at the Ocean View restaurant because the martinis were big, and the waitresses had nice boobs and wore tight pants.

Ten years later, at 55 years of age, the group once again discussed where they should meet for dinner. It was agreed they should meet at the Ocean View restaurant because the prices were reasonable, the wine list was good and fish is good for your cholesterol.

Ten years later, at 65 years of age, the group once again discussed where they should meet for dinner. It was agreed they should meet at the Ocean View restaurant because the lighting was good and they have an early bird special.

Ten years later, at 75 years of age, the group once again discussed where they should meet for dinner. It was agreed they should meet at the Ocean View restaurant because the food was not too spicy, and the restaurant was handicapped accessible.

Ten years later, at 85 years of age, the group once again discussed where they should meet for dinner. It was agreed they should meet at the Ocean View restaurant because they had never been there before.

Forwarded by Auntie Bev

HIGH SCHOOL CLASS REUNION OF A 60+ YEAR OLD LADY

I had prepared for it like any intelligent woman would.

I went on a starvation diet the day before, knowing that all the extra weight would just melt off in 24 hours, leaving me with my sleek, trim, high-school-girl body. The last forty years of careful cellulite collection would just be gone with a snap of a finger.

I knew if I didn't eat a morsel on Friday, that I could probably fit into my senior formal on Saturday. Trotting up to the attic, I pulled the gown out of the garment bag, carried it lovingly downstairs, ran my hand over the fabric, and hung it on the door.

I stripped naked, looked in the mirror, sighed, and thought, "Well, okay, maybe if I shift it all to the back ..." Bodies never have pockets where you need them.

Bravely I took the gown off the hanger, unzipped the shimmering dress and stepped gingerly into it. I struggled, twisted, turned, and pulled and I got the formal all the way up to my knees ... Before the zipper gave out. I was disappointed. I wanted to wear that dress with those silver sandals again and dance the night away.

Okay, one setback was not going to spoil my mood for this affair. No way! Rolling the dress into a ball and tossing it into the corner, I turned to Plan B: the black crepe caftan.

I gathered up all the goodies that I had purchased at Saks: the scented shower gel; the body building and highlighting shampoo and conditioner; the split-end killer and shine enhancer. Soon my hair would look like that girl's in the Pantene ads.

Then the makeup -- the under eye "ain't no lines here" firming cream, the all-day face-lifting gravity-fighting moisturizer with wrinkle filler spackle; the 'all day kiss me till my lips bleed, and see if this gloss will come off' lipstick, the bronzing face powder for that special glow

But first, the roll-on facial hair remover. I could feel the wrinkles shuddering in fear.

Okay, time to get ready! I jumped into the steaming shower, soaped, lathered, rinsed, shaved, tweezed, buffed, scrubbed and scoured my body to a tingling pink.

I plastered my freshly scrubbed face with the anti-wrinkle, gravity fighting "your face will look like a baby's posterior" face cream. I set my hair on hot rollers.

I felt wonderful. Ready to take on the world. Or in this instance, my underwear. With the towel firmly wrapped around my glistening body, I pulled out the black lace, tummy-tucking, cellulite-pushing, ham hock-rounding girdle, and the matching "lifting those bosoms like they're filled with helium" bra.

I greased my body with the scented body lotion and began the plunge. I pulled, stretched, tugged, hiked, folded, tucked, twisted, shimmied, hopped, pushed, wiggled, snapped, shook, caterpillar crawled and kicked. Sweat poured off my forehead but I was done. And it didn't look bad.

So I rested. A well deserved rest, too.

The girdle was on my body. Bounce a quarter off my behind? It was tighter than a trampoline. Can you say, "Rubber baby buggy bumper buns?" Okay, so I had to take baby steps, and walk sideways, and I couldn't move from my buns to my knees. But I was firm!

Oh no ... I had to go to the bathroom. And there wasn't a snap crotch. From now on, undies gotta have a snap crotch. I was ready to rip it open and re-stitch the crotch with Velcro, but the pain factor from past experiments was still fresh in my mind. I quickly sidestepped to the bathroom.

An hour later, I had answered nature's call and repeated the struggle into the girdle. I was ready for the bra. I remembered what the saleslady said to do. I could see her glossed lips mouthing, "Do not fasten the bra in the front, and twist it around. Put the bra on the way it should be worn -- straps over the shoulders Then bend over and gently place both breasts inside the cups."

Easy if you have four hands. But, with confidence, I put my arms into the holsters, bent over and pulled the bra down ... But the boobs weren't cooperating. I'd no sooner tuck one in a cup, and while placing the other, the first would slip out. I needed a strategy. I bounced up and down a few times, tried to dribble them in with short bunny hops, but that didn't work. So, while bent over, I began rocking gently back and forth on my heel and toes and I set 'em to swinging. Finally, on the fourth swing, pause, and lift, I captured the gliding glands. Quickly fastening the back of the bra, I stood up for examination.

Back straight, slightly arched, I turned and faced the mirror, turning front, and then sideways. I smiled, yes, Houston , we have lift up!

My breasts were high, firm and there was cleavage! I was happy until I tried to look down. I had a chin rest And I couldn't see my feet.

I still had to put on my pantyhose, and shoes. Oh ... why did I buy heels with buckles?

Then I had to pee again. ........So I put on my sweats, fixed myself a drink, ordered pizza, and skipped the high school reunion.

Forwarded by Auntie Bev

If you've ever worked for a boss who reacts before getting the facts and thinking things through, you will love this!

Arcelor-Mittal Steel, feeling it was time for a shakeup, hired a new CEO. The new boss was determined to rid the company of all slackers.

On a tour of the facilities, the CEO noticed a guy leaning against a wall.. The room was full of workers and he wanted to let them know that he meant business.

He asked the guy, "How much money do you make a week?"

A little surprised, the young man looked at him and said, "I make $400 a week. Why?"

The CEO said, "Wait right here." He walked back to his office, came back in two minutes, and handed the guy $1,600 in cash and said, "Here's four weeks' pay.

Now GET OUT and don't come back.."

Feeling pretty good about himself, the CEO looked around the room and asked, "Does anyone want to tell me what that goof-ball did here?"

From across the room a voice said, "Pizza delivery guy from Domino's."

Forwarded by Dick and Cec

Ole and his finkers
Ole vas vorking at da fish plant up nort in Dulut vhen he accidentally cut off all ten of his finkers.

He vent to da emergency room in the Clinik and vhen he got dar da Norsky doctor looked at Ole and said, "Okie dokie, let's have da finkers and I'll see vhat I can do."

Ole said, "I haven't got da finkers."

Vhat do you mean, you hafen't got da finkers?" he said. "Mercy- it's 2011 and Ive's got microsurgery and all kinds of incredible surgery techniques. I could hafe put dem back on and made you like new! Vhy didn't you brink da finkers?"

Ole says........."How vas I suppose to pick dem up?"

Forwarded by Maureen

'Someone asked the other day, 'What was your favorite fast food when you were growing up?'

'We didn't have fast food when I was growing up,'

I informed him.

'All the food was slow.'

'C'mon, seriously. Where did you eat?'

'It was a place called 'at

home,'' I explained. !

'Mom cooked every day and when Dad got home from work, we sat down together at the dining room table, and if I didn't like what she put on my plate I was allowed to sit there until I did like it.'

By this time, the kid was laughing so hard I was afraid he was going to suffer serious internal damage, so I didn't tell him the part about how I had to have permission to leave the table.

But here are some other things I would have told him about my childhood if I figured his system could have handled it :

Some parents NEVER owned their own house, never wore Levis, never set foot on a golf course, never traveled out of the country or had a credit card.

In their later years they had something called a revolving charge card. The card was good only at Sears Roebuck. Or maybe it was Sears & Roebuck.

Either way, there is no Roebuck anymore. Maybe he died.

My parents never drove me to soccer practice. This was mostly because we never had heard of soccer.

I had a bicycle that weighed probably 50 pounds, and only had one speed, (slow)

We didn't have a television in our house until I was 19.

It was, of course, black and white, and the station went off the air at midnight, after playing the national anthem and a poem about God; it came back on the air at about 6 a..m. and there was usually a locally produced news and farm show on, featuring local people.

I was 21 before I tasted my first pizza, it was called 'pizza pie.' When I bit into it, I burned the roof of my mouth and the cheese slid off, swung down, plastered itself against my chin and burned that, too. It's still the best pizza I ever had.

I never had a telephone in my room. The only phone in the house was in the living room and it was on a party line. Before you could dial, you had to listen and make sure some people you didn't know weren't already using the line.

Pizzas were not delivered to our home But milk was.

All newspapers were delivered by boys and all boys delivered newspapers --my brother delivered a newspaper, six days a week.. It cost 7 cents a paper, of which he got to keep 2 cents. He had to get up at 6AM every morning.

On Saturday, he had to collect the 42 cents from his customers. His favorite customers were the ones who gave him 50 cents and told him to keep the change. His least favorite customers were the ones who seemed to never be home on collection day.

Movie stars kissed with their mouths shut. At least, they did in the movies. There were no movie ratings because all movies were responsibly produced for everyone to enjoy viewing, without profanity or violence or most anything offensive.

If you grew up in a generation before there was fast food, you may want to share some of these memories with your children or grandchildren

Just don't blame me if they bust a gut laughing.

Growing up isn't what it used to be, is it?

MEMORIES from a friend :

My Dad is cleaning out my grandmother's house (she died in December) and he brought me an old Royal Crown Cola bottle. In the bottle top was a stopper with a bunch of holes in it.. I knew immediately what it was, but my daughter had no idea. She thought they had tried to make it a salt shaker or something. I knew it as the bottle that sat on the end of the ironing board to 'sprinkle' clothes with because we didn't have steam irons. Man, I am old.

How many do you remember?

Head lights dimmer switches on the floor.

Ignition switches on the dashboard.

Heaters mounted on the inside of the fire wall.

Real ice boxes.

Pant leg clips for bicycles without chain guards.

Soldering irons you heat on a gas burner.

Using hand signals for cars without turn signals.

Humor Between January 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor013112

Humor Between December 1-31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor123111

Humor Between November 1 and November 30, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor113011

Humor Between October 1 and October 31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor103111

Humor Between September 1 and September 30, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor093011

Humor Between August 1 and August 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor083111

Humor Between July 1 and July 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor073111

Humor Between May 1 and June 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor063011

Humor Between April 1 and April 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor043011

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 January 31, 2012 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 Resume --- http://www.trinity.edu/rjensen/Resume.htm

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

**For an elaboration on the reasons you should join a ListServ (usually for free) go to http://www.trinity.edu/rjensen/ListServRoles.htm**
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which started out as an accounting education technology Listserv. It has mushroomed into the largest global Listserv of accounting education topics of all types, including accounting theory, learning, assessment, cheating, and education topics in general. At the same time it provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
~~CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/~~ (closed down) CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.
Yahoo (Practitioners) http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the activities of the AICPA. This can be anything from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld http://accountantsworld.com/forums/default.asp?scope=1 This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.
Business Valuation Group BusValGroup-subscribe@topica.com This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM]

Concerns That Academic Accounting Research is Out of Touch With Reality

What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings
http://www.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated
http://www.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling
http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://www.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying

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 Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

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

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
http://www.trinity.edu/rjensen/2008Bailout.htm

Health Care News --- http://www.trinity.edu/rjensen/Health.htm

Bob Jensen's Resume --- http://www.trinity.edu/rjensen/Resume.htm

574 Shields Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Bob Jensen's Personal History in Pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

From the Back Cover

About the Author

Free to Borrow

'Honor Roll' From 'U.S. News' of Online Graduate Programs in Business

Where Recent History Ph.D.'s Are Working

A Background in Policy

Data for Everybody

Corruption Perceptions Index 2009 | Transparency International

We (Don't) Have The Technology

Tenure Doesn't Equal Tech Savvy

High School's Chilling Effects

Hope On The Horizon: The Kindle Effect

Novel solutions

Program

. . .

Everyone loves Squiggly. (This is right because everyone is singular and paired with a singular verb, loves.)

Everyone are happy. (This is wrong because it's pairing the singular noun everyone with a plural verb, are.)

Everyone hates subject-verb agreement. (This is right because everyone and hates are both singular.)

Subject-Verb Agreement

The Write-Around

The Conditions at Foxconn

Framing the Utilitarian vs. Deontological Conversation

Frequent Flier Program --- http://en.wikipedia.org/wiki/Frequent-flyer_program

“Citibank deems frequent-flier miles taxable, but does the IRS?” by David Lazarus, Los Angeles Times, January 24, 2012 ---
http://www.latimes.com/business/la-fi-lazarus-20120124,0,1228880.column

Jensen Comment
I searched for “frequent flier miles” in the IRS Website and found no hits of relevance on this issue.

How do airlines recognize revenue for frequent flyer miles? Which specific accounting rules apply?
http://answers.yahoo.com/question/index?qid=20080407083708AAR4zFl

Five things accounting educators need to know

Scribes used to use it to list prices on invoices and accounting sheets, as in 12 eggs AT one pence per egg.

The real market vs the expectations market

How did capitalism get into this mess?

Economics and policy recommendations

'Honor Roll' From 'U.S. News' of Online Graduate Programs in Business

What if Jeff Foxworthy Was an Accountant? - a humorous video created by an accounting educator using a computer and a multimedia application :-)

	Total	Instruction	Research	Medical Centers
UC Berkeley	$2,026	$ 566	$ 533	0
UC Los Angeles	$4,563	$1,240	$ 702	$1,285

1	Wyoming	41	Iowa
2	South Dakota	42	Maryland
3	Nevada	43	Wisconsin
4	Alaska	44	North Carolina
5	Florida	45	Minnesota
6	New Hampshire	46	Rhode Island
7	Washington	47	Vermont
8	Montana	48	California
9	Texas	49	New York
10	Utah	50	New Jersey

From the Back Cover

About the Author

Free to Borrow

'Honor Roll' From 'U.S. News' of Online Graduate Programs in Business

Where Recent History Ph.D.'s Are Working

A Background in Policy

Data for Everybody

Corruption Perceptions Index 2009 | Transparency International

We (Don't) Have The Technology

Tenure Doesn't Equal Tech Savvy

High School's Chilling Effects

Hope On The Horizon: The Kindle Effect

Novel solutions

Program

. . .

Everyone loves Squiggly. (This is right because everyone is singular and paired with a singular verb, loves.)

Everyone are happy. (This is wrong because it's pairing the singular noun everyone with a plural verb, are.)

Everyone hates subject-verb agreement. (This is right because everyone and hates are both singular.)

Subject-Verb Agreement

The Write-Around

The Conditions at Foxconn

Framing the Utilitarian vs. Deontological Conversation

Frequent Flier Program --- http://en.wikipedia.org/wiki/Frequent-flyer_program

“Citibank deems frequent-flier miles taxable, but does the IRS?” by David Lazarus, Los Angeles Times, January 24, 2012 --- http://www.latimes.com/business/la-fi-lazarus-20120124,0,1228880.column

Jensen Comment I searched for “frequent flier miles” in the IRS Website and found no hits of relevance on this issue.

How do airlines recognize revenue for frequent flyer miles? Which specific accounting rules apply? http://answers.yahoo.com/question/index?qid=20080407083708AAR4zFl

Five things accounting educators need to know

Scribes used to use it to list prices on invoices and accounting sheets, as in 12 eggs AT one pence per egg.

The real market vs the expectations market

How did capitalism get into this mess?

Economics and policy recommendations

'Honor Roll' From 'U.S. News' of Online Graduate Programs in Business

What if Jeff Foxworthy Was an Accountant? - a humorous video created by an accounting educator using a computer and a multimedia application :-)

“Citibank deems frequent-flier miles taxable, but does the IRS?” by David Lazarus, Los Angeles Times, January 24, 2012 ---
http://www.latimes.com/business/la-fi-lazarus-20120124,0,1228880.column

Jensen Comment
I searched for “frequent flier miles” in the IRS Website and found no hits of relevance on this issue.

How do airlines recognize revenue for frequent flyer miles? Which specific accounting rules apply?
http://answers.yahoo.com/question/index?qid=20080407083708AAR4zFl