New Bookmarks
Year 2012 Quarter 4:  October 1 - December 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

December 31 

November 30

October 31 

 

December 31, 2012

 

Bob Jensen's New Bookmarks December 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/

FASB Accounting Standards Updates ---
http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB/Page/SectionPage&cid=1176156316498

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 
 

2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view these videos.
Bob Jensen is an obscure speaker following Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc

2013 IFRS Blue Book (Not Free) ---
http://shop.ifrs.org/ProductCatalog/Product.aspx?ID=1717

Links to IFRS Resources (including IFRS Cases) for Educators ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
 

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

American Accounting Association  Past Presidents are listed at
http://www.cs.trinity.edu/~rjensen/temp/PastPresidentsAAA.htm 

"2012 tax software survey:  Which products and features yielded frustration or bliss?" by Paul Bonner, Journal of Accountancy, September 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Sep/20125667.htm

Center for Financial Services Innovation --- http://cfsinnovation.com/

"Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
Note this has a good explanation of how the inspection process works.

PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx

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

Subtle Distinctions in Technical Terminology
Machine Learning, Big Data, Deep Learning, Data Mining, Statistics, Decision & Risk Analysis, Probability, Fuzzy Logic FAQ ---
http://wmbriggs.com/blog/?p=6465


 

Humor Between December 31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor123112

Humor Between November 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor113012

Humor Between October 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor103112

Humor Between September 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor093012

Humor Between August 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor083112

Humor Between July 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor073112

Humor Between June 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor063012

Humor Between May 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor053112  

Humor Between April 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor043012

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




Rest in Peace Herb and Lenore Miller
After a long illness, Herb Miller joined his long-time wife Lenore on the other side. Herb was a very important mentor to me early in my career. He came a long way from being a clarinet player in a traveling dance band to one of the best known accounting professors in the world.

His Accounting Hall of Fame profile is at
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/herbert-elmer-miller/


Please Don't Forget Stratified Sampling Expert Will Yancey
I remind readers of my good friend Will Yancey (now deceased) who left academe to build an exceptionally lucrative consulting  practice in compliance testing other than GAAP compliance. The main comparative advantages that Will brought to the table were his exceptional skills in stratified sampling. Perhaps Will made four times as much per year in compliance consulting than even our best professors make in the Academy compensation unless they too are making exceptional money in outside consulting and/or textbook publishing.


Bob Jensen's Tribute to Will Yancey ---
http://www.trinity.edu/rjensen/Yancey.htm


To the possible benefit of students, practitioners, and professors Will Yancey's widow maintains Will's fabulous Website ---
http://www.willyancey.com/



Especially note the section of Will's Website devoted to Sampling and Statistics. And keep in mind that, like  Rumpelstiltskin, Will wove this section into gold, much gold.



Personally, I think the largest curriculum deficiency in schools of business is the failure to create a concentration tracks in compliance testing. This could be a natural for business statistics professors who want to do more than teach from statistics textbooks.


Think of the  compliance testing cases that Will Yancey could have written if his life had not been cut so short.


The Going Concern Editor's Picks, some controversial picks, for 2012 ---
http://goingconcern.com/post/zombie-cpas-grant-thornton-temporary-tattoos-and-porn-stars-going-concern-editors-picks-2012


"The Top Ten Stories of 2012:  While the biggest news concerned ObamaCare, perennial CFO subjects like budgeting and planning and the use of spreadsheets were highly popular," by David M. Katz, CFO.com, December 28, 2012 ---
http://www3.cfo.com/article/2012/12/benchmarking_obamacare-health-exchanges-romney-budgeting-excel-spreadsheets-pdf-internal-audit-benefits-


"The 10 Dumbest Things on Wall Street in 2012," by Greg Greenberg, The Street, December 28, 2012 ---
http://www.thestreet.com/story/11800972/1/the-10-dumbest-things-on-wall-street-in-2012.html


"Ball and Brown and the Usefulness of EPS." by Robert Lipe, FASRI, August 9, 2012 ---
http://www.fasri.net/index.php/2012/08/ball-and-brown-and-the-usefulness-of-eps/

At the AAA meeting in DC, I attended a presidential address by Ray Ball and Phil Brown regarding their seminal research paper (JAR 1968). They described the motivation for their study as a test of existing scholarly research that painted a dim picture of reported earnings. The earlier writers noted that earnings were based on old information (historical cost) or, worse yet, a mix of old and new information (mixed attributes). The early articles concluded that earnings could not be informative, and therefore major changes to accounting practice where necessary to correct the problem.

Ball and Brown viewed this literature as providing a testable hypothesis – market participants should not be able to use earnings in a profitable manner. Stated another way, knowing the amount of earnings that would be reported at the end of the year with certainty could not be used to profitably trade common stocks at the beginning of the year. Evidence to the contrary would suggest the null that earnings are non-informative does not hold.

While the methods part of the paper is probably difficult for recent accounting archivalists to follow, Ball and Brown produce perhaps the single most famous graph in the accounting literature. It shows stock returns trending up over the year for companies that ultimately report increases in earnings and trending down for companies that report decreases in earnings. Thus they show that accounting numbers can be informative even if the aggregate number is not computed using a single unified measurement approach across transactions/events. Subsequent research would show that numbers from the income statement have predictive ability for future earnings and cash flows.

As I sat listening to these two research icons, I could not help but think about some comments I have heard recently from a few standard setters and practitioners. Those individuals express contempt for EPS in a mixed attribute world. They appear to wish they could jump in a time machine and eliminate per share computations related to income. I readily admit that EPS does not explain much of the variance in returns over periods of one year or less ( e.g., Lev, JAR 1989). However the link is clearly significant, and over longer periods, the R2’s are quite high (Easton, Harris, and Ohlson, JAE 1992). Can the standard setters make incremental improvements to increase usefulness of EPS? I sure hope so, and maybe the recent paper posted by Alex Milburn will help. But dismissing a reported number because it is not derived from a single consistent measurement attribute – be it fair value or historical cost – seems to revert back to pre-Ball and Brown views that are rejected by years of research.

Jensen Comment
Given the balance sheet focus of the FASB and the IASB at the expense of the income statement I don't see how net income or eps could be anything but misleading to investors and financial analysts. The biggest hit, in my opinion, is the way the FASB and IASB create earnings volatility not only unrealized fair value changes but the utter fiction created by posting fair value changes that will never ever be realized for held-to-maturity investments and debt. This was not the case at the time of the seminal Ball and Brown article. Those were olden days before accounting standards injected huge doses of fair value fiction in eps numbers so beloved by investors and analysts.

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them. “Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said
"Bank Profits Appear Out of Thin Air ," by Andrew Ross Sorkin, The New York Times, April 20, 2009 --- http://www.nytimes.com/2009/04/21/business/21sorkin.html?_r=1&dbk

This is starting to feel like amateur hour for aspiring magicians.

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.

Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.

“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”

But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.

The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.

This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.

The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.

But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.

The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.

And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.

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

 


Question
Why is Francine fuming?

"Accountants Skirt Shareholder Lawsuits," by Jonathan D. Glater, The New York Times, December 27, 2012 ---
http://dealbook.nytimes.com/2012/12/27/accountants-skirt-shareholder-lawsuits/

The accountants who service publicly traded companies are likely to have something to be thankful for this year: shareholders are not filing federal securities fraud lawsuits against them.

Just 10 years ago, public company accountants were in the cross hairs of shareholders, regulators and prosecutors. A criminal indictment destroyed Enron’s auditor, Arthur Andersen. Congress created a new regulator, the Public Company Accounting Oversight Board, to oversee the profession. And in dozens of lawsuits in the years afterward, shareholders named accountants as co-defendants when alleging accounting fraud.

But things have changed. According to NERA Economic Consulting, which tracks shareholder litigation and reported on the decline in accounting firm defendants in its midyear report in July, not one accounting firm has been named a defendant so far this year. One of the study’s co-authors, Ron I. Miller, confirmed that the trend has continued at least through November.

That prompts the question, why don’t shareholders sue accountants anymore?

“To the extent that firms have been burned for a lot of money, they have some pretty strong incentives to try to behave,” Mr. Miller said. “That’s the hopeful side of the legal system: You hope that if you put in penalties, that those penalties change people’s actions.”

The less positive alternative, he added, is that public companies “have gotten better at hiding it.”

From 2005 to 2009, according to the NERA report, 12 percent of securities class action cases included accounting firm co-defendants. The range of federal securities fraud class action cases filed per year in that period was 132 to 244.

The absence of accounting firm defendants this year can probably be explained at least in part by court decisions; the Supreme Court has issued rulings, as in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. in 2008, making it more difficult to recover damages from third parties in fraud cases.

So perhaps more shareholder suits would take aim at accountants, if the plaintiffs believed that their claims would survive a defendant’s motion to dismiss. And it is possible that plaintiffs will add accounting firm as defendants to existing cases in the future, if claimants get information to support such claims.

Over all, fewer shareholder class action lawsuits are based on allegations of accounting fraud, as opposed to other types of fraud. The NERA midyear report found that in the first six months of 2012, about 25 percent of complaints in securities class action cases included allegations of accounting fraud, down from nearly 40 percent in all of 2011.

Perhaps the Sarbanes-Oxley Act, the legislative response to the accounting scandals of the early 2000s, actually worked, Mr. Miller said.

“There’s been a lot of complaining about SOX, and certainly the compliance costs are high for smaller publicly traded companies,” he said, but accounting fraud “is to a large extent what SOX was intended to stop.”

Public company accountants still have potential civil liability to worry about, said Joseph A. Grundfest, a former commissioner of the Securities and Exchange Commission who teaches at Stanford Law School. Regulators, he said, are investigating potential misconduct involving accounting firms.

Continued in article

Bob Jensen's threads on lawsuits where CPA firms have not been so lucky ---
http://www.trinity.edu/rjensen/Fraud001.htm


To a fault I've argued that accountics scientists do not challenge each other or do replications and other validity tests of their published research ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

By comparison the real science game is much more a hard ball game of replication, critical commentary, and other validity checking. Accountics scientists have a long way to go in their quest to become more like real scientists.

 

"Casualty of the Math Wars," by Scott Jaschik, Inside Higher Ed, October 15, 2012 ---
http://www.insidehighered.com/news/2012/10/15/stanford-professor-goes-public-attacks-over-her-math-education-research

. . .

The "math wars" have raged since the 1990s. A series of reform efforts (of which Boaler's work is a part) have won support from many scholars and a growing number of school districts. But a traditionalist school (of which Milgram and Bishop are part) has pushed back, arguing that rigor and standards are being sacrificed. Both sides accuse the other of oversimplifying the other's arguments, and studies and op-eds from proponents of the various positions appear regularly in education journals and the popular press. Several mathematics education experts interviewed for this article who are supportive of Boaler and her views stressed that they did not view all, or even most, criticism from the "traditionalist" camp as irresponsible.

The essay Boaler published Friday night noted that there has been "spirited academic debate" about her ideas and those of others in mathematics education, and she says that there is nothing wrong with that.

"Milgram and Bishop have gone beyond the bounds of reasoned discourse in a campaign to systematically suppress empirical evidence that contradicts their stance," Boaler wrote. "Academic disagreement is an inevitable consequence of academic freedom, and I welcome it. However, responsible disagreement and academic bullying are not the same thing. Milgram and Bishop have engaged in a range of tactics to discredit me and damage my work which I have now decided to make public."

Some experts who have been watching the debate say that the reason this dispute is important is because Boaler's work is not based simply on a critique of traditional methods of teaching math, but because she has data to back up her views.

Keith Devlin, director of the Human Sciences and Technologies Advanced Research Institute at Stanford, said that he has "enormous respect" for Boaler, although he characterized himself as someone who doesn't know her well, but has read her work and is sympathetic to it. He said that he shares her views, but that he does so "based on my own experience and from reading the work of others," not from his own research. So he said that while he has also faced "unprofessional" attacks when he has expressed those views, he hasn't attracted the same level of criticism as has Boaler.

Of her critics, Devlin said that "I suspect they fear her because she brings hard data that threatens their view of how children should be taught mathematics." He said that the criticisms of Boaler reach "the point of character assassination."

Debating the Data

The Milgram/Bishop essay that Boaler said has unfairly damaged her reputation is called "A Close Examination of Jo Boaler's Railside Report," and appears on Milgram's Stanford website. ("Railside" refers to one of the schools Boaler studied.) The piece says that Boaler's claims are "grossly exaggerated," and yet expresses fear that they could be influential and so need to be rebutted. Under federal privacy protection requirements for work involving schoolchildren, Boaler agreed to keep confidential the schools she studied and, by extension, information about teachers and students. The Milgram/Bishop essay claims to have identified some of those schools and says this is why they were able to challenge her data.

Boaler said -- in her essay and in an interview -- that this puts her in a bind. She cannot reveal more about the schools without violating confidentiality pledges, even though she is being accused of distorting data. While the essay by Milgram and Bishop looks like a journal article, Boaler notes that it has in fact never been published, in contrast to her work, which has been subjected to peer review in multiple journals and by various funding agencies.

Further, she notes that Milgram's and Bishop's accusations were investigated by Stanford when Milgram in 2006 made a formal charge of research misconduct against her, questioning the validity of her data collection. She notes in her new essay that the charges "could have destroyed my career." Boaler said that her final copy of the initial investigation was deemed confidential by the university, but she provided a copy of the conclusions, which rejected the idea that there had been any misconduct.

Here is the conclusion of that report: "We understand that there is a currently ongoing (and apparently passionate) debate in the mathematics education field concerning the best approaches and methods to be applied in teaching mathematics. It is not our task under Stanford's policy to determine who is 'right' and who is 'wrong' in this academic debate. We do note that Dr. Boaler's responses to the questions put to her related to her report were thorough, thoughtful, and offered her scientific rationale for each of the questions underlying the allegations. We found no evidence of scientific misconduct or fraudulent behavior related to the content of the report in question. In short, we find that the allegations (such as they are) of scientific misconduct do not have substance."

Even though the only body to examine the accusations made by Milgram rejected them, and even though the Milgram/Bishop essay has never been published beyond Milgram's website, the accusations in the essay have followed Boaler all over as supporters of Milgram and Bishop cite the essay to question Boaler's ethics. For example, an article she and a co-author wrote about her research that was published in a leading journal in education research, Teachers College Record, attracted a comment that said the findings were "imaginative" and asked if they were "a prime example of data cooking." The only evidence offered: a link to the Milgram/Bishop essay.

In an interview, Boaler said that, for many years, she has simply tried to ignore what she considers to be unprofessional, unfair criticism. But she said she was prompted to speak out after thinking about the fallout from an experience this year when Irish educational authorities brought her in to consult on math education. When she wrote an op-ed in The Irish Times, a commenter suggested that her ideas be treated with "great skepticism" because they had been challenged by prominent professors, including one at her own university. Again, the evidence offered was a link to the Stanford URL of the Milgram/Bishop essay.

"This guy Milgram has this on a webpage. He has it on a Stanford site. They have a campaign that everywhere I publish, somebody puts up a link to that saying 'she makes up data,' " Boaler said. "They are stopping me from being able to do my job."

She said one reason she decided to go public is that doing so gives her a link she can use whenever she sees a link to the essay attacking her work.

Bishop did not respond to e-mail messages requesting comment about Boaler's essay. Milgram via e-mail answered a few questions about Boaler's essay. He said she inaccurately characterized a meeting they had after she arrived at Stanford. (She said he discouraged her from writing about math education.) Milgram denied engaging in "academic bullying."

He said via e-mail that the essay was prepared for publication in a journal and was scheduled to be published, but "the HR person at Stanford has some reservations because it turned out that it was too easy to do a Google search on some of the quotes in the paper and thereby identify the schools involved. At that point I had so many other things that I had to attend to that I didn't bother to make the corrections." He also said that he has heard more from the school since he wrote the essay, and that these additional discussions confirm his criticism of Boaler's work.

In an interview Sunday afternoon, Milgram said that by "HR" in the above quote, he meant "human research," referring to the office at Stanford that works to protect human subjects in research. He also said that since it was only those issues that prevented publication, his critique was in fact peer-reviewed, just not published.

Further, he said that Stanford's investigation of Boaler was not handled well, and that those on the committee considered the issue "too delicate and too hot a potato." He said he stood behind everything in the paper. As to Boaler's overall criticism of him, he said that he would "have discussions with legal people, and I'll see if there is an appropriate action to be taken, but my own inclination is to ignore it."

Milgram also rejected the idea that it was not appropriate for him to speak out on these issues as he has. He said he first got involved in raising questions about research on math education as the request of an assistant in the office of Rod Paige, who held the job of U.S. education secretary during the first term of President George W. Bush.

Ze'ev Wurman, a supporter of Milgram and Bishop, and one who has posted the link to their article elsewhere, said he wasn't bothered by its never having been published. "She is basically using the fact that it was not published to undermine its worth rather than argue the specific charges leveled there by serious academics," he said.

Critiques 'Without Merit'

E-mail requests for comment from several leading figures in mathematics education resulted in strong endorsements of Boaler's work and frustration at how she has been treated over the years.

Jeremy Kilpatrick, a professor of mathematics education at the University of Georgia who has chaired commissions on the subject for the National Research Council and the Rand Corporation, said that "I have long had great respect for Jo Boaler and her work, and I have been very disturbed that it has been attacked as faulty or disingenuous. I have been receiving multiple e-mails from people who are disconcerted at the way she has been treated by Wayne Bishop and Jim Milgram. The critiques by Bishop and Milgram of her work are totally without merit and unprofessional. I'm pleased that she has come forward at last to give her side of the story, and I hope that others will see and understand how badly she has been treated."

Alan H. Schoenfeld is the Elizabeth and Edward Conner Professor of Education at the University of California at Berkeley, and a past president of the American Educational Research Association and past vice president of the National Academy of Education. He was reached in Sweden, where he said his e-mail has been full of commentary about Boaler's Friday post. "Boaler is a very solid researcher. You don't get to be a professor at Stanford, or the Marie Curie Professor of Mathematics Education at the University of Sussex [the position she held previously], unless you do consistently high quality, peer-reviewed research."

Schoenfeld said that the discussion of Boaler's work "fits into the context of the math wars, which have sometimes been argued on principle, but in the hands of a few partisans, been vicious and vitriolic." He said that he is on a number of informal mathematics education networks, and that the response to Boaler's essay "has been swift and, most generally, one of shock and support for Boaler." One question being asked, he said, is why Boaler was investigated and no university has investigated the way Milgram and Bishop have treated her.

A spokeswoman for Stanford said the following via e-mail: "Dr. Boaler is a nationally respected scholar in the field of math education. Since her arrival more than a decade ago, Stanford has provided extensive support for Dr. Boaler as she has engaged in scholarship in this field, which is one in which there is wide-ranging academic opinion. At the same time, Stanford has carefully respected the fundamental principle of academic freedom: the merits of a position are to be determined by scholarly debate, rather than by having the university arbitrate or interfere in the academic discourse."

Boaler in Her Own Words

Here is a YouTube video of Boaler discussing and demonstrating her ideas about math education with a group of high school students in Britain.

Continued in article

How Accountics Scientists Should Change: 
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
One more mission in what's left of my life will be to try to change this so that we don't get along so well
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm


During a goodly number of years of my career I was rather deep into cluster analysis that in biology is known as numerical taxonomy ---
http://en.wikipedia.org/wiki/Cluster_analysis
Also see http://en.wikipedia.org/wiki/Numerical_taxonomy
Some of my presentations and publications on this topic include the following:

"Isotropic Scaling of the Interior Components Inside Joiner Scaler Block Clusterings of Entities (Cases) and Variates (Attributes): An Application to United Nations Voting Records," University of Manchester, England, October 3, 1988.

"Extension of Consensus Methods For Priority Ranking Problems: Eigenvector Analysis of 'Pick-the-Winner' Paired Comparison Matrices," Decision Sciences, Vol. 17, Spring 1986, 195-211.

"Aggregation (Composition) Schema for Eigenvector Scaling of Priorities in Hierarchial Structures," Multivariate Behavioral Research, Vol. 18, January 1983, 63-84.

"Accounting Futures Analysis: An Eigenvector Model for Subjective Elicitations of Variations in Cross-Impacts Over Time," Decision Sciences, January 1982, Vol. 13, 15-37.

"Scenario Probability Scaling: An Eigenvector Analysis of Elicited Scenario Odds Ratios," Futures, December 1981, Vol. 13, 489-98.

"The Evaluation of Generic Cross-Impact Models: A Revised Balancing Law for the R-Space Model," Futures, June 1981, 217-220.\

"A Dynamic Programming Algorithm for Cluster Analysis," Mathematical Programming in Statistics, Edited by Arthanari and Dodge, 1979, New York, John Wiley & Sons.

Seminar on cluster analysis, sponsored by The Institute for Advanced Technology, January 10 and 11, 1972, New York City.

"A Cluster Analysis Study of Financial Performance of Selected Business Firms," The Accounting Review, Vol. XLVI, No. 1, January 1971, 36-56.

Here's a paper that was rejected by a referee who later plagiarized part of it in his own name
Working Paper 127
Comparisons of Eigenvector, Least Squares, Chi Square, and Logarithmic Least Squares Methods of Scaling a Reciprocal Matrix
http://www.trinity.edu/rjensen/127wp/127wp.htm

 

Therefore it's of some interest to me that neuroscientists are now learning how the brain seems to perform a natural cluster analysis for terminology:
"Data + Design Project How Do Our Brains Semantically Map the Things We See?"
December 23. 2012
Posted by Paul Caridad
http://www.visualnews.com/2012/12/23/how-do-our-brains-semantically-map-things/

I always thought there was great potential for cluster analysis in financial statement analysis, but along the way I got distracted by other lines of research. But I still think there is great potential for basic research in clustering and pattern recognition. Now there may be some research idea potential in numerical taxonomy of XBRL taxonomy.

Visualization of Multivariate Data (including faces) ---
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm 

 


"Irving Fisher, the First Celebrity Finance Professor," by Colin Read, Bloomberg, November 27, 2012 ---
http://www.bloomberg.com/news/2012-11-27/irving-fisher-the-first-celebrity-finance-professor.html

When speculative bubbles form, as they did in the 1920s and the late 1990s, the financial community invariably listens to academic entrepreneurs peddling their pet philosophies about the financial boom.

There have been many such financial celebrities, though Irving Fisher, the son of an itinerant minister from New York and Connecticut, may have been the first.

Fisher was born Feb. 27, 1867, in Saugerties, New York. Throughout his footloose youth, he thrived at public and private schools that demanded mathematical rigor. Eventually, he entered Yale University as a science major. He ended up in a new area of study called economics. He received his doctorate with one of Yale’s first economics dissertations, and remained associated with the university for the rest of his life.

Fisher was obviously brilliant, though health problems stemming from a bout of tuberculosis early in his career forced him to postpone his plans. This mishap also gave him a taste of his own vulnerability and a lifelong concern for health and eugenics, the now-discredited study of methods designed to improve the genetics of the population. Consumption Decisions

Once returned to health, Fisher developed revolutionary insights into financial theory that are still invoked today. He explained that the market interest rate coincides with the human tendency to discount an uncertain future when compared with the more pressing present. He argued that we distribute our present and expected future wealth over the consumption decisions we make now and in the future. In doing so, he anticipated the life-cycle hypothesis that would demonstrate, half a century later, why we save and how we consume.

And, he showed that we make our financial decisions based on real wealth and real interest rates. Consequently, he devoted his career to designing financial instruments that are immune to inflation. Indeed, he proposed the first inflation-protected Treasuries that offer a fixed real interest rate by allowing the coupon payments to rise along with prices.

Fisher was zealously entrepreneurial for his new financial instruments and his economic theories. He lobbied presidential candidates to promote his inflation-protected bonds, but he showed a remarkable tendency to back the wrong horse.

He also put his money where his mouth is. First, he accumulated data on inflation so that he would be prepared to help calculate the necessary coupon on inflation-protected bonds. To keep track of the data he maintained on index cards, Fisher designed a large revolving-file system to allow for their quick retrieval. When he felt he perfected his system, he sold a version of the idea that allowed the New York City telephone company to organize and quickly retrieve telephone numbers.

His concept eventually became the Rolodex system. When another business company merged with him to form Remington Rand, Fisher became a multimillionaire. His self-made fortune and his financial theories became the stuff of legend on Wall Street during the Roaring Twenties and made Irving Fisher as close to a household name as any academic financial economist.

Fisher absolutely believed in the manifest destiny of the U.S. as it became the world’s economic superpower. The media sought him out to provide regular doses of financial-market optimism. Even when trouble loomed, and the stock market crashed in October 1929, Fisher offered reassurance that the market was just taking a breather before it expanded again. Momentary Irrationality

Fisher succumbed to his own optimism, as had millions of others. By the late 1920s, he had lost most of his considerable fortune. In the early 1930s, he devoted his remaining assets to one long-shot investment after another, always in the belief that the market would soon overcome its momentary irrationality.

He would have lost everything had it not been for the generous decision by Yale University to accept the donation of his home under the provision that he and his wife could remain there until they died.

Continued in article

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


"The 'Be Yourself' Myth," by Karen Kelsky, Inside Higher Ed, January 30, 2012 ---
http://www.insidehighered.com/advice/2012/01/30/essay-why-candidates-academic-jobs-cant-just-be-themselves

. . .

Toward the end of our work together, in a Skype conversation, she asked if I had any final thoughts on how to advise people to prepare for interviews and campus visits. She said, "Of course I always tell them to just be themselves. I mean, that’s always the best advice, isn’t it?"

"Oh good god, Margaret!" I burst out. "Are you kidding me? THAT’S what you tell them?"

A started silence, followed by a sheepish laugh. "Really? That’s not good advice? Why?"

O, Margaret…. O, job candidates…. Where do I begin?

The exchange took me back to the day oh so many years ago, when my very own adviser had also told me, when I asked her for some advice for an upcoming campus visit, to just be myself.

And not knowing any better, I heeded that advice. And went out and made a complete ass of myself.

The fact is, Dear Readers, "yourself" is the very last person you want to be. Why?

Continued in article

Bob Jensen's threads on higher education controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm

 


TODAY'S PH.D. STUDENTS
IS THERE A FUTURE GENERATION OF ACCOUNTING ACADEMICS OR ARE THEY A DYING BREED - A UK PERSPECTIVE
by Vivien Beatte and Mary Jane Smith
Source: ICAS
Country: UK
Date: 20/12/2012

Web: http://icas.org.uk/smith-beattie.pdf
Thank you Andy Lymer for the heads up.

Contents

Foreword .................................................................................................................. 1

Acknowledgements ..................................................................................................... 3

Executive summary .................................................................................................... 5

1. Introduction ......................................................................................................... 12

2. Literature review ................................................................................................... 15

3. Research methods ................................................................................................. 20

4. Results: PhD students ........................................................................................... 26

5. Results: PhD supervisors/academic members of staff .................................................... 41

6. Results: Professional accounting bodies and ASB ....................................................... 56 

7. Summary and conclusions ...................................................................................... 60

References ................................................................................................................. 69

About the authors ...................................................................................................... 72

About SATER ......................................................................................................... 73

 

EXECUTIVE SUMMARY

I’m a new PhD [recently graduated]. What I notice most about our new faculty is that they are all culturally quite different from those departing [retiring].

Background

One of the defining characteristics of a profession is the existence of a related academic discipline, which engages in teaching and research activities that support the profession. The linkage of the profession with the university sector legitimises claims to professionalism. In the US, severe faculty shortages in accounting have been documented and attributed to inadequate renewal in terms of PhD graduates (AAA, 2008; AAA/AAPLG, 2005). In the UK, too, there is a very thin academic labour market for both the accounting and finance disciplines, despite a large increase in PhD student numbers in these disciplines in recent years. This rapid increase in numbers has created concern regarding the quality of doctoral education generally (THES, 2009).

Aims of study and research approach

The aims of this study are to:

1. Document the current state of the market for PhD studies in the UK in the accounting and finance disciplines, in terms of supply, demand, student demographics and employment destinations.

2. Investigate the degree of satisfaction with current PhD supervisory processes.

3. Explore the implications for accounting education and training in the UK, for the academic accounting profession and for the public accounting profession. This includes eliciting the views of organisations with an interest in the academic accounting profession (i.e. professional accounting bodies, the UK accounting standard-setter) regarding PhD and faculty issues.

To address these issues, databases were compiled to allow questionnaire surveys to be undertaken of three groups: current PhD students, recently graduated PhD students and supervisors across pre-1992 and post-1992 institutions. The year 1992 marked a structural shift in the UK university sector. Government policy sought to increase the proportion of school leavers entering university from approximately 12% to 40% by awarding university status to polytechnic institutions. In the present study, these new, less research-focused universities are labelled ‘post-1992’ while the established, more research-focused institutions are labelled ‘pre-1992’. It was anticipated that this difference in research emphasis could affect certain PhD supervisory issues.

One hundred and seventy-six respondents completed the current PhD student survey, with variations being completed by 73 recently graduated students and 299 academic staff. Across the three groups, the 548 responses represent a 22% response rate. Ninety-seven follow-up interviews were conducted to explore the issues further. An additional five interviews were conducted with representatives from the UK professional bodies (ICAS, ICAEW, and ACCA) and the UK Accounting Standards Board (ASB).

Key findings

Current market for PhD studies in the UK (research aim 1)

Nationality. The proportion of current PhD students of British nationality is found to be very low (approximately 20%) and markedly lower than the comparable proportion of US nationals in the US (50%). The vast majority of PhD students come from outside Europe, with a significant proportion coming from Asia (33% of current students). Interview evidence suggested that the trend of students coming from Asia may start to reverse due to a relaxation in the entry requirements applied by US institutions (a key competitor nation for PhDs).

• Disincentives for British students. British students are discouraged from undertaking a PhD by the lower levels of financial reward associated with an academic career in comparison to the profession/industry.

• Mode of study. In pre-1992 institutions, the vast majority of students are enrolled full-time (87%), with part-time study being more common in post-1992 institutions (only 65% full-time).

• Funding of PhD studies. Thirty percent of current students are financed by university/departmental scholarships, some of which have significant teaching/ administrative duties attached. Employer or overseas government sources are also common (31%) and are generally linked to a requirement for the student to return home after the PhD is completed.

• Professional qualification. In pre-1992 institutions, only 23% of current PhD students are members of a professional accounting body, rising to 38% in post-1992 institutions. The corresponding figures for recently graduated students are 13% and 29%, respectively, while those for supervisors are 39% and 66%, respectively. Looking to the future, a continuation in the documented UK decline in the proportion of professionally qualified academics (Brown et al., 2007) can be predicted.

PhD topic area. From the questionnaire survey of current students, a more or less even split between finance and accounting topics is apparent. However, from the questionnaire survey of recently graduated students, finance appears more popular than financial accounting. Only a very small proportion of current students appear to be researching in management accounting, a phenomenon that is attributed, at least in part, to the lack of databases.

• Career plans. The vast majority of current PhD students intended to pursue an academic career (64%), however, only 34% of current students in pre-1992 institutions were intending to apply for an academic position in the UK, with the proportion being even lower in post-1992 institutions (23%). Approximately one-third of current students intended to other countries to work in academia, many of them obligated to do so by way of their funding.

Satisfaction with current PhD supervisory processes (research aim 2)

Overall satisfaction. Current and recently graduated students are generally very satisfied with their supervisors’ availability, assistance and encouragement.

• Additional pastoral support. Some overseas students sought additional emotional and practical support which was not always available.

• Adverse consequences of institutional pressure to increase PhD numbers. These included student perceptions of poor value-for-money (especially for privately funded students); supervisors taking students outside their areas of expertise; and supervisors taking students of inadequate quality.

• Additional supervisory problems. Supervisor relocations disrupted the PhD, especially if alternative supervisors did not have the same level of knowledge in the topic area. Significant pressure to complete within three to four years, due to university performance indicators and funding restrictions, adversely impacted the quality of the final thesis and placed supervisors under stress.

• PhDs fit for purpose. The ability of PhD programmes to produce accounting academics who are fit for purpose in terms of teaching was seriously questioned. The purpose of researching in areas so far removed from teaching and of interest/ assistance to the profession was also cause for concern.

Policy implications, including profession/regulator concerns (research aim 3)

Changing demographics. In contrast to the current student sample, a large majority of those responding to the supervisor survey were British across both pre-1992 and post-1992 institutions (71% and 84%, respectively). A substantial proportion of these academic staff moved from the profession several decades earlier without a PhD qualification.

• Dissatisfaction of current generation of academic staff. Many current faculty doubted that they would make the same career decision in today’s academic environment. This was due to the decreased freedom and flexibility of an academic career, the lack of career prospects for new lecturers, the reduced prestige associated with academia, and the severe lack of financial rewards compared to the profession. The potential to lose members of the current generation to academic institutions outside the UK was also evident.

• Need for professionally-qualified accounting academics. This need in terms of teaching, research, and other service provision to students was strongly advocated, yet severe structural difficulties in fulfilling this need exist as the PhD is now seen as a pre-requisite for securing a research and teaching contract in universities. Although some accounting and finance academics expressed scepticism as to the value placed on the academic function by the profession, representatives from the accounting profession were keen to acknowledge the necessity of professionally-qualified academics.

• Consequences of lack of professionally-qualified accounting academics. Representatives from the profession were aware that the inability of institutions to recruit professionally-qualified academics had led to the loss of course accreditations (in particular in the areas of audit and tax) and the employment of staff on teachingonly contracts. However, this was perhaps less of a concern to the profession than might be expected, due to the low overall proportion of entrants with ‘relevant’ degrees.

Policy-relevance of academic research. All interested parties expressed concern regarding the general lack of policy-relevance of academic research and the increasing divergence between the accounting profession and academia.

• Future of the discipline. Creating a future generation of accounting academics in the UK relies heavily on recruiting those completing UK PhD programmes into UK institutions. The potential, in terms of the number of students enrolled on PhD programmes, is currently there. However, only a minority are potential candidates for UK academia, as they are either required to (or chose to) return to their home country. Current members of the academic accounting community foresee a bleak future, in which the discipline withers, due to staff shortages, the emergence of a clear demarcation between teaching and research institutions and/or a loss of distinctiveness by becoming subsumed within business schools. Representatives from the profession were concerned by this prospect, feeling that it would adversely impact upon claims to be a profession. For some, accounting academics were predicted as a dying breed!

 

Conclusions and recommendations

Continued in article

Jensen Comment
Among the parts not quoted above, the complaint is repeated that in the U.K. the ties between Ph.D. programs and the practicing profession are weaker than in other parts of Europe. This is also a huge complaint raised in the United States in the AAA Pathways Commission Report.

Although every time I mention the Pathways Commission Report accountics scientists run for cover, I will repeat parts of it here from
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

Accountics is the mathematical science of values.
Charles Sprague [1887] as quoted by McMillan [1998, p. 1]

http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm 

"Accounting for Innovation," by Elise Young, Inside Higher Ed, July 31, 2012 ---
http://www.insidehighered.com/news/2012/07/31/updating-accounting-curriculums-expanding-and-diversifying-field

Accounting programs should promote curricular flexibility to capture a new generation of students who are more technologically savvy, less patient with traditional teaching methods, and more wary of the career opportunities in accounting, according to a report released today by the Pathways Commission, which studies the future of higher education for accounting.

In 2008, the U.S. Treasury Department's  Advisory Committee on the Auditing Profession recommended that the American Accounting Association and the American Institute of Certified Public Accountants form a commission to study the future structure and content of accounting education, and the Pathways Commission was formed to fulfill this recommendation and establish a national higher education strategy for accounting.

In the report, the commission acknowledges that some sporadic changes have been adopted, but it seeks to put in place a structure for much more regular and ambitious changes.

The report includes seven recommendations:

According to the report, its two sponsoring organizations -- the American Accounting Association and the American Institute of Certified Public Accountants -- will support the effort to carry out the report's recommendations, and they are finalizing a strategy for conducting this effort.

Hsihui Chang, a professor and head of Drexel University’s accounting department, said colleges must prepare students for the accounting field by encouraging three qualities: integrity, analytical skills and a global viewpoint.

“You need to look at things in a global scope,” he said. “One thing we’re always thinking about is how can we attract students from diverse groups?” Chang said the department’s faculty comprises members from several different countries, and the university also has four student organizations dedicated to accounting -- including one for Asian students and one for Hispanic students.

He said the university hosts guest speakers and accounting career days to provide information to prospective accounting students about career options: “They find out, ‘Hey, this seems to be quite exciting.’ ”

Jimmy Ye, a professor and chair of the accounting department at Baruch College of the City University of New York, wrote in an email to Inside Higher Ed that his department is already fulfilling some of the report’s recommendations by inviting professionals from accounting firms into classrooms and bringing in research staff from accounting firms to interact with faculty members and Ph.D. students.

Ye also said the AICPA should collect and analyze supply and demand trends in the accounting profession -- but not just in the short term. “Higher education does not just train students for getting their first jobs,” he wrote. “I would like to see some study on the career tracks of college accounting graduates.”

Mohamed Hussein, a professor and head of the accounting department at the University of Connecticut, also offered ways for the commission to expand its recommendations. He said the recommendations can’t be fully put into practice with the current structure of accounting education.

“There are two parts to this: one part is being able to have an innovative curriculum that will include changes in technology, changes in the economics of the firm, including risk, international issues and regulation,” he said. “And the other part is making sure that the students will take advantage of all this innovation.”

The university offers courses on some of these issues as electives, but it can’t fit all of the information in those courses into the major’s required courses, he said.

Continued in article

Bob Jensen's threads on Higher Education Controversies and Need for Change ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm

The sad state of accountancy doctoral programs ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

How Accountics Scientists Should Change: 
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
One more mission in what's left of my life will be to try to change this
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm 

 

July 31, 2012 reply from Paul Williams

Bob, A good place to start is to jettison pretenses of accounting being a science. As Anthony Hopwood noted in his presidential address, accounting is a practice. The tools of science are certainly useful, but using those tools to investigate accounting problems is quite a different matter than claiming that accounting is a science. Teleology doesn't enter the picture in the sciences -- nature is governed by laws, not purposes. Accounting is nothing but a purposeful activity and must (as Jagdish has eloquently noted here and in his Critical Perspectives on Accounting article) deal with values, law and ethics. As Einstein said, "In nature there are no rewards or punishments, only consequences." For a social practice like accounting to pretend there are only consequences (as if economics was a science that deals only with "natural kinds) has been a major failing of the academy in fulfilling its responsibilities to a discipline that also claims to be a profession. In spite of a "professional economist's" claims made here that economics is a science, there is quite some controversy over that even within the economic community. Ha-Joon Chang, another professional economist at Cambridge U. had this to say about the economics discipline: "Recognizing that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realize that economics is not a science like physics or chemistry, but a political exercise. Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you are studying cannot be scientifically determined what you are doing is not a science (23 Things They Don't Tell You About Capitalism, p. 10)." The silly persistence of professional accountants in asserting that accounting is apolitical and aethical may be a rationalization they require, but for academics to harbor the same beliefs seems to be a decidedly unscientific posture to take. In one of Ed Arrington's articles published some time ago, he argued that accounting's pretenses of being scientific are risible. As he said (as near as I can recall): "Watching the positive accounting show, Einstein's gods must be rolling in the aisles."

 

Jensen Conclusion
It would seem that the complaints about accounting doctoral programs in the United Kingdom and the United States have common threads, especially in complaints about the way accounting doctoral programs and curricula have divorced themselves from the practicing profession. As I mentioned above, if you mention this to a group of accountics scientists they will run for cover in an effort to preserve their pretense of being scientists in the accounting profession, scientists who rarely replicate findings, will not publish commentaries on their findings, and do not communicate in the social media such as the AAA Commons. They don't give a damn about much of anything except counting their publications that nobody in the practicing profession wants to read.


But having a good idea is only the start. What you have to do is make it
into a story. Some people think that all they need in order to be a writer is
inspiration. Not a bit of it! Plenty of people have good ideas, but very few of them
actually go on and write  story. That's where the hard work starts.

Phillip Pullman, "How do Writers Think of Their Ideas?"
Big Questions From Little People, Edited by Gemma Elwin Harris, Faber & Faber, Ltd., ISBN 978-0-16-222322-7, 2012, Page 168
Also see the video at
http://www.openculture.com/2012/11/adam_savage_host_of_mythbusters_explains_how_simple_ideas_become_great_scientific_discoveries.html

Every today that is, and that will be, Is sculptured by all that was
Bob Schlag - January 24, 1982
Thank you Auntie Bev for the heads up


Editing is "the lifeblood of the profession," Hutner remarked. He emphasized that tasks like putting out new editions, compiling anthologies, and editing journals, among other things, "matter to members of the professoriate as much as, if not more than, writing thesis-length books," which are otherwise the gold standard in the humanities.
"The Editor as Power Broker," by Jeffrey J. Williams, Chronicle of Higher Education's Chronicle Review, December 17, 2012 ---
http://chronicle.com/article/The-Editor-as-Power-Broker/136259/?cid=cr&utm_source=cr&utm_medium=en

Jensen Comment
As I read this piece I kept thinking that this is not about Gordon Hutner. It's about Tony Hopwood who founded Accounting, Organizations and Society in 1976 and was the AOS Editor until just before he died ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/anthony-george-hopwood/

Tony published quite a few accountics science articles, but the main contribution of AOS was to go beyond the limits of big data and limiting assumptions of mathematics to encompass a much more scholarly view of accounting, organizations, and society. He was willing to publish accounting research papers that contained no equations and statistical inference tables


Some Accounting Blogs That I Should View More Frequently

Building Business Value by Lynn Northrup -
http://www.accountingweb.com/blogs/accountingweb/building-business-value
Lynn has some good posts but they are very infrequent

Ethics Sage by Steven Mintz ---
http://www.ethicssage.typepad.com/ 
This is a good blog that I intend to view more frequently

FraudBytes by Mark Zimbelman ---
http://fraudbytes.blogspot.com/
Mark covers some the same fraud modules that I cover, but he goes into more types of fraud other than accounting, finance, and business fraud

re:TheAuditors by Francine McKenna---
http://retheauditors.com/
Francine once told me she never writes anything nice about CPA firms because she figures there are many other sites that have something nice to say about accounting and auditing firms. I used to visit her re:TheAuditors daily until her postings became so infrequent. In part this is probably due to the column she now writes frequently for Forbes. Her column is mostly a muckraking column about accounting and auditing firms.

Jim Peterson's re:Business ---
http://www.jamesrpeterson.com/home/
Jim is a liberal lawyer who teaches auditing and usually blogs progressive modules that are sometimes cleverly written with humanities references. Jim's blog is mostly a muckraking site but with a bit more of an academic flavor than Francine's blog.

Canada's Jerry Trites eBusiness Blog --- http://trites-e-business.blogspot.com/
Canada's Jerry Trites IS Assurance Blog ---
http://uwcisa-assurance.blogspot.com/
Jerry is a good friend with infrequent and highly specialized postings. Jerry started blogging under the name Zorba and has been blogging persistently for many years.

Richard Torian's Managerial Accounting Information Center ---
http://www.informationforaccountants.com/ 
This is more of a resources database for those teaching and doing research in managerial and cost accounting

David Albrecht's Summa Blog ---
http://profalbrecht.wordpress.com/
David is an accounting teacher who bubbles with humor and enthusiasm for social networking. His blogs are often clever and informative. However, they are not especially frequent.

John Stancil's Tax Blog ---
http://www.thetaxdocspot.com/
John posts infrequently, but his posts are worthwhile in the field of taxation

Zane Swanson's Askerif XBRL Blog --- http://blog.askaref.com/
Zane has great intentions for this but posts very infrequently

 

Jensen Comment
There are many more accounting professor blogs that I visit much more frequently, at least weekly and sometimes daily.
These are listed at http://www.trinity.edu/rjensen/ListservRoles.htm

Also see David Albrecht's listing of bloggers ---
http://profalbrecht.wordpress.com/links/

I like bloggers who let me know that they've posted something that might be of interest to me and the AECM. These include Tom Selling (The Accounting Onion) and Andrew Priest (AccountingEducation.com). I also get email notices from commercial bloggers like SmartPros, AccountingWeb. and the Big Four.

There are some tremendous Websites where blogging is almost incidental. My best example here is Jim Martin's tremendous MAAW open-sharing Website ---
http://maaw.info/

Please let me know if there are important accounting blogger sites that I've overlooked at
http://www.trinity.edu/rjensen/ListservRoles.htm

Of course there are nearly 50 other sites that I visit almost daily, but most of these are not accounting professor sites.

 


From PwC
"Setting the standard -- What you need to know about the FASB's and IASB's standard setting activities" -- December 2012" --- Click Here
http://www.pwc.com/us/en/cfodirect/publications/setting-the-standard/setting-the-standard-fasb-and-iasb-standard-setting-activities-december-2012.jhtml?display=/us/en/cfodirect/publications/setting-the-standard


"PCAOB Delivers Bad Inspection News to 3 More Firms, by Tammy Whitehouse, Compliance Week, December 26, 2012 ---
http://www.complianceweek.com/pcaob-delivers-bad-inspection-news-to-3-more-firms/article/273958/

Three major audit firms received less than glowing inspection reports from the Public Company Accounting Oversight Board, continuing a theme of high failure rates that the audit regulator is hammering firms to fix.

The latest reports for Deloitte & Touche, Ernst & Young, and Grant Thornton say that in four cases concerns raised by inspectors ultimately led to restatements, two for Deloitte and one each for E&Y and Grant Thornton. Deloitte showed a slight improvement in its failure rate from 2010 to 2011, but the failure rates rose for both E&Y and Grant Thornton, according to the reports.

Inspectors dug into 56 audit reports at E&Y and found problems with 20 of them for a failure rate of 36 percent. That's a big increase over the 21 percent rate of problem audits in the firm's 2010 inspection report. Grant Thornton, likewise, saw a jump in the rate of problem audits from 37 percent in 2010 to 43 percent in 2011. Deloitte, however, showed some improvement from a problem rate of 45 percent in 2010 to 42 percent in 2011.

None of the three firms challenged the PCAOB findings in their letters to the PCAOB that are attached to their inspection reports. Each firm simply acknowledged the PCAOB's findings, indicated they complied with auditing and documentation standards in making adjustments called for by inspectors, and said they are working internally to improve audit quality.

The PCAOB earlier published its latest inspection findings for PwC and KPMG. While KPMG's failure rate held fairly steady around 22 percent, the rate jumped for PwC, from 37 percent in 2010 to 41 percent in 2011. The board also offered no improvement in its findings at McGladrey.

The most commonly cited audit problems for all the major firms center on many of the same areas that have been problematic for several years -- issues around allowance for loan losses, impairments, fail value, revenue recognition, and problems with internal control over financial reporting. In its letter to the board, PwC challenged the PCAOB to step up progress on some auditing standards that would give auditors more concrete guidance on how to handle some of the toughest areas of auditing that are most often cited by inspectors.

PCAOB Member Jeanette Franzel recently warned the board is not seeing the improvement in its 2011 inspection cycle that it hoped for after 2010 inspections were complete. The board recently published a summary report of the problems it sees most frequently among the major firms in the audit of internal control over financial reporting, and it is developing another report that will summarize its greatest concerns with respect to financial statement audits. The board also is working on an additional report to summarize the themes it has identified in audits performed by smaller firms, or those that audit fewer than 100 issuers.

Jensen Comment
The big auditing firms seem to not much care anymore about their bad PCAOB inspection reports. This could possibly be due to the client market not caring about that the PCAOB says about large audit firms. Or it could be that all the big auditing firms have such bad inspection reports that the none of the firms rise to the top due to great PCAOB inspection reports.

December 27, 2012 reply from Steve Kachelmeir

Bob, as always, I thank you for calling these developments to our attention. This is the primary reason I tune into AECM. I also tend to agree with your interpretation of this particular document. Among other reasons, one has to take the PCAOB inspection "failure rate" with a big grain of salt, give that by the PCAOB's own admission, the sample of audits selected for inspection is anything but random. Rather, the PCAOB picks on audits with the toughest issues, for which the ability to second-guess the auditor is the highest.

Steve

PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx

The PCAOB That Stole Christmas: Lumps of Coal Stocking Stuffers
"The PCAOB Has Conveniently Released 2011 Inspection Reports For Deloitte, Grant Thornton and Ernst & Young the Friday Before Christmas," by Adrenne Gonzalez, December 21, 2012 ---
http://goingconcern.com/post/pcaob-has-conveniently-released-2011-inspection-reports-deloitte-grant-thornton-and-ernst-young

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

 


"Advantages of Low Capital Gains Tax Rates," by Chris Edwards, Cato Institute, December 2012 ---
http://www.cato.org/sites/cato.org/files/pubs/pdf/tbb-066.pdf

. . .

Eleven OECD countries do not impose taxes on longterm capital gains, nor do some jurisdictions outside of the OECD, such as Hong Kong, Malaysia, and Thailand.4 The nontaxation of long-term gains used to be the norm in many countries. Britain did not tax capital gains until 1965 because policymakers thought “that capital gains were not income … hence were not subject to taxation.”5 Capital gains taxation was also imposed relatively recently in Canada (1972), Ireland (1975), and Australia (1985). And only in the last few years have long-term gains been taxed in Austria, Germany, and Portugal.

. . .

Inflation
If an individual buys a stock at $10 and sells it years later for $12, much of the $2 in capital gain may represent inflation, not a real return. In an economy with inflation, capital gains taxes can substantially reduce returns, and even turn them negative. And uncertainty about future inflation makes returns from capital gains more risky. Thus, inflation and capital gains taxes together suppress investment, particularly in growth companies. This problem is widely appreciated, and one solution is to index capital gains for inflation. For investments in corporate equities, indexing would be a straightforward process of adjusting a stock’s purchase price by a measure such as the consumer price index, which was the approach used by Australia between 1985 and 1999. However, most countries do not index capital gains, but instead roughly compensate for inflation by reducing the statutory rate on gains or providing an exclusion. In 1999, for example, Australia abandoned inflation indexing in favor of a 50 percent exclusion for gains.

. . .

Table 1. Top
Individual Capital Gains Tax Rates, 2012
Australia                22.5%
Italy                        20.0%
Austria                   25.0%
Japan                      10.0%
Belgium                    0.0%
Luxembourg            0.0%
Britain                     28.0%
Mexico                      0.0%
Canada                    22.5%
Netherlands            0.0%
Chile                        18.5%
New Zealan              0.0%
Czech Rep.               0.0%
Norway                   28.0%
Denmark                 42.0%
Poland                    19.0%
Estonia                   21.0%
Portugal                 25.0%
Finland                   32.0%
Slovakia                  19.0%
France                     32.5%
Slovenia                    0.0%
Germany                  25.0%
South Korea             0.0%
Greece                        0.0%
Spain                        27.0%
Hungary                   16.0%
Sweden                     30.0%
Iceland                      20.0%
Switzerland                 0.0%
Ireland                       30.0%
Turkey                        0.0%
Israel                         25.0%
United States          19.1%
OECD Average      16.4%

. . .

Conclusions
Economists since Irving Fisher have called for ending capital gains taxation. In the 1980s, economist Bruce Bartlett looked at the positive effects of prior capital gains tax cuts and called for abolishing the tax altogether.22 In the 1990s, Federal Reserve chairman Alan Greenspan testified that the tax’s “major impact is to impede entrepreneurial activity and capital formation. While all taxes impede economic growth to one extent or another, the capital gains tax is at the far end of the scale. I argued that the appropriate capital gains tax rate was zero.”23 Unfortunately, policymakers are going in the opposite direction with capital gains tax increases in 2013. Class warfare rhetoric has sadly overwhelmed the lessons learned here and abroad about the benefits of low capital gains taxes. Short-term expediency has replaced an interest in tax policies that promote long-run growth. Hopefully, policymakers will reconsider capital gains tax policy in coming months. They should reverse course and cut the capital gains tax rate again in order to boost innovation, spur entrepreneurship, and help America regain its competitive edge.

Jensen Comment
One of the most puzzling outcomes in Table 1 is how capital gains rates vary within Europe from 0.0% in Belgium and The Netherlands to much higher rates in some other European nations like neighboring France having a  32.0% rate. The welfare states having generous national health and education programs are also somewhat confusing. New Zealand has a 0.0% rate in comparison with Denmark's huge 42.0% rate.


Welfare States Don't Come Cheap

"U.S. Taxes and Government Benefits in an International Context," by Bruce Bartlett, TaxProf Blog, December 26, 2012 ---
http://taxprof.typepad.com/files/137tn1429.pdf

Bruce Bartlett reviews new international data on taxes and healthcare spending as a share of GDP in OECD countries and suggests that Americans' antipathy to taxes may be a function of the modest benefits they receive from government in contrast to those in high-tax countries.

Table 1. Total Tax Revenue, 2010

Country Percent of GDP

Denmark 47.6

Sweden 45.5

Belgium 43.5

Italy 42.9

Norway 42.9

France 42.9

Finland 42.5

Austria 42.0

Netherlands 38.7

Hungary 37.9

Slovenia 37.5

Luxembourg 37.1

Germany 36.1

Iceland 35.2

United Kingdom 34.9

Czech Republic 34.2

Estonia 34.2

OECD average 33.8

Israel 32.4

Spain 32.3

Poland 31.7

New Zealand 31.5

Portugal 31.3

Canada 31.0

Greece 30.9

Slovakia 28.3

Switzerland 28.1

Ireland 27.6

Japan 27.6

Turkey 25.7

Australia 25.6

Korea 25.1

United States 24.8

Chile 19.6

Mexico 18.8

Source: OECD.

Jensen Comment
Comparing nations on this index is difficult, particularly due to how health care is provided.

Nations like Denmark that are high in egalitarian living have difficulty motivating workers to work overtime and invest savings in risky ventures. This is partly the reason all the highest ranked nations above reduced top tax rates from what they were in the 1970s ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm


From Grumpy Old Tony Catenach
"H-P Throws Its Accountants Under the Bus! But Why?" by Anthony H. Catenach, Jr., Grumpy Old Accountant Blog, December 18, 2012 ---
http://grumpyoldaccountants.com/blog/2012/12/19/h-p-throws-its-accountants-under-the-bus-but-why

Well, with grumpy Ed Ketz’s retirement from blogging, here is my first attempt to carry on his vision solo.  I really preferred being part of the dynamic duo that fought for financial reporting transparency.

Recently, the business press has flooded the markets with countless stories of H-P’s striking write-off of $8.8 billion in assets related to its 2011 acquisition of British software company Autonomy.  What’s gotten my attention, and that of many “bean counters,” is that over $5 billion of this “impairment charge” was attributed to questionable accounting practices (i.e., irregularities) that were not detected by three of the major international auditing  firms, as well as a number of “respected” investment advisors.  But what really makes my blood boil is the market’s cavalier attitude toward this “big bath” loss, which may well be one of the most cleverly executed earnings management strategies in recent financial history

A review of H-P’s 2011 10-K (notes 6 and 7) reveals that the Company recorded a total of $11.2 billion of intangible assets ($6.6 billion of goodwill and $4.6 billion of developed and core technology and patents).  The sizeable goodwill amount indicates that H-P paid more than “market value” for the $4.6 billion in technology assets that it acquired from Autonomy, as goodwill is nothing more than an excess purchase premium.  Given that goodwill represents almost 59 percent of the purchase price, it seems reasonable to assume that H-P spent some time tying down the numbers needed to come up with a purchase price.  In fact, according to Jim Petersen at Re:Balance, H-P’s acquisition team included some 300 financial and legal experts from KPMG, Perella Weinberg, Barclays, and a number of law firms. So, one might reasonably conclude that H-P knew what is what it was paying for, right? 

But on November 20, 2012, the Company wrote off $8.8 billion (almost 79 percent) of the intangible assets that it had acquired from Autonomy on October 3, 2011!  So, what happened?  Well, if you believe Meg Whitman, Autonomy made misrepresentations that created “financial illusions” upon which H-P relied in pricing the deal.  But should we be surprised that a seller would paint the best possible picture of the asset being sold?  Isn’t that what seller’s do…isn’t that what we call “puffing?”

 

And isn’t that why your merger team does due diligence?  So, what does Meg do?  She blames Deloitte, Autonomy’s auditor, and KPMG, an H-P due diligence team member, for not detecting the Autonomy accounting irregularities that allegedly caused over half of the recent write-off.  According to Peter Svensson of the AP, Meg stated:

"What I will say is that the board relied on audited financials. Audited by Deloitte—not 'Brand X' accounting firm, but Deloitte. During our very extensive due diligence process, we hired KPMG to audit Deloitte. And neither of them saw what we now see after someone came forward to point us in the right direction."

Yes, she threw her accountants under the bus!  And since she’s playing the blame game, why not include her own H-P auditors, Ernst & Young, who probably should have spotted the accounting irregularities at Autonomy, if they were material?

 

Now those of you that have followed the Grumpy Old Accountants in the past know that we are not Big Four softies.  In fact, the grumpies have been downright tough on the major accounting firms during 2012 by writing blogs with titles like Arrogance or Ignorance: Why the Big Four Don’t Do Better Audits and The Auditors Expectations Gap…Not Again! But in this case, I am inclined to give the big accounting firms a pass.  Why you ask?

Well, first of all, the three  Autonomy “accounting irregularities” to which Meg takes exception are NOT exactly unexpected or unknown financial reporting issues in the technology space.  Andrew Peaple of the Wall Street Journal does an excellent job summarizing these as:

 

To blame the accountants in this case is simply ludicrous because these are precisely the type of reporting issues that experienced big accounting firms routinely look for in technology audits.  To imagine that Deloitte missed these red flags at Autonomy is believable given the firms recently troublesHowever, to believe that both KPMG and Ernst & Young AND Deloitte also failed to uncover the alleged “accounting irregularities” is preposterous. And don’t lend any credence to PwC’s forensic findings as they’re just doing what any consultant does…give the client what it wants. In this case, if you want us to find accounting problems, we will.  However, if you must find fault with an accountant, try the accounting standard-setters who crafted the ambiguous and judgmental revenue recognition rules in question…but not the auditors.

Continued in article

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


The Worst CEOs in 2012 --- http://www.businessweek.com/articles/2012-12-13/the-worst-ceos-of-2012


Ross School (University of Michigan) Nearly Erases MBA Gender Pay Gap -(for graduates) ---
http://www.businessweek.com/articles/2012-12-14/ross-school-nearly-erases-mba-gender-pay-gap

At the University of Texas women MBAs beat out the men ---
http://www.businessweek.com/articles/2012-12-12/mccombs-women-beat-mba-gender-salary-gap

Jensen Comment
This does not mean that there were no differences between majors. For example, women finance graduates earned about $6,500 less than men majoring in finance, but they may have been paid more than women in management and marketing. I do not know that this is the case, but as in the case of comparing inequality between nations, it's important to note that the degree of equality is not nearly as important as the level of poverty. For example, the Gini Coefficients of equality are about the same for Canada and North Korea, but the absolute differences in poverty are immense.

Accounting firms probably do not hire many MBA graduates from Michigan since Michigan has a separate Masters of Accounting Program ---
http://www.bus.umich.edu/Admissions/Macc/Whyross.htm
It would surprise me if there were any gender differences in salary offers in this MAC program, although there may be some racial differences where top minority graduates have higher offers than whites.

The one question about all this that I would raise is job location. At Trinity University when I was still teaching we sometimes placed a single graduate from our very small MS in Accounting graduating class at a higher salary in San Francisco or some other city having very high living costs.

The ANOVA statistician in me questions gender comparisons across geographic cells having greatly varying living costs. For example the MBA woman landing a consulting job for $140,000 in San Francisco or Geneva really cannot compare her salary with the woman who gets $140,000 in Detroit. In Detroit some relatively nice houses are being given away free to people who will occupy them full time. The exact same house in San Francisco might sell for $845,000. So much for declaring that both women are being paid the same.

It's also difficult to compare salary offers that are variable. For example, it's common to offer base salary plus commissions for majors in marketing and finance for stock brokers and other sales jobs.

In the 1990s it would've also been difficult to compare some salary offers for graduates in finance and computer science. For example, I know about a Stanford Computer Science graduate who was paid minimum wage plus $1 million in stock options. I think this type of hiring declined when the 1990s technology bubble burst and FAS 126R went into effect. FAS 123R pretty much killed stock option compensation.

Bob Jensen's threads on gender salary differences ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GenderSalaryDifferences


At the University of Texas MBA women graduates edged out men in terms of compensation offers
At the University of Michigan female and male MBA graduates average about the same compensation offers
Why are women MBA graduates from Stanford not faring as well as their male counterparts?

"Why Stanford MBA Men Make So Much More Than Women?" by Alison Damast, Bloomberg Business Week, December 21, 2012 ---
http://www.businessweek.com/articles/2012-12-21/why-stanford-mba-men-make-so-much-more-than-women

The gender pay gap at Stanford’s Graduate School of Business has female graduates earning 79¢ on the male dollar, the widest discrepancy in earnings between men and women at any of the top 30 business schools, according to new research from Bloomberg Businessweek.

That disparity may seem large, but it isn’t startling to many of the women in the Stanford Class of 2012, who say the figures largely indicate the wide range of career choices they are making.

Take Shan Riku, who worked as a consultant at McKinsey before business school and is now working as head of new business development at Cookpad, Japan’s largest recipe-sharing website. Riku admits she took a pay cut in accepting the position but says she was more interested in taking on a role that would challenge her. It also didn’t hurt that Cookpad encourages families to cook and spend time together. “Many women at Stanford tend to make choices that are a little bit more focused on ‘how do I want to balance my life,’ rather than ‘how can I earn a lot of money,’” she says.

Pulin Sanghvi, director of the career management center at Stanford’s business school, says most of the pay gap at his school can be “attributed to industry choice.” According to Sanghvi, women and men at Stanford who go into the consulting or Internet technology sectors tend to have average starting salaries that are close or equivalent in size. Those 2012 MBA graduates who headed into the consulting field received a mean base salary of $130,636, while others who went into the technology sector earned $118,050, according to the business school’s most recent employment report.

The wage gap comes about partly because fewer women are heading into some of the more lucrative finance fields. For example, 16 percent of male students took jobs in private equity and leveraged-buyout firms, compared with just 5 percent of women, Sanghvi says. The top four industries that Stanford women went into in 2012 were information technology, management consulting, consumer products, and venture capital.

“I think a part of the story of this generation of students is that they have a much larger playing field in terms of career choices,” Sanghvi says. “I don’t think the level of income in a job is necessarily the primary motivator for why someone makes an empowered choice to pursue a career.”

That’s not to say that women at the school aren’t thinking long and hard about their salary offers and how to best negotiate them.

Continued in article

Jensen Comment
This says very little about graduates wanting to become CPAs since Stanford does not offer a career track for taking the CPA examination. The few graduates who do seek to become auditors or tax accountants most likely were CPAs before entering Stanford's MBA program. After graduating they most likely will no longer seek to work for CPA firms as auditors and tax accountants.

Bob Jensen's threads on the gender pay gap in academe ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GenderSalaryDifferences


From the CFO Journal on December 18, 2012

Going-concern warnings decline.
The ranks of companies getting new warnings from their auditors about their ability to continue functioning as a going concern have been thinning since 2007, and hit a 12-year low this year. Just 545 companies that didn’t receive going-concern warnings the previous year got one on their 2011 annual reports, down from a peak of 1,177 in 2007, according to research firm Audit Analytics. Companies have “gotten more resilient after the recession,” Don Whalen, the firm’s director of research,
tells Emily Chasan. He added that many struggling companies entered bankruptcy, merged or were taken private during the financial crisis.

Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting (Formerly Going Concern) ---
http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011115

Project Update

The Liquidation Basis of Accounting and Going Concern (Formerly Disclosures about Risks and Uncertainties)

Last updated on November 6, 2012. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
*Due Process Documents
Decisions Reached at Last Meeting
Summary of Decisions Reached to Date
Next Steps
Board/Other Public Meeting Dates
Background Information
Contact Information

Project Objective

Phase I: The objective of this phase of the project is to provide guidance about how and when an entity should apply the liquidation basis of accounting.

Phase II: The objective of this phase of the project is to provide guidance about (a) whether and how an entity should assess its ability to continue as a going concern and (b) if so, the nature and extent of any related disclosure requirements.

*Due Process Documents

Phase I: The Liquidation Basis of Accounting

On July 2, 2012, the FASB issued a proposed Accounting Standards Update, Presentation of Financial Statements (Topic 205): The Liquidation Basis of Accounting, for a 90-day comment period. The comment period ended on October 1, 2012.

Exposure Draft

Comment Letters

Comment Letter Summary
 
 

Phase II: Going Concern

On October 9, 2008, the Board issued an Exposure Draft, Going Concern, for a 60-day comment period. The comment period ended on December 8, 2008.

Exposure Draft 

Comment Letters

Comment Letter Summary 

Decisions Reached at Last Meeting (May 2, 2012)

The Board also decided that it will revisit the question of whether management should be required to assess whether there is doubt about an entity’s ability to continue as a going concern in light of its recent decision not to pursue going-concern-type disclosures in the project about liquidity and interest rate risk disclosures. The Board directed the staff to consider this question in the context of a separate phase of this project.

The effect of the Board’s decision is that the project has been divided into two separate and distinct phases.

For decisions related to The Liquidation Basis of Accounting, see minutes below.

Summary of Decisions Reached to Date

The Board has reached the following decisions based on discussions surrounding issues raised in comment letters on the Exposure Draft, in other outreach meetings, and in redeliberations.

Phase I: The Liquidation Basis of Accounting

See proposed Accounting Standards Update above.

Phase II: Going Concern

Project Objective

During initial deliberations, the Board decided to develop guidance that would require an entity’s management to evaluate the entity’s ability to continue as a going concern and require disclosures when either financial statements are not prepared on a going concern basis or there is substantial doubt about the entity’s ability to continue as a going concern.

In October 2008, the Board issued an Exposure Draft, Going Concern. The Board received 29 comment letters in response to that Exposure Draft, and respondents’ comments were considered by the Board during redeliberations. The Board decided that the following matters warranted further deliberations:
 
  1. Reconsideration of defining and incorporating the terms going concern and substantial doubt into U.S. GAAP
     
  2. The time horizon over which management would evaluate the entity’s ability to meet its obligations
     
  3. The type of information that management should consider in evaluating the entity’s ability to meet its obligations
     
  4. The effect of subsequent events on management’s evaluation of the entity’s ability to meet its obligations
     
  5. Whether to provide guidance on the liquidation basis of accounting.
The Board then modified the objective of the project to require an entity to provide earlier disclosures (early warning disclosures) as it became increasingly likely that the entity would be unable to meet its obligations as they become due. This objective replaced the project’s initial objective of incorporating AU 341 into U.S. GAAP because the Board came to believe that users of financial statements would benefit more from ongoing and incremental disclosures about risk than they would if such disclosures were required only when management concluded that there was substantial doubt about the entity’s ability to continue as a going concern. Because of comments from stakeholders that the guidance about when and how an entity should apply the liquidation basis of accounting was unclear, the Board also added a separate objective to provide guidance related to that topic.

Before the Board commenced its redeliberations on this project, it added a separate project to its agenda (as part of the accounting for financial instruments project) about improving disclosures about liquidity and interest rate risk. During the outreach phase of the project on going concern and the liquidation basis of accounting, many users of financial statements commented that sufficient liquidity is the most critical factor when assessing an entity’s ability to continue as a going concern. Given the similarities between the early warning disclosures in this project and the disclosures proposed in the separate project about liquidity and interest rate risk, the Board decided that those disclosures were unnecessary and that they would no longer be an objective of this project.

The Board then decided not to pursue going concern-type disclosures in the separate project about liquidity and interest rate risk disclosures. In light of that decision, the Board decided that to revisit in this project the question of whether management should be required to assess whether there is doubt about an entity’s ability to continue as a going concern.

Superseded Tentative Decisions
 
 
Early Warning Disclosures

The Board previously decided to require certain early warning disclosures when management, applying commercially reasonable business judgment, is aware of conditions and events that indicate, based on current facts and circumstances, that it is reasonably foreseeable that an entity may not be able to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, issuance of equity, externally or internally forced revisions of its operations, or similar actions. Subsequently, the Board decided not to pursue these disclosures as part of this project because of questions about their incremental value over and above the liquidity risk disclosures that are being proposed in the financial instrument project.

Subsequent Events

If management were required to make a going concern assessment, the Board decided that management would update its assessment if a subsequent event that significantly affects the assessment occurs before the financial statements are issued or are available to be issued. The time horizon for the reassessment would be extended to include the foreseeable future beginning as of the date of the subsequent event. The determination of whether the related disclosures are required would be based on that updated assessment. The entity would still be required to apply the guidance in Topic 855, Subsequent Events, for recognition and disclosure of specified subsequent events.

Time Horizon

If management were required to make a going concern assessment, the Board decided that management should take into account available information about the foreseeable future, which is generally, but not limited to, 12 months from the end of the reporting period. Certain events that are expected to occur or are reasonably foreseeable beyond 12 months that would materially affect the assessment are considered part of the foreseeable future. The time frame beyond 12 months is limited to a practical amount of time thereafter in which significant events or conditions that may affect the evaluation can be identified. The Board decided to use this time horizon because it avoids the inherent problems that a bright-line time horizon would create and requires management to consider events or conditions occurring beyond the one-year time horizon that are significant and most likely would have to be disclosed. The Board does not intend for the assessment of the period beyond a year to be open ended or an indefinite period.
 
Next Steps

The Board will consider feedback received on the proposed Update during redeliberations on the liquidation basis of accounting (Phase I). The Board directed the staff to prepare materials for discussion at a future Board meeting about (a) whether and how an entity should conduct a going concern assessment and (b) if so, the nature and extent of any related disclosure requirements.

Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

The following are links to the minutes for each meeting.

May 2, 2012 Board Meeting—Liquidation Basis of Accounting and Project Objective
February 15, 2012 Board Meeting—Liquidation Basis of Accounting
January 11, 2012 Board Meeting—Project Scope and Objective
October 26, 2011 Board Meeting—Project Scope and Objectives
December 1, 2010 Board Meeting—Subsequent Events and Limited Life Entities
November 10, 2010 Board Meeting—Issues Raised by External Reviewers
March 31, 2010 Board Meeting—Disclosure Threshold and Liquidation Basis
January 13, 2010 Board Meeting—Project Scope
June 3, 2009 Board Meeting—Analysis of Additional Constituent Outreach
February 18, 2009 Board Meeting—Comment Letter Discussion
August 27, 2008 Board Meeting—Codification Discussion
September 19, 2007 Board Meeting—Removal from Board agenda
May 30, 2007 Board Meeting—Add Project to Board agenda

Background Information

The U.S. guidance for when and how to apply the liquidation basis of accounting is located in the AICPA Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures, Section 9508, “Reports on Audited Financial Statements: Auditing Interpretations of Section 508,” and states that a liquidation basis of accounting may be considered GAAP for entities in liquidation or for which liquidation appears imminent. The objective of the liquidation basis of accounting is to provide financial statement users with relevant information about an entity’s resources and obligations by measuring and presenting assets and liabilities in the entity’s financial statements at the estimated amount of cash the entity expects to collect or the amount of cash the entity expects to pay to settle its obligations during the course of liquidation. Some constituents have expressed a need for accounting literature in this area because there currently may be diversity in practice.

Originally, the Board undertook this project to incorporate AICPA Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures, Section 341, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern,” (AU Section 341) into GAAP. AU Section 341 states that the auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.

Contact Information

Brian North
Project Manager
bnorth@fasb.org

Daghan Or
Practice Fellow
dor@fasb.org

Kathryn Cantlon
Postgraduate Technical Assistant
kscantlon@fasb.org

 

Jensen Comment
The biggest embarrassment for audit firms is their failure to provide going concern warnings for over a thousand banks that failed in 2008.
Where Were the Auditors? ---  http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


Boehner's Plan B was killed in the House of Representatives on December 20, 2012
Many portions of this plan (including the million dollar threshold) were originally proposed by House Minority Leader Nancy Pelosi.

From the TaxProf (Paul Caron) Blog on December 21, 2012

The Competing Obama and Boehner Tax Plans


"Brother of Suspected Newtown Shooter Is Ernst & Young Employee," by Caleb Newquist, Going Concern, December 14, 2012 ---
http://goingconcern.com/post/reports-brother-suspected-newtown-shooter-ernst-young-employee


Clarified Auditing Standards and Risk-Based Auditing

December 24, 2012 message from Ken Yaotsung Chen

Hi, All,

Merry Christmas and Happy New Year!

Let me briefly describe some background information, and then my humble opinion.

I started to teach ISA auditing since summer 2011, because I was invited to teach an intensive auditing course in the conversion program (funded by one of the Big 4) in H.K., which fully adopts ISAs (see Basis of ISA Adoption by Jurisdiction (2010)). Before that, I use U.S. textbook or follows GAAS to teach Auditing, and touched only a little bit ISAs in class, and always hesitate to teach Auditing by totally using ISAs.

In Taiwan we started to adopt ISAs several years ago, and IFRS adoption for listed companies will go into effect on Jan.1, 2013. Therefore, I decided to teach ISA auditing starting Fall semester 2011, after I returned from H.K. I am so lucky that I can get help from my friend (colleague when I worked at a cpa firm more than 20 years ago) who is an ISA expert in one of the Big 4 in Taiwan, but I still have to spend time reading ISAs in order to incorporate them into the lectures.

Generally, there are 6 sections of the Clarified ISAs (200-General Principles and Responsibilities, 300~499-Risk Assessment and Response to Assessed Risk, 500-Audit Evidence, 600-Using the Work of Others, 700-Audit Conclusions and Reporting, 800-Special Considerations, not including 900-Special Considerations in the United States).

I use ISA instead of AU C section, although it should be the same.

The ISA 200 is the most important one to read, because it covers the basic concepts that link to other ISAs.

Since the Clarified ISAs is a risk-based auditing standard, I think the key ISAs (AU_C section) are ISA315, and ISA330 (AU_C 315, and 330 as in SAS No. 122) for identifying, assessing and responding risk of material misstatements. For auditors to perform audit procedures to respond assessed risk of material misstatement, the concept of ISA 500 (AU_C 500 as in SAS No. 122, sufficient and appropriate audit evidence) is also important, which also links to ISA 330.

The materiality concept is also important, as in planning and performing audit procedures during the audit. The clarified ISAs discussed it in ISA 320 and ISA450, which are also important.

For audit conclusion and report, ISA 700, 705,706,710, and 720, are also important. However, we should note that IAASB plan to revise the future auditor report to provide useful additional information and increase the relevance and value of the audit report.

To better focus on the clarified standards (related to audit process), my humble opinion is to read at least ISA 200, 315, 330, 320, 450, 500, 700, 705, 706, 710, and 720, although it is even better to read the whole set of clarified standards.

Best Regards,

-- Ken Y. Chen
Professor of Accounting Department of Accounting
National Taiwan University
85 Sec. 4, Roosevelt Road,
Taipei, 10617
Phone: 886-2-3366-9780
Email:
kenchen@ntu.edu.tw

 

December 25, 2012 reply from Bob Jensen

Hi Professor Chen,

It is terrific to have a new voice on the AECM, and I thank you for such a value-added message.

The one thing I worry about is the that "risk-based" standards become excuses for cost cutting by audit firms. In particular, the area where audit firms like to cut costs is in the area of detail testing. The most notorious risk-based auditing firm was Andersen that traded off detail testing for analytical review risk-based auditing of Enron, Worldcom, and all the other clients that got the worst audits in history before Andersen imploded ---
http://www.trinity.edu/rjensen/FraudEnron.htm

Arguably the world's worst audits in the history of large international CPA firms were Andersen's audits of Worldcom. It's rumored that the there was no detail testing in the Purchasing Department of Worldcom for over three years. Other large CPA firms were falling into the same cost-cutting ploys.

PricewaterhouseCoopers also fell prone to faulty risk assessments. In July, the SEC forced Tyco, the industrial conglomerate, to restate its profits, which it inflated by $1.15 billion, pretax, from 1998 to 2001. The next month, the SEC barred the lead partner on the firm's Tyco audits from auditing publicly registered companies. His alleged offense: fraudulently representing to investors that his firm had conducted a proper audit. The SEC in its complaint said that the auditor, Richard Scalzo, who settled without admitting or denying the allegations, saw warning signs about top Tyco executives' integrity but never expanded his team's audit procedures.
"Behind Wave of Corporate Fraud: A Change in How Auditors Work: 'Risk Based' Model Narrowed Focus of Their Procedures, Leaving Room for Trouble,' " by Jonathan Weil, The Wall Street Journal, March 25, 2004, Page A1--- http://www.trinity.edu/rjensen/Fraud001.htm

"Behind Wave of Corporate Fraud: A Change in How Auditors Work:  'Risk Based' Model Narrowed Focus of Their Procedures, Leaving Room for Trouble,' " by Jonathan Weil, The Wall Street Journal, March 25, 2004, Page A1

The recent wave of corporate fraud is raising a harsh question about the auditors who review and bless companies' financial results: How could they have missed all the wrongdoing? One little-discussed answer: a big change in the way audits are performed.

Consider what happened when James Lamphron and his team of Ernst & Young LLP accountants sat down early last year to plan their audit of HealthSouth Corp.'s 2002 financial statements. When they asked executives of the Birmingham, Ala., hospital chain if they were aware of any significant instances of fraud, the executives replied no. In their planning papers, the auditors wrote that HealthSouth's system for generating financial data was reliable, the company's executives were ethical, and that HealthSouth's management had "designed an environment for success."

As a result, the auditors performed far fewer tests of the numbers on the company's books than they would have at an audit client where they perceived the risk of accounting fraud to be higher. That's standard practice under the "risk-based audit" approach now used widely throughout the accounting profession. Among the items the Ernst & Young auditors didn't examine at all: additions of less than $5,000 to individual assets on the company's ledger.

Those numbers are where HealthSouth executives hid a big part of a giant fraud. This blind spot in the firm's auditing procedures is a key reason why former HealthSouth executives, 15 of whom have pleaded guilty to fraud charges, were able to overstate profits by $3 billion without anyone from Ernst & Young noticing until March 2003, when federal agents began making arrests.

A look at the risk-based approach also helps explain why investors continue to be socked by accounting scandals, from WorldCom Inc. and Tyco International Ltd. to Parmalat SpA, the Italian dairy company that admitted faking $4.8 billion in cash. Just because an accounting firm says it has audited a company's numbers doesn't mean it actually has checked them.

In a September 2003 speech, Daniel Goelzer, a member of the auditing profession's new regulator, the Public Company Accounting Oversight Board, called the risk-based approach one of the key factors "that seem to have contributed to the erosion of trust in auditing." Faced with difficulty in raising audit fees, Mr. Goelzer said, the major accounting firms during the 1990s began to stress cost controls. And they began to place greater emphasis on planning the scope of their work based on auditors' judgments about which clients are risky and which areas of a company's financial reports are most prone to error or fraud.

Auditors still plow through "high risk" items, such as derivative financial instruments or "related party" business dealings between a company and its executives. But ostensibly "low risk" items -- such as cash on the balance sheet or accounts that fluctuate little from year to year -- often get no more than a cursory review, for years at a stretch. Instead, auditors rely more heavily on what management tells them and the auditors' assessments of a company's "internal controls."

Old and New

A 2001 brochure by KPMG LLP, which claims to have pioneered the risk-based audit during the early 1990s, explained the difference between the old and new ways. Under a traditional "bottom up" audit, "the auditor gains assurance by examining all of the component parts of the financial statements, ensuring that the transactions recorded are complete and accurate." By comparison, under the "top down" risk-based audit methodology, auditors focus "less on the details of individual transactions" and use their knowledge of a company's business and organization "to identify risks that could affect the financial statements and to target audit effort in those areas."

So, for instance, if controls over a company's sales and customer IOUs are perceived to be strong, the auditor might mail out only a limited number of confirmation requests to companies that do business with the audit client at the end of the year. Instead, the auditor would rely more on the numbers spit out by the company's computers.

For inventory, the lower the perceived risk of errors or fraud, the less frequently junior-level accountants might be dispatched on surprise visits to a client's warehouses to oversee the company's procedures for counting unsold goods. If cash and securities on the balance sheet are deemed low risk, the auditor might mail out only a relative handful of confirmation requests to a company's banks or brokerage firms.

In theory, the risk-based approach should work fine, if an auditor is good at identifying the areas where misstatements are most likely to occur. Proponents advocate the shift as a cost-efficient improvement. They also say it forces auditors to pay needed attention to areas that are more subjective or complex.

"The problem is that there's not a lot of evidence that auditors are very good at assessing risk," says Charles Cullinan, an accounting professor at Bryant College in Smithfield, R.I., and co-author of a 2002 study that criticized the re-engineered audit process as ineffective at detecting fraud. "If you assess risk as low, and it really isn't low, you really could be missing the critical issues in the audit."

Auditors can't check all of a company's numbers, since that would make audits too expensive, particularly in an age of sprawling multinationals. The tools at auditors' disposal can't ensure the reliability of a company's numbers with absolute certainty. And in many ways, they haven't changed much over the modern industry's 160-year history.

Auditors scan the accounting records for inconsistencies. They ask people questions. That can mean independently contacting a client's customers to make sure they haven't struck undocumented side deals -- such as agreeing to buy more products today in exchange for a salesperson's oral promises of future discounts. They search for unrecorded liabilities by tracing cash disbursements to make sure the obligations are recorded properly. They examine invoices and the terms of sales contracts to check if a company is recording revenue prematurely.

Auditors are supposed to avoid becoming predictable. Otherwise, a client's management might figure out how to sneak things by them. It's also important to sample-test tiny accounting entries, even as low as a couple of hundred dollars. An old accounting trick is to fudge lots of tiny entries that appear insignificant individually but materially distort a company's financial statements when taken together.

Facing a crush of shareholder lawsuits over the accounting scandals of the past four years, the Big Four accounting firms say they are pouring tens of millions of dollars into improving their auditing techniques. KPMG's investigative division has doubled to 280 its force of forensic specialists, some hailing from the Federal Bureau of Investigation. PricewaterhouseCoopers LLP auditors attend seminars run by former Central Intelligence Agency operatives on how to spot deceitful managers by scrutinizing body language and verbal cues. Role-playing exercises teach how to stand up to a company's management.

But the firms aren't backing away from the concept of the risk-based audit itself. "It would really be negligent" not to take a risk-based approach, says Greg Weaver, head of Deloitte & Touche LLP's U.S. audit practice. Auditors need to "understand the areas that are likely to be more subject to error," he says. "Some might believe that if you cover those high-risk areas, you could do less work in other areas." But, he adds, "I don't think that's been a problem at Deloitte."

Mr. Lamphron, the Ernst & Young partner, and his firm blame HealthSouth's former executives for deceiving them. Mr. Lamphron declined to comment for this article. Testifying before a congressional subcommittee in November, he said he had looked through his audit papers and "tried to find that one string that, had we yanked it, would have unraveled this fraud. I know we planned and conducted a solid audit. We asked the right questions. We sought out the right documentation. Had we asked for additional documentation here or asked another question there, I think that it would have generated another false document and another lie."

The pioneers of the auditing industry had a more can-do spirit. In Britain during the 1840s, William Deloitte, whose firm continues today as Deloitte & Touche, made a name for himself by helping to unravel frauds at the Great Eastern Steamship Co. and Great Northern Railway. A growing breed of professionals such as William Cooper, whose name lives on in PricewaterhouseCoopers, began advertising their services as an essential means for rooting out fraud.

"The auditor who is able to detect fraud is -- other things being equal -- a better man than the auditor who cannot," wrote influential British accountant Lawrence Dicksee in his 1892 book, "Auditing," one of the earliest on the subject.

But in the U.S., the notion of the auditor as detective never quite took off. The Securities and Exchange Commission in the 1930s made audits mandatory for public companies. The auditing profession faced its first real public test in 1937, when an accounting scandal broke open at McKesson & Robbins: More than 20% of the assets reported by the drug company were fictitious inventory and customer IOUs. The auditors had been fooled by forged documents.

The case triggered some reforms. Auditing standards began requiring that auditors perform more substantive tests, such as contacting third parties to confirm customer IOUs and physically inspecting clients' warehouses to check inventories. However, the American Institute of Certified Public Accountants, the group that set auditing standards, repeatedly emphasized the limitations on auditors' ability to detect fraud, fearing liability exposure for its members.

By the 1970s, a new force emerged to erode audit quality: price competition. For decades, the AICPA had barred auditors from publicly advertising their services, making uninvited solicitations to rival firms' clients or participating in competitive-bidding contests. The institute was forced to lift those bans, however, when the federal government deemed them anticompetitive and threatened to bring antitrust lawsuits.

Bidding wars ensued. The pressures to hold down hours on a job "inadvertently discouraged auditors to look for" fraud, says Toby Bishop, president of the Association of Certified Fraud Examiners, a professional association.

Increasingly, audits became a commodity product. Flat-fee pricing became common. The big accounting firms spent much of the 1980s and 1990s building more-lucrative consulting operations. Many audit clients soon were paying their independent accounting firms far more money for consulting than auditing. The audit had become a mere foot in the door for the consultants. Economic pressures also brought a wave of mergers, winnowing down the number of accounting firms just as the number of publicly traded companies was exploding and corporate financial statements were becoming more complex.

Even before the recent rash of accounting scandals, the shift away from extensive line-by-line number crunching was drawing criticism. In an October 1999 speech, Lynn Turner, then the SEC's chief accountant, noted that more than 80% of the agency's accounting-fraud cases from 1987 to 1997 involved top executives. While the risk-based approach was focusing on information systems and the employees who fed them, auditors really needed to expand their scrutiny to include top executives, who with a few keystrokes could override their companies' systems.

Looking back, the risk-based approach's flaws are on display at a variety of accounting scandals, from WorldCom to Tyco to HealthSouth.

When WorldCom was a small, start-up telecommunications company, its outside auditor, Arthur Andersen LLP, did things the old-fashioned way. It tested the thousands of details of individual transactions, and it reviewed and confirmed the items in WorldCom's general ledger, where the company's accounting entries were first logged.

But as WorldCom grew, Andersen shifted toward what it called a risk-based "business audit process." By 1998, it was incurring more costs to audit WorldCom than it was billing, making up the difference with fees for consulting and other work, according to an investigative report last year by WorldCom's audit committee. In its 2000 audit proposal to WorldCom, Andersen said it considered itself "a committed member of [WorldCom's] team" and saw the company as a "flagship client and a crown jewel" of the firm.

Under the revised audit approach, Andersen used sophisticated software to analyze WorldCom's financial statements. The auditors gathered for brainstorming sessions, imagining ways WorldCom might cook its books. After identifying areas of high risk, the auditors checked the adequacy of internal controls in those areas by reviewing the company's procedures, discussing them with some employees and performing sample tests to see if the procedures were followed.

'Maximum Risk'

When questions arose, the auditors relied on the answers supplied by management, even though their software had rated WorldCom a "maximum risk" client, according to a January report by WorldCom's bankruptcy examiner, former U.S. Attorney General Richard Thornburgh.

One question that Andersen auditors routinely asked WorldCom management was whether they had made any "top side" adjustments -- meaning unusual accounting entries in a company's general ledger that are recorded after the books for a given quarter had closed. Each year, from 1999 through 2002, WorldCom management told the auditors they hadn't. According to Mr. Thornburgh's report, the auditors conducted no testing to corroborate if that was true.

They did check to see if there were any major swings in the items on the company's consolidated balance sheet. There weren't any, and from this, the auditors concluded that follow-up procedures weren't necessary. Indeed, WorldCom executives had manipulated its numbers so there wouldn't be any unusual variances.

Had the auditors dug into specific journal entries -- the debits and credits that are the initial entries of transactions or events into a company's accounting systems -- they would have seen hundreds of huge entries of suspiciously round numbers that had no supporting documentation.

The sole documentation for one $239 million journal entry, recorded after the close of the 1999 fourth quarter, was a sticky note bearing the number "$239,000,000," according to the WorldCom audit committee's report. Sometimes the "top side" adjustments boosted earnings by reversing liabilities. Other times they reclassified ordinary expenses as assets, which delayed recognition of costs. Other unsupported journal entries included one for precisely $334 million in July 2000, three weeks after the second quarter's books were closed. Another was for exactly $560 million in July 2001.

Andersen signed its last audit report for WorldCom in March 2002, saying the numbers were clean. Three months later, WorldCom announced that top executives, including its former chief financial officer, had improperly classified billions of dollars of ordinary expenses as assets. The final tally of fraudulent profits hit $10.6 billion. WorldCom filed for Chapter 11 reorganization in June 2002, marking the largest bankruptcy in U.S. history. Now out of business, Andersen is appealing its June 2002 felony conviction for obstruction of justice in connection with its botched audits of Enron Corp.

"No matter what kind of audit you do, it is virtually impossible for an auditor to detect purposeful fraud by management," says Patrick Dorton, an Andersen spokesman. "And that's exactly what happened at WorldCom."

PricewaterhouseCoopers also fell prone to faulty risk assessments. In July, the SEC forced Tyco, the industrial conglomerate, to restate its profits, which it inflated by $1.15 billion, pretax, from 1998 to 2001. The next month, the SEC barred the lead partner on the firm's Tyco audits from auditing publicly registered companies. His alleged offense: fraudulently representing to investors that his firm had conducted a proper audit. The SEC in its complaint said that the auditor, Richard Scalzo, who settled without admitting or denying the allegations, saw warning signs about top Tyco executives' integrity but never expanded his team's audit procedures.

Mr. Scalzo declined to comment. A PricewaterhouseCoopers spokesman declined to comment on the SEC's findings in the Tyco matter.

Like Tyco and WorldCom, HealthSouth grew mainly by buying other companies, using its own shares as currency. So it needed to keep its stock price up. To do that, the company admitted last year, it faked its profits.

In their audit-planning papers, Ernst & Young auditors noted HealthSouth executives' "excessive interest" in maintaining or increasing its stock price and earnings. Twice since the 1990s, the Justice Department had filed Medicare-fraud suits against HealthSouth.

But none of that shook the Ernst & Young audit team's confidence in management's integrity, members of the team later testified. And at little more than $1 million annually, Ernst & Young's audits were fairly low cost. The firm charged slightly less to audit HealthSouth's financial statements than it did for one of its other services for HealthSouth: performing janitorial inspections of the company's 1,800 health-care facilities. The inspections, performed by junior-level accountants armed with 50-point checklists, included checking to see that the toilets and ceilings were free of stains, the magazine racks were neat and orderly, and the trash receptacles all had liners.

Most of HealthSouth's fraud occurred in an account called "contractual adjustments." This is an allowance on the income statement that estimates the difference between the gross amount charged to a patient and the amount that various insurers, including Medicare, will pay for a specific treatment. The company manipulated the account to make net revenue and bottom-line earnings look higher. But for every dollar of illicit revenue, HealthSouth executives had to make a corresponding entry on the balance sheet, where the company listed its assets and liabilities.

An Ernst & Young spokesman, Charlie Perkins, says the firm "performed appropriate procedures" on the contractual-adjustment account.

At an April 2003 court hearing, Ernst & Young auditor William Curtis Miller testified that his team mainly had performed "analytical type procedures" on the contractual adjustments. These consisted of mathematical calculations to see if the account had fluctuated sharply overall, which it hadn't. As for the balance-sheet entries, prosecutors say HealthSouth executives knew the auditors didn't look at increases of less than $5,000, a point Ernst & Young acknowledges. So the executives broke up the entries into tiny pieces, sprinkling them across lots of assets.

The company's ledger showed thousands of unusual journal entries that reclassified everyday expenses -- such as gasoline and auto-service bills -- as assets. Had the auditors seen those items, one congresswoman noted at a November hearing, they would have spotted that something was wrong. Mr. Lamphron conceded her point.

 

March 27, 2004 reply from MacEwan Wright, Victoria University [Mac.Wright@VU.EDU.AU

-----Original Message----- 
From:  
Sent: Saturday, March 27, 2004 10:29 PM 
Subject: Re: Attacks on Risk-Based Auditing

Dear Bob, 

I wonder if this is not a case of throwing the baby out with the bathwater. I mean the idea of risk based auditing is not in itself a bad idea, The problem is that the idea of what constitutes risk is not properly understood. As I interpret it - risk means probability of event multiplied by cost of event. Risk as used in audit planning means probability of event. It is obvious that the team did not do enough to properly evaluate the inherent risk or more properly stated - the probability that management wouold lie and cheat for profit.

It is am American attitude problem. An American executive posted to an Australian company found the amount of work put into finding out how honest potential employees were a waste of time - "just bond them and sack them and claim the bond insurance if they cheat". Bonding is virtually unheard of in Australia.

I feel that attitude may encourage fraud - the game is what can each party get away with!

Sorry about the social implications. 

Kind regards, 

Mac Wright

March 27, 2004 reply from Bob Jensen

Hi Mac,

You are correct about the fact that risk-based auditing has led to game playing. Somehow the HealthSouth executives figured out that the risk of getting caught with fraudulent transactions under $6,000 each was nearly zero under their auditor's (E&Y) risk-based model, so they looted the company with transactions under $6,000 each.

I agree with you that some form of risk-based auditing should be utilized.  I think this was the case long before KPMG formalized the concept.  However, in addition the fear of detailed testing of small transactions must still remain high among client employees. Auditors must invest more in unpredictable detailed testing up to a point where the probability of being audited for even small transactions is significant.

Probably the worst-case scenario that virtually eliminated fear of getting caught was Andersen's notoriously defective audits of Worldcom. I'm told (rumor mill) that an Andersen auditor had not even been seen in Worldcom's purchasing department for a number of years. What is the first department an auditor should investigate for fraud?

Bob

March 28, 2004 reply from Glen L Gray [vcact00f@CSUN.EDU]

I know a treasurer of a major company. It used to bug him that the auditors came by every year and take up her staff's time collecting & reconciling bank and investment information. Then a few years ago, they just stopped showing up in the treasury dept. I've always wondered what the auditor's risk model was if suddenly cash and investments were no longer important.

Jensen Comment
One thing that we will never be able to measure is the value that audits bring to prevention of fraud and error. Perhaps the greatest value of having the auditors on site performing detail testing is not what they discover. Rather it is what they prevent due to anticipation that they might discover in future detail testing. It's a bit like having cops walking the beat as opposed to whizzing by in squad cars. The cop on the beat provides an image of presence as well as making genuine PR with local business establishments and residents walking about.

 

Bob Jensen's threads on risk-based auditing ---
http://www.trinity.edu/rjensen/fraud001.htm#RiskBasedAuditing


Bloom's Taxonomy in accounting education at Kansas State University

Hi David and Zane and others,

One of the Accounting Education Change Commission experiments focused on Bloom's Taxonomy in accounting education at Kansas State University. I should point out that KSU had one of the most successful and popular traditional accounting education programs in the USA before attempting this Bloom Taxonomy revision of the program.

In particular, note the link at
http://aaahq.org/AECC/changegrant/chap3.htm

 
Other Readings
Volume No. 13. Position and Issues Statements of the Accounting Education Change Commission
http://aaahq.org/AECC/PositionsandIssues/cover.htm
By Accounting Education Change Commission (AECC). Published 1996, 80 pages.

During its 7-year existence the AECC adopted two position statements and six issues statements. The purpose of this publication is to provide a convenient resource document for all of these statements.

Members No charge–print or online
Nonmembers No charge–print or online
Volume No. 14. The Accounting Education Change Commission Grant Experience: A Summary
http://aaahq.org/AECC/changegrant/cover.htm
Edited by Richard E. Flaherty. Published 1998, 150 pages.

Members No charge–print or online
Nonmembers No charge–print or online
Kansas State Grant Experience --- Chapter 3
http://aaahq.org/AECC/changegrant/chap3.htm
Volume No. 15. The Accounting Education Change Commission: Its History and Impact
http://aaahq.org/AECC/history/cover.htm
By Gary L. Sundem. Published 1999, 96 pages.

Members No charge–print or online
Nonmembers No charge–print or online

From the University of Pennsylvania (Wharton):  The U.S. Deficit is Tremendously Understated
"A Proper Accounting: The Real Cost of Government Loans and Credit Guarantees," Knowledge@Wharton, December 5, 2012 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=3126


InfoGraphic on How the Tax Burden Has Changed ---
http://www.nytimes.com/interactive/2012/11/30/us/tax-burden.html

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


"How Do You Spot The Thief Inside Your Company?" by Marc Weber Tobias, Forbes, December 21, 2012 --- Click Here
http://www.forbes.com/sites/marcwebertobias/2012/12/21/how-do-you-spot-the-thief-inside-your-company/?utm_campaign=techtwittersf&utm_source=twitter&utm_medium=social

The vast majority of annual losses that result from criminal activity in business and government entities are not caused by shoplifters or burglars in the United States. It is employee-thieves cloaked in many forms who commit their crimes, which are often discovered long after their various schemes begin.

Their many schemes are identified as occupational fraud in the Report to the Nations, produced every two years since 1996 by the Association of Certified Fraud Examiners, or ACFE. The current report is based upon an analysis of 1388 cases that were investigated and documented by Certified Fraud Examiners in more than 100 countries on six continents. It provides a detailed look at the prevalence and culture of business thieves in categories such as misappropriation and theft of assets and cash, skimming, payroll fraud, financial statements and reporting schemes, conversion of assets, and corruption and misuse of influence.

Based upon the Gross World Productthe ACFE estimates that global losses from fraud may be $3.5 trillion. In my career in both the public and private sectors, my colleagues and I have been involved in thousands of criminal and civil investigations involving thieving employees, vendors, contractors and suppliers. We’ve caught perpetrators trying to steal, defraud, and convert assets that included anything from cash to precious metals, and trade secrets and intellectual property. No entity is exempt and, in our world, just about everyone can be engaged in some form of fraudulent activity and theft, be it office supplies, time, gasoline, telephone calls, cash, assets, food, liquor, pictures hanging on the wall, bed sheets, dishes, narcotics, credit cards, checks, information, and whatever else is available for the taking or diversion. They pad time sheets and expense reports, submit false medical claims, forge mortgage documents, submit phony bills to clients and customers, and anything else that can be imagined.

Our rule and mantra: “If it can be stolen, it will be, and often.”

No one is exempt. We have worked cases in businesses, retail stores, banks, factories, hospitals, clinics, nursing homes, cruise ships, copper mines, construction sites, car dealerships, restaurants, bars, casinos and literally hundreds of other venues. Any entity can and has been a target, even law enforcement agencies and jails and prisons, where inmates, correctional officers, teachers and senior staff have been caught in a variety of schemes to steal, corrupt, defraud, extort and improperly obtain or divert assets and use their influence for personal gain.

It is a multi-faceted problem but is rooted in two simple premises: everyone wants things they may not be able to afford (although that is often not the prime motivation for stealing) or they have a financial crisis that drives them to steal.

The message for every reader: any entity can be the subject of losses. Sometimes you may not even know it for many months, years, or ever, with the average scheme taking eighteen months to discover.Companies, governments, and other entities must understand how to mitigate or reduce losses from a multitude of criminal schemes designed to siphon assets, in many forms, which ultimately destroy many enterprises.  The best protection against fraud is to prevent it before it can occur. If your entity or enterprise is operating without the proper controls and anti-fraud programs in place then you likely have been, are, or will be a victim. There are fraudsters everywhere and they are often destroying productivity, profitability, morale, and ultimately many businesses. They are able to get away with their crimes because the operation of almost all business is based upon trusting employees with resources and responsibility.

This was going to be a simple article on the best way to alert companies about occupational fraud and their employees, and then describe one solution. After reviewing many investigations, discussing this with my colleagues, and examining the latest ACFE report, I decided that this article should profile the company thief and the companies that are most at risk, and then talk about one of the most effective means to stop people we work with from engaging in illegal activities in the workplace. So in this article I will look at who and what the looters are, and in the follow-up I will describe the work of a retired FBI Special Agent whom I first met forty years ago in Omaha when I was in law school.

The businesses or entities most at risk

The businesses most at risk to internal fraud and theft, in the order of losses from highest to lowest, are banking and financial services, government, and public administration, and the manufacturing sectors. Small employers (fewer than 100 workers) are more commonly victimized than larger companies because they usually cannot afford strong anti-fraud measures. They’re also often not in a financial position to absorb losses and less likely to recover either what was stolen or, in some cases, keep their business going as a viable entity.

The implementation of anti-fraud control measures is highly correlative with significant decreases in the cost and duration of occupational fraud. While these controls cost money, not to implement them usually costs a lot more in terms of dollars, business reputation, litigation, and other costs. Those organizations that had implemented any of these controls had fewer losses and detection time than those entities that did not put such safeguards in place.

Some sobering statistics about losses

Businesses, on a global basis, experience losses of about 5% a year from schemes executed by and with employees. The median loss was about $400,000, and in one-fifth of businesses that were surveyed in the ACFE study, the loss was at least $1,000,000. In the least costly forms of fraud, the cost to business was about $120,000.

In about 87% of the cases the appropriation of assets was the leading cause of losses. While financial statement fraud accounted for only about eight percent of all cases, it had the highest median loss of about $1,000,000 for each occurrence. Finally, corruption and various phony billing schemes made up about one third of all cases but more than fifty percent of the dollar losses, for an average of $250,000. This type of fraud was shown to pose the greatest overall risk on a global basis.

Many cases will never be detected, and of those that are discovered, the actual amount of the losses may never be known or reported. Almost half of the victim organizations do not recover any of their losses. In cases that are referred to law enforcement, 55% of the offenders plead guilty, 19% of prosecutions are declined, and 16% are convicted at trial.

A profile of the thieves within the workforce

The ACFE report analyzed a number of parameters to identify who he or she is: education, criminal history, employment history, job description, administrative level and responsibilities, gender, lifestyles, and other factors that tell the story. In my world I have found that long-term employees are the most suspect because of their knowledge of the inner workings of the entity and understanding of the controls that they must circumvent.

Report to the Nations
by the Association of Certified Fraud Examiners
http://www.acfe.com/uploadedFiles/ACFE_Website/Content/rttn/2012-report-to-nations.pdf

How Not to Catch a Thief
She was mostly just horsing around
"Somehow the City of Dixon, Illinois Just Noticed (after six years) That $30 Million Was Missing," Going Concern, April 19, 2012 ---
http://goingconcern.com/post/somehow-city-dixon-illinois-just-noticed-30-million-was-missing

What a surprise. I thought she could gallop faster than the posse.
"U.S. Attorney: Ex-Dixon comptroller to plead guilty," Chicago Tribune, November 13, 2012 ---
http://www.chicagotribune.com/news/local/breaking/chi-us-atorney-exdixon-comptroller-to-plead-guilty-20121113,0,227018.story

Former Dixon comptroller Rita Crundwell plans to plead guilty Wednesday to a federal fraud charge that alleges she siphoned more than $53 million from the small northwestern Illinois city’s coffers, according to the U.S. Attorney's office.

The office released a statement saying Crundwell will change her plea to guilty at a hearing Wednesday morning before U.S. District Judge Philip G. Reinhard in federal court in Rockford.

It was unclear from the release how Crundwell’s guilty plea to the federal charge will impact separate state charges she faces for the same wrongdoing. She also faces 60 counts of theft tied to her alleged embezzlement from the city's accounts.

Crundwell is accused of stealing the money over two decades and using it to sustain a lavish lifestyle and a nationally renowned horse-breeding operation.

Federal authorities have auctioned off about 400 horses and a luxury motor home that Crundwell allegedly bought with the stolen city funds. If Crundwell is convicted, much of the money will be returned to Dixon – after the federal government takes its cut for caring for the horses for months.

How true can you get?
As (Commissioner) Bridgeman left office last year, he praised (Controller) Rita Crundwell for being an asset to the city and said she "
looks after every tax dollar as if it were her own," according to meeting minutes.

As quoted by Caleb Newquest on April 27, 2012 ---
http://goingconcern.com/post/heres-ominous-statement-former-dixon-city-finance-commissioner-made-about-accused-embezzler

 

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


That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 --- http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.

"Horribly Rotten, Comically Stupid:  Even as they rigged LIBOR rates, UBS bankers displayed a warped loyalty to their co-manipulators," CFO.com, December 21, 2012 ---
http://www3.cfo.com/article/2012/12/capital-markets_ubs-libor-euribor-financial-service-authority-barclays

For any who doubted whether there was honour among thieves, or indeed among investment bankers, solace may be found in the details of a settlement between UBS, a Swiss bank, and regulators around the world over a vast and troubling conspiracy by some of its employees to rig LIBOR and EURIBOR, key market interest rates. Regulators in Britain and Switzerland have argued that manipulation of interest rates that took place over a long period of time, involved many employees at UBS and that, according to Britain’s Financial Service Authority, was so “routine and widespread” that “every LIBOR and EURIBOR submission, in currencies and tenors in which UBS traded during the relevant period, was at risk of having been improperly influenced to benefit derivatives trading positions.” In these settlements UBS agreed to pay 1.4 billion Swiss Francs ($1.5 billion) to British, American and Swiss regulators. CFO.com (http://s.tt/1xxaa)

Yet, even in the midst of this wrongdoing there was evidence of a sense of honour, however misplaced. One banker at UBS, in asking a broker to help manipulate submissions, promised ample recompense:

"I will fucking do one humongous deal with you ... Like a 50, 000 buck deal, whatever. I need you to keep it as low as possible ... if you do that ... I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want ... I’m a man of my word."

Further hints emerge of the warped morality that was held by some UBS employees and their conspirators at brokers and rival banks. In one telling conversation an unnamed broker asks an employee at another bank to submit a false bid at the request of a UBS trader. Lest the good turn go unnoticed the broker reassures the banker that he will pass on word of the manipulation to UBS.

Broker B: “Yeah, he will know mate. Definitely, definitely, definitely”;

Panel Bank 1 submitter: “You know, scratch my back yeah an all”

Broker B: “Yeah oh definitely, yeah, play the rules.”

The interchanges published by the FSA also reveal a comical stupidity among people who, if judged by their above-average pay, ought to have been expected to display above-average insight and intelligence. Sadly, they showed neither.

In one instance, two UBS employees, a manager and a trader (who also submitted interest rates) discuss an article in the Wall Street Journal raising doubt over the accuracy of bank’s LIBOR submissions. “Great article in the WSJ today about the LIBOR problem” says one. “Just reading it” his colleague replies.

Yet according to the FSA, some two hours later they were happily conspiring to submit manipulated bids:

Trader-Submitter D: “mate any axe in [GBP] libors?”

Manager D: “higher pls”

Trader-Submitter D: “93?”

Manager D: “pls”

Trader-Submitter D: “[o]k”

In another moment of comical stupidity one employee sends out a request on a public chat forum at the bank asking the 58 participants if there are any requests for a manipulated rate. Later, after being admonished to “BE CAREFUL DUDE” in a private note from a manager, he replies “i agree we shouldnt ve been talking about putting fixings for our positions on public chat (sic)”.

Apart from the salacious glimpse that these settlements give into the foul-mouthed and matey culture (as well as atrocious grammar) of investment banking trading desks, they also reveal worrying suggestions that this conspiracy was bigger than previously suspected. Information released by the FSA shows it involved not just banks, as was previously known from a settlement earlier this year by Barclays, but that it also involves the collusion of employees at inter-broker dealers, the firms that stand between banks and help them to trade with one another.

Regulators found that brokers at these firms helped coordinate false submissions between banks, posted false rates and estimates of where rates might go on their own trading screens, and even posted spoof bids to mislead market participants as to the real rate in the market.

The details in these settlements suggest that lawyers representing clients in a clutch of class-action lawsuits in America against banks including UBS will have a field day.

The first reason they are cheering is because UBS didn’t simply submit false estimates of interest rates on its own. According to the settlement documents, UBS tried and apparently succeeded in some cases in getting other firms to collude in manipulating rates. That collusion strengthens the case of civil litigants in America who are arguing in court that banks worked together to fix prices. It also undermines one of the defences filed by banks in American courts that their submissions, although possibly incorrect in some cases, were simply the individual acts of banks that happened by chance to be acting in parallel. The latest settlements may also make it easier for civil litigants to claim damages from UBS since the Swiss regulator found that it had profited from its wrongdoing.



Continued in article

 

LIBOR --- http://en.wikipedia.org/wiki/Libor

"How Barclays Rigged the Machine," by Rana Foroohar, Time Magazine, July 23, 2012 ---
http://www.time.com/time/subscriber/article/0,33009,2119318,00.html

Ever wonder why surveys about very personal topics (think sex and money) are done anonymously? Of course you don't, because it's obvious that people wouldn't tell the truth if they were identified on the record. That's a key point in understanding the latest scandal to hit the banking industry, which comes, as ever, with much hand-wringing, assorted apologies and a crazy-sounding acronym--this time, LIBOR. That's short for the London interbank offered rate, the interest rate that banks charge one another to borrow money. On June 27, Britain's Barclays bank admitted that it had deliberately understated that rate for years.

LIBOR is a measure of banks' trust in their solvency. And around the time of the financial crisis of 2008, Barclays' rate was rising. If a bank revealed publicly that it could borrow only at elevated rates, it would essentially be admitting that it--and perhaps the financial system as a whole--was vulnerable. So Barclays gamed the system to make the financial picture prettier than it was. The charade was possible because LIBOR is calculated not on the basis of documented lending transactions but on the banks' own estimates, which can be whatever bankers decree. This Kafkaesque system is overseen for bizarre historical reasons by an association of British bankers rather than any government body.

The LIBOR scandal has already claimed Barclays' brash American CEO, Bob Diamond, a man infamous for taking huge bonuses while his company's share price and profit were declining. Diamond resigned, but his head may not be the only one to roll. As many as 20 of the world's largest banks are being sued or investigated for manipulating over the course of many years the interest rate to which $350 trillion worth of derivatives contracts are pegged. Bank of England and former British-government officials accused of colluding with Barclays to stem a financial panic may also be caught up in the mess.

What's surprising is that individual consumers may actually have benefited, at least financially, from the collusion. Not only the central reference point for derivatives markets, LIBOR is also the rate to which all sorts of loans--variable mortgage rates, student loans, even car payments--may be pegged. To the extent that banks kept LIBOR artificially low, all those other loan rates were marked down too. Unlike the JPMorgan trading fiasco of a few weeks ago, which has resulted in a multibillion-dollar loss, the only apparent red ink so far in the LIBOR scandal is the $450 million in fines that Barclays will pay to the U.K. and U.S. governments for rigging rates (though pension funds and insurance companies on the short end of LIBOR-pegged financial transactions may have lost a lot of money).

Either way, the truth is that LIBOR is a much, much bigger deal than what happened at JPMorgan. Rather than one screwed-up trade that was--whether you like it or not (and I don't)--most likely legal, it represents a financial system that is still, four years after the crisis began, opaque, insular and dangerously underregulated. "This is a very, very significant event," says Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (CFTC), which is one of the regulators investigating the scandal. "LIBOR is the mother of all financial indices, and it's at the heart of the consumer-lending markets. There have been winners and losers on both sides [of the LIBOR deals], but collectively we all lose if the market isn't perceived to be honest."

Continued in article

View from the Left
"Barclays and the Limits of Financial Reform," by Alexander Cockburn, The Nation, July 30, 2012 ---
http://www.thenation.com/article/168834/barclays-and-limits-financial-reform

 

Bob Jensen's threads on interest rate swaps and LIBOR ---
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Search for LIBOR or swap.

Timeline of Financial Scandals, Auditing Failures, and the Evolution of International Accounting Standards ---- http://www.trinity.edu/rjensen/FraudCongress.htm#DerivativesFrauds

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

 


Best 2012 Performing Currencies Against the U.S. Dollar ---
world's top performing currencies against the dollar
Not a good time for Polish jokes
http://soberlook.com/2012/12/the-2012-winner-for-best-performing.html


"Real Estate with a Cause: Identifying Investments that Serve a Triple Bottom Line," Knowledge@Wharton, December 19, 2012 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=3141

A derelict medical center for veterans in Salem, Va., that was transformed into an energy efficient place to live and work -- thanks to a mélange of private and public funds -- proves that investors can make money and support social change at the same time.

That was the message of a panel discussion at the recent Wharton Social Impact Conference focused on innovative approaches to financing socially responsible projects in the real estate sector. How much money is potentially available for building while also serving social and environmental benefits is anybody's guess. One expert, who manages a large, San Francisco-based investment fund dedicated to creating quality jobs in low-income areas of California, estimated $20 trillion. Figures from JPMorgan, however, came in substantially lower -- $400 billion to $1 trillion within the next eight years.

Douglas P. Lawrence, managing principal for 5 Stone Green Capital, a small investment fund that is focused on green technologies, called the veterans' medical complex in Virginia, a "win-win" because "investors get an 8% return, and homeless veterans get a modern, light-filled place to live, stellar medical care and a chance to make some money in a year-round greenhouse. For the environment, we reduced energy consumption by 30%. For the military, this project has impact because it cares deeply about veterans," said Lawrence, a former co-portfolio manager for JPMorgan's urban green property fund.

In addition, the Virginia veterans' project was a rock-solid investment because construction loans and rents were government guaranteed, Lawrence noted, adding that he "wouldn't even look at a building project today that does not incorporate green technologies."

Socially responsible or sustainable real estate development does more than turn a profit. While investors expect gains, there is a growing number who also want to do something for the greater good, whether it is in urban housing, green technology, job creation, preserving historic treasures, providing access to health care, education, clean water, healthy food or numerous other areas around the world in need of capital for change.

"Building green does not cost more. It costs different because the savings are over the long haul," said Lawrence. "With the population expected to grow to seven billion by 2050 and the depletion of our fossil fuels, it only makes sense that we employ the best technologies to keep operating costs as low as possible."

Forget Bamboo Floors and Bike Racks

Lawrence's fund is targeted to three types of real estate: multi-family housing in cities, old industrial buildings suitable for rehabilitation because they are likely to spawn new companies and jobs, and construction of grocery stores and pharmacies because they will "always be essential." He derided what he called "merchant builders who build as cheaply as possible, then move out and leave the problems for the next guy."

On the contrary, he noted, "building green is not about bamboo floors and bicycle racks. It is about improving the bottom line by driving down expenses. It's also about learning how to be a better steward of the resources we have on the planet and how to build better in the first place. This is nothing more than old-fashioned asset management, instead of financial engineering, as a way to increase profits."

While impact investing is gaining momentum in these post-recessionary times, it is far from mainstream, said panel moderator Benjamin Blakney, an investment consultant and former treasurer of the city of Philadelphia. He credited a subtle shift in language for an uptick in interest.

"There is movement away from the term 'socially responsible' investing because it sounds a bit inferior, like maybe the investor should expect a compromise in returns," he noted. "The term 'impact investing' shifts the emphasis to the target. It acknowledges that cash is king and that investment conversations are mercenary. Show me the money. Don't forget money managers have a fiduciary responsibility to seek out market-rate or above market-rate returns."

Other buzz words for the practice that are growing in popularity are "venture philanthropy" or "responsible capitalism." Bill Gates' name surfaced repeatedly during the conference to illustrate the need to make money first before having enough to give away.

Better Analytics Align Money with Passion

Real estate development is inherently complex. Sometimes the desire to add impact investing can make a tentative deal collapse, warned Blakney. A major obstacle, according to The Gallin Group, a market research firm that surveyed 51 leading impact investors last year, is the dearth of high-quality investments along with too few investment managers, consultants and entrepreneurs who can construct and promote measurable investments.

"Asset owners say they would put more capital to work if they were able to find high-quality investments," the study said. "They recognize that their investments serve as demonstration projects, and success may be able to catalyze the flow of additional capital. Therefore, the management teams of the investments must be solid."

Industry pioneers, such as the $3 billion Rockefeller Foundation in New York, view impact investing as a way to reduce poverty and other social problems, but more importantly as a carrot to attract wealth from the largest private capital markets.

More investors are beginning to poke around for social benefit investments because "traditional investments in the last few years have left them dry," noted panelist Joseph J. Haslip, managing director of Blue Harbour Group, a hedge fund. Previously, he was the city of New York's representative to four pension funds with assets in excess of $100 billion. "The atmosphere is definitely getting better. Increased availability of analytics is also helping investors align their money with their passions, he said. "For example, data has shown that corporations with minorities and women on their boards actually outperform those that have none."

While some observers consider green construction to be the "new normal," panelist Stuart Brodsky, a professor at New York University's Schack Institute of Real Estate, predicted that U.S. commercial markets are still 15 years away from "building totally green." The market has made progress, "but there is still a lot of wasted money in construction. The industry would benefit from greater standardization of requirements and government leadership," said Brodsky, who served as the national manager for ENERGY STAR, a program that resulted in a 24 million metric ton reduction in greenhouse gas emissions and a savings of $7.5 billion in energy operating costs.

Tax credits and other government-sponsored redevelopment strategies incentivize private investors to put their money into public projects. Approximately 20 states already mandate or encourage public pension funds to invest in initiatives with a social benefit and, in particular, to support local economies.

A 'Second Downtown' for D.C.

Panelist Elinor R. Bacon, president of a real estate development company in Washington, D.C., and a former deputy assistant secretary for the U.S. Department of Housing and Urban Development's office of public housing investments, noted that the amount of private capital invested in public housing in the last decade has increased four-fold. Her latest project is a 23-acre waterfront site in southwest Washington that is a private-public partnership between the District of Columbia and a team of six development companies, including Bacon's.

Construction on The Wharf is expected to begin early next year and be completed in 2020. It is a poster child for socially responsible real estate development, Bacon added, because it will transform a swath of blighted and isolated waterfront land, owned by the District, into a vibrant place to live, work, shop, study and play. By creating what some are calling a "second downtown" for D.C., as opposed to pushing into the suburbs where building costs are lower, the project exemplifies smart growth, she noted.

Continued in article

Bob Jensen's threads on Triple Bottom Reporting ---
http://www.trinity.edu/rjensen/Theory02.htm#TripleBottom


"Fantasy Academe: a Role for Sabermetrics Fantasy Academe: a Role for Sabermetrics 1," by Robert Zaretsky, Chronicle of Higher Education, December 17, 2012 ---
http://chronicle.com/article/Fantasy-Academe-a-Role-for/136325/?cid=at&utm_source=at&utm_medium=en

Jensen Comment
The above article was triggered by an unfavorable accreditation review at the University of Houston. Interestingly, before the 1990s the AACSB accreditation standards were filled with bright lines that were essentially "sabermetrics," such as student/faculty ratio thresholds and the minimum proportion of terminally qualified faculty in each department, with "terminally qualified" defined as not being doctoral faculty with degrees outside the field of business such as non-qualifying doctoral degrees in education, economics, mathematics, statistics, history, etc.

Then, for complicated reasons and excuses, the AACSB moved toward eliminating bright line sabermetrics with squishy standards rooted in mission-driven criteria. AACSB mission-driven accreditation standards are analogous to principles-based accounting standards. Now business administration departments may define "terminally qualified" in terms of the unique missions of the college of business.

I might add that top university officials hate bright line, rules-based accreditation standards. In the old days some astute college presidents (I know one personally)  absolutely refused to allow a college of business to seek AACSB accreditation. This is because when the number of business major credit hours soar relative to humanities and science, business deans would blackmail the college president for increased budgets on the basis that the falling behind the bright lines of the AACSB would result in losing accreditation. Losing accreditation is much more serious than not having had such accreditation in the first place. It's a bit like getting a divorce versus not ever having been married in the first place. Divorces can be expensive. As Jerry Reed sang, "she got the gold mine and I got the shaft."
http://www.youtube.com/watch?v=U-p0zn3PijY

Mission-based AACSB standards are a bit more like bypassing rules-based marriage laws with squishy standards where the business school in College A has a much different faculty-student profile than business school B. My college president friend mentioned above readily funded our quest for AACSB accreditation when the AACSB restated its standard setting to be mission-based. This meant that this president couldn't be blackmailed out of using his own discretion in setting budgets for all departments on campus.

I might add that the AACSB has not been at all flexible with regard to the distance education mission. Distance education cannot be the primary mission, and no for-profit university is accredited by the AACSB whether or not it has onsite campuses to supplement its distance education degree alternatives.

What should be the role of sabermetrics in accreditation?


"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

Bob Jensen's threads on accreditation issues ---
http://www.trinity.edu/rjensen/Assess.htm#AccreditationIssues

 


Julie Smith David, who is now a full-time administrator in the American Accounting Association, posted the following on the AAA Commons: She needs to update her profile following her move to Sarasota --- http://commons.aaahq.org/people/687f7dcd30

I always enjoy reflecting on the year, and finding out what others think has made a difference...so from many of the "best of" lists that come out  at this time of year, the one that first caught my eye:

7 Most Important Tech Trends Of 2012 posted on CIO's web site...

What struck me as interesting was how many of these technologies (5 out of 7) have implications for accountants:

1.  Big data - if we're not analyzing it, are we doing our job?

3.  Near-field communications - what are the audit implications?  Privacy issues?

4.  Biometrics - sure it helps with security, but, again, what about privacy?

6.  Bring Your Own Device (BYOD—oh, don't I wish it was a "---B"?) - the technology challenges with consumer devices are huge, as are implications for processes (and SOX compliance), security, and potentially privacy

7.  3-D Printing - We have entered the Enterprise and can have replicators in our homes!  Think how this could turn manufacturing on its head: no more "work in progress" and a lot less inventory!  Would ABC costing still be needed?

My questions to all of you - are you including these in your classes and your research?  Do you think the accounting profession sees these initiatives as ones they should be involved in?  Do you think the article missed anything important?

And if these aren't too interesting, here are a few more "best of's" for 2012:

Happy New Year to you, and yours!

 

"Six Social-Digital Trends for 2013," by David Armano, Harvard Business Review Blog, December 12, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/12/six_social-digital_trends_for.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 technology trends are at
http://www.trinity.edu/rjensen/Bookbob4.htm

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


December 22, 2012 message from Rick Lillie on the AAA Commons

This weekend, I participated in the AAA Council meeting held at the Anaheim Hilton Hotel in Anaheim, California.  The meeting opened with a talk by Lloyd Armstrong titled Which Way Higher Education?  In preparation for Armstrong's presentation, we were asked to read the article College is Dead.  Long Live College!

Armstrong explored the traditional college/university business model and described "big forces" causing the business model to change.  Below is a concept diagram summarizing key points from Armstrong's talk.  It was interesting to hear his comments about the growth and impact of online learning for all aspects of university-level education.  Armstrong briefly described recent events such as a consortium of universities agreeing to offer courses online that could be taken for credit by students at other universities.

Times are rapidly changing.  Armstrong's question to us was whether accounting (and university) education will be prepared for the change.

Rick Lillie
CSU San Bernardino

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


According to Hoyle
"EVERYONE CHANGES OVER TIME," by Joe Hoyle, Teaching Blog, December 14, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/12/everyone-changes-over-time.html

. . .

I am always shocked by how many well intentioned faculty members turn testing over to a textbook test bank. I want to run screaming into the night when I hear that. In my opinion, an overworked graduate student who does not know you or your students is not in any position to write a legitimate test for your students. When writing this blog, I sometimes discuss what I would do if I were king of education. Burning all test banks would be one of my first royal acts.

Yes, I know you are extremely busy. But abdicating this valuable task to a person who might never have taught a single class (or a class like yours) makes no sense. Any test in your class should be designed for your students based on what you have covered and based on what you want them to know. It should not be composed of randomly selected questions written by some mysterious stranger. To me, using a test bank is like asking Mickey Mouse to pinch hit for Babe Ruth. You are giving away an essential element of the course to someone who might not be up to the task.

Over the decades, I have worked very hard to learn how to write good questions. During those years, I have written some questions that were horrible. But, I have learned much from that experience.

--The first thing I learned about test writing was that a question that everyone could answer was useless. --The second thing that I learned was that a question that no one could answer was also useless.

As with any task, you practice and you look at the results and you get better. You don’t hand off an essential part of your course to a test bank.

As everyone who has read this blog for long probably knows, one of the things I started doing about 8 years ago was allowing students to bring handwritten notes to every test. That immediately stopped me from writing questions that required memorization because the students had all that material written down and in front of them.

That was a good start but that was not enough. Allowing notes pushed me in the right direction but it did not get me to the tests I wanted. It takes practice and study.

About 3 weeks ago, I wrote a 75 minute test for my introduction to Financial Accounting class here at the University of Richmond. This test was the last one of the semester (prior to the final exam). By that time, I surely believed that everyone in the class had come to understand what I wanted them to accomplish. So, I wanted to test the material in such a way as to see how deeply they really did understand it.

I wrote 12 multiple-choice questions designed to take about 4-8 minutes each. For accounting tests that are often numerically based, I like multiple-choice questions because I can give 6-8 potential answers and, therefore, limit the possibility of a lucky guess.

In writing the first four of these questions, I tried to envision what an A student could figure out but that a B student could not. In other words, I wanted these four questions to show me the point between Good and Excellent. These were tough. For those questions, I really didn’t worry about the C, D, or F students. These questions were designed specifically to see if I could divide the A students from the B students.

The next four questions were created to divide the B students from the C students. They were easier questions but a student would have to have a Good level of understanding to figure them out. I knew the A students could work these questions and I knew the D students could not work them. These four were written to split the B students from the C students.

The final four questions were created to divide the C students from those with a lesser level of understanding. They were easier but still not easy. I wanted to see who deserved a C and who did not. If a student could get those four questions correct, that (to me) was average work. Those students deserved at least a C. But, if a student could not get those four, they really had failed to achieve a basic level of understanding worthy of a C.

Then, I shuffled the 12 questions and gave them to my students.

How did this test work out in practice? Pretty well. When it was over, I put the papers in order from best to worse to see if I was comfortable with the results. I genuinely felt like I could tell the A students from the B students from the C students from everyone else. And, isn’t that a primary reason for giving a test?

Okay, I had to create a pretty interesting curve to get the grades to line up with what I thought I was seeing. But I am the teacher for this class. That evaluation should be mine. I tell my students early in the semester that I do not grade on raw percentages. Getting 66 percent of the questions correct should not automatically be a D. In fact, in many cases, getting 66 percent of the questions correct might well be a very impressive performance. It depends on the difficulty of the questions.

After the first test, students will often ask something like, “I only got four questions out of 12 correct and I still got a C, how can that be?” My answer is simple “by answering those four questions, you have shown me how much you have understood and I thought that level of understanding deserved a C.”

Continued in article

Jensen Comment
I think professors who use publisher test banks are totally naive on how easy it is to get publisher test banks. Some who aren't so naive contend that learning from memorizing test banks is so tremendous that they want to give student A grades for memorizing a test bank. I think that's a cop out!

The following appears in RateMyProfessor for a professor that will remain unnamed ---
http://www.ratemyprofessors.com/

She is a really easy teacher-especially if you have old tests!! There are always repeat questions from the year before! It is always easy to see what will be on the test if you go to class...she always picks one question from each topic she talked about in class! You won't even need to buy the book bc everything is from her lecture!

She tries to indoctrinate all of her pupils with her liberal views on the the environment, business, and religion. She's patronizing, rude, her voice is annoying, and she NEVER speaks on econ. she pushes her views on us daily. cares more about the environment than econ and won't listen to other opinions. treats students like they're idiots.

"How You Test Is How They Will Learn," by Joe Hoyle, Teaching Financial Accounting Blog, January 31, 2010 ---
 http://joehoyle-teaching.blogspot.com/2010/01/how-you-test-is-how-they-will-learn.html 

Bob Jensen's threads on higher education controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm


"TWO STUDENTS I MISJUDGED," by Joe Hoyle, Teaching Blog, December 26, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/12/two-students-i-misjudged.html

I am now halfway through my 42nd year as a college teacher. This semester (like all semesters) had its ups and downs. There were days when every student seemed brilliant and days when no one seemed to be able to count to four. I don’t think I taught any geniuses but almost every student appeared capable and, hopefully, gained something of lasting benefit. I started with 73 students and a total of 16 finished with the grade of A. I always hope for more excellent work but 21.9 percent was not bad. I try not to contribute too heavily to grade inflation.

At the end of every semester, there are always a few students that I wish I had handled differently. I often ponder them long after class has ended. With 73 students, it can be difficult to get an accurate read on each student at the beginning of the semester. Some need carrots to do well and some need sticks. Often, I feel frustrated because I do not have the time needed to determine what buttons to push to get individual students excited about the learning process. In those cases, I am left wondering if I helped or hindered the student’s learning.

When I travel around the county speaking to teachers, I get to talk with a lot of folks. One common theme I hear is that students do not always appreciate what teachers do for them. “If I work them hard, they are unhappy.” “If I challenge them to go deeper, they rebel.” “Why should I work so hard when the students prefer the easy way?” Teaching can be really frustrating.

And, in truth, human beings (even teachers) need motivation. Everyone needs a pat on the back as often as possible. It is hard to beat your head against a wall if no one really appreciates what you do.

Occasionally, though, I am brought back to reality and reminded that many (if not most) students really do care about their education. But, they do not always have an easy way to show their appreciation for what you do. Last week, I got emails from two of my fall students, two students that I never expected to hear from because I was not sure whether I had taught them anything or not. Until I got their emails, I would have included them on the list of: “I didn’t get through to these students very well.” I guess that is my point: Sometimes you just never know.

Student A

Student A seemed extremely quiet. He was a student in my Introduction to Financial Accounting class. When I called on him each day, he would take a long time to answer and his answers frequently seemed very hesitant and unsure. As a result, if you had asked me, I would have said that he was not well prepared. I assumed his hesitancy was because he was not terribly interested in the material. From my vantage point, that was how it appeared.

The email I got from Student A last week was 1,276 words long. I cannot remember ever getting such a long email from a student. All semester, I thought he was a relatively nonverbal student when, in fact, he was just quiet. He was not uninterested, he was quiet. If this email was any indication, he was actually a very very verbal student.

This student that I thought was basically uninterested in financial accounting was, in fact, one of the most interested. I would have said that he did not appreciate what I did when he really did. I misjudged him completely. I am not sure how I should have taken advantage of that knowledge but I judged him incorrectly and probably should have pushed him harder.

Here are just a few (494) of those 1,276 words.

Continued in article


Here are the ten highest paid private college presidents:

  1. Bob Kerrey (The New School), $3,047,703
  2. Shirley Ann Jackson (Rensselaer Polytechnic Institute), $2,340,441
  3. David Pollick (Birmingham-Southern College), $2,312,098
  4. Mark Wrighton (Washington University), $2,268,837
  5. Nicholas Zeppos (Vanderbilt University), $2,228,349
  6. Steven Sample (USC), $1,963,710
  7. Lee Bollinger (Columbia University),  $1,932,931
  8. Richard Levin Yale University $1,616,066
  9. Robert Zimmer (University of Chicago) $1,597,918
  10. Jack Varsalona (Wilmington University) $1,550,218

Bob Jensen's threads on higher education controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm


"Ohio State Researcher Guilty of Falsifying Federal Studies," Inside Higher Ed, December 24, 2012 ---
http://www.insidehighered.com/quicktakes/2012/12/24/ohio-state-researcher-guilty-falsifying-federal-studies

The federal Office of Research Integrity has concluded that an Ohio State University pharmacology professor fabricated data in studies sponsored by the National Institutes of Health. The agency announced last month that two investigations by the university and its own inquiry had uncovered evidence that Terry S. Elton falsified data in five published papers, all of which the university recommended be retracted. Elton has been barred from participation in federal studies for three years.

Bob Jensen's threads on professors who cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize


For Jim Hunton maybe the world did end on December 21, 2012

"Following Retraction, Bentley Professor Resigns," Inside Higher Ed, December 21, 2012 ---
http://www.insidehighered.com/quicktakes/2012/12/21/following-retraction-bentley-professor-resigns

James E. Hunton, a prominent accounting professor at Bentley University, has resigned amid an investigation of the retraction of an article of which he was the co-author, The Boston Globe reported. A spokeswoman cited "family and health reasons" for the departure, but it follows the retraction of an article he co-wrote in the journal Accounting Review. The university is investigating the circumstances that led to the journal's decision to retract the piece.

 

An Accounting Review Article is Retracted

One of the article that Dan mentions has been retracted, according to
http://aaajournals.org/doi/abs/10.2308/accr-10326?af=R 

Retraction: A Field Experiment Comparing the Outcomes of Three Fraud Brainstorming Procedures: Nominal Group, Round Robin, and Open Discussion

James E. Hunton, Anna Gold Bentley University and Erasmus University Erasmus University This article was originally published in 2010 in The Accounting Review 85 (3) 911–935; DOI: 10/2308/accr.2010.85.3.911.

The authors confirmed a misstatement in the article and were unable to provide supporting information requested by the editor and publisher. Accordingly, the article has been retracted.

 

November 15, 2012 reply from Bob Jensen

Hi Richard,

 
Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s?
 
 
Thank you for the heads up on the Hinton and Gold article. This is sad, because Steve Kachelmeier pointed out this article to me last year as an example of where the researchers used real-world experimentation data using subjects from a large CPA firm as opposed to students. Another factor that surprised me was was sample size of  supposedly 2,614 auditors.
 
 
Bob Kaplan wrote the following in
"Accounting Scholarship that Advances Professional Knowledge and Practice," AAA Presidential Scholar Address by Robert S. Kaplan, The Accounting Review, March 2011, pp. 372-373

 
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.  
 
 
One thing I note is that the article has not been removed from the TAR database. The article still exists with a large "Retracted" stamp that appears over every page of the article
http://aaajournals.org/doi/pdf/10.2308/accr.2010.85.3.911
 
 
I attached the picture of a sample page.
 
 
Would the Techies on the AECM explain this:
The "Retracted" stamp is transparent in terms of copying any passage or table in the article. In other words, the article can be quoted as easily by copy and paste as text without any interference from the "Retracted Stamp." It cannot, however, be copied as a picture without interference from the "Retracted Stamp." 

 
Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s
 
 
Years ago Les Livingstone was the first person to detect a plagiarized article in TAR (back in the 1960s when we were both doctoral students at Stanford). This was long before digital versions articles could be downloaded. The TAR editor published an apology to the original authors in the next edition of TAR. The article first appeared in Management Science and was plagiarized in total for TAR by a Norwegian (sigh).
 
 
Not much can be done to warn readers about hard copy articles if they are subsequently "retracted." One thing that can be done these days is to have an AAA Website that lists retracted publications in all AAA journals. The Hunton and Gold article may be the only one since the 1960s.
 


Respectfully,
Bob Jensen

 

November 28, 2012 forward from Dan Stone

Anna Gold sent me the following statement and also indicated that she had no objections to my posting it on AECM:

Explanation of Retraction (Hunton & Gold 2010)

On November 9, 2012, The Accounting Review published an early-view version of the voluntary retraction of Hunton & Gold (2010). The retraction will be printed in the January 2013 issue with the following wording:

“The authors confirmed a misstatement in the article and were unable to provide supporting information requested by the editor and publisher. Accordingly, the article has been retracted.”

The following statement explains the reason for the authors’ voluntary retraction. In the retracted article, the authors reported that the 150 offices of the participating CPA firm on which the study was based were located in the United States. In May 2012, the lead author learned from the coordinating partner of the participating CPA firm that the 150 offices included both domestic and international offices of the firm. The authors apologize for the inadvertently inaccurate description of the sample frame.

The Editor and the Chairperson of the Publications Committee of the American Accounting Association subsequently requested more information about the study and the participating CPA firm. Unfortunately, the information they requested is subject to a confidentiality agreement between the lead author and the participating firm; thus, the lead author has a contractual obligation not to disclose the information requested by the Editor and the Chairperson. The second author was neither involved in administering the experiment nor in receiving the data from the CPA firm. The second author does not know the identity of the CPA firm or the coordinating partner at the CPA firm. The second author is not a party to the confidentiality agreement between the lead author and the CPA firm.

The authors offered to print a correction of the inaccurate description of the sample frame; however, the Editor and the Chairperson rejected that offer. Consequently, in spite of the authors' belief that the inaccurate description of the sample does not materially impact either the internal validity of the study or the conclusions set forth in the Article, the authors consider it appropriate to voluntarily withdraw the Article from The Accounting Review at this time. Should the participating CPA firm change its position on releasing the requested information in the future, the authors will request that the Editor and the Chairperson consider reinstating the paper.

Signed:

James Hunton Anna Gold

References: Hunton, J. E. and Gold, A. (2010), “A field experiment comprising the outcomes of three fraud brainstorming procedures: Nominal group, round robin, and open discussions,” The Accounting Review 85(3): 911-935.

 

December 1, 2012 reply from Harry Markopolos <notreallyharry@outlook.com

Harry Markopolos <notreallyharry@outlook.com>

The explanation provided by the Hunton and Gold regarding the recent TAR retraction seems to provide more questions than answers. Some of those questions raise serious concerns about the validity of the study.

1. In the paper, the audit clients are described as publically listed (p. 919), and since the paper describes SAS 99 as being applicable to these clients, they would presumably be listed in the U.S. However, according to Audit Analytics, for fiscal year 2007, the Big Four auditor with the greatest number of worldwide offices with at least one SEC registrant was PwC, with 134 offices (the remaining firms each had 130 offices). How can you take a random sample of 150 offices from a population of (at most) 134?

Further, the authors state that only clients from the retail, manufacturing, and service industries with at least $1 billion in gross revenues with a December 31, 2007 fiscal year-end were considered (p. 919). This restriction further limits the number of offices with eligible clients. For example, the Big Four auditor with the greatest number of offices with at least one SEC registrant with at least $1 billion in gross revenues with a December 31, 2007 fiscal year end was Ernst & Young, with 102 offices (followed by PwC, Deloitte and KPMG, with 94, 86, and 83 offices, respectively). Limiting by industry would further reduce the pool of offices with eligible clients (this would probably be the most limiting factor, since most industries tend to be concentrated primarily within a handful of offices).

2. Why the firm would use a random sample of their worldwide offices in the first place, especially a sample including foreign affiliates of the firm? Why not use every US office (or every worldwide office with SEC registrants)? The design further limited participation to one randomly selected client per office (p. 919). This design decision is especially odd. If the firm chose to sample from the applicable population of offices, why not use a smaller sample of offices and a greater number of clients per office? Also, why wouldn’t the firm just sample from the pool of eligible clients? Finally, would the firm really expect its foreign affiliates to be happy to participate just because the US firm is asking them to do so? Would it not be much simpler and more effective to focus on US offices and get large numbers of clients from the largest US Offices (e.g., New York, Chicago, LA) and fill in the remaining clients needed to reach 150 clients from smaller offices?

3. Given the current hesitancy of the Big Four to allow any meaningful access to data, why would the international offices be consistently willing to participate in the study, especially since each national affiliate of the Big Four is a distinct legal entity? The coordination of this study across the firm’s international offices seems like a herculean effort, at least. Further, even if the authors were not aware that the population of offices included international offices, the lead author was presumably aware of the identity of the partner coordinating the study for the firm. Footnote 4 of the paper and discussion on page 919 suggest that the US national office coordinated the study. It seems quite implausible that the US national office alone would be able to coordinate the study internationally.

4. In the statement that has been circulated among the accounting research community, the authors state:

“The second author was neither involved in administering the experiment nor in receiving the data from the CPA firm. The second author does not know the identity of the CPA firm or the coordinating partner at the CPA firm. The second author is not a party to the confidentiality agreement between the lead author and the CPA firm.”

However, this statement is inconsistent with language in the paper suggesting that both authors had access to the data and were involved in discussions with the firm regarding the design of the study (e.g. Footnote 17). Also, isn’t this kind of arrangement quite odd, at best? Not even the second author could verify the data. We are left with only the first author’s word that this study actually took place with no way for anyone (not even the second author or the journal editor) to obtain any kind of assurance on the matter. Why wouldn’t the firm be willing to allow Anna or Harry Evans to sign a confidentiality agreement in order to obtain some kind of independent verification? If the firm was willing to allow the study in the first place, it seems quite unreasonable for them to be unwilling to allow a reputable third party (e.g. Harry) to obtain verification of the legitimacy of the study. In addition, assuming the firm is this extremely vigilant in not allowing Harry or Anna to know about the firm, does it seem odd that the firm failed to read the paper before publication and, therefore, note the errors in the paper, including the claim that is made in multiple places in the paper that the data came from a random sample of the firm’s US offices?

5. Why do the authors state that the paper is being voluntarily withdrawn if the authors don’t believe that the validity of the paper is in any way questioned? The retraction doesn’t really seem voluntary. If the authors did actually offer to retract the study that implies that the errors in the paper are not simply innocent mistakes.

Given that most, if not all US offices would have had to be participants in the study (based on the discussion above), it wouldn’t be too hard to obtain some additional information from individuals at the firms to verify whether or not the study actually took place. In particular, if we were to locate a handful of partners from each of the Big Four who were office-managing partners in 2008, we could ask them if their office participated in the study. If none of those partners recall their office having participated in the study, the reported data would appear to be quite suspect.

Sincerely,

Harry Markopolos

For Jim Hunton maybe the world did end on December 21, 2012

"Following Retraction, Bentley Professor Resigns," Inside Higher Ed, December 21, 2012 ---
http://www.insidehighered.com/quicktakes/2012/12/21/following-retraction-bentley-professor-resigns

James E. Hunton, a prominent accounting professor at Bentley University, has resigned amid an investigation of the retraction of an article of which he was the co-author, The Boston Globe reported. A spokeswoman cited "family and health reasons" for the departure, but it follows the retraction of an article he co-wrote in the journal Accounting Review. The university is investigating the circumstances that led to the journal's decision to retract the piece.

An Accounting Review Article is Retracted

One of the article that Dan mentions has been retracted, according to
http://aaajournals.org/doi/abs/10.2308/accr-10326?af=R 

Retraction: A Field Experiment Comparing the Outcomes of Three Fraud Brainstorming Procedures: Nominal Group, Round Robin, and Open Discussion

James E. Hunton, Anna Gold Bentley University and Erasmus University Erasmus University This article was originally published in 2010 in The Accounting Review 85 (3) 911–935; DOI: 10/2308/accr.2010.85.3.911.

The authors confirmed a misstatement in the article and were unable to provide supporting information requested by the editor and publisher. Accordingly, the article has been retracted.

 

November 15, 2012 reply from Bob Jensen

Hi Richard,

 
Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s?
 
 
Thank you for the heads up on the Hinton and Gold article. This is sad, because Steve Kachelmeier pointed out this article to me last year as an example of where the researchers used real-world experimentation data using subjects from a large CPA firm as opposed to students. Another factor that surprised me was was sample size of  supposedly 2,614 auditors.
 
 
Bob Kaplan wrote the following in
"Accounting Scholarship that Advances Professional Knowledge and Practice," AAA Presidential Scholar Address by Robert S. Kaplan, The Accounting Review, March 2011, pp. 372-373

 
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.  
 
 
One thing I note is that the article has not been removed from the TAR database. The article still exists with a large "Retracted" stamp that appears over every page of the article
http://aaajournals.org/doi/pdf/10.2308/accr.2010.85.3.911
 
 
I attached the picture of a sample page.
 
 
Would the Techies on the AECM explain this:
The "Retracted" stamp is transparent in terms of copying any passage or table in the article. In other words, the article can be quoted as easily by copy and paste as text without any interference from the "Retracted Stamp." It cannot, however, be copied as a picture without interference from the "Retracted Stamp." 

 
Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s
 
 
Years ago Les Livingstone was the first person to detect a plagiarized article in TAR (back in the 1960s when we were both doctoral students at Stanford). This was long before digital versions articles could be downloaded. The TAR editor published an apology to the original authors in the next edition of TAR. The article first appeared in Management Science and was plagiarized in total for TAR by a Norwegian (sigh).
 
 
Not much can be done to warn readers about hard copy articles if they are subsequently "retracted." One thing that can be done these days is to have an AAA Website that lists retracted publications in all AAA journals. The Hunton and Gold article may be the only one since the 1960s.
 


Respectfully,
Bob Jensen

 

November 28, 2012 forward from Dan Stone

Anna Gold sent me the following statement and also indicated that she had no objections to my posting it on AECM:

Explanation of Retraction (Hunton & Gold 2010)

On November 9, 2012, The Accounting Review published an early-view version of the voluntary retraction of Hunton & Gold (2010). The retraction will be printed in the January 2013 issue with the following wording:

“The authors confirmed a misstatement in the article and were unable to provide supporting information requested by the editor and publisher. Accordingly, the article has been retracted.”

The following statement explains the reason for the authors’ voluntary retraction. In the retracted article, the authors reported that the 150 offices of the participating CPA firm on which the study was based were located in the United States. In May 2012, the lead author learned from the coordinating partner of the participating CPA firm that the 150 offices included both domestic and international offices of the firm. The authors apologize for the inadvertently inaccurate description of the sample frame.

The Editor and the Chairperson of the Publications Committee of the American Accounting Association subsequently requested more information about the study and the participating CPA firm. Unfortunately, the information they requested is subject to a confidentiality agreement between the lead author and the participating firm; thus, the lead author has a contractual obligation not to disclose the information requested by the Editor and the Chairperson. The second author was neither involved in administering the experiment nor in receiving the data from the CPA firm. The second author does not know the identity of the CPA firm or the coordinating partner at the CPA firm. The second author is not a party to the confidentiality agreement between the lead author and the CPA firm.

The authors offered to print a correction of the inaccurate description of the sample frame; however, the Editor and the Chairperson rejected that offer. Consequently, in spite of the authors' belief that the inaccurate description of the sample does not materially impact either the internal validity of the study or the conclusions set forth in the Article, the authors consider it appropriate to voluntarily withdraw the Article from The Accounting Review at this time. Should the participating CPA firm change its position on releasing the requested information in the future, the authors will request that the Editor and the Chairperson consider reinstating the paper.

Signed:

James Hunton Anna Gold

References: Hunton, J. E. and Gold, A. (2010), “A field experiment comprising the outcomes of three fraud brainstorming procedures: Nominal group, round robin, and open discussions,” The Accounting Review 85(3): 911-935.

 

December 1, 2012 reply from Harry Markopolos <notreallyharry@outlook.com

Harry Markopolos <notreallyharry@outlook.com>

The explanation provided by the Hunton and Gold regarding the recent TAR retraction seems to provide more questions than answers. Some of those questions raise serious concerns about the validity of the study.

1. In the paper, the audit clients are described as publically listed (p. 919), and since the paper describes SAS 99 as being applicable to these clients, they would presumably be listed in the U.S. However, according to Audit Analytics, for fiscal year 2007, the Big Four auditor with the greatest number of worldwide offices with at least one SEC registrant was PwC, with 134 offices (the remaining firms each had 130 offices). How can you take a random sample of 150 offices from a population of (at most) 134?

Further, the authors state that only clients from the retail, manufacturing, and service industries with at least $1 billion in gross revenues with a December 31, 2007 fiscal year-end were considered (p. 919). This restriction further limits the number of offices with eligible clients. For example, the Big Four auditor with the greatest number of offices with at least one SEC registrant with at least $1 billion in gross revenues with a December 31, 2007 fiscal year end was Ernst & Young, with 102 offices (followed by PwC, Deloitte and KPMG, with 94, 86, and 83 offices, respectively). Limiting by industry would further reduce the pool of offices with eligible clients (this would probably be the most limiting factor, since most industries tend to be concentrated primarily within a handful of offices).

2. Why the firm would use a random sample of their worldwide offices in the first place, especially a sample including foreign affiliates of the firm? Why not use every US office (or every worldwide office with SEC registrants)? The design further limited participation to one randomly selected client per office (p. 919). This design decision is especially odd. If the firm chose to sample from the applicable population of offices, why not use a smaller sample of offices and a greater number of clients per office? Also, why wouldn’t the firm just sample from the pool of eligible clients? Finally, would the firm really expect its foreign affiliates to be happy to participate just because the US firm is asking them to do so? Would it not be much simpler and more effective to focus on US offices and get large numbers of clients from the largest US Offices (e.g., New York, Chicago, LA) and fill in the remaining clients needed to reach 150 clients from smaller offices?

3. Given the current hesitancy of the Big Four to allow any meaningful access to data, why would the international offices be consistently willing to participate in the study, especially since each national affiliate of the Big Four is a distinct legal entity? The coordination of this study across the firm’s international offices seems like a herculean effort, at least. Further, even if the authors were not aware that the population of offices included international offices, the lead author was presumably aware of the identity of the partner coordinating the study for the firm. Footnote 4 of the paper and discussion on page 919 suggest that the US national office coordinated the study. It seems quite implausible that the US national office alone would be able to coordinate the study internationally.

4. In the statement that has been circulated among the accounting research community, the authors state:

“The second author was neither involved in administering the experiment nor in receiving the data from the CPA firm. The second author does not know the identity of the CPA firm or the coordinating partner at the CPA firm. The second author is not a party to the confidentiality agreement between the lead author and the CPA firm.”

However, this statement is inconsistent with language in the paper suggesting that both authors had access to the data and were involved in discussions with the firm regarding the design of the study (e.g. Footnote 17). Also, isn’t this kind of arrangement quite odd, at best? Not even the second author could verify the data. We are left with only the first author’s word that this study actually took place with no way for anyone (not even the second author or the journal editor) to obtain any kind of assurance on the matter. Why wouldn’t the firm be willing to allow Anna or Harry Evans to sign a confidentiality agreement in order to obtain some kind of independent verification? If the firm was willing to allow the study in the first place, it seems quite unreasonable for them to be unwilling to allow a reputable third party (e.g. Harry) to obtain verification of the legitimacy of the study. In addition, assuming the firm is this extremely vigilant in not allowing Harry or Anna to know about the firm, does it seem odd that the firm failed to read the paper before publication and, therefore, note the errors in the paper, including the claim that is made in multiple places in the paper that the data came from a random sample of the firm’s US offices?

5. Why do the authors state that the paper is being voluntarily withdrawn if the authors don’t believe that the validity of the paper is in any way questioned? The retraction doesn’t really seem voluntary. If the authors did actually offer to retract the study that implies that the errors in the paper are not simply innocent mistakes.

Given that most, if not all US offices would have had to be participants in the study (based on the discussion above), it wouldn’t be too hard to obtain some additional information from individuals at the firms to verify whether or not the study actually took place. In particular, if we were to locate a handful of partners from each of the Big Four who were office-managing partners in 2008, we could ask them if their office participated in the study. If none of those partners recall their office having participated in the study, the reported data would appear to be quite suspect.

Sincerely,

Harry Markopolos

 

Bob Jensen's threads on professors who cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize


July 1964 Plagiarized Article in The Accounting Review

Hi Dan,

You really should verify everything I wrote below with Les Livingstone, my partner in crime in the accounting doctoral program at Stanford. By the way, even though there were three of us in that doctoral program in the 1960s, I don't think Bob Jensen, Les Livingstone, and Jay Smith ever took a course together. I was more the quant guy and took most of my courses outside the business school in mathematics, statistics, and operations research. Les from South Africa started in the MBA program and then delved more deeply into economics. Jay Smith was more the BYU accountant of the bunch. Jay and Les were both married with young children. I was the single gadfly chasing wild women (not really). To chase wild women it takes money, and I certainly did not have much of that. I did, however, have a cool 1956 pinkish and white Oldsmobile convertible that I wish I still owned. I think we all had Ford Foundation Fellowships that were money laundered by Stanford University. I taught in the Economics Department for a little extra money.

 

As I recall, the article you asked about is as follows:

 

"Using Mathematical Probability to Estimate the Allowance for Doubtful Accountants," by Goran Schroderheim, The Accounting Review, Vol. 39, No. 3, July 1964 ---
http://www.jstor.org/discover/10.2307/242463?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101586066737

 

The first page of the article (Page 679) states "Goran Schroderheim is Chief Chemist for materials development and mechanical rubber goods manufacturing in an industrial concern."

 

My colleague in the accounting doctoral program at Stanford University, Les Livingstone, was the person who first discovered the plagiarism. In communications with the TAR Editor at the time, it was later disclosed to Les that the plagiarist was from Norway. Purportedly, the plagiarist's excuse is that he wanted the article originally published in Management Science to be available to accounting professors. However, he did not cite or reference the article in Management Science. The title and some early paragraphs were modified. Other than that it's the same article as the one cited below:

 

"Estimation of the Allowance for Doubtful Accounts by Markov Chains," by R.M. Cyert, H.J. Davidson, and G.L Thompson, Management Science 1962 8:287-303; doi:10.1287/mnsc.8.3.287
http://mansci.journal.informs.org/content/8/3/287.full.pdf+html?sid=8d91d926-0557-4675-a9dd-a8288b50b429

 

The above article is one of the all-time classics published by Management Science. I taught this article for years as a theory article when I was teaching operations research at Michigan State first and then the University of Maine later on. It was not, however, a very practical article due to difficulties in estimating robust transition probabilities in the Markov transition matrix.

 

Les may remember more details about this incident. There were no electronic versions of articles back in 1964. At best the article could've been typed onto IBM cards and transferred to magnetic tape. Main frame omputers could be telephone networked somewhat between universities in those days, but this type of data transmission was not at all reliable. My guess is that Goran Schroderheim retyped the article before he submitted it to TAR in 1964.


"Psychopathy, Academic Accountants’ Attitudes towards Ethical Research Practices, and Publication Success," by Charles D. Bailey, SSRN, December 8, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2186902

Abstract:
Psychopathy is one of the “Dark Triad” of personality variables, along with Machiavellianism and narcissism. It has received no attention, to my knowledge, in accounting literature, yet it has powerful implications for fraud in many areas. Psychopathy is characterized by deficits of conscience and empathy, rendering the rationalization of fraud easy or completely moot. Empirical research is an area in which two sides of the “Fraud Triangle,” motive and opportunity, are in place, awaiting only rationalization. Widespread fraud has been uncovered in scientific research, and studies indicate that accounting is not exempt. Using a sample of 545 accounting faculty who have published in leading accounting research journals, I find a positive effect of psychopathy on publication count. The effect is fully mediated (via an indirect-only mediation) through the influence of psychopathy on attitudes about the ethicality of questionable or blatantly unethical acts in the research and publication process. Implications and limitations are discussed.

December 11, 2012 reply from Paul Williams

Charlie and Dan,
The juxtaposition of your two recent contributions to AECM prompts me to recommend to you a wonderful little book written by a philosopher named Aaron James. The book's title implies it is not a serious scholarly work. Though tongue-in-cheek, it isn't frivolous. It's titled Assholes: A Theory. In short: "Our theory is simply this: a person counts as an asshole when, and only when, he systematically allows himself to enjoy special advantages in interpersonal relations out of an entrenched sense of entitlement that immunizes him against the complaints of other people (pages 4 - 5 of Assholes: A Theory)." [The author notes he used the masculine pronoun because most assholes are men, though there are some exceptionally paradigmatic examples among women, as well] Dan, if only accounting were analogous to a guild that made clocks, even if we burned 90% of them. At least a clock is a useful thing. But what if the guild is merely in the business of producing assholes -- you end up with an elite of really, really impressive ones. James' chapter seven (titled Asshole Capitalism) speculates on the prospect of institutions being so arranged as to encourage the creation of more and more such folks in society, i.e., assholes are not merely born, but are made.


 


"The Data Vigilante:  Students aren’t the only ones cheating—some professors are, too. Uri Simonsohn is out to bust them. inShare48," by Christopher Shea, The Atlantic, December 2012 ---
http://www.theatlantic.com/magazine/archive/2012/12/the-data-vigilante/309172/

Uri Simonsohn, a research psychologist at the University of Pennsylvania’s Wharton School, did not set out to be a vigilante. His first step down that path came two years ago, at a dinner with some fellow social psychologists in St. Louis. The pisco sours were flowing, Simonsohn recently told me, as the scholars began to indiscreetly name and shame various “crazy findings we didn’t believe.” Social psychology—the subfield of psychology devoted to how social interaction affects human thought and action—routinely produces all sorts of findings that are, if not crazy, strongly counterintuitive. For example, one body of research focuses on how small, subtle changes—say, in a person’s environment or positioning—can have surprisingly large effects on their behavior. Idiosyncratic social-psychology findings like these are often picked up by the press and on Freakonomics-style blogs. But the crowd at the restaurant wasn’t buying some of the field’s more recent studies. Their skepticism helped convince Simonsohn that something in social psychology had gone horribly awry. “When you have scientific evidence,” he told me, “and you put that against your intuition, and you have so little trust in the scientific evidence that you side with your gut—something is broken.”

Simonsohn does not look like a vigilante—or, for that matter, like a business-school professor: at 37, in his jeans, T-shirt, and Keen-style water sandals, he might be mistaken for a grad student. And yet he is anything but laid-back. He is, on the contrary, seized by the conviction that science is beset by sloppy statistical maneuvering and, in some cases, outright fraud. He has therefore been moonlighting as a fraud-buster, developing techniques to help detect doctored data in other people’s research. Already, in the space of less than a year, he has blown up two colleagues’ careers. (In a third instance, he feels sure fraud occurred, but he hasn’t yet nailed down the case.) In so doing, he hopes to keep social psychology from falling into disrepute.

Simonsohn initially targeted not flagrant dishonesty, but loose methodology. In a paper called “False-Positive Psychology,” published in the prestigious journal Psychological Science, he and two colleagues—Leif Nelson, a professor at the University of California at Berkeley, and Wharton’s Joseph Simmons—showed that psychologists could all but guarantee an interesting research finding if they were creative enough with their statistics and procedures.

The three social psychologists set up a test experiment, then played by current academic methodologies and widely permissible statistical rules. By going on what amounted to a fishing expedition (that is, by recording many, many variables but reporting only the results that came out to their liking); by failing to establish in advance the number of human subjects in an experiment; and by analyzing the data as they went, so they could end the experiment when the results suited them, they produced a howler of a result, a truly absurd finding. They then ran a series of computer simulations using other experimental data to show that these methods could increase the odds of a false-positive result—a statistical fluke, basically—to nearly two-thirds.

Just as Simonsohn was thinking about how to follow up on the paper, he came across an article that seemed too good to be true. In it, Lawrence Sanna, a professor who’d recently moved from the University of North Carolina to the University of Michigan, claimed to have found that people with a physically high vantage point—a concert stage instead of an orchestra pit—feel and act more “pro-socially.” (He measured sociability partly by, of all things, someone’s willingness to force fellow research subjects to consume painfully spicy hot sauce.) The size of the effect Sanna reported was “out-of-this-world strong, gravity strong—just super-strong,” Simonsohn told me over Chinese food (heavy on the hot sauce) at a restaurant around the corner from his office. As he read the paper, something else struck him, too: the data didn’t seem to vary as widely as you’d expect real-world results to. Imagine a study that calculated male height: if the average man were 5-foot‑10, you wouldn’t expect that in every group of male subjects, the average man would always be precisely 5-foot-10. Yet this was exactly the sort of unlikely pattern Simonsohn detected in Sanna’s data.

Simonsohn launched an e-mail correspondence with Sanna and his co-authors; the co-authors later relayed his concerns to officials at the University of North Carolina, Sanna’s employer at the time of the study. Sanna, who could not be reached for comment, has since left Michigan. He has also retracted five of his articles, explaining that the data were “invalid,” and absolving his co-authors of any responsibility. (In a letter to the editor of Psychological Science, who had asked for more detail, Sanna mentioned “research errors” but added that he could say no more, “at the direction of legal counsel.”)

Not long after the exchange with Sanna, a colleague sent Simonsohn another study for inspection. Dirk Smeesters of Erasmus University Rotterdam, in the Netherlands, had published a paper about color’s effect on what social psychologists call “priming.” Past studies had found that after research subjects are prompted to think about, say, Albert Einstein, they are intimidated by the comparison, and perform poorly on tests. (Swap Einstein out for Kate Moss, and they do better.) Smeesters sought to build on this research by showing that colors can interact with this priming in strange ways. Simultaneously expose people to blue (a soothing hue), for example, and the Einstein and Moss effects reverse. But a strange thing caught Simonsohn’s eye: the outcomes that Smeesters had predicted ahead of time were eerily similar, across the board, to his actual outcomes.

Simonsohn ran some simulations using both Smeesters’s own data and data found in other papers, and determined that such a data array was unlikely to occur naturally. Then he sent Smeesters his findings, launching what proved to be a surreal exchange. Smeesters admitted to small mistakes; Simonsohn replied that those mistakes couldn’t explain the patterns he’d identified. “Something more sinister must have happened,” he recalled telling Smeesters. “Someone intentionally manipulated the data. This may be difficult to accept.”

“I was trying to give him any out,” Simonsohn said, adding that he wasn’t looking to ruin anyone’s career. But in June, a research-ethics committee at Smeesters’s university announced that it had “no confidence in the scientific integrity” of three of his articles. (The committee noted that it had no reason to suspect Smeesters’s co-authors of any wrongdoing.) According to the committee’s report, Smeesters said “he does not feel guilty” and also claimed that “many authors knowingly omit data to achieve significance, without stating this.” Smeesters, who could not be reached for comment, resigned from the university, prompting another Dutch scholar to publicly remark that Simonsohn’s fraud-detecting technique was “like a medieval torture instrument.”

That charge disturbs Simonsohn, who told me he would have been content with a quiet retraction of Smeesters’s article. The more painful allegation, however, is that he is trying to discredit social psychology. He adores his chosen field, he said, funky, counterintuitive results and all. He studied economics as an undergrad at Chile’s Universidad Católica (his father ran a string of video-game arcades in Santiago; Simonsohn initially hoped to go into hotel management), but during his senior year, an encounter with the psychologist Daniel Kahneman’s work convinced him to switch fields. He prefers psychology’s close-up focus on the quirks of actual human minds to the sweeping theory and deduction involved in economics. (His own research, which involves decision making, includes a recent study titled “Weather to Go to College,” which finds that “cloudiness during [college] visits has a statistically and practically significant impact on enrollment rates.”)

So what, then, is driving Simonsohn? His fraud-busting has an almost existential flavor. “I couldn’t tolerate knowing something was fake and not doing something about it,” he told me. “Everything loses meaning. What’s the point of writing a paper, fighting very hard to get it published, going to conferences?”

Continued in article

Bob Jensen's threads on professors who cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize


"Grant Thornton Int'l Reports Double-Digit Growth," by Daniel Hood, Accounting Today, December 23, 2012 ---
http://www.accountingtoday.com/news/Grant-Thornton-International-Reports-Double-Digit-Growth-65155-1.html


Paul A Beswick, the Acting Chief Accountant at the US Securities and Exchange Commission (SEC), has been named to the position permanently. Mr Beswick, so far the SEC Deputy Chief Accountant, had been serving as Acting Chief Accountant since James L Kroeker left the Commission in July ---
http://www.iasplus.com/en/news/2012/december/paul-beswick-named-sec-chief-accountant


"PwC and Thomson Reuters: Too Close For Comfort," by Francine McKenna, re:TheAuditors, December 26, 2012 ---
http://retheauditors.com/2012/12/26/pwc-and-thomson-reuters-too-close-for-comfort/

A few days ago I reported at Forbes.com on a new business alliance between PwC China and Thompson Reutersa PwC audit client. The three-year agreement is a license to use Thomson Reuters tax software exclusively – in an ironic twist of fate the software was originally developed by Deloittefor client service in China. PwC UK already uses the software for its clients.

PwC US is also a “Certified Implementer” of Thomson Reuters One Source software. That means PwC consulting professionals implement Thomson Reuters for third-parties, perhaps at times in joint engagements with Thomson Reuters. Are there incentives paid? There must be a joint marketing and training arrangement at least. There is a certainly a shared benefit to teaming up to sell software and consulting services. You can agree or disagree whether such arrangements should be prohibited, but under existing rules in the UK and for US listed audit clients of the global firms, they are prohibited.

Why isn’t the SEC and PCAOB enforcing auditor independence rules prohibiting business alliances between auditors and their audit clients?

PwC and Thomson Reuters would not comment for Forbes.com.

Professor Paul Gillis, a PCAOB SAG member and author of the China Accounting Blog, thinks I “jumped the shark” with this one.

Here’s the thing… According to the SEC’Final Rule: Revision of the Commission’s Auditor Independence Requirements effective February 5, 2001, the perception of auditor of independence is as important, or maybe even more important, than the fact of auditor independence.

This is not new.

The independence requirement serves two related, but distinct, public policy goals. One goal is to foster high quality audits by minimizing the possibility that any external factors will influence an auditor’s judgments. The auditor must approach each audit with professional skepticism and must have the capacity and the willingness to decide issues in an unbiased and objective manner, even when the auditor’s decisions may be against the interests of management of the audit client or against the interests of the auditor’s own accounting firm.

The other related goal is to promote investor confidence in the financial statements of public companies. Investor confidence in the integrity of publicly available financial information is the cornerstone of our securities markets. Capital formation depends on the willingness of investors to invest in the securities of public companies. Investors are more likely to invest, and pricing is more likely to be efficient, the greater the assurance that the financial information disclosed by issuers is reliable. The federal securities laws contemplate that that assurance will flow from knowledge that the financial information has been subjected to rigorous examination by competent and objective auditors.

The two goals — objective audits and investor confidence that the audits are objective — overlap substantially but are not identical. Because objectivity rarely can be observed directly, investor confidence in auditor independence rests in large measure on investor perception. For this reason, the professional literature, such as the AICPA’s Statement on Auditing Standards (SAS) No. 1, has long emphasized that auditors “should not only be independent in fact; they should also avoid situations that may lead outsiders to doubt their independence.” The Supreme Court has emphasized the importance of the connection between investor confidence and the appearance of independence:

The SEC requires the filing of audited financial statements in order to obviate the fear of loss from reliance on inaccurate information, thereby encouraging public investment in the Nation’s industries. It is therefore not enough that financial statements be accurate; the public must also perceivethem as being accurate. Public faith in the reliability of a corporation’s financial statements depends upon the public perception of the outside auditor as an independent professional. . . . If investors were to view the auditor as an advocate for the corporate client, the value of the audit function itself might well be lost.

Here’s my column aForbes.com.

Apparently, PwC ad Thomson Reuters believe what happens in China stays in China.

Thomson Reuters announced it signed a three-year contract with PwC, the company’s auditor, to provide use of the Thomson Reuters ONESOURCE Corporate Tax solution for China. PwC U.K. also uses this Thomson Reuters software for its tax clients. Business alliances between a company and its auditor are prohibited under U.S. law and U.K. auditor regulations. Thomson Reuters, headquartered in New York, has its shares listed on the Toronto and New York Stock Exchanges.

Rule 2-01(b) of Regulation S-X (17 CFR 210.2-01.), amended under the Sarbanes-Oxley Act of 2002 to enhance auditor independence after the Enron and Arthur Andersen failures, provides the standard used to judge a business relationship between a company and its auditor or services provided  to an audit client:

For business relationships specifically, the law allows contracts between a auditor and its client only if the auditor is a consumer in the normal course of business and receives no incentives, special pricing or other advantage that other customers would not receive.

Continued in article

Bob Jensen's threads on PwC ---
http://www.trinity.edu/rjensen/Fraud001.htm

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

 


"Recent developments in Islamic banking, finance and accounting," IAS Plus from Deloitte, December 27, 2012 ---
http://www.iasplus.com/en/news/2012/december/islamic-banking-and-finance

The rapid global growth in Islamic finance has brought increased international attention to the questions of what Islamic finance is, how it differs from conventional finance and and whether accounting for Islamic and conventional finance transactions can be harmonised.

The papers for the AAOIFI - World Bank Annual Conference on Islamic Banking and Finance held earlier this month and recently posted to the AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) website offer a good overview of current topics in Islamic Finance. However, they also illustrate that the definitions of Sharia-compliant operations are still diverse and can differ from jurisdiction to jurisdiction, which make a single approach to accounting difficult. Yet, as one of the speakers at the conference pointed out: "Ethics, transparency and accountability are values not alien to [the] Islamic world view." Please click for access to the conference papers on the AAOFI website.

The need to harmonise the treatment of Islamic finance first in itself and then with international standards has lead to the publication of a series of papers over the last months. In September 2012, the Islamic Financial Services Board (IFSB) published a report from a high-level roundtable offered jointly with the International Organisation of Securities Commissions (IOSCO), which was to be a first step towards the development of international regulatory standards for Islamic capital market products. In November 2012, the Malaysian Accounting Standards Board (MASB) published a staff paper discussing Islamic finance, accounting treatments for various Islamic finance instruments, and the reasons why the MASB chose to require Islamic financial institutions to follow Malaysian Financial Reporting Standards, which are equivalent to IFRS.

Finally, the Association of Chartered Certified Accountants (ACCA) followed suit with a report published on its website calling on the International Accounting Standards Board (IASB) and the Islamic finance industry to work together to develop guidance, standards and educate the investor community on key issues. ACCA points out that:

  • the IASB should consider issuing guidance on the application of IFRSs to the accounting for certain Islamic financial products;
  • it should also consider issuing guidance on additional disclosures in relation to Sharia-compliant operations;
  • the IASB should work with leading Islamic Finance standard-setters and regulators in establishing differences and developing harmonised solutions; and
  • the Islamic Finance Institutes (IFIs) should support the IASB by forming an expert advisory group.

The IASB has responded to the repeated calls and has asked the MASB to help with setting up an expert advisory group on Islamic accounting. This development was first announced at the fourth meeting of the Asian-Oceanian Standard-Setters Group (AOSSG) at the end of November 2012 in Kathmandu where the IASB staff briefed the members on the plans. The IASB has since confirmed these plans in the feedback-statement to the agenda consultation:

 

The IASB could benefit from learning more about Islamic (Shariah-compliant) transactions and instruments - neither the IASB nor our staff have expertise in this area. The IASB is establishing a consultative group to assess the relationship between Shariah-compliant transactions and instruments and IFRS and to help educate the IASB, mainly through public education sessions. Work undertaken by some standard-setters suggests that IFRS provides relevant information about Shariah-compliant transactions and that there is little, if anything, the IASB would need to do to bring this sector of the economy within IFRS. However, the IASB needs more information before it can make that assessment itself. We have asked the Malaysian Accounting Standards Board to assist us with setting up this group, reflecting the helpful analysis they provided to the AOSSG on Shariah-compliant matters.

 

More information on developments in Islamic accounting and useful links are available on our dedicated IAS Plus page.

 

Sukuk --- http://en.wikipedia.org/wiki/Sukuk

Islamic Bond Excitement in Financial Markets
"Interested in buying sukuk? by Sabine Vollmer, CGMA Magazine, October 5, 2012 ---
http://www.cgma.org/magazine/news/pages/20126503.aspx

Following financial crises in the US and Europe, investors are increasingly attracted to raising funds for investments through Islamic bonds called “sukuk.”

Sukuk are an alternative to conventional bonds that governments and companies sell regularly to raise funds. They comply with sharia law, the moral code of conduct based on the Quran, which prohibits charging interest and trading in debt.

Ernst & Young’s Global Islamic Banking Centre of Excellence projects that global demand for sukuk is likely to triple to $900 billion in 2017. Here are a few reasons for the surge:

“Would the growth be the same if the US and the European market weren’t in crisis? Perhaps yes, but not at the rate you see now,” said Rizwan Kanji, a lawyer who specialises in sukuk transactions in the Dubai office of the law firm King & Spalding. “… The growth of sukuk will continue while the Western markets recover.”

Establishing a global standardised sukuk trading platform that is open to all financial institutions would go a long way toward spurring more supply, according to Ashar Nazim, E&Y’s MENA Islamic finance services leader.

Continued in article

 


"Islamic Accounting," IAS Plus, January 3, 2011  --- http://www.iasplus.com/islamicfinance/islamicaccounting.htm

Accounting Standards for financial reporting by Islamic financial institutions have to be developed because in some cases Islamic financial institutions encounter accounting problems because the existing accounting standards such as IFRSs or local GAAP were developed based on conventional institutions, conventional product structures or practices, and may be perceived to be insufficient to account for and report Islamic financial transactions. Shariah compliant transactions that observe the prohibition to charge interest may not have parallels in conventional financing and therefore, there may be significant accounting implications. Likewise, the Islamic finance industry is under considerable pressure to enhance practice and improve risk management systems and protect investors.

On this page, we maintain a history of recent developments in Islamic accounting requirements and practices.

 


August 24, 2011 message from Mohammad Asim Raza

Hi Robert -
Read your response on the AECM listserv - I think you would find the Thomas McElwain's writing on interest in his Islam in Bible to be interesting. Here is excerpt.

Usury

Islamic banking is well-known in the financial world and is becoming popular as an investment alternative even outside the sphere of Islam. The prohibition of usury or charging interest on any lending is described in the literature of every Islamic school of jurisprudence. In justification of the prohibition Ali (1988, 141a) quotes Qur'an 2:275 `Those who swallow interest will not (be able to) stand (in resur­rection) except as standeth one whom Satan hath confounded with his touch.'

The Bible is also very clear on the matter of usury. It is in perfect harmony with Islam. The Arabic term for usury, raba, is rather neutral, coming from a root meaning to remain over or increase. The Biblical term for usury, neshek, is strongly negative, coming from a root whose basic meaning is to strike as a serpent.

The term neshek itself is used twelve times in the Bible, but related words are used several times as well. All of them either prohibit usury or speak of it in deprecating terms.

Leviticus 25:36,37. `Take thou no usury of him, or in­crease: but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.' The Hebrew term for increase here, tarbath, is a cognate of the Arabic riba. The word `or' in the translation of verse 36 is an interpretation of the undesignated copula we-. This is an example of the typical Hebrew habit of pairing synonyms.

Exodus 22:25. `If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer, neither shalt thou lay upon him usury.' This text already brings up the question of whether usury in general is prohibited, or merely usury of a brother, that is one under the covenant of God. The Torah has been interpreted to permit usury from unbelievers.

Deuteronomy 23:19-20. 'Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.'

Here the import of the passage in Exodus becomes clear. Usury is prohibited from those under the covenant, but permitted from strangers, that is, unbelieving heathens. Beyond this clarification there is an interesting remark on economy. The strength and well-being of the economic situation is considered to depend on the avoidance of usury.

Psalm 15:1-5. `Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that putteth not out his money to usury...' The prohibition of usury in the Psalms is universal, whether the loan is made to believers or unbelievers.

Jeremiah 15:10. `Woe is me, my mother, that thou has borne me a man of strife and a man of contention to the whole earth! I have neither lent on usury, nor men have lent to me on usury; yet every one of them doth curse me.' The words of Jeremiah imply not only a prohibition on lending with interest, but on borrowing with interest as well. The guilt is thus attached to both parties in the transaction.

As part of the divine definition of justice we find in Ezekiel 18:8-9, `He that hath not given forth upon usury, neither hath taken any increase... he is just, he shall surely live, saith the Lord God.' This is a positive approach to the problem, as well as another affirmation that neshek and tarbith are equivalent.

Ezekiel 18:13 makes the point negatively, `Hath given forth upon usury, and hath taken increase: shall he then live? he shall not live: he hath done all these abominations; he shall surely die; his blood shall be upon him.' The context suggests that the abomination of usury is one of the sins provoking the Babylonian captivity. Verses seventeen and eighteen release the innocent children of the effects of their parents' sins in taking usury.

Ezekiel 22:12. `In thee have they taken gifts to shed blood; thou has taken usury and increase, and thou hast greedily gained of thy neighbours by extortion, and hast forgotten me, saith the Lord God.' The taking of usury is equated here with bribes in judgement resulting in the execution of the innocent, and with extortion. Ezekiel thus defines more carefully what he means by `abominations' in chapter eighteen.

After the captivity the matter of usury arose again, and was put to a quick end by the intervention of Nehemiah. Nehemiah's argument is not based on fear of renewed captivity as a result of usury. Rather, he appeals directly to law and justice. Having authority as governor, his measures were met with success: Nehemiah five.

The Gospel references to usury are neither legislative nor normative. In a parable we find Jesus quoting a master scolding a servant for neglecting his property. Matthew 25:27 'Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.' The same story is repeated in Luke 19:23. Jesus makes no comment here on usury as such. The text does reveal that Jesus' hearers were familiar with the practice and that at least some, those having capital, approved of it. The context might well be lending to unbelievers.

In sum, usury is prohibited in the Torah when between believers. The prophets suggest usury to be one of the factors resulting in the Babylonian captivity. Ezekiel uses very strong language against usury, equating it with bribery and extortion. The Psalms seem to apply the prohibition not merely within the context of believers but in general.

Although it appears that the Torah at least might permit usury in some contexts, the sum of Biblical teaching comes down firmly against it. The Islamic form of banking finds support not only in the Qur'an but in the Bible as well.

http://www.al-islam.org/islaminthebible/index.htm 

Regards, Mohammad Asim Raza, CPA
Baltimore, MD 21208

 

Bob Jensen's threads on Islamic Accounting ---
http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting

 


Type I and Type II Errors ---
http://en.wikipedia.org/wiki/False_positive#Type_I_error
Also see http://www.stats.gla.ac.uk/steps/glossary/hypothesis_testing.html 

"Psychopathy, Academic Accountants’ Attitudes towards Ethical Research Practices, and Publication Success," by Charles D. Bailey, SSRN, December 8, 2012 ---
 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=218690

"The Data Vigilante:  Students aren’t the only ones cheating—some professors are, too. Uri Simonsohn is out to bust them. inShare48," by Christopher Shea, The Atlantic, December 2012 ---
http://www.theatlantic.com/magazine/archive/2012/12/the-data-vigilante/309172/

Uri Simonsohn, a research psychologist at the University of Pennsylvania’s Wharton School, did not set out to be a vigilante. His first step down that path came two years ago, at a dinner with some fellow social psychologists in St. Louis. The pisco sours were flowing, Simonsohn recently told me, as the scholars began to indiscreetly name and shame various “crazy findings we didn’t believe.” Social psychology—the subfield of psychology devoted to how social interaction affects human thought and action—routinely produces all sorts of findings that are, if not crazy, strongly counterintuitive. For example, one body of research focuses on how small, subtle changes—say, in a person’s environment or positioning—can have surprisingly large effects on their behavior. Idiosyncratic social-psychology findings like these are often picked up by the press and on Freakonomics-style blogs. But the crowd at the restaurant wasn’t buying some of the field’s more recent studies. Their skepticism helped convince Simonsohn that something in social psychology had gone horribly awry. “When you have scientific evidence,” he told me, “and you put that against your intuition, and you have so little trust in the scientific evidence that you side with your gut—something is broken.”

Simonsohn does not look like a vigilante—or, for that matter, like a business-school professor: at 37, in his jeans, T-shirt, and Keen-style water sandals, he might be mistaken for a grad student. And yet he is anything but laid-back. He is, on the contrary, seized by the conviction that science is beset by sloppy statistical maneuvering and, in some cases, outright fraud. He has therefore been moonlighting as a fraud-buster, developing techniques to help detect doctored data in other people’s research. Already, in the space of less than a year, he has blown up two colleagues’ careers. (In a third instance, he feels sure fraud occurred, but he hasn’t yet nailed down the case.) In so doing, he hopes to keep social psychology from falling into disrepute.

Simonsohn initially targeted not flagrant dishonesty, but loose methodology. In a paper called “False-Positive Psychology,” published in the prestigious journal Psychological Science, he and two colleagues—Leif Nelson, a professor at the University of California at Berkeley, and Wharton’s Joseph Simmons—showed that psychologists could all but guarantee an interesting research finding if they were creative enough with their statistics and procedures.

The three social psychologists set up a test experiment, then played by current academic methodologies and widely permissible statistical rules. By going on what amounted to a fishing expedition (that is, by recording many, many variables but reporting only the results that came out to their liking); by failing to establish in advance the number of human subjects in an experiment; and by analyzing the data as they went, so they could end the experiment when the results suited them, they produced a howler of a result, a truly absurd finding. They then ran a series of computer simulations using other experimental data to show that these methods could increase the odds of a false-positive result—a statistical fluke, basically—to nearly two-thirds.

Just as Simonsohn was thinking about how to follow up on the paper, he came across an article that seemed too good to be true. In it, Lawrence Sanna, a professor who’d recently moved from the University of North Carolina to the University of Michigan, claimed to have found that people with a physically high vantage point—a concert stage instead of an orchestra pit—feel and act more “pro-socially.” (He measured sociability partly by, of all things, someone’s willingness to force fellow research subjects to consume painfully spicy hot sauce.) The size of the effect Sanna reported was “out-of-this-world strong, gravity strong—just super-strong,” Simonsohn told me over Chinese food (heavy on the hot sauce) at a restaurant around the corner from his office. As he read the paper, something else struck him, too: the data didn’t seem to vary as widely as you’d expect real-world results to. Imagine a study that calculated male height: if the average man were 5-foot‑10, you wouldn’t expect that in every group of male subjects, the average man would always be precisely 5-foot-10. Yet this was exactly the sort of unlikely pattern Simonsohn detected in Sanna’s data.

Simonsohn launched an e-mail correspondence with Sanna and his co-authors; the co-authors later relayed his concerns to officials at the University of North Carolina, Sanna’s employer at the time of the study. Sanna, who could not be reached for comment, has since left Michigan. He has also retracted five of his articles, explaining that the data were “invalid,” and absolving his co-authors of any responsibility. (In a letter to the editor of Psychological Science, who had asked for more detail, Sanna mentioned “research errors” but added that he could say no more, “at the direction of legal counsel.”)

Not long after the exchange with Sanna, a colleague sent Simonsohn another study for inspection. Dirk Smeesters of Erasmus University Rotterdam, in the Netherlands, had published a paper about color’s effect on what social psychologists call “priming.” Past studies had found that after research subjects are prompted to think about, say, Albert Einstein, they are intimidated by the comparison, and perform poorly on tests. (Swap Einstein out for Kate Moss, and they do better.) Smeesters sought to build on this research by showing that colors can interact with this priming in strange ways. Simultaneously expose people to blue (a soothing hue), for example, and the Einstein and Moss effects reverse. But a strange thing caught Simonsohn’s eye: the outcomes that Smeesters had predicted ahead of time were eerily similar, across the board, to his actual outcomes.

Simonsohn ran some simulations using both Smeesters’s own data and data found in other papers, and determined that such a data array was unlikely to occur naturally. Then he sent Smeesters his findings, launching what proved to be a surreal exchange. Smeesters admitted to small mistakes; Simonsohn replied that those mistakes couldn’t explain the patterns he’d identified. “Something more sinister must have happened,” he recalled telling Smeesters. “Someone intentionally manipulated the data. This may be difficult to accept.”

“I was trying to give him any out,” Simonsohn said, adding that he wasn’t looking to ruin anyone’s career. But in June, a research-ethics committee at Smeesters’s university announced that it had “no confidence in the scientific integrity” of three of his articles. (The committee noted that it had no reason to suspect Smeesters’s co-authors of any wrongdoing.) According to the committee’s report, Smeesters said “he does not feel guilty” and also claimed that “many authors knowingly omit data to achieve significance, without stating this.” Smeesters, who could not be reached for comment, resigned from the university, prompting another Dutch scholar to publicly remark that Simonsohn’s fraud-detecting technique was “like a medieval torture instrument.”

That charge disturbs Simonsohn, who told me he would have been content with a quiet retraction of Smeesters’s article. The more painful allegation, however, is that he is trying to discredit social psychology. He adores his chosen field, he said, funky, counterintuitive results and all. He studied economics as an undergrad at Chile’s Universidad Católica (his father ran a string of video-game arcades in Santiago; Simonsohn initially hoped to go into hotel management), but during his senior year, an encounter with the psychologist Daniel Kahneman’s work convinced him to switch fields. He prefers psychology’s close-up focus on the quirks of actual human minds to the sweeping theory and deduction involved in economics. (His own research, which involves decision making, includes a recent study titled “Weather to Go to College,” which finds that “cloudiness during [college] visits has a statistically and practically significant impact on enrollment rates.”)

So what, then, is driving Simonsohn? His fraud-busting has an almost existential flavor. “I couldn’t tolerate knowing something was fake and not doing something about it,” he told me. “Everything loses meaning. What’s the point of writing a paper, fighting very hard to get it published, going to conferences?”

Continued in article

Bob Jensen's threads on professors who cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize


Jensen Comment
As I look back on my own career, including the last 24 years at Trinity University, I was lucky because I never had a medical event in my 40-year academic career that prevented me from meeting my classes. If that should have happened I most likely would not have resigned before using up my short-term disability benefits that the University provided free to me.

Those of you who have not closely examined your disability benefits should closely examine the short-term disability benefits provided by your employer.

Trinity University's Disability Leave contact is quoted below. Trinity University carried its own employee disability insurance policy to cover this type of leave at zero out-of-pocket costs to employees. I considered disability insurance so important that I also carried the maximum long-term coverage at my own out-of-pocket expense. Most of the time this was a TIAA disability plan that kept premiums lower by no having to pay for short-term disability leave. My long-term TIAA disability plan would have kicked in automatically when my Trinity University short-term coverage expired. Payments were based upon salary at the time of becoming disabled.

Unlike my TIAA term life insurance, I paid for my long-term TIAA disability insurance right up thru the day I retired from Trinity University. With my children became grown and earning their own livings, I ended my term life insurance coverage when I was 55 years of age. With advancing age the annual premiums for this life insurance became absurdly expensive at a time when I had built up comfortable personal savings plus my TIAA-CREF retirement account. But becoming disabled before retirement age without disability insurance might have clobbered my personal savings.

Note that if you're disabled on the job Worker Compensation will probably reduce, but not eliminate, the short-term disability benefits that you receive from your employer. Disabilities not related to your job will nearly all be covered until the short-term disability leave coverage expires. The fact that this coverage will eventually expire makes it extremely important in most instances to have your own long-term disability coverage that will then kick in.

At Trinity University the short-term disability for full salary and benefits coverage expires after six months. Added details are quoted below. If I ever had become disabled I would have taken advantage of this coverage for six months at which time my TIAA long-term coverage would have kicked in to cover me until nearly retirement age. As I dimly recall, my coverage would have ceased at retirement age. Long-term disability insurance plans vary considerably regarding termination. I know some folks in other occupations who have disability coverage for as long as they live.

Trinity University Faculty and Contract Staff Handbook ---
http://web.trinity.edu/Documents/Academic Affairs/minutes/handbook2012-2013.pdf

III. DISABILITY LEAVE

A. Faculty

Trinity University will provide protection of remuneration (salary and other benefits) to any fulltime employee who through protracted physical or psychological disability is unable to perform the tasks and/or meet the responsibilities normally associated with the duties of his/her position. This protection of remuneration will be for a period of no more than six months from the commencement of the disability. The protection is only for the actual remuneration due under the applicable contract or pay grade classification. Due to the nature of the protection plan, the University will not continue payments for periods beyond the completion of a terminal contract or provide remuneration protection for periods not otherwise covered by the contract (e.g., summer recess for nine-month faculty) even though these periods will be counted toward the six-month limit. An employee who becomes disabled as a result of a work-related injury will have his/her short-term disability payments reduced by any compensation received from the University’s Worker Compensation Insurance Company. During short-term disability leave, all accruals of vacation and sick leave will be suspended. Eligibility for remuneration protection will be based upon clear and convincing medical evidence, and a change to disability status shall be made

1. at the request of an affected employee by presentation of a request to commence disability status and presentation of such medical evidence as may be necessary to demonstrate the existence of a physical or psychological disability which precludes that individual from performing the tasks or meeting the responsibilities normally associated with the discharge of his/her duties, and that such is expected to be protracted;

or,

2. at the request of the University by presentation to the affected employee of a determination of long-term disability. For faculty members action is to be initiated by the University pursuant to Chapter 3A, Article V: Termination of Tenured or Unexpired Appointments. All of the various due process provisions contained in this Handbook shall apply.

Every effort will be made to assure that disability coverage provided by the Teachers Insurance and Annuity program or other such disability program will become applicable upon the conclusion of the period of remuneration protection; however, in no event will the University’s obligation to provide remuneration protection continue past six calendar months from the commencement of the disability period.

The University’s obligation for remuneration protection will cease effective upon the affected individual’shaving obtained another position of employment. Further, the University reserves the right to deduct from any remuneration provided hereunder the amount of earnings received by the affected individual from such employment during the period of disability.

In the event of a request by either the affected faculty member or the University for long-term disability status, the commencement of such disability will be presumed to be the date of a recognizable event that resulted in the disability. In the event of a request by the faculty member, if the University disputes the existence and/or extent of disability, the University may require the affected faculty member to be examined by a physician or other professional of its choosing at the University’s expense.

Where necessary, each faculty member’s contract will be modified to reflect agreement to the foregoing. Additionally, the relevant provisions of this Handbook above will be restated to reflect the foregoing.

The University will require a medical release before the employee returns to work. This action will be taken to certify that the employee is capable of returning to work and performing normal duties. Should the University require a second opinion, this will be at the University’s expense.

Once the six-month disability benefit has been used and if the employee later returns to work, he/she must work for two years before a similar benefit can again be used.

If the faculty member is eligible for leave under the Family and Medical Leave Act, such leave will be taken concurrently with any disability leave.

Failure to apply for disability leave in a timely manner will not extend the six-month period.

 

Jensen Comment
A worse situation perhaps arises where a faculty member, for medical reasons, no longer wants to perform faculty duties for his/her employer but has a medical condition that does not qualify for short-term or long-term disability coverage. Purportedly there are a lot of those folks seeking Social Security Disability Benefits and Medicare. The son of one of my neighbors is currently in this situation down in Florida. He was turned down for short-term disability benefits from his former employer. He does have chronic back pain, although he could probably do just as well faking the pain. For reasons I won't go into, in Florida especially, there's so much fraud in this area that people with zero medical justification can obtain lifetime SS Disability Benefits and Medicare. Purportedly their are a lot of sleazy physicians and shyster lawyers both in in Florida and in the other 49 states. The law firms even advertise on national television to get clients seeking SS Disability.

Generally, it takes much longer than six months for the sleazy physicians and shyster lawyers to accomplish the job. Hence they are not of much use when seeking short-term disability benefits from employers. But SS Disability Benefits, when obtained, can cover a lot of years between age 43 and when Social Security and Medicare set in between Age 65 and 70.

 

It is exceptionally difficult -- for all practical purposes, impossible," writes Eberstadt, "for a medical professional to disprove a patient's claim that he or she is suffering from sad feelings or back pain. In other words, many people are gaming or defrauding the system. This includes not only disability recipients but health care professionals, lawyers and others who run ads promising to get you disability benefits. Between 1996 and 2011, the private sector generated 8.8 million new jobs, and 4.1 million people entered the disability rolls.
Michael Barone, "Men Find Careers in Collecting Disability," --- Click Here
http://townhall.com/columnists/michaelbarone/2012/12/03/men_find_careers_in_collecting_disability?utm_source=thdaily&utm_medium=email&utm_campaign=nl
 
Jensen Comment
 Even after one or more spine surgeries it is virtually impossible to determine whether remaining pain is real or faked. I can claim first hand that after 15 spine surgeries and metal rods from neck to hip that my wife's suffering is real. However, I know of at least two instances where the disability careers are faked in order to get monthly lifetime disability payments and access to Medicare long prior to age 65. This seems to be one of the unsolvable problems in society that becomes even more problematic when a disability career is easier to enter than a job-like career.

December 3, 2012 reply from Glen Gray

There was (and continues to be) a sad story in L.A. regarding a hospital that closed partly because employees basically saw it as a lottery. The number of disability claims were far above the average and I believe the most common stated reason for the claim was falling backwards out of folding chairs in the cafeteria.

I recall that Goodwill Industries ran into a similar problem. They were paying people some money to work at Goodwill to supplement the work of volunteers. These workers would quickly file work comp claims, which in turn made Goodwill's worker comp insurance to skyrocket. Goodwill had to stop the outreach program.

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


"Corporate Shams," by Joshua D. Blank and Nancy C. Staudt, SSRN, March 23, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2035057

Abstract:     
Many people — perhaps most — want to make money and lower their taxes, but few want to unabashedly break the law. These twin desires have led to a range of strategies, such as the use of “paper corporations” and offshore tax havens, that produce sizable profits with minimal costs. The most successful and ingenious plans do not involve shady deals with corrupt third parties, but strictly adhere to the letter of the law. Yet the technically legal nature of the schemes has not deterred government lawyers from challenging them in court as “nothing more than good old-fashioned fraud.”

In this Article, we focus on government challenges to corporate financial plans — often labeled “corporate shams” — in an effort to understand how and why courts draw the line between legal and fraudulent behavior. The scholars and commentators who have investigated this question nearly all agree: Judicial decision making in this area of the law is erratic and unpredictable. We build on the extant literature with the help of a new, large dataset, and uncover important and heretofore unobserved trends. We find that courts have not produced a confusing morass of outcomes (as some have argued), but instead have generated more than a century of opinions that collectively highlight the point at which ostensibly legal planning shades into abuse and fraud. We then show how both government and corporate attorneys can exploit our empirical results and explore how these results bolster many of the normative views set forth by the scholarly and policymaking communities.

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


Teaching Case from The Wall Street Journal Accounting Weekly Review on December 13, 2012

Hostess Maneuver Deprived Pension
by: Julie Jargon, Rachel Feintzeig and Mike Spector
Dec 10, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Pension Accounting

SUMMARY: "Hostess Brands Inc. said it used wages that were supposed to help fund employee pensions for the company's operations as it sank toward bankruptcy....Hostess had 115 different collective-bargaining agreements with employees represented by the bakers union. Each contract let those workers choose an amount of wages to direct to the pension plan. For example, John Jordan, a union official and former Hostess employee, said workers at a Hostess factory in Biddeford, Maine, agreed to plow 28 cents of their 30-cents-an-hour wage increase in November 2010 into the pension plan. Hostess was supposed to take the additional 28 cents an hour and contribute it to the workers' pension plan....[However, ] in the five months before this past January's bankruptcy filing, the company missed payments to the...pension fund totaling $22.1 million...After that, forgone pension payments added up at a rate of $3 million to $4 million a month...As the company's financial condition deteriorated, 'whatever cash it had was being used to fund the business, to keep it afloat'...."

CLASSROOM APPLICATION: The article may be used to discuss issues in payroll accounting and cash flows.

QUESTIONS: 
1. (Advanced) Summarize the payroll accounting process, showing a basic journal entry for a weekly payroll and describing the calculation that supports the entry.

2. (Advanced) What is the difference between gross and net pay? What must a company do with federal income taxes and other items withheld from gross pay?

3. (Introductory) What was Hostess supposed to do with the amounts withheld from employee wages for pension plan contributions? What did the company do instead?

4. (Introductory) According to a letter from the former chief executive officer (CEO) of Hostess, Brian Driscoll, why did Hostess "temporarily suspend" its contributions to the employees' pension plans?

5. (Advanced) Now that Hostess has filed for bankruptcy, what do you think is the status of the withheld wages that were not paid over to the employees' pension funds?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Hostess Maneuver Deprived Pension," by Julie Jargon, Rachel Feintzeig and Mike Spector, The Wall Street Journal, December 10, 2012 ---
http://professional.wsj.com/article/SB10001424127887323316804578165813739413332.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Hostess Brands Inc. said it used wages that were supposed to help fund employee pensions for the company's operations as it sank toward bankruptcy.

It isn't clear how many of the Irving, Texas, company's workers were affected by the move or how much money never wound up in their pension plans as promised.

After the company said in August 2011 that it would stop making pension contributions, the foregone wages weren't put toward the pension. Nor were they restored.

The maker of Twinkies, Ho-Hos and Wonder Bread filed for bankruptcy protection in January and shut down last month following a strike by one of the unions representing Hostess workers. A judge is overseeing the sale of company assets.

Gregory Rayburn, Hostess's chief executive officer, said in an interview it is "terrible" that employee wages earmarked for the pension were steered elsewhere by the company.

"I think it's like a lot of things in this case," he added. "It's not a good situation to have."

Mr. Rayburn became chief executive in March and learned about the issue shortly before the company shut down, he said. "Whatever the circumstances were, whatever those decisions were, I wasn't there," he said.

A spokeswoman for Hostess's previous top executive, Brian Driscoll, declined to comment.

Hostess hasn't previously acknowledged that the foregone wages went toward its operations.

The maneuver probably doesn't violate federal law because the money Hostess failed to put into the pension didn't come directly from employees, experts said.

"It's what lawyers call betrayal without remedy," said James P. Baker, a partner at Baker & McKenzie LLP who specializes in employee benefits and isn't involved in the Hostess case. "It's sad, but that stuff does happen, unfortunately."

The decision to cease pension contributions angered many employees. After the bankruptcy filing, Hostess tangled with the International Brotherhood of Teamsters and the Bakery, Confectionery, Tobacco and Grain Millers International Union to renegotiate labor contracts.

While the Teamsters union agreed in September to a compromise, resistance from the bakers union was fierce.

Halted pension contributions were a major factor in the bakers union's refusal to make a deal with the company. After a U.S. bankruptcy judge granted Hostess's request to impose a new contract, the union's employees went on strike. Hostess then moved to liquidate the company.

The bakers union represented about 5,600 of the company's 18,500 employees.

"The company's cessation of making pension contributions was a critical component of the bakers' decision" to walk off the job, said Jeffrey Freund, a lawyer for the union.

"If they had continued to fund the pension, I think we'd still be working there today," said Craig Davis, a 44-year-old forklift operator who loaded trucks with Twinkies, cupcakes and sweet rolls at an Emporia, Kan., bakery, for nearly 22 years.

Hostess's retirees receive payments mostly from so-called multiemployer pension plans. Such pensions get contributions from various companies in a particular industry. Hostess's pension plans still are making payouts to retirees.

Most companies provide pensions through single-employer plans that they fund themselves. When companies with these plans file for bankruptcy protection, they sometimes terminate the plans, leading the Pension Benefit Guaranty Corp., the government agency that insures corporate pensions, to take over the plans and make payouts to their retirees.

With the multiemployer plans from which most Hostess retirees receive benefits, the PBGC doesn't step in unless the plans become insolvent. If that happened, the PBGC would send roughly $12,870 for each employee with at least 30 years of service, according to an agency spokesman.

The Bakery & Confectionary Union & Industry International Pension Fund, the largest fund covering Hostess bakers, was 72% funded when Hostess stopped making contributions, the company said.

Teamster-represented employees at Hostess didn't contribute a portion of their wages toward pensions, a union spokesman said. But among workers in the bakers union, it was "standard practice," said Mr. Rayburn, Hostess's CEO.

Hostess had 115 different collective-bargaining agreements with employees represented by the bakers union. Each contract let those workers choose an amount of wages to direct to the pension plan.

For example, John Jordan, a union official and former Hostess employee, said workers at a Hostess factory in Biddeford, Maine, agreed to plow 28 cents of their 30-cents-an-hour wage increase in November 2010 into the pension plan.

Hostess was supposed to take the additional 28 cents an hour and contribute it to the workers' pension plan.

"This local was very aggressive about saving for the future," he said.

Employees in Biddeford began directing wages toward pensions in 1955, and the amount grew to $4.28 an hour per employee.

Amounts varied by location, and it isn't clear how many unionized employee groups participated in the arrangement.

In five months before this past January's bankruptcy filing, the company missed payments to the main baker pension fund totaling $22.1 million, Mr. Freund said. After that, forgone pension payments added up at a rate of $3 million to $4 million a month until Hostess formally rejected its contracts with the union. The figures include company contributions and employee wages that were earmarked for the pension, according to Mr. Freund.

Continued in article

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


Patent Troll --- http://en.wikipedia.org/wiki/Patent_troll

"Intellectual Ventures: Don't Mind Our 2000 Shell Companies, That's Totally Normal from the nothing-nefarious-at-all dept," TechDirt, December 20, 2012 ---
http://www.techdirt.com/articles/20121220/02365821447/intellectual-ventures-dont-mind-our-2000-shell-companies-thats-totally-normal.shtml

Back in 2010, we wrote about a report suggesting that Intellectual Ventures was using somewhere around 1000 shell companies to hide many of its patent shakedown attempts. For years, IV itself liked to say that it wasn't involved in any patent litigation directly (that changed not so long ago), but we had seen some IV patents showing up from some small patent trolls, where it was impossible to determine who actually controlled the patent or the lawsuits. However, at times, other companies have argued that the shell lawsuits were really IV in disguise.

A few months ago, we wrote about an attempt to crowdfund an investigation into all of IV's shell companies. While that attempt to raise money did not reach its goal, it has helped put renewed attention on IV's use of a massive number of shell companies. In response, IV has been trying very hard to play down the whole thing. It published a ridiculous blog post arguing that the use of thousands of shell companies is just a normal business procedure:

This is a common practice for asset management firms, and it’s just common sense. Do stock brokers broadcast tips to their competitors? Does Warren Buffet tell the world where he’s investing next? Does Disney broadcast which plots of land it is planning to buy for its next theme park? Of course not, and IV takes a similar approach to our investments.
Ah, sure, this is all to throw other companies off the scent of what IV is "investing" in. That makes sense if IV were actually an investment company, rather than a shakedown play. The idea that publicly stating what patents it owns would somehow "broadcast tips" to "competitors" is ridiculous. Who out there is really an IV competitor? No, what IV is almost certainly worried about is that, if the extent of its activities were known, there would be more fodder for real and necessary reform against trolling -- and, more importantly, it's worried about tipping off the companies it's about to go after. It's not about competition -- it's about avoiding a smart company going to court to get a declaratory judgment against IV, which they admit later on in the post:
Moreover, were we to publish the entirety of our holdings we, or any other company for that matter, could find ourselves mired down in a series of tactical declaratory judgments and reexaminations.
Shocking. Perhaps if you didn't go around demanding huge sums of money from companies with a giant stack of vague and overly-broad patents you wouldn't face a series of declaratory judgments and re-exams.
In fact, no one has ever suggested that transparency is needed in the real estate world, yet properties are routinely held in the name of holding companies. When it comes to property ownership, patents shouldn’t be held to a different of set of rules
Well, if property holding companies routinely used their assets to shake down every other real estate owner out there, perhaps there would be calls for the practice to end. Plus, sorry, patents are not "property" like real estate is property. And, in fact, this is the key to IV's entire business model. If patents properly delineated the boundaries of what the patents covered, there wouldn't be much room for trolling. But, instead, IV relies on the fact that patents are broad and vague and "might" apply to all sorts of things.

In response to an article about all of this, IV also
claimed that anyone who wanted to know about what patents IV holds can simply "search the USPTO's public database." Of course, this is a snarky and misleading answer for a number of reasons. First, it ignores the shell company patents. Second, it assumes that the USPTO's search actually works well (it does not).

Thankfully, however, the good folks at PlainSite, who try to shine some light on the hidden corners of the legal system, decided to take Intellectual Ventures up on its offer -- and actually
went through the data to see what was lurking:
Like all of the USPTO's on-line systems, the assignment database is a technological abomination--sadly ironic for the agency that effectively manages the nation's technology rights. (The USPTO does deserve credit for making raw XML data available through Google, which is where our project began.) It must be noted that Intellectual Ventures would have had a much harder time lurking in the shadows all these years if government information technology systems, such as the USPTO assignment database and different states' corporation databases, were kept up to par. In fact, its business model would likely be impossible, as the courts would be likely to label the company as a vexatious litigant if they only knew how many lawsuits it filed.
In the end, after digging through the database, PlainSite has identified -- and released for all your enjoyment -- the names of what appear to be over 2,000 shell companies, though they admit that some of them may be fully independent. But... many of them apparently had "some obvious overlaps" like sharing "managing corporations, telephone numbers, and other factors." Oops. They're hoping not to "crowdfund" the efforts here, but rather to crowdsource the data. As they note, they're spreading this information, because "we hope that Congress and the courts take notice of one of the largest racketeering schemes ever perpetrated on the nation, with some of its richest billionaires acting more like thugs than visionaires."

Continued in article

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


Mary S. Stone is listed in the University of Alabama Website as the Current Director of the Culverhouse School of Accounting
http://cba.ua.edu/academics/departments/accountancy#Faculty%20and%20Staff
Mary is also a former President of the American Accounting Association

More About the  Mary Stone Controversy
"Other House of Morgan Spawns a Web of Scandals," by Jonathan Weil, Bloomberg News, December 13, 2012 ---
http://www.bloomberg.com/news/2012-12-13/other-house-of-morgan-spawns-a-web-of-scandals.html

It has been more than five years since a group of mutual funds run by Morgan Keegan & Co. crashed in an accounting debacle, costing investors about $1.5 billion. Now the scandal has reached the boardroom at one of the U.S. accounting profession’s highest bodies.

This week the Securities and Exchange Commission accused eight former Morgan Keegan fund directors of shirking their oversight responsibilities when it came to the funds’ asset valuations. One former director, Mary Stone, is a trustee for the Norwalk, Connecticut-based Financial Accounting Foundation, which oversees the board that sets U.S. accounting standards.

After the SEC’s enforcement division filed its claims on Dec. 10, the foundation issued a news release saying Stone had requested and been granted a leave of absence from its board of trustees. It didn’t say why. The SEC previously had accused the funds of fraudulently overstating their asset values.

That the foundation appointed Stone to its board in the first place was a serious lapse. It was a matter of public record when Stone was selected that she had been the funds’ audit-committee chairman during the time when the SEC said the fraud occurred. The SEC filed its complaint accusing Morgan Keegan and two employees of accounting fraud in April 2010. Stone was named a trustee of the accounting foundation in November 2010, while the SEC’s investigation was ongoing. Settlement Terms

Stone, who is an accounting professor at the University of Alabama in Tuscaloosa, didn’t return phone calls. Through their attorneys, the eight former directors have denied the SEC’s allegations, saying they acted diligently and in good faith. Morgan Keegan agreed to pay $200 million in June 2011 to settle fraud claims by the SEC and other regulators. The two employees at the Memphis, Tennessee-based securities firm also paid fines.

The SEC’s order this week said the fund directors “delegated their responsibility to determine fair value to a valuation committee without providing any meaningful substantive guidance on how those determinations should be made.” Additionally, it said “they made no meaningful effort to learn how fair values were actually being determined” for illiquid securities.

You have to wonder what the accounting foundation’s trustees were thinking when they selected Stone. Of all the people they might have tapped, surely they could have found someone who hadn’t been on the audit committee of an outfit accused by the SEC of accounting fraud. The foundation should be setting a positive example when choosing its leaders. Trustees’ backgrounds should be pristine.

Stone’s job as an audit-committee member was to oversee the financial integrity of the Morgan Keegan funds. Regardless of whether the funds’ violations were Stone’s fault, they happened on her watch. Stone already was a defendant in numerous investor lawsuits when she was named a trustee.

So how did Stone, 62, manage to get picked? Robert Stewart, a spokesman for the foundation, said he “can’t comment on any specific case.” Speaking generally, he said candidates are interviewed by members of the trustees’ appointments committee, and that names of finalists are submitted to the SEC chief accountant’s office. He also said that the foundation conducts background checks on finalists, and that SEC commissioners have the opportunity to express their views.

Obviously, the foundation’s trustees knew or should have known about Stone’s role at the Morgan Keegan funds before hiring her. All anyone had to do was a Google search. Likewise, they should have realized there was a risk the SEC would file claims against her individually, as it did this week. It isn’t clear what the SEC told the foundation about Stone, if anything, or what the board’s rationale was for choosing her.

An SEC spokesman, John Nester, declined to answer questions about Stone’s appointment process. Different Animal

The accounting foundation is no ordinary private party. It oversees the Financial Accounting Standards Board, which sets U.S. generally accepted accounting principles, as well as the Governmental Accounting Standards Board, which determines accounting rules for state and local governments. It’s up to the SEC to decide whether the FASB continues as a designated standard-setter for U.S. companies.

The foundation’s 17-member board is filled with luminaries from the worlds of accounting and finance. Its chairman when Stone was appointed was John Brennan, the former chief executive officer of the investment manager Vanguard Group Inc. Brennan, who remains a trustee, was succeeded as chairman this year by Jeffrey Diermeier, the former CEO of the CFA Institute, which is the global accreditation body for chartered financial analysts.

Continued in article

Message from Denny Beresford on December 11, 2012

I happened to stumble across this SEC enforcement action - http://www.sec.gov/litigation/admin/2012/ic-30300.pdf 

The Financial Accounting Foundation just announced that Trustee Mary S. Stone, who is named in the SEC enforcement release and is a former AAA President, is taking a leave of absence from the Foundation

Denny

SEC Release 2012-259

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation

FOR IMMEDIATE RELEASE
2012-259

Washington, D.C., Dec. 10, 2012 — The Securities and Exchange Commission today announced charges against eight former members of the boards of directors overseeing five Memphis, Tenn.-based mutual funds for violating their asset pricing responsibilities under the federal securities laws.


Additional Materials


The funds, which were invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges.

Under the securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available. According to the SEC’s order instituting administrative proceedings against the eight directors, they delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made. The fund directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds’ fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities.

“Investors rely on board members to establish an accurate process for valuing their mutual fund investments. Otherwise, they are left in the dark about the value of their investments and handicapped in their ability to make informed decisions,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Had the board not abdicated its responsibilities, investors may have stood a better chance of preserving their hard-earned assets.”

The SEC Enforcement Division’s Asset Management Unit continues to prioritize asset valuation investigations, with recent enforcement actions including charges against three top executives at New York-based KCAP Financial and two executives at former $1 billion hedge fund advisory firm Yorkville Advisors LLC.

The eight fund directors named in today’s SEC enforcement action are:

According to the SEC’s order, the eight directors’ failure to fulfill their fair value-related obligations was particularly inexcusable given that fair-valued securities made up the majority of the funds’ net asset values – in most cases more than 60 percent. The mutual funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund.

The SEC Enforcement Division alleges that the directors caused the funds to violate the federal securities laws by failing to adopt and implement meaningful fair valuation methodologies and procedures and failing to maintain internal control over financial reporting. For example, the funds’ valuation procedures did not include any mechanism for identifying and reviewing fair-valued securities whose prices remained unchanged for weeks, months, and even entire quarters.

“While it is understood that fund directors typically assign others the daily task of calculating the fair value of each security in a fund’s portfolio, at a minimum they must determine the method, understand the process, and continuously evaluate the appropriateness of the method used,” said William Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.

According to the SEC’s order, the funds’ valuation procedures required that the directors be given explanatory notes for the fair values assigned to securities. However, no such notes were ever provided to the directors, and they never followed up to request such notes or any other specific information about the basis for the assigned fair values. In fact, Morgan Keegan’s Fund Accounting unit, which assigned values to the securities, did not utilize reasonable procedures and often allowed the portfolio manager to arbitrarily set values. As a result, the net asset values of the funds were materially misstated in 2007 from at least March 31 to August 9. Consequently, the prices at which one open-end fund sold, redeemed, and repurchased its shares were inaccurate. Furthermore, other reports and at least one registration statement filed by the funds with the SEC contained net asset values that were materially misstated.

The SEC’s order alleges that the fund directors caused the funds’ violations of Rules 22c-1, 30a-3(a) and 38a-1 under the Investment Company Act of 1940.

The SEC’s investigation was conducted by members of the SEC’s Atlanta Regional Office and the Asset Management Unit.

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


Theft in the State of Georgia (the one that's north of Florida)
"Postal employees stole millions in federal checks:  Georgia supervisor, coworkers and four others cashed 1,300 U.S. Treasury checks before authorities caught them. More than 171 Postal workers arrested in 2012," by Phillip Swarts, Washington Guardian, December 19, 2012 ---

Neither snow nor rain nor heat nor gloom of night could stop these postal employees from stealing checks.

The former supervisor at an Atlanta mail distribution facility, a coworker and four others pled guilty this month to stealing $3 million in U.S. Treasury checks, including veterans benefits, tax refunds and Social Security checks. By the time authorities figured out the scheme, the small theft ring had stolen or cashed 1,300 federal checks, officials said.

And the Georgia workers aren't alone. Between April and September of this year, 171 Postal Service employees were arrested for theft, willful delay or destruction of mail, according to a new report by the USPS inspector general. The Service has about 546,000 employees. "We have taken two corrupt postal workers, including a supervisor, off the streets who were responsible for stealing thousands of checks worth over $3 million," U.S. Attorney Sally Quillian Yates in Atlanta said. "We will continue to target these theft rings, both those on the inside and their network of check cashers, to address this serious problem.”

Gerald Eason, 47, pled guilty to stealing more than 1,300 checks while working at the postal facility. His accomplice, mail handler Deborah Fambro-Echols, 49, has also pled guilty.

The two employees pled guilty to conspiracy and theft of government money. Eason pleaded guilty to several other charges including possession of stolen Treasury checks. There's a wide range of jail time they could be serving, though. Each charge carries anywhere from five to 30 years in prison.

Investigators became aware there was a problem in December 2010, USPS Office of Inspector General spokeswoman Agapi Doulaveris said. Federal agents watched and investigated Eason and his accomplices before they were arrested in early March, Doulaveris said.

"Eason and Fambro-Echols reflect just a very small percentage of employees who failed to uphold the trust and integrity placed in them," said Paul Bowman, the U.S. Postal Service Office of Inspector General's special agent in charge. "The majority of Postal Service employees are honest, hardworking, and committed to providing the timely and reliable service that customers expect and deserve."

Four other defendants also pled guilty to helping the Atlanta scheme, including cashing the stolen checks, acting as brokers and using fake ID's. Two were arrested in a Georgia bank when they tried to impersonate the intended recipient of the check. None of the four are U.S. Postal Service employees.

In 2011, Georgia "ranked third in the country in the number of federal tax refund, Social Security, and Veterans checks reported stolen by their intended recipients," Yates said, prompting the creation of the U.S. Attorney's Stolen Treasury Check Task Force, a coalition of 14 federal, state and local law enforcement agencies to investigate the problem of stolen checks in northern Georgia.

The Post Office is facing a multi-billion dollar budget deficit and is looking for ways to save money, but Doulaveris said any measures aren't expected to affect investigations and the service's ability to respond to illegal behavior.

Continued in article

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


"Controller finds more accounting problems in parks payroll," Los Angeles Times, December 18, 2012 ---
http://latimesblogs.latimes.com/california-politics/2012/12/california-parks-accounting-scandal-payroll.html

A review of the scandal-plagued California parks department found that managers were circumventing payroll policies and boosting employee salaries, according to the state controller's office on Tuesday.

"The deliberate disregard for internal controls along with little oversight and poorly trained staff resulted in improper payouts to parks' employees," said Controller John Chiang in a statement. "When security protocols and authorization requirements so easily can be overridden, it invites the abuse of public funds."

One of the apparent abuses involved "out of class" payments, which is extra money paid to employees for handling duties outside their regular responsibilities. The controller's office said managers were circumventing proper procedures to award payments totaling $520,000 to 203 employees from July 1, 2009, through June 30, 2012.

Although a lack of paperwork made it impossible for officials to determine exactly how much of that money was wrongfully paid, some policies were violated, resulting in excessive payments, according to the controller's office.

A spokesman for the parks department did not immediately respond to a request for comment.

[Updated, 11:58 a.m. Dec. 18: "We acknowledge and it is widely known that some very unfortunate events occurred at the Department of Parks and Recreation, in particular with the mismanagement of payroll systems and data," said Roy Stearns, a parks spokesman, in a statement. He said the department is using the controller's findings to "continue to improve and safeguard our payroll systems."]

The controller's review was launched after officials revealed the parks department had hidden away $54 million in two accounts over a period of several years. The department's director, Ruth Coleman, was ousted, and Gov. Jerry Brown appointed a retired Marine general, Anthony Jackson, to replace her last month. Jackson is awaiting Senate approval.

Continued in article

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


TheStreet gets caught with accounting fraud on Wall Street

SEC Charges Financial Media Company and Executives Involved in Accounting Fraud

  FOR IMMEDIATE RELEASE
2012-270

Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a digital financial media company and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors.

The SEC alleges that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year.  The co-presidents of the subsidiary – Gregg Alwine and David Barnett – entered into sham transactions with friendly counterparties that had little or no economic substance.  They also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting.  Barnett is additionally charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services.  The SEC also alleges that TheStreet’s former chief financial officer Eric Ashman caused the company to report revenue before it had been earned.  

The three executives agreed to pay financial penalties and accept officer-and-director bars to settle the SEC’s charges.

“Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “The SEC will continue to root out accounting fraud and punish the executives responsible.”

According to the SEC’s complaints filed in federal court in Manhattan, the subsidiary acquired by TheStreet specializes in online promotions such as sweepstakes.  After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud. 

The SEC alleges that through the actions of Ashman, Alwine, and Barnett, TheStreet:

  • Improperly recognized revenue based on sham transactions.
  • Used the percentage-of-completion method of revenue recognition without meeting fundamental prerequisites to do so, including reliably estimating and documenting progress toward the completion of relevant contracts.
  • Prematurely recognized revenue when the subsidiary had not performed actual work and therefore had not really earned the revenue. 

According to the SEC’s complaint, when the subsidiary’s financial results were consolidated with TheStreet’s financial results for financial reporting purposes, the improper revenue on the subsidiary’s books resulted in material misstatements in the company’s quarterly and annual reports for fiscal year 2008.  On Feb. 8, 2010, TheStreet restated its 2008 Form 10-K and disclosed a number of improprieties related to revenue recognition at its subsidiary, including transactions that lacked economic substance, internal control deficiencies, and improper accounting for certain contracts. 

Ashman agreed to pay a $125,000 penalty and reimburse TheStreet $34,240.40 under the clawback provision (Section 304) of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years.  Barnett and Alwine agreed to pay penalties of $130,000 and $120,000 respectively, and to be barred from serving as officers or directors of a public company for 10 years.  Without admitting or denying the allegations, the three executives and TheStreet agreed to be permanently enjoined from future violations of the federal securities laws. 

The SEC’s investigation was conducted by Senior Counsel Maureen P. King and Staff Accountant Nandy Celamy of the New York Regional Office.  Aaron Arnzen served as Senior Trial Counsel in the matter. 

http://www.sec.gov/news/press/2012/2012-270.htm

Other Alleged Frauds as of December 19, 2012

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


Lehman Repo 105/109 Scandal Involving Ernst & Young --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo

"Lehman Troubles Not Over For Ernst & Young," by Francine McKenna, Forbes, December 13, 2012 ---
http://www.forbes.com/sites/francinemckenna/2012/12/13/lehman-troubles-not-over-for-ernst-young/

Ernst & Young chalked up one small victory in New York State Supreme Court this week over claims by the New York Attorney General that the firm committed fraud leading to the failure of Lehman Brothers in 2008. Justice Jeffrey Oing said the New York Attorney General cannot claim $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings from 2001-2008, when the firm filed bankruptcy.

Attorney David Ellenhorn of the NYAG claimed the fees represented “disgorgement” of “ill gotten gains” since the Attorney General says Ernst & Young repeatedly committed “fraudulent acts” as auditor of Lehman Brothers all those years. When Ellenhorn tried to explain this to the judge, Oing told Ellenhorn he had the wrong remedy.

Not good when you have to explain too much to the judge.

Fortunately for the New York Attorney General, the fees disgorgement strategy is Plan B. (It’s literally “Letter B” in the list of remedies the NYAG seeks for Ernst & Young’s alleged fraudulent acts.)  The New York Attorney General can still pursue its request that Ernst & Young “pay restitution, disgorgement and damages caused, directly or indirectly, by the fraudulent and deceptive acts and repeated fraudulent acts and persistent illegality complained of herein plus applicable pre-judgment interest.”

The New York Attorney General, you may recall from my previous reports, has the powerful Martin Act on its side. Back in December of 2010, The Wall Street Journal’s Ashby Jones at the Law Blog explained just how powerful this law is.

In the lawsuit filed against accounting firm Ernst & Young, Andrew Cuomo brought four claims, three of them under New York’s Martin Act, one of the most powerful prosecutorial tools in the country. Technically speaking, the Martin Act allows New York’s top law enforcer to go after wrongdoing connected to the sale or purchase of securities. Nothing too noteworthy there.

But what is noteworthy is the power the act confers upon its user. It enables him to subpoena any document from anyone doing business in New York and, if he so desires, keep an investigation entirely secret. People subpoenaed in Martin Act cases aren’t afforded a right to counsel or the right against self-incrimination. “Combined, the act’s powers exceed those given any regulator in any other state,” wrote Nicholas Thompson in this 2004 Legal Affairs article.

And we haven’t even gotten to the kicker. Courts in civil Martin Act cases have held that “fraud” under the Martin Act “includes all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive or mislead the public, whether or not the product of scienter or intent to defraud.” In other words, in order to prove a Martin Act violation, the attorney general is not required to prove that the defendant intended to defraud anyone, only that a defrauding act was committed…

Mr. Ellenhorn, however, is all, “We’ll never make it…”, like Glum in Gulliver’s Travels. He worried aloud to the judge, according to Reuters, that the private class action litigation still facing Ernst & Young over Lehman will beat him to the punch in claiming compensation for investor losses.

In July of 2011New York Federal Court Judge Lewis Kaplan decided to allow substantially all of the allegations against Lehman executives and at least one of the allegations against Ernst & Young to move forward to discovery and trial. That case is proceeding.

The remaining allegation in the class action litigation against Ernst & Young? That Ernst & Young had reason to know that Lehman’s 2Q 2008 financial statements could be materially misstated because of the extensive use of Repo 105 transactions.

Ellenhorn is worried because the NYAG’s remaining remedy is for investors’ damages. Investors, however, have their own ongoing lawsuits against Ernst & Young to recover the same damages. If the investors are successful first in their lawsuits, the state cannot pursue a double recovery for the same damages.

Ernst & Young claimed victory at the time of Judge Kaplan’s decision, too. To me, however, the threat of a trial is formidable. It’s costing Ernst & Young a lot of time and money to address.

Continued in article

Bob Jensen's threads on the Repo 105/109 scandal ---
 http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo 

Bob Jensen's threads on Ernst & Young ---
http://www.trinity.edu/rjensen/Fraud001.htm


"Fresh Design Brightens Evernote 5," by Katherine Boehret, The Wall Street Journal, December 18, 2012 ---
http://professional.wsj.com/article/SB10001424127887323723104578187450194767998.html?mg=reno64-wsj

Ever miss the simplicity of file cabinets and manila folders? Although today's digital lifestyle is supposed to be easier, it can quickly turn into a muddled mess of out-of-sync devices, forgotten account passwords and misplaced files.

Since its debut in 2008, Evernote has tried to change that. This free service gives people a place to store all kinds of documents and uses a system of virtual notebooks to sort things like PDFs, text notes, audio snippets and drawings. One of Evernote's strongest features has been its usability on almost all devices and operating systems, including Macs, Windows PCs, BlackBerrys, devices running iOS (Apple's AAPL -0.96% mobile operating system) or Android, and browsers and printers.

But like a ho-hum, reliable car that merely got you where you wanted to go, Evernote hasn't always been a particularly delightful thing to use.

Meet Evernote 5, a revamped version of the service that purrs with fluid features and playful design elements. In place of a dull list view of notes and notebooks, a handsome Cards view shows better images and details for saved items; on iOS, each card spins around and floats toward you when it's selected.

A new Atlas section sorts all Evernote entries by where they were captured, displaying attractive maps that bring life to boring notes. Searching has improved. And a handy left-side panel includes new sections for Shortcuts to notebooks or notes, which you set up, and Recent Notes, which displays the five most recent things saved to your Evernote account.

Evernote 5 recently launched on Apple's Mac computers and iOS mobile devices, and the company will bring out versions for Windows, Android and the Web early next year. A free Evernote account gives you 60 megabytes of usage a month, while a Premium account includes 1 gigabyte of usage each month, no ads, offline usage and other extras. Premium costs $45 a year or $5 monthly.

Last summer, when I finished my final project for graduate school, I relied on Evernote to organize all of my notes, files, emails, photos and interviews. It did the job, but Evernote 5 is simply better looking, more functional and more enjoyable to use.

If you like collaborating with other people on notes, you can share anything from your Evernote account with others via Facebook, FB -0.69% Twitter, LinkedIn LNKD -0.81% or email. Evernote 5 has a smarter way of displaying notebooks, with a small people icon in the top right of each shared notebook. The covers of these notebooks also tell who owns them, and notebooks can now be sorted by Name, Note Count or Owner in one simple step.

Evernote makes seven different apps and works with various products from other companies. To keep track of all these offerings, a Trunk section in Evernote 5 sorts them and directs people to links where they can buy or download products.

My favorite app is the Evernote Web Clipper, which works with browsers including Google GOOG -0.36% Chrome, Firefox, Internet Explorer and Apple's Safari to help you save anything you find on the Web. This can include entire Web pages or just a particular image or selection of text. I used Evernote to gather gift ideas for family and friends, keeping them all in a notebook labeled Christmas 2012.

I also like using Evernote's Clearly, which is a browser add-on for Chrome and Firefox that works like the Reader tool in Apple's Safari browser. I use it with Chrome, and anytime I click on the Clearly icon, the text of the blog page or website that I'm reading appears without cluttered ads and other distractions. I can adjust the background color and text size on the page, or clip pages directly to Evernote.

A few keyboard shortcuts are extra helpful when using Evernote on your computer. Pressing Control + N on Windows, or Command + N on Macs, will instantly create a new note. On Macs, tapping Command + Z will undo your last action in Evernote and pressing Command + ; will check spelling.

One of the little-known Evernote features is its integration with email. Each account, free or Premium, is assigned an email address. This address is your account name added to a forgettable string of letters and numbers, but it can be added to your email contacts. Anything you email to your Evernote account gets saved just like a note would.

Continued in article

"Zotero vs. EndNote," by Brian Croxall, Chronicle of Higher Education, May 3, 2011 ---
http://chronicle.com/blogs/profhacker/zotero-vs-endnote/33157

"Taking Better Notes in Zotero," by Lincoln Mullen, Chronicle of Higher Education, October 10, 2011 ---
http://chronicle.com/blogs/profhacker/taking-better-notes-in-zotero/36561?sid=wc&utm_source=wc&utm_medium=en

Bob Jensen threads on Zotero and EverNote ---
http://www.trinity.edu/rjensen/Bookbob4.htm#WebData


"The Top Five Career Regrets," by Daniel Gulati, Harvard Business Review Blog, December 14, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/12/the_top_five_career_regrets.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

I had just finished a guest lecture on business and innovation at Parson's School for Design, and a particularly attentive front-row audience member kicked off question time with the curliest one of the day. I answered quickly with the hope of getting back on target. But judging from the scores of follow-up questions and the volume of post-lecture emails I received, a talk on career regret would have been the real bull's-eye.

Ever since that afternoon, I've been on a mission to categorically answer the awkward but significant question of exactly what we'd do if we could magically rewind our careers. The hope? That by exposing what others are most disappointed about in their professional lives, we're maximizing our chances of minimizing regret in our own.

To this end, I sat down with 30 professionals between the ages of 28 and 58, and asked each what they regretted most about their careers to date. The group was diverse: I spoke with a 39-year-old managing director of a large investment bank, a failing self-employed photographer, a millionaire entrepreneur, and a Fortune 500 CEO. Disappointment doesn't discriminate; no matter what industry the individual operated in, what role they had been given, or whether they were soaring successes or mired in failure, five dominant themes shone through. Importantly, the effects of bad career decisions and disconfirmed expectancies were felt equally across age groups.

Here were the group's top five career regrets:

1. I wish I hadn't taken the job for the money. By far the biggest regret of all came from those who opted into high-paying but ultimately dissatisfying careers. Classic research proves that compensation is a "hygiene" factor, not a true motivator. What was surprising, though, were the feelings of helplessness these individuals were facing. Lamented one investment banker, "I dream of quitting every day, but I have too many commitments." Another consultant said, "I'd love to leave the stress behind, but I don't think I'd be good at anything else." Whoever called them golden handcuffs wasn't joking.

2. I wish I had quit earlier. Almost uniformly, those who had actually quit their jobs to pursue their passions wished they had done so earlier. Variable reinforcement schedules prevalent in large corporations, the visibility of social media, and the desire to log incremental gains are three reasons that the 80% of people dissatisfied with their jobs don't quit when they know they should. Said one sales executive, "Those years could have been spent working on problems that mattered to me. You can't ever get those years back."

3. I wish I had the confidence to start my own business. As their personal finances shored up, professionals I surveyed yearned for more control over their lives. The logical answer? To become an owner, not an employee in someone else's company. But in the words of Artful Dodger, wanting it ain't enough. A recent study found that 70% of workers wished their current job would help them with starting a business in the future, yet only 15% said they had what it takes to actually venture out on their own. Even Fortune 500 CEOs dream of entrepreneurial freedom. Admitted one: "My biggest regret is that I'm a 'wantrepreneur.' I never got to prove myself by starting something from scratch."

4. I wish I had used my time at school more productively. Despite all the controversy currently surrounding student loans, roughly 86% of students still view college as a worthwhile investment. This is reflected in the growing popularity of college: In writing Passion & Purpose, my coauthors and I found that 54% of Millennials have college degrees, compared to 36% of Boomers. Although more students are attending college, many of the group's participants wished they had thoughtfully parlayed their school years into a truly rewarding first job. A biology researcher recounted her college experience as being "in a ridiculous hurry to complete what in hindsight were the best and most delightfully unstructured years of my life." After starting a family and signing up for a mortgage, many were unable to carve out the space to return to school for advanced study to reset their careers.

5. I wish I had acted on my career hunches. Several individuals recounted windows of opportunity in their careers, or as one professional described, "now-or-never moments." In 2005, an investment banker was asked to lead a small team in (now) rapidly growing Latin America. Sensing that the move might be an upward step, he still declined. Crushingly, the individual brave enough to accept the offer was promoted shortly to division head, then to CEO. Recent theories of psychology articulate the importance of identifying these sometimes unpredictable but potentially rewarding moments of change, and jumping on these opportunities to non-linearly advance your professional life.

Continued in article

Jensen Comments
Outside the realm of mathematics and the natural sciences, writers should probably avoid use of the words "proof" and "proves." In the social sciences and business about the only things that can be "proven" are tautologies. Classic research does not prove compensation is not a true motivator in many (most?) instances. Ask any prostitute on the streets? Ask most (not all) any con men or women? Ask most any bank robber? Ask most any Wall Street executive selling out the best interest for shareholders so he can get a bigger bonus?

Some of the above "career regrets" can be turned inside out. For example, I know a number of professors who gave up tenured faculty positions to follow business interests that turned into disasters. Now the best they can do is struggle in life with low-paid and part-time adjunct teaching contracts.

The term "using school more productively" has various meanings. For example, it might be confused with not choosing a major having more career opportunities. This can also vary. Some students have such high GRE/GMAT/LSAT scores that they can turn around most any undergraduate major into a successful graduate school major in an Ivy League university. Most other students are not so successful on admissions tests. Using "school more productively" can even mean something apart from academics and grades. Some Harvard Business School graduates with average grades maximized career success by making use of student and alumni networking opportunities afforded by the HBS.

And many other workers quit or retired too soon. Ask most any old person in a second career as a Wal-Mart greeter.

 


"Mortgages in Reverse:  Taxpayers get hit by another federal housing money loser," The Wall Street Journal, December 14, 2012 ---
http://professional.wsj.com/article/SB10001424127887324640104578165683785829580.html?mg=reno64-wsj#mod=djemEditorialPage_t

Spare a thought for Shaun Donovan, who must be tired of crafting nuanced explanations of how his agency costs taxpayers billions of dollars. The latest example came this month when the Housing and Urban Development Secretary told the Senate that the Federal Housing Administration's once-modest reverse-mortgage program is the latest drain on taxpayers thanks to gross mismanagement.

Or as Mr. Donovan delicately put it to Tennessee Senator Bob Corker, the FHA's reverse-mortgage business is an "important" issue that the agency needs "to make changes on." You don't say.

HUD's independent actuary estimated last month that the FHA will lose $2.8 billion this fiscal year on reverse mortgages, and in the worst case $28.3 billion, with the losses stretching through 2019. The feds have no idea how big the pool of red ink might be.

For those who haven't seen former Senator Fred Thompson's TV ads, reverse mortgages are a type of home-equity loan for Americans age 62 and older who have mostly or fully paid off their mortgage. If the borrower can pay real-estate taxes, insurance and other fees, he can borrow against the home and stay in it until death. Then the lender demands repayment with interest.

The problem is that taxpayers, via the FHA, insure lenders against the funds they advance plus accrued interest, and borrowers can also borrow to pay the fees. FHA did fewer than 50,000 reverse-mortgage deals a year until 2006, when the housing mania went galactic. By 2007, the agency was insuring more than 100,000 reverse mortgages, and by 2009 the average FHA-backed reverse mortgage reached $262,763, often paid in a lump sum.

At least FHA guarantees for home purchases foster Congress's professed goal of homeownership—though we've seen in the housing bust how that misallocates capital. But guarantees for reverse mortgages go to people who are already homeowners who want to cash out of a real-estate asset. That's fine if they want to do it at their own risk. FHA's guarantees are essentially a subsidy for older Americans to spend down their savings. FHA crowded out competitors and now accounts for 90% of outstanding reverse mortgages.

The FHA's analysts didn't foresee an extended period of house price declines and didn't price mortality risk properly. Many loans are now worth more than the house itself, and heirs decided to walk away. FHA has to foot the bill for selling the house and make good on the shortfall between the net proceeds and what lenders are owed on the insurance. Taxpayers are ultimately on the hook.

So now comes the usual Beltway talk about reform to try to save a program that shouldn't exist. The National Reverse Mortgage Lenders Association wants to limit the amount that borrowers can draw upfront and have lenders do more stringent underwriting and set aside money to cover taxes and insurance. Mr. Donovan told the Senate he wants to make the program "much more effective and safe."

Continued in article

The sad state of governmental accounting (it's all done with smoke and mirrors) ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting


From the CFO Journal on December 14, 2012 (including a $1 billion UBS settlement in the LIBOR scandal)

Senate allows TAG expiration to proceed.
A bill that would have extended unlimited FDIC coverage on non-interest bearing bank accounts failed in the Senate,
Emily Chasan reports. As a result, after Dec. 31, only the first $250,000 in the accounts will have the insurance. The financial-crisis era guarantee made the accounts popular for companies to park large amounts of cash. Treasurers have been evaluating other options like money market funds and Treasurys ahead of the program’s end.

New IPOs take a pass on JOBS Act exemptions.
A study by Ernst & Young indicates that nearly three quarters of all new IPO registrations have been classified as “emerging growth company,” but many aren’t taking advantage of accounting provisions that designation entitles them to under the JOBS Act,
Emily Chasan reports. Companies with less than $1 billion in annual revenue only have to provide two years of audited financial information in lieu of the usual three, but only 39% of such companies have done so, the report said. The decision to not use the exemptions is often “at the advice of bankers and attorneys and others,” said Jackie Kelley, E&Y’s America’s IPO leader. “With a limited amount of capital available to the market and so many IPOS in the pipeline, they are competing against companies doing secondary and other follow-on offerings.”

UBS to agree to $1 billion rate-rigging settlement.
UBS
is close to an agreement to pay more than $1 billion to resolve allegations that it tried to rig interest-rate benchmarks to boost trading profits, according to the WSJ, citing people briefed on the negotiations. A settlement may be announced as soon as early next week, but discussions may yet unravel. The settlement would be more than double the $450 million or so Barclays paid.

 


Financial Statement Fraud: Strategies for Detection and Investigation
by Gerard M. Zack
Wiley
ISBN: 978-1-1183-0155-5
Hardcover 288 pages November 2012 US $85.00
http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118301552.html

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"Grasping the Power of Social Networking for Financial Services," American Banker White Paper, November 12, 2012 ---
http://www.americanbanker.com/papers/-1054313-1.html

"Banking on Analytics: How High-Performance Analytics Tackle Big Data Challenges in Banking," American Banker White Paper, August 30, 2012 ---
http://www.americanbanker.com/papers/-1054313-1.html


This could just have easily have been a Joe Hoyle blog
"How am I doing? Reflections on What Teaching Entails," by Rosalie Arcala Hall, Inside Higher Ed, December 13, 2012 ---
http://www.insidehighered.com/blogs/university-venus/how-am-i-doing-reflections-what-teaching-entails

Jensen Comment
I agree with Professor Hall states, but I think she has not perhaps studied or experienced the power of intense electronic communications that are both more spontaneous and often more revealing than face-to-face office hour encounters. The power of such electronic communications was discovered early on in the SCALE experiments at the University of Illinois ---
http://www.trinity.edu/rjensen/255wp.htm#Illinois

Tax Professor Amy Dunbar also demonstrated the power of such online communications between an instructor and her students ---
http://www.cs.trinity.edu/~rjensen/002cpe/Dunbar2002.htm

Obviously such intense online communications are not generally feasible when there are hundreds or thousands of student online or onsite. There may, however, be smaller recitation sections with teaching assistants who communicate intensely with students.


Just how far has the culture in government schools devolved? School district efforts to professionalize staff is now considered an affront to teachers. At least that’s the attitude emanating from teachers in the Hampton, New Hampshire SAU 90 school district. The school board is considering an update to its dress-code policy for teachers, and, according to Seacoastonline.com, “several teachers are insulted such a policy exists, telling them blue jeans, sneakers, flip-flops and tank tops are off limits.”
Kyle Olson, Townhall, December 2, 2012 --- Click Here
http://townhall.com/columnists/kyleolson/2012/12/02/new_hampshire_teachers_call_flipflop_tank_top_ban_condescending?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Jensen Comment
Before he died last year, my cousin Mark Jensen and his wife Terri devoted almost full time to volunteer work in Tanzania. As a long-time farmer, Mark focused on genetic adaptation of corn to the Tanzania climate. Terri devoted her time to a school. What was noteworthy is how important school uniforms were in the eyes of these African children. Whereas most of our public school children, even those in ghetto schools, in the U.S. shudder at the thought of uniforms, the African children associate uniforms with school and learning. I think they also respect teachers more if those teachers are professionally dressed.

Before I retired I was on the faculty at four universities and taught part time in two other universities while in graduate school. Except for when I taught as a graduate student in the Economics Department at Stanford, I was always in the Business Administration department. Although I don't think I ever encountered a written dress code, I think there was more peer pressure in business schools to dress professionally when teaching classes.

As for my accounting students, however, in some instances I did not even recognize them as they waited for internship interviews dressed as I'd never seen them dressed before.


December 11, 2012 message from Denny Beresford

Bob,

I happened to stumble across this SEC enforcement action - http://www.sec.gov/litigation/admin/2012/ic-30300.pdf

The Financial Accounting Foundation just announced that Trustee Mary S. Stone, who is named in the SEC enforcement release and is a former AAA President, is taking a leave of absence from the Foundation

Denny

December 11, 2012 reply from Bob Jensen

Hi Denny,

Thanks for the SEC link.

I was on an AAA Executive Committee with Mary and was relieved that she survived a horrible auto accident some years back on one of her commutes between Birmingham and Tuscaloosa. Her long-time husband is an attorney in Birmingham.

Mary seems to be an unsung hero with a lot of irons in the fire behind the scenes and is a voice for linking academia with the profession.

Bob


Proposed Accounting Standards Update
Financial Instruments—Credit Losses (Subtopic 825-15)
Exposure Draft Issued on December 20, 2012 --- Click Here
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176160587228
 

Jensen Comment
This proposal lacking bright lines can best be described as a principles-based standard allowing either discounted cash flow or anticipated cash flows or fair value of the contract depending upon which is deemed most appropriate by the client and its auditors. The former probability threshold would no longer apply.

Nearly all debt contracts receivable would receive and "Allowance for Credit Impairment" based on the present value of contractual cash flows that the client does not expect to collect.

This proposal abandons the infamous three-bucket model proposed by the FASB and the IASB jointly.

 

Proposed Accounting Standards Update
Financial Instruments—Credit Losses (Subtopic 825-15)
Exposure Draft Issued on December 20, 2012 --- Click Here
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176160587228
 

Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)?

Before the global economic crisis that began in 2008, both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began a joint project to revise and improve their respective standards of accounting for financial instruments. In the aftermath of the global economic crisis, the overstatement of assets caused by a delayed recognition of credit losses associated with loans (and other financial instruments) was identified as a weakness in the application of existing accounting standards. Specifically, because the existing ―incurred loss‖ model delays recognition until a credit loss is probable (or has been incurred), the Financial Crisis Advisory Group1 recommended exploring alternatives to the incurred loss model that would use more forward-looking information. The inherent complexity of having multiple credit impairment models was identified as an additional weakness of existing accounting standards.

1The Financial Crisis Advisory Group (FCAG) was created in October 2008 by the FASB and the IASB, as part of a joint approach to dealing with the reporting issues arising from the global financial crisis. The FCAG was asked to consider how improvements in financial reporting could help enhance investors’ confidence in financial markets.

The main objective in developing this proposal is to provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit held by a reporting entity at each reporting date. This objective would be achieved by replacing the current impairment model, which reflects incurred credit events, with a model that recognizes expected credit risks and by requiring consideration of a broader range of reasonable and supportable information to inform credit loss estimates. These proposed amendments also would reduce complexity by replacing the numerous existing impairment models in current U.S. GAAP with a consistent measurement approach.

Who Would Be Affected by the Amendments in This Proposed Update?

All entities that hold financial assets that are not accounted for at fair value through net income and are exposed to potential credit risk would be affected by the proposed amendments. Loans, debt securities, trade receivables, lease receivables, loan commitments, reinsurance receivables, and any other receivables that represent the contractual right to receive cash would generally be affected by the proposed amendments.

What Are the Main Provisions?

The proposed amendments would require an entity to impair its existing financial assets on the basis of the current estimate of contractual cash flows not expected to be collected on financial assets held at the reporting date. This impairment would be reflected as an allowance for expected credit losses. The proposed amendments would remove the existing ―probable‖ threshold in U.S. generally accepted accounting principles (GAAP) for recognizing credit losses and broaden the range of information that must be considered in measuring the allowance for expected credit losses. More specifically, the estimate of expected credit losses would be based on relevant information about past events, including historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectibility of the assets’ remaining contractual cash flows. An estimate of expected credit losses would always reflect both the possibility that a credit loss results and the possibility that no credit loss results. Accordingly, the proposed amendments would prohibit an entity from estimating expected credit losses solely on the basis of the most likely outcome (that is, the statistical mode).

As a result of the proposed amendments, financial assets carried at amortized cost less an allowance would reflect the current estimate of the cash flows expected to be collected at the reporting date, and the income statement would reflect credit deterioration (or improvement) that has taken place during the period. For financial assets measured at fair value with changes in fair value recognized through other comprehensive income, the balance sheet would reflect the fair value, but the income statement would reflect credit deterioration (or improvement) that has taken place during the period. An entity, however, may choose to not recognize expected credit losses on financial assets measured at fair value, with changes in fair value recognized through other comprehensive income, if both (1) the fair value of the financial asset is greater than (or equal to) the amortized cost basis and (2) expected credit losses on the financial asset are insignificant.

The Board expects that different types of entities can leverage their current risk monitoring systems in implementing the proposed approach (for example, by a bank using regulatory risk categories or an industrial company using an aging analysis). However, the inputs used to estimate the allowance for credit losses may need to change to implement the expected credit

How Would the Main Provisions Differ from Current U.S. GAAP and Why Would They Be an Improvement?

Current U.S. GAAP includes five different incurred loss credit impairment models for instruments within the scope of the proposed amendments. The existing models generally delay recognition of credit loss until the loss is considered ―probable.‖ This initial recognition threshold is perceived to have interfered with the timely recognition of credit losses and overstated assets during the recent global economic crisis. The credit loss recognition guidance in the proposed amendments would eliminate the existing ―probable‖ initial recognition threshold in U.S. GAAP and instead reflect the entity’s current estimate of expected credit losses.

Furthermore, when credit losses are measured under current U.S. GAAP, an entity generally only considers past events and current conditions in measuring the incurred loss. The proposed amendments would broaden the information that an entity is required to consider in developing its credit loss estimate. Specifically, the proposed amendments would require that an entity’s estimate be based on relevant information about past events, including historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectibility of the financial assets’ remaining contractual cash flows. As a result, an entity would consider quantitative and qualitative factors specific to the borrower, including the entity’s current evaluation of the borrower’s creditworthiness. An entity also would consider general economic conditions and an evaluation of both the current point in, and the forecasted direction of, the economic cycle (for example, as evidenced by changes in issuer or industry-wide underwriting standards).

How Would the Main Provisions Differ from the FASB’s Previously Proposed Accounting Standards Update?

In May 2010, the FASB issued a proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities. For purposes of measuring credit impairment, the May 2010 proposed Update would have required that an entity assume that the economic conditions existing at the reporting date would remain unchanged for the remaining life of the financial assets. In contrast, the proposed amendments in this 2012 proposed Update would broaden rather than limit the information set that an entity is required to consider in developing its credit loss estimate. Specifically, the proposed amendments would require that an entity’s estimate be based on relevant information about past events, including historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectibility of the financial assets’ remaining contractual cash flows. Also, the credit loss allowance objective in the credit loss approach, as explained in the examples.

May 2010 proposed Update differed on the basis of whether the asset was originated or purchased. The proposed amendments have a single measurement objective, one in which expected credit losses should reflect management’s estimate of the contractual cash flows not expected to be collected from a recognized financial asset (or group of financial assets). Furthermore, the May 2010 proposed Update proposed to dramatically change the interest income recognition approach by measuring interest income on the basis of the effective interest rate multiplied by the net carrying amount (that is, amortized cost minus the associated allowance). Unlike the May 2010 proposed Update, the proposed amendments would maintain the approach in current U.S. GAAP that measures interest income and credit losses separately.

. . .

825-15-55-3 Paragraph 825-15-25-4 requires that an estimate of expected credit losses reflect the time value of money either explicitly or implicitly. A discounted cash flow model is an example of a method that explicitly reflects the time value of money by forecasting future cash flows (or cash shortfalls) and discounting these amounts to a present value using the effective interest rate. Other methods implicitly reflect the time value of money by developing loss statistics on the basis of the ratio of the amortized cost amount written off because of credit loss and the amortized cost basis of the asset and by applying the loss statistic (after updating it for current conditions and reasonable and supportable forecasts of the future) to the amortized cost balance as of the reporting date to estimate the portion of the recorded amortized cost basis that is not expected to be recovered because of credit loss. Such methods may include loss-rate methods, roll-rate methods, probability-of-default methods, and a provision matrix method using loss factors. The requirement in paragraph 825-15-25-4 is met when the method used to estimate expected credit losses either explicitly or implicitly reflects the time value of money.

825-15-55-4 For collateral-dependent financial assets, an entity may use, as a practical expedient, methods that compare the amortized cost basis with the fair value of collateral. Such an approach is considered a practical expedient because there is an inherent inconsistency in how the time value of money is reflected in an amortized cost amount (wherein the discount rate implicit in the present value is a historical rate) and a fair value amount for collateral (wherein the discount rate implicit in the present value is a current rate). If an entity uses the fair value of the collateral to measure expected credit losses on a collateral-dependent financial asset and repayment or satisfaction of the asset depends on the sale of the collateral, the fair value of the collateral should be adjusted to consider estimated costs to sell (on a discounted basis). However, if repayment or satisfaction of the financial asset depends only on the operation, rather than the sale of the collateral, the estimate of expected credit losses should not incorporate estimated costs to sell the collateral.

> > Estimation of Expected Credit Losses—Multiple Possible Outcomes

825-15-55-5 Paragraph 825-15-25-5 requires that an estimate of expected credit losses, always reflect both the possibility that a credit loss results and the possibility that no credit loss results. However, in making this estimate, a variety of credit loss scenarios are not required to be identified and probability weighted to estimate expected credit losses, when a range of at least two outcomes is implicit in the method.

825-15-55-6 Some measurement methods (such as a loss-rate method, a roll-rate method, a probability-of-default method, and a provision matrix method using loss factors) rely on an extensive population of actual historical loss data as an input when estimating credit losses. Therefore, they implicitly satisfy the requirement in paragraph 825-15-25-5 as long as the population of actual loss data reflects items within that population that ultimately resulted in a loss and those items within that population that resulted in no loss. Similarly, as a practical expedient, an entity may use the fair value of collateral (less estimated costs to sell, as applicable) in estimating credit losses for collateral-dependent financial assets. Such an approach is considered a practical expedient because the fair value of collateral reflects several potential outcomes on a market-weighted basis and may result in expected credit losses of zero when the fair value of collateral exceeds the amortized cost basis of the asset.

> > Estimation of Expected Credit Losses—Lease Receivables

825-15-55-7 This Subtopic requires that an entity recognize an allowance for all expected credit losses on lease receivables recognized by a lessor in accordance with Topic 840. When measuring expected credit losses on lease receivables using a discounted cash flow method, the cash flows and discount rate used in measuring the lease receivable under Topic 840 would be used in place of the contractual cash flows and effective interest rate discussed in Section 825-15-25.

> > Estimation of Expected Credit Losses—Loan Commitments

825-15-55-8 This Subtopic requires that an entity recognize all expected credit losses on loan commitments that are not measured at fair value with qualifying changes in fair value recognized in net income. In estimating expected credit losses for such loan commitments, an entity would estimate credit losses over the full contractual period over which the entity is exposed to credit risk via a present legal obligation to extend credit, unless unconditionally cancellable by the issuer. For that period of exposure, the estimate of expected credit losses should consider both the likelihood that funding will occur (which may be affected by, for example, a material adverse change clause) and an estimate of expected credit losses on commitments expected to be funded.

 

Continued in article

Jensen Comment
This proposal lacking bright lines can best be described as a principles-based standard allowing either discounted cash flow or anticipated cash flows or fair value of the contract depending upon which is deemed most appropriate by the client and its auditors. The former probability threshold would no longer apply.

Nearly all debt contracts receivable would receive and "Allowance for Credit Impairment" based on the present value of contractual cash flows that the client does not expect to collect.

This proposal abandons the infamous three-bucket model proposed by the FASB and the IASB jointly.

I think this exposure draft is the answer to a long awaited charge of the SEC to issue a new standard on credit impairment accounting.

 

"SEC ISSUES DETAILED STUDY ON MARK-TO-MARKET ACCOUNTING," by Gia Chevis, Accounting Education.com, February 19, 2009 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=148980
The report was issued on December 31, 2008

At the direction of the U.S. Congress, the SEC prepared and released on 30 December 2008 a study on mark-to-market accounting and its role in the recent financial crises. Though it concluded that mark-to-market accounting was not responsible for the crisis, it did make eight recommendations.

The 259-page document, a result of the Emergency Economic Stabilization Act of 2008, details an in-depth study of six issues identified by the Act: effects of fair value accounting standards on financial institutions' balance sheets; impact of fair value accounting on bank failures in 2008; impact of fair value accounting on the quality of financial information available to investors; process used by the FASB in developing accounting standards; alternatives to fair value accounting standards; and advisability and feasibility of modifications to fair value accounting standards. Its eight recommendations are:

1) SFAS No. 157 should be improved, but not suspended.

2) Existing fair value and mark-to-market requirements should not be suspended.

3) While the Staff does not recommend a suspension of existing fair value standards, additional measures should be taken to improve the application and practice related to existing fair value requirements (particularly as they relate to both Level 2 and Level 3 estimates).

4) The accounting for financial asset impairments should be readdressed.

5) Implement further guidance to foster the use of sound judgment.

6) Accounting standards should continue to be established to meet the needs of investors.

7) Additional formal measures to address the operation of existing accounting standards in practice should be established.

8) Address the need to simplify the accounting for investments in financial assets.

On February 18, the FASB announced the addition of two short-timetable projects to its agenda concerning fair value measurement and disclosure. The first project aims to improve application guidance for measurement of fair value, with issuance projected for the second quarter. The second will address issues related to input sensitivity analysis and changes in levels; the FASB anticipates completing that project in time for calendar-year-end filing deadlines. Both projects were undertaken in response to the SEC's recent study on mark-to-market accounting and input from the FASB's Valuation Resource Group.

The full report can be freely downloaded at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf. (pdf)
 

SFAS No. 157’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). With respect to IFRS, the report states the following on Page 33:

Currently, under IFRS, “guidance on measuring fair value is dispersed throughout [IFRS] and is not always consistent.”52 However, as discussed in Section VII.B, the IASB is developing an exposure draft on fair value measurement guidance.

IFRS generally defines fair value as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction” (with some slight variations in wording in different standards).53 While this definition is generallyconsistent with SFAS No. 157, it is not fully converged in the following respects:

The definition in SFAS No. 157 is explicitly an exit price, whereas the definition in IFRS is neither explicitly an exit price nor an entry price.

SFAS No. 157 explicitly refers to market participants, which is defined by the standard, whereas IFRS simply refers to knowledgeable, willing parties in an arm’s length transaction.

For liabilities, the definition of fair value in SFAS No. 157 rests on the notion that the liability is transferred (the liability to the counterparty continues), whereas the definition in IFRS refers to the amount at which a liability could be settled.

 

Through the Banking Glass Darkly
 "FASB to Propose More Flexible Accounting Rules for Banks," by Floyd Norris, The New York Times, December 7, 2009 ---
http://www.nytimes.com/2009/12/08/business/08account.html?_r=2&ref=business

Facing political pressure to abandon “fair value” accounting for banks, the chairman of the board that sets American accounting standards will call Tuesday for the “decoupling” of bank capital rules from normal accounting standards.

His proposal would encourage bank regulators to make adjustments as they determine whether banks have adequate capital while still allowing investors to see the current fair value — often the market value — of bank loans and other assets.

In the prepared text of a speech planned for a conference in Washington, Robert H. Herz, the chairman of the Financial Accounting Standards Board, called on bank regulators to use their own judgment in allowing banks to move away from Generally Accepted Accounting Principles, or GAAP, which his board sets.

“Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,” Mr. Herz said in the prepared text.

“Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,” he added. “And, conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. To do so could degrade the financial information available to investors and reduce public trust and confidence in the capital markets.”

Mr. Herz said that Congress, after the savings and loan crisis, had required bank regulators in 1991 to use GAAP as the basis for capital rules, but said the regulators could depart from such rules.

Banks have argued that accounting rules should be changed, saying that current rules are “pro-cyclical” — making banks seem richer when times are good, and poorer when times are bad and bank loans may be most needed in the economy.

Mr. Herz conceded the accounting rules can be pro-cyclical, but questioned how far critics would go. Consumer spending, he said, depends in part on how wealthy people feel. Should mutual fund statements be phased in, he asked, so investors would not feel poor — and cut back on spending — after markets fell?

The House Financial Services Committee has approved a proposal that would direct bank regulators to comment to the S.E.C. on accounting rules, something they already can do. But it stopped short of adopting a proposal to allow the banking regulators to overrule the S.E.C., which supervises the accounting board, on accounting rules.

“I support the goal of financial stability and do not believe that accounting standards and financial reporting should be purposefully designed to create instability or pro-cyclical effects,” Mr. Herz said.

He paraphrased Barney Frank, the chairman of the House committee, as saying that “accounting principles should not be viewed to be so immutable that their impact on policy should not be considered. I agree with that, and I think the chairman would also agree that accounting standards should not be so malleable that they fail to meet their objective of helping to properly inform investors and markets or that they should be purposefully designed to try to dampen business, market, and economic cycles. That’s not their role.”

Banks have argued that accounting rules made the financial crisis worse by forcing them to acknowledge losses based on market values that may never be realized, if market values recover.

Mr. Herz said the accounting board had sought middle ground by requiring some unrealized losses to be recognized on bank balance sheets but not to be reflected on income statements.

Banking regulators already have capital rules that differ from accounting rules, but have not been eager to expand those differences. One area where a difference may soon be made is in the treatment of off-balance sheet items that the accounting board is forcing banks to bring back onto their balance sheets. The banks have asked regulators to phase in that change over several years, to slow the impact on their capital needs.

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

Please don't blame the accountants for the banking meltdown ---
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValue

Bob Jensen's threads on banking frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking


"FASB clarifies scope of nonpublic entity fair value disclosure exemption (No. 2012-59)," PwC, December 19, 2012 --- Click Here
http://www.pwc.com/en_US/us/cfodirect/assets/pdf/in-brief/in-brief-2012-59-fasb-clarifies-scope-of-non-public-entity-fair-value-disclosure-exemption.pdf  

What's new?

On December 19, 2012, the FASB (the “board”) met to clarify the applicability of an exemption from a specific fair value disclosure for nonpublic entities.

The board decided to clarify that all nonpublic entities are exempt from the requirement to disclose the categorization by level of the fair value hierarchy for items disclosed but not measured on the balance sheet at fair value.

What were the key decisions?

Certain nonpublic entities are excluded from the requirement to disclose the fair value of their financial instruments not measured at fair value on the balance sheet. Questions have arisen during the adoption of ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, regarding which nonpublic entities are excluded from the new requirement to disclose the categorization by level of the fair value hierarchy for items not measured at fair value in the balance sheet but for which fair value is disclosed. Some read the exemption to apply to only those nonpublic entities that are able to apply the general exemption to not disclose the fair value of their financial instruments.

The board voted to clarify that all nonpublic entities are exempt from the requirement to disclose the level in the fair value hierarchy for items disclosed but not measured on the balance sheet at fair value. The board noted that this was its intent when it deliberated ASU 2011-04.

Is convergence achieved?

Although the issuance of ASU 2011-04 was the result of a joint project on fair value conducted with the IASB, the disclosure exemptions provided to nonpublic entities in ASU 2011-04 and confirmed at this board meeting are only for reporting entities applying U.S. GAAP. A similar scope exemption is not included in the IASB’s fair value standard.

Who's affected?

Nonpublic entities are affected by the clarification.

What's the proposed effective date?

ASU 2011-04 is effective for nonpublic entities for annual periods beginning after December 15, 2011. The clarification described above is not expected to have a different effective date.

What's next?

A proposed ASU with the clarified language is expected in January 2013. The board decided to provide a 15-day comment period.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-780

Authored by:

Jill Butler
Partner
Phone: 1-973-236-4678
Email: jill.butler@us.pwc.com

Mia DeMontigny
Managing Director
Phone: 1-973-236-4012
Email: mia.demontigny@us.pwc.com

Maria Constantinou
Director
Phone: 1-973-236-4957
Email: maria.constantinou@us.pwc.com

 

Bob Jensen's threads on fair value controversies ---
The Controversy Over Fair Value (Mark-to-Market) Financial Reporting
Go to http://www.trinity.edu/rjensen/theory02.htm#FairValue
 

 


Can't we sing about accounting as well?

Math and Science Sing Along Experiments
Sing About Science & Math: Lesson Plans (oceanography sing along) --- http://singaboutscience.org/wp/lesson-plans/ 

Richard Sansing forwarded Monte Python's accounting sing along song ---
http://www.youtube.com/watch?v=7YUiBBltOg4

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


PwC In Brief:  FASB agrees on changes to reporting of discontinued operations (No. 2012-57) --- Click Here
http://www.pwc.com/us/en/cfodirect/publications/in-brief/2012-57-fasb-agrees-on-changes-to-reporting-of-discontinued-operations.jhtml?display=/us/en/cfodirect/publications/in-brief

This proposal will align the threshold for determining whether a component should be presented as a discontinued operation with the guidance in IFRS 5, Non-current assets held for sale and discontinued operations. However, some of the FASB’s proposed disclosures are incremental to those required under IFRS


"Doctoral Degrees Rose in 2011, but Career Options Weren't So Rosy," by Stacey Patten, Chronicle of Higher Education, December 5, 2012 ---
http://chronicle.com/article/Doctoral-Degrees-Rose-in-2011/136133/

American universities awarded a total of 49,010 research doctorates in 2011, a 2-percent increase from 2010, according to an annual survey by the National Science Foundation.

A report describing the survey's findings, released on Wednesday, says that almost three-quarters of all doctorates awarded last year were in science and engineering fields, a proportion that increased by 4 percent from the previous year. During the same period, the number of doctorates awarded in the humanities declined by 3 percent.

That decline was attributed in part to the reclassification of most doctor-of-education degrees as professional rather than research doctorates. Without that decrease in education degrees, the overall number of research doctorates awarded would have exceeded 50,000, said Mark K. Fiegener, a project officer at the NSF.

Mr. Fiegener noted that certain trends were continuing. "There's increased representation of women in all fields, with greater numbers in the hard sciences and engineering," he said. "The same is true with race and ethnicity, but to a lesser degree."

Women continue to become more prevalent with each cohort of doctorate recipients, according to the report. They earned 42 percent of doctorates in science and engineering in 2011, up from 30 percent 20 years ago. The share of doctorates awarded to black students rose to over 6 percent in 2011, up from a little over 4 percent in 1991. And the proportion of Hispanic doctorate recipients increased from a little over 3 percent in 1991 to just over 6 percent last year.

Despite the gains in degree attainment, trends on postgraduate career opportunities appear to reflect the broader economic malaise. The proportion of new doctoral recipients who reported having definite job commitments or a postdoctoral position fell in both the humanities and sciences, and was at the lowest level in the past 10 years.

Meanwhile, the proportion of students who planned to pursue postdoctoral positions continued rising, especially in engineering and social-science fields. Last year more than two-thirds of doctoral graduates in the life sciences, and over half of those in engineering, took postdoctoral positions immediately after graduation.

Five years ago 33 percent of graduates in the humanities had no employment or postdoctoral commitments upon completion; that number rose to 43 percent in 2011.

The report, "Doctorate Recipients From U.S. Universities: 2011," is available on the National Science Foundation's Web site.

 

"Chemistry Ph.D. Programs Need New Formula, Experts Say," by Stacey Patton, Chronicle of Higher Education, December 10, 2012 ---
http://chronicle.com/article/Chemistry-PhD-Programs-Need/136235/

The humanities disciplines are not alone in grappling with how to stay relevant and prepare graduate students for jobs that meet the demands of a rapidly changing labor market. Doctoral programs in chemistry need to be overhauled, too, including by reducing students' time to degree, the American Chemical Society says in a new report.

The chemical society released the report on Monday at news conference here at which speakers discussed ways that doctoral training needed to change to meet pressing societal needs and play a greater role in producing new jobs. The report, "Advancing Graduate Education in the Chemical Sciences," focuses on five key areas of graduate education the society says need to be overhauled: curricula, financial support, laboratory safety, career opportunities, and mentoring of postdoctoral students.

Among the recommendations are that programs need to be changed so that students can complete their Ph.D.'s in less than five years and that the chemical society collect and publish data on student outcomes in Ph.D. and postdoctoral programs.

The report is the result of a yearlong review that was conducted by 22 scientists and other experts, mostly from universities but also from industry, that the chemical society appointed to a commission. Bassam Z. Shakhashiri, the chemical society's president, said at the news conference that the report was "long overdue."

According to data from the society, nearly 25,000 jobs have been lost in chemical-manufacturing companies in the United States since 2008, and layoffs continue. Employment patterns are also changing, as chemical companies are hiring fewer new graduates of chemistry Ph.D. programs than in the past. Small businesses are continuing to hire more new chemistry Ph.D.'s but at slow rates.

Experts in the field say they face a conundrum: Innovation in chemistry is declining at the very time that society needs scientists to come up with solutions to problems like climate change and obesity, to further drug discoveries, and to help find ways of improving food generation, infrastructure, and water supplies.

Graduate education in the American sciences, speakers at the news conference said, has not kept pace with global economic, social, and political changes since World War II, when the current graduate-education system evolved.

Among the members of the commission that drafted the recommendations were Larry R. Faulkner, president emeritus of the Houston Endowment and former president of the University of Texas at Austin, who was the panel's chair; Paul L. Houston, dean of the College of Sciences at Georgia Institute of Technology, who was the panel's executive director; Hunter R. Rawlings III, president of the Association of American Universities; and Peter J. Stang, a professor at the University of Utah, the 2013 Priestley Medal winner, and editor of the Journal of the American Chemical Society.

 

The commission recommended that:

"This won't be a report that sits on the shelf," said Mr. Shakhashiri. "The ultimate goal is to have action taken."

The chemical society's board has already committed $50,000 for "dissemination activities" to get the word out to faculty, deans, college presidents, policy makers, agencies that provide financial support, industries that employ chemical scientists and engineers, and professional societies. The next phase will begin in 2013

 

Bob Jensen's threads on proposals for radical changes in doctoral programs ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#DoctoralProgramChange

 


"The Current State of Accounting Ph.D. Programs in the United States," by Alisa G. Brink, Robson Glasscock and Benson Wier, Issues in Accounting Education, Vol. 27, No. 4,  November 2012 ---
Not Free http://aaajournals.org/doi/full/10.2308/iace-50254

The primary purpose of this study is to provide evidence about current practices in accounting Ph.D. programs in the United States. Plumlee et al. (2006) investigated the shortage of Ph.D. qualified accounting faculty and made recommendations toward addressing this shortage. We assess the extent to which these recommendations have been followed and areas where additional progress might be needed. We gather data from Ph.D. program websites, a survey of doctoral students in accounting Ph.D. programs in the United States, and interviews with Ph.D. program coordinators. Key findings, following Plumlee et al. (2006) indicate: (1) on average, university Ph.D. program websites do not provide all of the specific information about admission and program requirements that would be useful for potential students; (2) increases in the level of financial support for Ph.D. students; (3) considerable variability with respect to reduction in costs to Ph.D. students; (4) Ph.D. programs may reduce the number of students accepted in response to constrained resources; and (5) increases in students pursuing audit and tax specialties that are attributable, at least in part, to the Accounting Doctoral Scholars program. Based on our data, we also identify a number of additional findings, and then discuss the larger context within which this complex problem (the supply of Ph.D. students) is situated. Our findings and discussion should be of interest to potential Ph.D. candidates, Ph.D. program directors/advisors, business school deans, and accounting department chairs, as well as the larger accounting-professional community.

. . .

Our findings indicate several areas where changes have occurred. For example, websites and survey respondents indicate an average of ten students per program, which is an increase from the average of eight students per program reported by Behn et al. (2008). In addition, websites and survey respondents indicate that mean Ph.D. student stipends exceed $20,000, which is a significant increase over the mean stipend of $16,000 reported by the Committee based on the 2005 survey (Plumlee et al. 2006). Further, survey respondents and Ph.D. coordinators indicate that it has become common practice for Ph.D. programs to provide research-related travel support for students. We also find evidence indicating that the number of students pursuing audit and tax specialties has increased. Specifically, 26 and 11 percent of our respondents indicate an interest in audit and tax research, respectively. This is a substantial increase from the results of the 2007 survey reported by Behn et al. (2008), which indicated that 12 and 9 percent of students were interested in audit and tax research, respectively. However, we also find that there are several areas where practices across doctoral programs vary widely and improvement could be made. For example, the information about Ph.D. programs on university websites, on average, lacks much of the specific information that prospective students might find useful when evaluating Ph.D. programs. Further, there is significant variation in doctoral student teaching responsibilities with some programs giving students large teaching loads and multiple preparations. Specifically, survey respondents indicate teaching a mean of 4.69 courses over the course of their programs, and individual responses range from 0 to 28 courses. In addition, the average number of course preparations is 2.08 with a range of 0 to 8 preparations.

Interviews with Ph.D. program coordinators indicate a desire for additional information so that they can benchmark best practices. These coordinators indicate that recent changes in Ph.D. programs are not driven by the shortage of academically qualified faculty. Rather, such changes are motivated by a trade-off between constrained resources and the desire to admit high-quality students.

Our findings are useful for several reasons. First, we assess the progress being made toward addressing the recommendations made by the Committee. We identify current trends and changes occurring in accounting Ph.D. programs in the United States and identify areas where improvement is still needed if we are to address the shortage of Ph.D. graduates. Second, the data presented in this study will enable potential doctoral students to have more realistic and informed expectations regarding Ph.D. programs and the requirements of these programs. Third, the information presented in this study is a valuable resource for Ph.D. program coordinators and advisors, as well as deans and department chairs who must deal with funding issues and accreditation requirements in the future.

 

METHODOLOGY

We gather data from three sources. First, we perform an analysis of the websites of doctoral granting accounting programs to gather data on program requirements and the ease of accessing this information from these websites. Second, we survey current doctoral students to obtain information about their demographic characteristics, doctoral program characteristics, and their interests and expectations regarding their research, teaching, and future careers. Third, we interview a sample of Ph.D. program coordinators to obtain information on trends and challenges in accounting Ph.D. programs. Table 1 lists the Ph.D. programs whose websites are included in our analyses and the number of survey respondents from each university.

. . .

Continued in article

 

Jensen Comment
The study provides some useful information about demographics of current students (gender, age, nationality, etc.). Half of the students in these doctoral students are CPAs and nearly half (43%) have some prior teaching experience. The percentage of international students is 27.8%. It also provides information about each university's number of accounting doctoral students and funding of those doctoral students and average GMAT scores.

Although the study hints at causes for the dramatic decline in enrollments in accounting doctoral programs it says nothing about what I view as the primary reason why practicing accountants are shunning away from accounting doctoral programs due to the 5-6 years required onsite beyond a masters degree and the lack of accounting in the curriculum relative to the heavy dosage of mathematics, statistics, econometrics, and psychometrics requirements ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

The study also provides no information about why doctoral students leave the program prior to graduation.

 

"Accounting for Innovation," by Elise Young, Inside Higher Ed, July 31, 2012 ---
http://www.insidehighered.com/news/2012/07/31/updating-accounting-curriculums-expanding-and-diversifying-field

Accounting programs should promote curricular flexibility to capture a new generation of students who are more technologically savvy, less patient with traditional teaching methods, and more wary of the career opportunities in accounting, according to a report released today by the Pathways Commission, which studies the future of higher education for accounting.

In 2008, the U.S. Treasury Department's  Advisory Committee on the Auditing Profession recommended that the American Accounting Association and the American Institute of Certified Public Accountants form a commission to study the future structure and content of accounting education, and the Pathways Commission was formed to fulfill this recommendation and establish a national higher education strategy for accounting.

In the report, the commission acknowledges that some sporadic changes have been adopted, but it seeks to put in place a structure for much more regular and ambitious changes.

The report includes seven recommendations:

 

According to the report, its two sponsoring organizations -- the American Accounting Association and the American Institute of Certified Public Accountants -- will support the effort to carry out the report's recommendations, and they are finalizing a strategy for conducting this effort.

Hsihui Chang, a professor and head of Drexel University’s accounting department, said colleges must prepare students for the accounting field by encouraging three qualities: integrity, analytical skills and a global viewpoint.

“You need to look at things in a global scope,” he said. “One thing we’re always thinking about is how can we attract students from diverse groups?” Chang said the department’s faculty comprises members from several different countries, and the university also has four student organizations dedicated to accounting -- including one for Asian students and one for Hispanic students.

He said the university hosts guest speakers and accounting career days to provide information to prospective accounting students about career options: “They find out, ‘Hey, this seems to be quite exciting.’ ”

Jimmy Ye, a professor and chair of the accounting department at Baruch College of the City University of New York, wrote in an email to Inside Higher Ed that his department is already fulfilling some of the report’s recommendations by inviting professionals from accounting firms into classrooms and bringing in research staff from accounting firms to interact with faculty members and Ph.D. students.

Ye also said the AICPA should collect and analyze supply and demand trends in the accounting profession -- but not just in the short term. “Higher education does not just train students for getting their first jobs,” he wrote. “I would like to see some study on the career tracks of college accounting graduates.”

Mohamed Hussein, a professor and head of the accounting department at the University of Connecticut, also offered ways for the commission to expand its recommendations. He said the recommendations can’t be fully put into practice with the current structure of accounting education.

“There are two parts to this: one part is being able to have an innovative curriculum that will include changes in technology, changes in the economics of the firm, including risk, international issues and regulation,” he said. “And the other part is making sure that the students will take advantage of all this innovation.”

The university offers courses on some of these issues as electives, but it can’t fit all of the information in those courses into the major’s required courses, he said.

Continued in article

 

Bob Jensen's threads on Higher Education Controversies and Need for Change ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm

The sad state of accountancy doctoral programs ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

How Accountics Scientists Should Change: 
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
One more mission in what's left of my life will be to try to change this
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm 


"Can the Estate Tax Solve the Fiscal Cliff?" by Christopher Matthews, Time Magazine, December 11, 2012 ---
http://business.time.com/2012/12/11/can-the-estate-tax-solve-the-fiscal-cliff/ 

Jensen Comment
I've been a long-time advocated of greatly increased estate taxation. But I also see problems if the threshold is set too high to protect family farms. Family farm estates, along with many other estates like farm estates, have frequent problems with liquidity. Estate taxes will exacerbate that problem to a point where the assets of the estate (e.g., the farm land and equipment) must be auctioned off to pay increased estate taxes. The end result will be ever-increasing loss of family farms to big agribusiness conglomerates. Maybe this is inevitable even without increasing estate taxes, but I would hope that along with increases in estate taxation some innovative solutions are found to allow farms to be passed on to family heirs rather than forcing these farms to be victims of ever-increasing ownership of the land by giant and faceless multinational corporations.

 


Question From Freakonomics:
Must there be a disconnect between introductory microeconomics and the business world?

"Putting Microeconomics to Work," by Steven D. Levitt, Freakonomics, November 27, 2012 ---
http://www.freakonomics.com/2012/11/27/putting-microeconomics-to-work/

I’ve long been puzzled by the almost complete disconnect between real-world businesses and academic economics.  After I graduated from college, I went to work as a management consultantAlmost nothing I learned as an economics major proved helpful to me in that job.  Then, when I went back to get a Ph.D., I thought what I had learned in consulting would help me in economics.  I was wrong about that as well!

Ever since, I’ve felt that both business and economics would benefit from a greater connection.  Why don’t businesses set prices the way economics textbooks say they should?  Why are randomized experiments so rare in business?  Why do economists write down models of how businesses behave without spending time watching how decisions are actually made at businesses? The list goes on and on.

It’s taken a while, but the business/economics connections are finally starting to happen with greater regularity.  John List and I wrote an academic piece about field experiments in businesses a few years back that focused on how partnering with businesses could help academics with their research.

The benefits are also going the other way.  The Economist has a nice article about how microeconomists are adding value to businesses.  (I’m sure the economists mentioned in the article are delighted to be included; I’m almost as sure they will hate the cartoon likenesses that accompany it!)

For what it’s worth, I’m trying to do my part to improve philanthropy and business through a little firm called The Greatest GoodBut, damn, it turns out to be a lot harder to make things happen in the real world than it is in the ivory tower!

Jensen Comment
We could use more of this in managerial accounting, especially in such areas as CVP Analysis and ABC Costing.

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


December 11, 2012 message from Dan Stone

Forthcoming in the Fall, 2012 AAA IS section newsletter
---------------------------------

The following is a work of fiction. It represents the (probably mistaken) views of the author and not necessarily those of any saner, more reasonable person or persons, including members of the IS section of the AAA, or, any other member or officer of the IS section, or, of the AAA.
---------------------------------

The mad clockmakers’ guild labors in the mountain kingdom of Strayhorn, near the clear waters of Lake Mystine. Clockmakers do two tasks: (1) making hand-crafted artisan clocks and (2) evaluating and approving the clocks made by other guild members. Membership in the guild is restricted to those who labor as apprentices to master clockmakers for four to six years, and who survive the (sometimes) harsh treatment by clockmakers of their apprentices. Constructing a single clock requires two to seven years and is usually done in teams of clockmakers. Clockmakers are handsomely rewarded for clocks that their fellow clockmakers approve. They receive nothing for clocks that are rejected by fellow clockmakers, and, they receive no compensation for evaluating and approving the clocks of others.

Competing teams of clockmakers use different tools and methods. Therefore, it is unsurprising that clockmakers, when evaluating clocks, favor those constructed using similar tools and methods as they use in making their own clocks. As in any guild, petty rivalries abound that lead the clocks of some teams to be favored by other teams, and eschewed by rivals - usually independent of their quality, craftsmanship, or accuracy. Although there are no substantive differences in their clocks, the clocks of clockmakers who live closer to the lake, i.e., in more beautiful and desirable locations, are approved more often than those who live in the more remote, less hospitable regions.

The citizens of Strayhorn consider the clockmakers mad because the clockmakers waste most of the resources provided to them, including time, metals, wood, and tools. Guild members approve less than 10% of the clocks made by their fellow craftsmen. The other 90% are burned, in large bonfires, in winter, to heat the clockmaker’s homes and studios. Clockmakers’ opinions in evaluating and approving clocks are sacred. They cannot be questioned or challenged without punishment by the Guild’s leaders, who are appointed by committees of clockmakers. This is another point on which the clockmakers are considered mad: clockmakers receive little training in evaluating the clocks of others; many know little or nothing about the tools and methods used by clockmakers who work in other areas. But these same clockmakers, when making clocks, at which they are highly skilled, have over 90% of their clocks rejected by their fellow Guild members.

Periodically, the citizens of Strayhorn call upon the Guild to reform, and to stop its remarkable waste of resources. In addition, in their darker moments, often in winter, the citizens ask why guild members are paid handsome salaries from the public treasury despite wasting 90% of their time on failed clocks. Guild leaders inevitably argue that this is the best possible system of clock making, that any reforms or changes would threaten the Guild’s vitality and viability, and that, after all, the citizens should be happy that they, now and then, actually get a working, accurate clock that is sometimes also beautiful. The Guild’s leaders have also created a new rule that requires Guild members to burn their discarded clocks only during daylight hours so that the citizens of Strayhorn are less likely to see the flames produced by the resources wasted by the Guild’s members. However, many guild members, particularly the older ones, are well paid, comfortable, and delight in walking, on cold winter days, by the houses warmed by the fires produced by their competing guild members’ burning clocks. They share the view of another learned Professor, Dr. Pangloss, that “all is for the best in the best of all possible <clockmaker> worlds” (Voltaire 1829)

-------------------------------------
Commentary:

My (obvious, I hope) contention is that the above parable opines on the manuscript submission and review process that we employ in academe. Some of the assertions of this parable, which are supported by published evidence, or my experiences, include:

1. PhD education requires 4-6 years to complete,

2. PhD students are sometimes mistreated by their supervisors (Fine and Kurdek 1993),

3. The criteria for acceptance in journals are capricious (Gans and Shepard, 1994); reviewers generally disagree in their evaluations of manuscripts (Fiske and Fogg 1990; Fogg and Fiske 1993).

4. An approximate 10% acceptance rate at journals (see AAA editor’s reports – which indicate acceptance rates of ~ 7 to 20%),

5. Scholars receive little (i.e., inadequate) training in a very difficult task: reviewing manuscripts.

6. The rejection of manuscripts is sometimes motivated by petty competitions among teams of rival authors (from my experience as an editor; see also Moizer 2009; Frey 2003).

7. Schadenfreude, i.e., pleasure derived from the misfortune of others, i.e., the rejection of competing researchers’ papers, is an important but largely unacknowledged motivator in manuscript evaluations (Frey 2003)

Reforms to ameliorate some of the above problems include:

1. Widely available online reviewer, submitting author, and reader evaluations of academic journals, using Yelp and eBay like evaluations that are universally accessible.

2. Removal of abusive reviewers from the peer evaluation system through activist editors and public disclosure of their abusive behavior by editors and other scholars.

3. Training in writing constructive reviews for scholarly communities.

4. Ethical education of young scholars regarding the morale obligations of the review process, including fairness, objectivity, and constructive comments.

References

Blank, R. M., 1991, "The effects of double-blind versus single-blind reviewing: Experimental Evidence from The American Economic Review," The American Economic Review, 81: 5 (December), 1041- 1067.

Fine, M. A. and L. A. Kurdek (1993). "Reflections on Determining Authorship Credit and Authorship Order on Faculty-Student Collaborations." American Psychologist 48(11 (November )): 1141- 1147

Fiske, D. W. and L. Fogg (1990). "But the Reviewers Are Making Different Criticisms of My Paper - Diversity and Uniqueness in Reviewer Comments." American Psychologist 45(5): 591-598.

Fogg, L. and D. W. Fiske (1993). "Foretelling the Judgments of Reviewers and Editors." American Psychologist 48(3): 293-294.

Frey, B. S. "Publishing as Prostitution? - Choosing between One's Own Ideas and Academic Success.", Public Choice 116, no. 1-2 (Jul 2003): 205-23.

Gans, J. S., and G. B. Shepard, 1994, "How are the mighty fallen: rejected classic articles by leading economists," Journal of Economic Perspectives, 8: 1 (Winter), 165-179.

Moizer, P. "Publishing in Accounting Journals: A Fair Game?" Accounting Organizations and Society 34, no. 2 (Feb 2009): 285-304.

Voltaire. 1829. Candide. 2 vols Paris,: Caillot.

+++ AECM Home Page (View archives, unsubscribe, etc.): http://www.aecm.org +++ Dan Stone

3:13 PM (15 hours ago)

to AECM Forthcoming in the AAA IS section fall 2012 newsletter

----------------------------------

A Reply: Baking Better Bread by Roger Debreceny

Guilds are an important part of the functioning of a modern economy. When managed well, guilds bring theoretical and applied learning to a knowledge domain. There is no comparison between the products of a German master guild baker (for example) with those of their counterparts in the USA. The same can be said for many other disciplines including medicine. The problem is not necessarily with the notion of a guild but with the training in the guild. Our problems often arise as a result of tenure and promotion performance metrics influencing our learning and knowledge production systems. The need to rush out two or three papers in a handful of accepted journals leads to PhD dissertations made up of three papers ready to go to journals. This leads in turn to concentrated and narrow PhD preparation that discourages the wide reading that was typical of earlier iterations of PhD study.

Within our section there is probably little that we can do to change now strongly entrenched PhD factories. We can, however, change the way that we do business within the section and the Journal of Information Systems. We can do more to improve the flow of papers through the JIS. We must not forget that reviews often significantly improve the quality of papers. I have observed this as author, reviewer and editor. Further, I think that we generally have more flexible reviewers in the accounting information systems domain than elsewhere in the discipline. There is more that we can do, however. Here are some suggestions that might improve the process:

• Pre-submission screening .. offer authors the opportunity to get informal feedback on a near to final draft. This might ensure that papers going to reviewers would be of higher quality. Talking about metrics – would a paper that came in for screening and was not subsequently completed count as a rejection? It is curious, that we revel in poor quality: “Look at me! I’m a high quality journal. I reject 90% of submissions!” That would never be acceptable in other areas of knowledge creation or use.

• Naming reviewers on the paper (some MIS journals are doing this already)

• Rating reviewers on consistent metrics

• Rewarding reviewers (financially or in some other tangible way) -- why just have one best reviewer award? Why not as many awards as reviewers meet five star ratings in the year? Why not give a complimentary mid-year meeting registration for each five star reviewer?

• Clearly stating expectations of reviewers.

• Working with authors to get the paper to publishable form (our current editor, Miklos Vasarhelyi excels in this)

• Clearly stating expectations of authors

• Taking risks on papers and theme issues

• Experimenting with production processes

 

 

Jensen Comment on Defense Mechanisms
The publication hurdles combined with publish-or-perish obstacles to promotion and tenure have led to some questionable defenses, especially in accountics science.

 

Accounting is not alone as a discipline questioning its doctoral programs and its promotion and tenure criteria. The most vocal discipline seeking change is the Modern Languages Association (MLA) ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#MLA

Rethinking Tenure, Dissertations, and Scholarship

 

A Dramatic Proposal for Change in Humanities Education
A panel of some of the top professors of foreign languages has concluded that the programs that train undergraduate majors and new Ph.D.’s are seriously off course, with so much emphasis on literature that broader understanding of cultures and nations has been lost . . . The implications of this call for change are, several panel members said, “revolutionary” and potentially quite controversial. For example, the measures being called for directly challenge the tradition in which first and second-year language instruction is left in many departments to lecturers, who frequently play little role in setting curricular policy. The panel wants to see tenure-track professors more involved in all parts of undergraduate education and — in a challenge to the hierarchy of many departments — wants departments to include lecturers who are off the tenure track in planning the changes and carrying them out.
Scott Jaschik, "Dramatic Plan for Language Programs," Inside Higher Ed, January 2, 2006 --- http://www.insidehighered.com/news/2007/01/02/languages

 


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.”

 


Academic Publishing in the Digital Age:  Scott McLemee claims this is a "must read"

"Sailing from Ithaka,"  By Scott McLemee, Inside Higher Ed, August 1, 2007 --- http://www.insidehighered.com/views/2007/08/01/mclemee 

It’s not always clear where the Zeitgeist ends and synchronicity kicks in, but Intellectual Affairs just got hit going and coming.

In last week’s column, we checked in on a professor who was struggling to clear his office of books. They had been piling up and possibly breeding at night. In particular, he said, he found that he seldom needed to read a monograph more than once. In a pinch, it would often be possible to relocate a given reference through a digital search – so why not pass the books along to graduate students? And so he did.

While getting ready to shoot that article into the Internet’s “series of tubes,” my editor also passed along a copy of “University Publishing in a Digital Age” – a report sponsored by Ithaka and JSTOR.

It was released late last week. On Thursday, IHE ran a detailed and informative article about the Ithaka Report, as I suppose it is bound to be known in due time. The groups that prepared the document propose the creation of “a powerful technology, service, and marketing platform that would serve as a catalyst for collaboration and shared capital investment in university-based publishing.”

Clearly this would be a vaster undertaking than JSTOR, even. The Ithaka Report may very well turn out to be a turning point in the recent history, not only of scholarly publishing, but of scholarship itself. And yet only a few people have commented on the proposal so far – a situation that appears, all things considered, very strange.

So, at the risk of being kind of pushy about it, let me put it this way: More or less everyone reading this column who has not already done so ought (as soon as humanly possible) to get up to speed on the Ithaka Report. I say that in spite of the fact that the authors of the report themselves don’t necessarily expect you to read it.

It’s natural to think of scholarship and publishing as separate enterprises. Each follows its own course – overlapping at some points but fundamentally distinct with respect to personnel and protocols. The preparation and intended audience for the Ithaka Report reflects that familiar division of things. It is based on surveys and interviews with (as it says) “press directors, librarians, provosts, and other university administrators.” But not – nota bene! — with scholars. Which is no accident, because “this report,” says the report, “is not directed at them.”

The point bears stressing. But it’s not a failing, as such. Press directors and university librarians tend to have a macroscopic view of the scholarly public that academic specialists, for the most part do not. And it’s clear those preparing the report are informed about current discussions and developments within professional associations – e.g., those leading to the recent MLA statement on tenure and promotion.

But scholars can’t afford to ignore the Ithaka Report just because they were not consulted directly and are not directly addressed as part of its primary audience. On the contrary. It merits the widest possible attention among people doing academic research and writing.

The report calls for development of “shared electronic publishing infrastructure across universities to save costs, create scale, leverage expertise, innovate, extend the brand of US higher education, create an interlinked environment of information, and provide a robust alternative to commercial competitors.” (It sounds, in fact, something like AggAcad, except on steroids and with a billion dollars.)

The existence of such an infrastructure would condition not only the ability of scholars to publish their work, but how they do research. And in a way, it has already started to do so.

The professor interviewed for last week’s column decided to clear his shelves in part because he expected to be able to do digital searches to track down things he remembered reading. Without giving away too much of this professor’s identity away, I can state that he is not someone prone to fits of enthusiasm for every new gizmo that comes along. Nor does he work in a field of study where most of the secondary (let alone primary) literature is fully digitalized.

But he’s taking it as a given that for some aspects of his work, the existing digital infrastructure allows him to offload one of the costs of research. Office space being a limited resource, after all.

It’s not that online access creates a substitute for reading print-based publications. On my desk at the moment, for example, is a stack of pages printed out after a session of using Amazon’s Inside the Book feature. I’ll take them to the library and look some things up. The bookseller would of course prefer that we just hit the one-click, impulse-purchase button they have so thoughtfully provided; but so it goes. This kind of thing is normal now. It factors into how you do research, and so do a hundred other aspects of digital communication, large and small.

The implicit question now is whether such tools and trends will continue to develop in an environment overwhelmingly shaped by the needs and the initiatives of private companies. The report raises the possibility of an alternative: the creation of a publishing infrastructure designed specifically to meet the needs of the community of scholars.

Continued in article

Also see "New Model for University Presses," The University of Illinois Issues in Scholarly Communication Blog, July 31, 2007 --- http://www.library.uiuc.edu/blog/scholcomm/

As posted in Open Access News...
It’s the nightmare-come-true scenario for many an academic: You spend years writing a book in your field, send it off to a university press with an interest in your topic, the outside reviewers praise the work, the editors like it too, but the press can’t afford to publish it. The book is declared too long or too narrow or too dependent on expensive illustrations or too something else. But the bottom line is that the relevant press, with a limited budget, can’t afford to release it, and turns you down, while saying that the book deserves to be published.

That’s the situation scholars find themselves in increasingly these days, and press editors freely admit that they routinely review submissions that deserve to be books, but that can’t be, for financial reasons. The underlying economic bind university presses find themselves in is attracting increasing attention, including last week’s much awaited report from Ithaka, “University Publishing in a Digital Age,” which called for universities to consider entirely new models.

One such new model is about to start operations: The Rice University Press, which was eliminated in 1996, was revived last year with the idea that it would publish online only, using low-cost print-on-demand....

Rice is going to start printing books that have been through the peer review process elsewhere, been found to be in every way worthy, but impossible financially to publish....

Some of the books Rice will publish, after they went through peer review elsewhere, will be grouped together as “The Long Tail Press.” In addition, Rice University Press and Stanford University Press are planning an unusual collaboration in which Rice will be publishing a series of books reviewed by Stanford and both presses will be associated with the work….

Alan Harvey, editor in chief at Stanford, said he saw great potential not only to try a new model, but to test the economics of publishing in different formats. Stanford might pick some books with similar scholarly and economic potential, and publish some through Rice and some in the traditional way, and be able to compare total costs as well as scholarly impact. “We’d like to make this a public experiment and post the results,” he said.

Another part of the experiment, he said, might be to explore “hybrid models” of publishing. Stanford might publish most of a book in traditional form, but a particularly long bibliography might appear online…

University Publishing in a Digital Age

In case you've not seen the notices, the non-profit organization Ithaka has just released a report on the state of university press publishing today, University Publishing in a Digital Age. Based on a detailed study of university presses, which morphed into a larger examination of the relationship among presses, libraries and their universities, the report's authors suggest that university presses focus less on the book form and consider a major collaborative effort to assume many of the technological and marketing functions that most presses cannot afford; they also suggest that universities be more strategic about the relationship of presses to broader institutional goals.

.

The Digital Revolution and Higher Education --- http://www.pewinternet.org/Reports/2011/College-presidents.aspx


Question
What is "scholarship" as a substitute for "research" as a tenure criterion?

 

Scholarship = the mastery of existing knowledge, including writing and sharing via review articles, tutorials, online videos, Website content, etc.

 

Research = the production of new knowledge from conception to rigorous analysis, including insignificant fleecing to new knowledge that overturns conventional wisdom.

 

 

"‘Scholarship Reconsidered’ as Tenure Policy," by Scott Jaschik, Inside Higher Ed, October 2, 2007 --- http://www.insidehighered.com/news/2007/10/02/wcu

 

In 1990, Ernest Boyer published Scholarship Reconsidered, in which he argued for abandoning the traditional “teaching vs. research” model on prioritizing faculty time, and urged colleges to adopt a much broader definition of scholarship to replace the traditional research model. Ever since, many experts on tenure, not to mention many junior faculty members, have praised Boyer’s ideas while at the same time saying that departments still tend to base tenure and promotion decisions on traditional measures of research success: books or articles published about new knowledge, or grants won.

Scholarship Reconsidered may make sense, but the fear has been that too many colleges pay only lip service to its ideas, rather than formally embracing them — at least that’s the conventional wisdom. Indeed, a trend in recent years has been for colleges — even those not identified as research universities — to take advantage of the tight academic job market in some fields to ratchet up tenure expectations, asking for two books instead of one, more sponsored research and so forth.

Western Carolina University — after several years of discussions — has just announced a move in the other direction. The university has adopted Boyer’s definitions for scholarship to replace traditional measures of research. The shift was adopted unanimously by the Faculty Senate, endorsed by the administration and just cleared its final hurdle with approval from the University of North Carolina system. Broader definitions of scholarship will be used in hiring decisions, merit reviews, and tenure consideration.

Boyer, who died in 1995, saw the traditional definition of scholarship — new knowledge through laboratory breakthroughs, journal articles or new books — as too narrow. Scholarship, Boyer argued, also encompassed the application of knowledge, the engagement of scholars with the broader world, and the way scholars teach.

All of those models will now be available to Western Carolina faculty members to have their contributions evaluated. However, to do so, the professors and their departments will need to create an outside peer review panel to evaluate the work, so that scholarship does not become simply an extension of service, and to ensure that rigor is applied to evaluations.

Lee S. Shulman, president of the Carnegie Foundation for the Advancement of Teaching (through which Boyer did much of his work), said Western Carolina’s shift was significant. While colleges have rushed to put Boyer’s ideas into their mission statements, and many individual departments have used the ideas in tenure reviews, putting this philosophy in specific institutional tenure and promotion procedures is rare, he said. “It’s very encouraging to see this beginning to really break through,” he said. What’s been missing is “systematic implementation” of the sort Western Carolina is now enacting, he said.

What could really have an impact, Shulman said, is if a few years from now, Western Carolina can point to a cohort of newly tenured professors who won their promotions using the Boyer model.

John Bardo, chancellor at Western Carolina, said that a good example of the value of this approach comes from a recent tenure candidate who needed a special exemption from the old, more traditional tenure guidelines. The faculty member was in the College of Education and focused much of his work on developing online tools that teachers could use in classrooms. He focused on developing the tools, and fine-tuning them, not on writing reports about them that could be published in journals.

“So when he came up for tenure, he didn’t have normal publications to submit,” Bardo said. Under a trial of the system that has now been codified, the department assembled a peer review team of experts in the field, which came back with a report that the professors’ online tools “were among the best around,” Bardo said.

The professor won tenure, and Bardo said it was important to him and others to codify the kind of system used so that other professors would be encouraged to make similar career choices. Bardo said that codification was also important so that departments could make initial hiring decisions based on the broader definition of scholarship.

Asked why he preferred to see his university use this approach, as opposed to the path being taken by many similar institutions of upping research expectations, Bardo quoted a union slogan used when organizing workers at elite universities: “You can’t eat prestige.”

The traditional model for evaluating research at American universities dates to the 19th century, he said, and today does not serve society well in an era with a broad range of colleges and universities. While there are top research universities devoted to that traditional role, Bardo said that “many emerging needs of society call for universities to be more actively involved in the community.” Those local communities, he said, need to rely on their public universities for direct help, not just basic research.

Along those lines, he would like to see engineering professors submit projects that relate to helping local businesses deal with difficult issues. Or historians who do oral history locally and focus on collecting the histories rather than writing them up in books. Or on professors in any number of fields who could be involved in helping the public schools.

In all of those cases, Bardo said, the work evaluated would be based on disciplinary knowledge and would be subject to peer review. But there might not be any publication trail.

Faculty members have been strongly supportive of the shift. Jill Ellern, a librarian at the university (where librarians have faculty status), said that a key to the shift is the inclusion of outside reviews. “We don’t want to lose the idea of evaluations,” she said. “But publish or perish just isn’t the way to go.”

Richard Beam, chair of the Faculty Senate and an associate professor of stage and screen in the university’s College of Fine and Performing Arts, said that the general view of professors there is that “putting great reliance on juried publication of traditional research didn’t seem to be working well for a lot of institutions like Western. We’re not a Research I institution — that’s not our thrust.”

 

 

Bob Jensen's threads on tenure can be found in the following links:

 

(Teaching vs. Research) --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#TeachingVsResearch

 

(Micro-level Research) --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#MicroLevelResearch

 

(Co-authoring) --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#JointAuthorship
 

(Scholarship in the Humanities) --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#MLA

 

(Obsolete and Dysfunctional Tenure) --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#Tenure

 

Bob Jensen's threads on the flawed peer review process are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#PeerReviewFlaws

 

 

 

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


The Digital Revolution and Higher Education --- http://www.pewinternet.org/Reports/2011/College-presidents.aspx


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

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.”

"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.

 

 

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 

 

"What I Wish I'd Known About Tenure," by Leslie M. Phinney, Inside Higher Ed, March 27, 2009 ---
http://www.insidehighered.com/advice/2009/03/27/phinney

1. Striving for tenure at a university is like gambling in a casino;
2. Becoming tenured is like joining a fraternity;
3. A tenure case is like a hunk of Swiss cheese;
4. The majority of those embarking on an academic career will end up with tenure cases in the gray zone;
5. Just as there are risk factors for contracting a disease, risk factors exist for not obtaining tenure;
6. True tenure is always being able to obtain another position;
7. The best type of tenure is that which matches your ideals and values;
8. Fight or flight decisions are part of the tenure process;
9. While important, tenure is only one facet in life.

Leslie M. Phinney was an assistant professor of mechanical engineering at the University of Illinois at Urbana-Champaign from 1997 until 2003. She received a National Science Foundation CAREER Award from 2000-2004 and a 2000 NASA/ASEE Faculty Fellowship at the Jet Propulsion Laboratories. She is now a principal member of the technical staff at Sandia National Laboratories, in Albuquerque, N.M.

Jensen Comment
 I agree with Dr. Phinney on many points, but I disagree that tenure seeking is like casino gambling. In a fair-game casino the odds are known and always in favor of the house. In tenure seeking there are so many unpredictable factors (departmental colleagues, college colleagues, university-level P&T members, etc.) that the odds are most certainly not knowable. There are many factors that are unpredictable such as what weight decision makers will put upon student evaluations and journal quality where published work appears. Tenure seeking is more like running for public office than casino gambling.

One of the big problems with tenure seeking is that decision makers are usually not held accountable, although committee chairs are often forced to write down reasons for rejection decisions.

One of the big advantages of tenure seeking is that most colleges now require documentation of progress toward tenure every two years or thereabouts. Tenure decisions should not come as a huge surprise in the sixth year of appointment.

Another controversial problem is arises when the tenure clock is suspended, sometimes unpaid, for a variety of reasons for which there is some justification --- health of a family member, pregnancy, leaves of absence from teaching, etc. The reason that these tenure clock suspensions are controversial is that in many instances the tenure candidate can do research and writing during the tenure clock suspension and thereby gain some advantage over other candidates given no more than six years before a final tenure decision is reached.

 

"ASIC threatens auditors with mandatory rotation," by Patrick Durkin and Agnes King, Financial Review, December 5, 2012 ---
http://afr.com/p/national/professional_services/asic_threatens_auditors_with_mandatory_T08zuuBkSqTtX6GQkelQqI?utm_source=News+Clips+12-12-12&utm_campaign=12-12-12-News+Clips&utm_medium=email

The Australian Securities and Investments Commission has handed the audit profession its second yellow card, threatening to push for mandatory audit firm rotation if audit quality continues to deteriorate.

“This is the second year where we have had a deterioration . . . if there is no improvement, next year we will consider under our new ability under legislation . . . to report auditors to audit committees and corporations,” ASIC chairman Greg Medcraft told a press conference in Sydney.

ASIC’s latest review of firms, published on Tuesday, found a 30 per cent increase in the failure of auditors to ensure there had not been a material misstatement of company accounts in the 18 months ended June 30.

“We can’t sit by and see a further deterioration – we’re talking about the cornerstone of commerce, to rely on financial statements that are not misstated,” Mr Medcraft said.

He warned audit firms that he will recommend mandatory audit-firm rotation to government if standards dropped further, to strengthen the present requirement that audit partners change every seven years. Mandatory rotation ‘inevitable’ in EUrope, US

Mr Medcraft sees mandatory audit-firm rotation in Europe and the US as “inevitable”. But industry experts disagree.

“There’s been no appetite out of US Congress whatsoever for mandatory audit-firm rotation,” said Institute of Chartered Accountants in Australia chief executive Lee White.

“Some European countries have moved to mandatory rotation of firms and it’s still an open discussion at the European Commission.”

He feels audit is being used as a scapegoat and that careful consideration should be given to whether heavy-handed tactics, like mandatory firm rotation, would serve to improve auditor independence, when no empirical evidence exists to support such a view.

PwC head of audit Peter Van Dongen said mandatory firm rotation is “a solution looking for a problem” and will ultimately reduce audit integrity.

“There are more effective, less disruptive and less costly ways to reinforce independence,” he said.

ASIC’s review found 13 per cent of large firms inspected had deficiencies in their audit procedures, up from 10 per cent last period. Shortcomings at national firms also rose, to 21 per cent up from 18 per cent. “We’ve excluded less critical areas,” Mr Medcraft said. Lack of professional scepticism

Ernst &Young head of audit Tony Johnson said the inspection program did not measure instances where auditors detect errors and correct them before financial statements are released.

Mr Medcraft took aim at that lack of professional scepticism being exercised by auditors. But professionals argue that this is hard to measure.

ASIC’s report found failings in respect of the audit of banks and credit unions, including insufficient evidence around the value of complex financial instruments, including derivatives and the adequacy of allowances for loans which may not be repaid.

For the mining and energy sector, ASIC found insufficient scrutiny in the valuation of capitalised exploration, evaluation or development expenditure.

And for the insurance industry, failing to properly examine the ‘liability adequacy’ was highlighted as a concern. Link partner pay to quality: Medcraft

In calling for standards to be lifted, ASIC said that the pay of audit partners and managers should be linked to audit quality as assessed independently.

The regulator also warned about big fee cuts by the accounting firms to win more business. It will also scrutinise moves for greater efficiency within firms to ensure it doesn’t compromise quality.

Mr Medcraft batted away complaints about price pressure. “Saying you’re not getting paid enough is not an acceptable excuse [for poor quality]. Don’t do the job if the fee is not good enough,” he said.

Auditors have come under fire in the wake of major corporate failures including Centro, Trio Capital, ABC Learning and Banksia, accused of being asleep at the wheel.

Auditors Richmond Sinnott & Delahunty in Bendigo approved the accounts of non-bank lender Banksia weeks before its $660 million collapse in October.

“We don’t want to see another major collapse where it comes out that there was another material misstatement [of the accounts],” Mr Medcraft said.

ASIC said it was considering legal action against a smaller audit firm.

Last month, ASIC suspended former Centro auditor and PwC partner Stephen Cougle from auditing companies for 2½ years for breaching accounting standards.

The corporate regulator took particular aim at accounting firms where, in “many instances”, there was a failure to gain appropriate evidence or question management about related-party transactions, the risk of fraud or expert evidence provided by the company.

Continued in article

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


"Ex-IndyMac Executives Found Liable for Negligent Loans," by Edvard Pettersson, Bloomberg News, December 8, 2012 ---
http://www.bloomberg.com/news/2012-12-08/indymac-executives-found-liable-for-negligent-loans.html

Three former IndyMac Bancorp Inc. executives must pay $169 million in damages to federal regulators for making negligent loans to homebuilders as the real estate market was deteriorating, a jury decided.

The federal court jury in Los Angeles issued the verdict against Scott Van Dellen, the former chief executive officer of IndyMac’s Homebuilder Division; Richard Koon, the unit’s former chief lending officer; and Kenneth Shellem, the former chief credit officer. Jurors yesterday found them liable for negligence and breach of fiduciary duty.

The jury awarded the damages to the Federal Deposit Insurance Corp., which brought the lawsuit in 2010.

The FDIC, which took over the failed subprime mortgage lender in 2008, alleged the men caused $500 million in losses at the homebuilders unit by continuing to push for growth in loan production without regard for credit quality and despite being aware a downturn in the real estate market was imminent.

The agency said the executives made loans to homebuilders that weren’t creditworthy or didn’t provide sufficient collateral.

“Today’s verdict is the result of a deliberate effort by the government to scapegoat a few men for the impact that the unforeseen and unprecedented housing collapse in 2007 had at IndyMac,” Kirby Behre, a lawyer for Shellem and Koon, said in an e-mailed statement after yesterday’s verdict.

“Mr. Shellem and Mr. Koon used the utmost care in making loan decisions, and there is no doubt that all of the loans at issue would have been repaid except for the housing crash,” Behre said.

Robert Corbin, a lawyer for Van Dellen, didn’t immediately return a call to his office yesterday after regular business hours seeking comment on the verdict.

The verdict was reported earlier by the Los Angeles Daily Journal.

The case is FDIC v. Van Dellen, 10-04915, U.S. District Court, Central District of California (Los Angeles).

 

Jensen Comment
Over 1,000 banks failed in 2008 due to reckless lending practices. The real causes of the subprime mortgage scandals are explained at
http://www.trinity.edu/rjensen/2008Bailout.htm#Causes

To read about the sleaze go to
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze


"Demand for Debt and Equity Before and After the Financial Crisis," by Ciaran Mac an Bhaird, SSRN, November 28, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2181872

Abstract:
Supply and demand responses to financial crises result in fluctuations in credit flow to the private sector. Policy makers concerned with the sustainability and growth of viable firms should disaggregate these responses. Utilizing firm level data, this study investigates characteristics of firms applying for external finance before and after the financial crisis, along with characteristics of successful applicants. Notwithstanding changes in credit conditions, salient features of external financing demand endure across the period, including ownership, asset structure, age and size. Failure to secure debt in an earlier period does not deter firm owners from applying for loans in a subsequent period. Evidence suggests that the most financially distressed firms are suffering the greatest consequences of the credit crunch.

Jensen Comment
One of the symptoms of the Fed's continued policy on low interest rates (virtually free money to banks) is that corporations are increasingly having a hard time finding buyers for corporate bonds. Higher rates on some bonds are sending signals of excessive high risk. Also the 20% of tax payers are increasingly shifting from corporate bonds into tax exempt bonds in anticipation of higher income taxes whether or not the U.S. economy goes over the cliff.


December 1, 2012 message from Jim McKinney

The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting opened today at http://www.sechistorical.org/

This gallery walks the reader through the development of accounting standards within the US and includes numerous copies of source material and an interesting read. Great for the classroom.

 

Jim McKinney, Ph.D., C.P.A.
Accounting and Information Assurance
Robert H. Smith School of Business
4333G Van Munching Hall
University of Maryland
College Park, MD 20742-1815

http://www.rhsmith.umd.edu

 


To Tom Selling and the AECM,

Tom seems to be letting me have the last word on whether bank loans should be marked up and down by fair value versus the FASB's proposed economic loss model revision of measuring bank loan impairment.


My "last word" is that the one thing that is lacking in Tom's posts are citations of empirical evidence and other important documents on the successes and failures of fair value accounting of bank loans to date. I've never bought into the great banker (e.g. the FDIC's Bill Isaac)  lament that fair value accounting is the major cause of the banking collapse of 2008. 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.
See
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValue 



Firstly, Tom tends to blame a few FASB members for challenging mark-to-market accounting for loan losses. Note especially his posting entitled:
"Marking Loans to (Market) Model is Far Easier and Better than Estimating Loan Loss Allowances: It's Time to Hear from the FASB Members who Changed Their Minds about That," by Tom Selling, The Accounting Onion, October 6, 2012 --- Click Here
http://accountingonion.typepad.com/theaccountingonion/2012/10/marking-loans-to-model-is-far-easier-and-better-than-estimating-loan-loss-allowances-its-time-to-hear-from-the-fasb-members.html

. . .

Mr. Schroeder was not on the FASB when it voted by a 3-2 margin to require fair value measurement for loans. The series of events that redirected the FASB from fair value back to yet another recipe for accounting sausage was an orchestrated comment letter campaign from irate bankers; the sacking of the FASB chairman (a proponent of fair value) by the Board's overseers; and the appointment of three new board members (including Mr. Schroeder), who could be reliably counted on to resoundingly overturn the vote for fair value.

And that, boys and girls, is how the anything-but-fair-value movement at the FASB got its start. If Mr. Schroeder and the other two Board members (Tom Linsmeier and Mark Siegel) who previously supported fair values for loans are continuing to act on their principles, it sure would be nice to know how they now came to sing in close harmony with the bankers on such short order:

The accounting for loans is important enough so that we should hear all seven board members express their views on all major aspects of the proposal. For starters, Mr. Schroeder should explain why, if fair value accounting for loans is as straightforward as he claims, he continues to align himself with the anything-but-fair-value bloc. Mr. Linsmeier should provide a justification for changing his views in a manner that is consistent with academic standards of intellectual rigor; and as a model for that, I would suggest that he examine the writings, dissents and speeches of Bob Swieringa while he was a board member.

 

I would suggest to Tom that, instead of only criticizing individual FASB board members for considering a loss impairment (discounted cash flow) model, Tom should instead examine the economic, finance, and banking literature concerning failures and risks of his beloved fair value model for bank loans. Even if bank loan markets were efficient and deep there's dispute about the mark-to-market value accounting for bank loans. But the fact of the matter is that the bank loan market is far from being deep and efficient, especially among poorly capitalized small and often rural banks
"Fair Value Accounting," adapted from remarks by Susan Schmidt Bies, Federal Reserve System, November 18. 2004 ---
Fed. Res. Bulletin 26 , 2005
http://heinonline.org/HOL/LandingPage?collection=journals&handle=hein.journals/fedred91&div=10&id=&page=
Fair value measures of bank loans vary greatly in quality

 

The FASB is not the first to issue a call to revise the fair value model for financial assets impairment.
One of the prior calls comes for the SEC itself at the behest of the U.S. Congress.

 

"SEC ISSUES DETAILED STUDY ON MARK-TO-MARKET ACCOUNTING," by Gia Chevis, Accounting Education.com, February 19, 2009 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=148980
The report was issued on December 31, 2008

At the direction of the U.S. Congress, the SEC prepared and released on 30 December 2008 a study on mark-to-market accounting and its role in the recent financial crises. Though it concluded that mark-to-market accounting was not responsible for the crisis, it did make eight recommendations.

The 259-page document, a result of the Emergency Economic Stabilization Act of 2008, details an in-depth study of six issues identified by the Act: effects of fair value accounting standards on financial institutions' balance sheets; impact of fair value accounting on bank failures in 2008; impact of fair value accounting on the quality of financial information available to investors; process used by the FASB in developing accounting standards; alternatives to fair value accounting standards; and advisability and feasibility of modifications to fair value accounting standards. Its eight recommendations are:

1) SFAS No. 157 should be improved, but not suspended.

2) Existing fair value and mark-to-market requirements should not be suspended.

3) While the Staff does not recommend a suspension of existing fair value standards, additional measures should be taken to improve the application and practice related to existing fair value requirements (particularly as they relate to both Level 2 and Level 3 estimates).

4)
The accounting for financial asset impairments should be readdressed.

5)
Implement further guidance to foster the use of sound judgment.

6) Accounting standards should continue to be established to meet the needs of investors.

7) Additional formal measures to address the operation of existing accounting standards in practice should be established.

8) Address the need to simplify the accounting for investments in financial assets.

On February 18, the FASB announced the addition of two short-timetable projects to its agenda concerning fair value measurement and disclosure. The first project aims to improve application guidance for measurement of fair value, with issuance projected for the second quarter. The second will address issues related to input sensitivity analysis and changes in levels; the FASB anticipates completing that project in time for calendar-year-end filing deadlines. Both projects were undertaken in response to the SEC's recent study on mark-to-market accounting and input from the FASB's Valuation Resource Group.

The full report can be freely downloaded at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf. (pdf)
 


Tom is overlooking some of the real problems his beloved fair value accounting model for bank loans. For example, fair value accounting allows for profit creation out of "thin air" and then lets the air out of the tires and leaves banks looking flat as dead hot air balloons. Extreme volatility in unrealized profits caused by fair value (thin air) adjustments can be very misleading to investors, analysts, and regulators.

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them. “Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said
"Bank Profits Appear Out of Thin Air ," by Andrew Ross Sorkin, The New York Times, April 20, 2009 --- http://www.nytimes.com/2009/04/21/business/21sorkin.html?_r=1&dbk

This is starting to feel like amateur hour for aspiring magicians.

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.

Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.

“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”

But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.

The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.

This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.

The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.

But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.

The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.

And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.

 

Tom is overlooking how errors, often huge errors, in fair value measurement are not offsetting in terms of financial assets versus liabilities. Also Tom is overlooking geographic differences in fair value accounting ---
"Fair Value Accounting for Financial Instruments: Some Implications for Bank Regulation," by Wayne R. Landsman, SSRN, August 2006 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=947569 

Abstract:     
I identify issues that bank regulators need to consider if fair value accounting is used for determining bank regulatory capital and when making regulatory decisions. In financial reporting, US and international accounting standard setters have issued several disclosure and measurement and recognition standards for financial instruments and all indications are that both standard setters will mandate recognition of all financial instruments at fair value. To help identify important issues for bank regulators, I briefly review capital market studies that examine the usefulness of fair value accounting to investors, and discuss marking-to-market implementation issues of determining financial instruments' fair values. In doing so, I identify several key issues. First, regulators need to consider how to let managers reveal private information in their fair value estimates while minimising strategic manipulation of model inputs to manage income and regulatory capital. Second, regulators need to consider how best to minimise measurement error in fair values to maximise their usefulness to investors and creditors when making investment decisions, and to ensure bank managers have incentives to select investments that maximise economic efficiency of the banking system. Third, cross-country institutional differences are likely to play an important role in determining the effectiveness of using mark-to-market accounting for financial reporting and bank regulation.

 

To this I might add that there are cross-country event happenings that affect effectiveness of mark-to-market accounting. For example, the extensive drought on 2012 in the Midwest grain belt of the U.S. has caused a wave of bankruptcies caused by high grain prices in hog, chicken, and turkey small containment feeding corporations who tend to have rural bank loans for which there are no viable markets for troubled loans for such things as sewage lagoons.

 

"Does Fair Value Accounting Contribute to Systemic Risk in the Banking Industry?" by Urooj Khan (Columbia University), November 15, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1911895

Abstract:
Critics have blamed fair value accounting for amplifying the subprime crisis and for causing a financial meltdown. It has been alleged that fair value accounting has created a vicious circle of falling prices, thereby increasing the overall risk in the financial system. In this paper, I investigate whether fair value accounting is associated with an increase in the risk of failure of the banking system as a whole. I find that the extent of fair value reporting is associated with an increase in contagion among banks. The increase in bank contagion is most severe during periods of market illiquidity. Further, my cross-sectional analyses suggest that increased bank contagion associated with fair value accounting is more likely to spread to banks that are poorly capitalized or have a relatively higher proportion of fair value assets and liabilities.

 

Hence I stand by my contention that in the thousands of rural banks in the United States having local loans (like the sewage lagoon loans of Ole versus Sven), the fair value model for such loans is just not viable. Far better is to do what the FDIC and Fed do when looking at bank loans. What they do is perform stress tests that consider many things, including the granular information of loans and the negotiations with particular customers regarding the restructuring of loans.

Fair value accounting is great as supplemental reporting when items being valued are fungible in deep and efficient markets. However, for many bank loans, especially troubled loans, the items are non-fungible (unique for each borrower) and have no external markets for the paper. Thus, fair value accounting falters for millions of bank loans, especially troubled bank loans.

Equally bad is the way fair value accounting, even when perfectly accurate, creates fictional volatility in profits that contribute to systematic risk in the banking industry in the unrealized hot air adjustments that wash out on the many, many held-to-maturity bank loans.

Conclusion
As the SEC noted, the mark-to-market model does not always work well for loan impairments. The SEC called for reconsideration of the loan impairment model. And the FASB followed through with an alternate proposal for troubled loans. I don't think Tom is giving the FASB's proposal a fair shake.


"Can fair value accounting lead to dysfunctional hedging decisions?" by Hung Tong, FASRI, November 1, 2012 ---
http://www.fasri.net/index.php/2012/11/can-fair-value-accounting-lead-to-dysfunctional-hedging-decisions/

In a forthcoming issue of the Journal of Accounting Research, I co-author a study (titled “Fair Value Accounting and Managers’ Hedging Decisions”) that investigates how fair value accounting affects managers’ real economic decisions.

The controversial impact of fair value accounting has been long debated, and the recent financial crisis further accentuates opponents’ concerns on its role in inducing volatility and market turmoil. However, there has been little empirical evidence on whether managers’ real economic decisions are actually adversely affected by fair value accounting. Using a context of risk management, we investigate whether fair value measurement of derivatives adversely influences managers’ hedging decisions. Our primary findings are that fair value accounting measurement causes managers to consider more accounting factors relative to economic factors, which in turn result in suboptimal hedging decisions. This effect is more likely when the price volatility is higher than when it is lower. We also propose two remedies to this effect.

In our study, we conduct two experiments using experienced accountants as participants. They were asked to make hedging decisions after reading a case material on hedging. In the first experiment, some participants were shown only the economic impact of hedging, while others were shown both the economic and accounting impact of hedging. The economic impact was positive, but the accounting impact indicated increased earnings volatility arising from the hedging decision. At the same time, we also varied the price volatility of the hedged asset—the price volatility was low in one instance, but high in another. In addition, we included a control condition where participants were provided with information on both the economic and historical cost accounting impact when price volatility was high and further told to assume that the company applied historical cost accounting to recognize derivatives. We found that participants were more likely to forgo economically sound hedging opportunities when both the economic and fair value accounting impact information was presented than when only the economic impact information was presented, or when both the economic and historical cost accounting impact information was presented. This adverse effect of fair value accounting was more likely when the price volatility of the hedged asset was higher—paradoxically, this was a situation where hedging was more beneficial. We also found that the effect was mediated by participants’ relative considerations of economic factors versus accounting factors (e.g., earnings volatility).

We conducted a second experiment to investigate the effectiveness of two simple debiasing mechanisms — altering the salience of accounting versus economic impact, and separately presenting net income not from fair value remeasurements — to mitigate any adverse impact of fair value accounting on managers’ decisions. In the experiment, we held constant the price volatility as high and provided the information on both the economic and accounting impact before asking for participants’ hedging decisions. We manipulated two presentation formats: 1) whether the economic impact information was presented first followed by accounting impact information, or the reverse order; and 2) whether the net income not from fair value remeasurements was reported in a separate column. The findings of the second experiment showed that notwithstanding managers’ concerns about the accounting impact of hedging, their propensity to hedge was increased by making them attend to the economic impact of hedging prior to their decisions, or by separately presenting net income not arising from fair value remeasurements.

Continued in article

"Fair Value Accounting and Managers' Hedging Decisions," by Wei Chen, Hun-Tong Tan, and Elaine Ying Wang, Journal of Accounting Research Forthcoming, September 13, 2012 ---
http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2012.00468.x/abstract

Jensen Comment
The results are not altogether unsurprising given the negative impact that FAS 133 had on the use of derivatives for both speculation and hedging. Banks in particular shun earnings volatility. Although perfect hedges generally keep fair value adjustments out of earnings until settlement dates, hedging ineffectiveness can make earnings more volatile. And hedges are more often than not perfectly effective.

Certainly FAS 133 and IAS 39 (soon to be part of IFRS 9) were not neutral accounting standards.

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


Answer to a Question Regarding What to Charge for Delivery of a Distance Education Course

Hi Roger,

That is really tough because fees vary so much in terms of expertise, class size, whether the course is for-profit, whether the course teaches something new to the world, etc.


Here is a distribution reported by a head hunting outfit for distance education
I think most of the courses are IT related but not all, including an anthropology course ---
http://www.indeed.com/q-Distance-Learning-Instructor-jobs.html 


 
Salary Estimate and number of open jobs
    $30,000+ (993)
    $50,000+ (713)
    $70,000+ (337)
    $90,000+ (157)
    $110,000+ (73)


However, this does not help much until both class size and number of courses are considered. Some courses require certified instructors such as "Microsoft Certified." Extend of grading should also be considered. For example, are term papers expected?
 


Of course any out-of-pocket expense should be considered.


And consideration should be given to the value of the opportunity to you for the first time you've done such a thing. I suspect you will be working pretty cheap by the hour in terms of time spent developing the course for the first time.


I figure I made less than a dollar an hour developing my first traveling dog and pony show on accounting for derivative financial instruments and hedging activities. Try to imagine the time I spent just writing my handout CD ---
http://www.cs.trinity.edu/~rjensen/Calgary/CD/ 


Note that this was not a distance education thing. I actually went onsite for companies (including GE Capital and KPMG) to deliver CPE courses. Like I said the first few times the hourly pay was far below minimum wage in terms of time spent putting my course on a CD. As time went on, however, I made a lot of money at a time when many companies had not yet developed their own experts on hedge accounting.



But all good things come to an end in CPE consulting. I made some money when education technology was an emerging topic for most universities. Later on those universities hired or developed their own experts and no longer needed me to teach specialists who had more expertise than me.


The same thing happened for hedge accounting. Eventually the Big Four and their clients hired or developed their own specialists who could teach me a thing or even a 100+ things. But it was great fun on the road while it lasted.



By the way my fees varied greatly from $0 to $5,000 per day. The freebies went to hundreds of universities, although on occasion a university gave me a sizable honorarium.


Actually I made more money consulting than delivering CPE courses, especially for clients who came up to my cottage in the mountains and relieved me of having to travel. The most valuable consulting for me was consulting on how to value interest rate swaps ---
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm 
But even here the opportunities waned as banks and accounting firms developed their own swap valuation experts.


I guess the bottom line for you is to charge what the market will bear, but don't expect to get paid well by the hour while putting your course "in the can" as they used to say in Hollywood.



One thing I gladly would have done for free but never had the opportunity was to be a quality control inspector at the Mustang Ranch. Just day dreaming of course.



Respectfully,
Bob Jensen

 


From The Wall Street Journal Accounting Weekly Review on December 7, 2012

0% Gains Tax: Grab It Before It's Gone
by: Arden Dale
Dec 03, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Individual Taxation, Tax Laws, Taxation

SUMMARY: The article covers the basics of capital gains tax treatment with an excellent graphic. It also highlights useful strategies to take advantage of 0% rate on long term capital gains to taxpayers for whom the amount of that income would be taxed at 15% or less if it were ordinary income.

CLASSROOM APPLICATION: The article may be used in an individual income tax class covering investments and long-term capital gains/losses.

QUESTIONS: 
1. (Introductory) What investors currently may pay zero income taxes on net long-term capital gains?

2. (Advanced) A 0% tax rate is applied to long term capital gains in the case that the gain would have been taxed at 15% or less, had it been ordinary income. Explain how this provision in the tax law is described in the article.

3. (Introductory) When was this zero percent tax rate introduced into the law and when is it due to expire?

4. (Advanced) What is the "kiddie tax"? Why do you think that those subject to the "kiddie tax" do not get the advantage of the 0% tax rate on capital gains?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"0% Gains Tax: Grab It Before It's Gone," by Arden Dale, The Wall Street Journal, December 3, 2012 --- Click Here
http://professional.wsj.com/article/SB10001424127887324556304578121201295337828.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

How would like to pay no tax when you sell a stock that's made money for you? Well, for a few more weeks some lucky investors can get a 0% tax rate on capital gains.

The chance to book tax-free gains before the New Year stands out amid the fog over whether Congress will allow a slate of tax increases to take effect in 2013. Tax-free is good no matter what happens next. If lawmakers do nothing, the 0% rate on net long-term gains for certain investors will rise to 10%.

Taxpayers in the bottom two brackets can qualify for the tax bonanza.

Among those who stand to benefit: retirees, couples with one spouse who earns far more than the other, and families with adult children. Some already have taken advantage of this break since it took effect in 2008. Others are learning about it now.

"This is an often missed opportunity," says Robert W. Stanley, a financial adviser in Libertyville, Ill. Even when people know of the 0%, rate, he says, they often fail to realize how many taxpayers qualify.

Jim Holtzman, an adviser in Pittsburgh, says people often are incredulous when he tells them they can sell an asset and owe no tax. A retired executive with whom Mr. Holtzman works has sold some stock in the company he works for to book gains without paying tax. Another is weeding the stocks of various companies from a brokerage account and paying no tax on the gains he's cashing in. Pass It On

One father funded his daughter's wedding by making her a gift of appreciated stock, which she then sold without having to pay any tax, says Benjamin E. Birken, an adviser at Woodward Financial Advisors Inc. in Chapel Hill, N.C.

Couples can get the low rate even if one spouse is in a top bracket. A man with a far greater income than his wife, for example, can transfer an asset to her, and she can sell it and get the 0% rate. The two, of course, must file separate tax returns.

"You have to do it very carefully," said Melanie Lauridsen, a technical manager at the American Institute of CPAs. Transferring assets from one person to another is a legal move that requires numerous steps.

Still, a lot of couples use the strategy to great success, though most don't have quite the colorful profile of one pair Ms. Lauridsen helped. The woman in this case had around $450 million in liquid assets; her husband earned somewhere around $40,000 a year (before tax deductions that brought his taxable income lower). She regularly transferred assets to him, and he sold them with no capital-gains tax due.

A caveat: Don't hand over an asset to a spouse for the tax break unless you are truly prepared to relinquish control. Once in the name of someone else, it belongs to them.

Continued in article

Jensen Comment
For years I've argued that there should be no special rates for capital gains as long as they are indexed for inflation.


"Is Accounting Blocking R&D Investments?  Companies should resist the urge to cut research expenses to meet an earnings per share target," John R. Cryan, Joseph Theriault,  CFO.com, December 5, 2012 ---
http://www3.cfo.com/article/2012/12/cash-flow_rd-eps-ebitda-accounting-treatment-of-rd

Jensen Comment
The "principles-based" IFRS allows for more subjectivity in capitalizing versus expensing R&D relative to US GAAP having more bright lines.

From The Wall Street Journal Accounting Weekly Review on November 12, 2009

3. (Advanced) Focusing on accounting issues, state why cutting R&D operations quickly impact any company's financial performance in a current accounting period. In you answer, first address the question considering U.S. accounting standards.

4. (
Advanced) Does your answer to the question above change when considering reporting practices under IFRS?

Pfizer Shuts Six R&D Sites After Takeover
by Jonathan D. Rockoff
Nov 10, 2009
Click here to view the full article on WSJ.com

TOPICS: Consolidation, GAAP, International Accounting, Mergers and Acquisitions, Research & Development

SUMMARY: "Pfizer Inc., digesting its $68 billion takeover of rival Wyeth last month, said Monday it will close six of its 20 research sites, in the latest round of cost cutting by retrenching drug makers....Pfizer executives wanted to cut costs quickly so the integration didn't stall research....'When we acquired Warner-Lambert, it took us almost two years to get into the position we will be in 30 to 60 days' after closing the Wyeth deal, Martin Mackay, one of Pfizer's two R&D chiefs, said in an interview."

CLASSROOM APPLICATION: Questions relate to understanding the immediate implications of reducing R&D expenditures for current period profit under both U.S. GAAP and IFRS as well as to understanding pharmaceutical industry consolidation and restructuring.

QUESTIONS: 
1. (
Introductory) What are the business issues within the pharmaceuticals industry in particular that are driving the need to reduce costs rapidly? In your answer, comment on industry consolidations and restructuring, including definitions of each of these terms.

2. (
Introductory) What business reasons specific to Pfizer did their executives offer as reasons to cut R&D costs quickly?

3. (
Advanced) Focusing on accounting issues, state why cutting R&D operations quickly impact any company's financial performance in a current accounting period. In you answer, first address the question considering U.S. accounting standards.

4. (
Advanced) Does your answer to the question above change when considering reporting practices under IFRS?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
Pfizer to Pay $68 Billion for Wyeth
by Matthew Karnitschnig
Jan 26, 2009
Page: A1

The Wall Street Journal, November 10, 2009 ---
http://online.wsj.com/article/SB10001424052748703808904574525644154101608.html?mod=djem_jiewr_AC

Pfizer Inc., digesting its $68 billion takeover of rival Wyeth last month, said Monday it will close six of its 20 research sites, in the latest round of cost cutting by retrenching drug makers.

Pfizer was expected to cut costs as part of its consolidation with Wyeth, and research and development was considered a prime target because the two companies' combined R&D budgets totaled $11 billion. In announcing the laboratory shutdowns Monday, Pfizer didn't say how many R&D jobs it would cut or how much it hoped to save from the shutdowns.

For much of this decade, pharmaceutical companies have been closing labs, laying off researchers and outsourcing more work from their once-sacrosanct R&D units. Pfizer previously closed several labs, including the Ann Arbor, Mich., facility where its blockbuster cholesterol fighter Lipitor was developed. In January, before the Wyeth deal was announced, Pfizer said it would lay off as many as 800 researchers.

But analysts say Pfizer Chief Executive Jeffrey Kindler and other industry leaders haven't done enough. A major reason for the industry consolidation this year is the opportunity to slash spending further.

Pfizer previously said it expects $4 billion in savings from its combination with Wyeth. It plans to eliminate about 19,500 jobs, or 15% of the combined company's total.

Merck & Co., which completed its $41.1 billion acquisition of Schering-Plough last week, is expected to cut 15,930 jobs, or about 15% of its work force. In September, Eli Lilly & Co. said it will eliminate 5,500 jobs, or nearly 14% of its total. Johnson & Johnson said last week that it will pare as many as 8,200 jobs, or 7%.

Drug makers are restructuring in anticipation of losing tens of billions of dollars in revenues as blockbuster products, such as Lipitor, start facing competition from generic versions. Setbacks developing new treatments have made the need to reduce spending all the more urgent, analysts say, and have reduced resistance to closing labs. The economic slump has only worsened the pharmaceutical industry's plight, pressuring sales.

The sites Pfizer is set to close include Wyeth's facility in Princeton, N.J., which has been working on promising therapies for Alzheimer's disease, including one called bapineuzumab under development by several companies. The Alzheimer's work will move to Pfizer's lab in Groton, Conn., which will be the combined company's largest site. The consolidation of Alzheimer's work "allows us to fully focus on that, rather than have to coordinate activities," said Mikael Dolsten, a former Wyeth official and one of two R&D chiefs at the combined company.

Besides Princeton, Pfizer said research also is scheduled to end at R&D sites in Chazy, Rouses Point and Plattsburgh, N.Y.; Gosport, Slough and Taplow in the U.K.; and Sanford and Research Triangle Park, N.C. Pfizer is counting as a single site labs close to each other, such as the facilities in Rouses Point and Plattsburgh, Slough and Taplow, and Sanford and Research Triangle Park. Along with the Princeton facility, those in Chazy, Rouses Point and Sanford had belonged to Wyeth.

The company is also planning to move work from its Collegeville, Pa.; Pearl River, N.Y., and St. Louis sites to other locations.

Pfizer executives wanted to cut costs quickly after the Wyeth deal's completion so the integration doesn't stall research. That was a problem with Pfizer's acquisition of Warner-Lambert in 2000 and its merger with Pharmacia in 2003. As a result, critics say the deals destroyed billions of dollars in shareholder value. Pfizer says it has learned from its past acquisitions.

"When we acquired Warner-Lambert, it took us almost two years to get into the position we will be in 30 to 60 days" after closing the Wyeth deal, Martin Mackay, one of Pfizer's two R&D chiefs, said in an interview. Up next, he said, the newly combined company will prioritize its R&D work and decide which potential therapies to abandon.

 


"The Risk of Using Spreadsheets for Statistical Analysis," CFO.com Whitepaper, 2012 ---
http://www.cfo.com/whitepapers/index.cfm/displaywhitepaper/14668959?mid=107705&rid=107705.59400.30390

Abstract:
While spreadsheets are widely used for statistical analysis, they are useful only to a certain point. When used for a task they?re not designed to perform, or for a task beyond the limit of their capabilities, using spreadsheets can be risky. Read this paper to learn about more powerful yet easy-to-use analytics alternatives that may be more suitable.

December 27, 2012 reply from Jagdish Gangolly

Bob,

This paper nicely summarises the drawbacks of spreadsheets for statistical analysis. It is also makes a pitch for IBM's SPSS.

While I hate to bite the hand that fed me at least for some time in my career, I think IBM is fighting a losing battle. Except for some social science disciplines, SPSS has already lost the battle to S-Plus and R. The reason is obvious: SPSS, like Stata, Statistica, SAS,..., is a program, while S-Plus and R are (object-oriented and functional) programming languages designed specifically for statistical computation.

Regards,

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

Bob Jensen's sadly neglected Excel tutorials ---
http://www.trinity.edu/rjensen/HelpersVideos.htm


Comparisons of IFRS with Domestic Standards of Many Nations
http://www.iasplus.com/country/compare.htm

More Detailed Differences (Comparisons) between FASB and IASB Accounting Standards

2011 Update

"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:

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.

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.

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

Comparisons of IFRS with Domestic Standards of Many Nations
http://www.iasplus.com/country/compare.htm

 

Bob Jensen's threads on R&D accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#FAS02


Question
As robots take increasingly displace labor in almost any market, are writers and music composers safe?

"Patented Book Writing System Creates, Sells Hundreds Of Thousands Of Books On Amazon," by David J. Hull, Security Hub, December 13, 2012 ---
http://singularityhub.com/2012/12/13/patented-book-writing-system-lets-one-professor-create-hundreds-of-thousands-of-amazon-books-and-counting/

Philip M. Parker, Professor of Marketing at INSEAD Business School, has had a side project for over 10 years. He’s created a computer system that can write books about specific subjects in about 20 minutes. The patented algorithm has so far generated hundreds of thousands of books. In fact, Amazon lists over 100,000 books attributed to Parker, and over 700,000 works listed for his company, ICON Group International, Inc. This doesn’t include the private works, such as internal reports, created for companies or licensing of the system itself through a separate entity called EdgeMaven Media.

Parker is not so much an author as a compiler, but the end result is the same: boatloads of written works.

Now these books aren’t your typical reading material. Common categories include specialized technical and business reports, language dictionaries bearing the “Webster’s” moniker (which is in the public domain), rare disease overviews, and even crossword puzzle books for learning foreign languages, but they all have the same thing in common: they are automatically generated by software.

The system automates this process by building databases of information to source from, providing an interface to customize a query about a topic, and creating templates for information to be packaged. Because digital ebooks and print-on-demand services have become commonplace, topics can be listed in Amazon without even being “written” yet.

The abstract for the U.S. patent issued in 2007 describes the system:

The present invention provides for the automatic authoring, marketing, and or distributing of title material. A computer automatically authors material. The material is automatically formatted into a desired format, resulting in a title material. The title material may also be automatically distributed to a recipient. Meta material, marketing material, and control material are automatically authored and if desired, distributed to a recipient. Further, the title may be authored on demand, such that it may be in any desired language and with the latest version and content.

To be clear, this isn’t just software alone but a computer system designated to write for a specific genre. The system’s database is filled with genre-relevant content and specific templates coded to reflect domain knowledge, that is, to be written according to an expert in that particular field/genre. To avoid copyright infringement, the system is designed to avoid plagiarism, but the patent aims to create original but not necessarily creative works. In other words, if any kind of content can be broken down into a formula, then the system could package related, but different content in that same formula repeatedly ad infinitum.

Parker explains the process in this nearly 10-minute video:

Scroll down to the video ---
http://singularityhub.com/2012/12/13/patented-book-writing-system-lets-one-professor-create-hundreds-of-thousands-of-amazon-books-and-counting/ 

Continued in article

Jensen Questions
If you publish an average of 1,267 books per year in your discipline can you possibly be denied promotion and tenure?

Will you continued to require a single essay that counts 50% of the grade in your theory course?

How do you sue an anonymous computer for plagiarism?

Bob Jensen's helpers for writers ---
http://www.trinity.edu/rjensen/Bookbob3.htm#Dictionaries

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


Taxes:  Navigating the Fiscal Cliff? AICPA Can Help ---
http://www.aicpa.org/InterestAreas/Tax/Resources/Pages/tax-fiscal-cliff.aspx


Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore
http://ctj.org/pdf/unrepatriatedprofits.pdf


Tax Law Enforcement
"South Africa maintains its PwC global tax ranking," by Amanda Visser, Business Day Live, November 29, 2012 ---
http://www.bdlive.co.za/economy/2012/11/29/south-africa-maintains-its-pwc-global-tax-ranking

SOUTH Africa may have maintained its ranking in the annual global Paying Taxes study that looks at tax systems from a business perspective, but several countries have increased their tax reforms and overtaken it on the list.

Charles de Wet, a tax director at PwC, said many of the reforms undertaken by the Treasury and the South African Revenue Service since the study started, such as electronic submissions of tax returns, were still being "bedded down".

However, if the country did not continuously reform its tax system, there was a danger that it could start falling behind in the global rankings. This could impact on investments as other more aggressive reformers could become more attractive destinations, Mr de Wet said.

He launched PwC’s Paying Taxes 2013 study in Johannesburg and gave a comparison between South Africa, global economies and African countries.

The study was done between June 2011 and June 2012. During that time 31 reforms were recorded globally and 12 economies reduced the profit tax rate, but 11 countries introduced new taxes, including El Salvador, Malawi, Maldives, Nigeria and Japan.

The report showed South Africa still compared quite favourably with international and African trends. The global total tax rate was 44.7%, Africa 57.4% and South Africa 33.3%. The total tax rate included corporate income tax, labour taxes and other taxes such as VAT.

The study used a company as a case study to measure the taxes and contributions it paid, and the complexity of a particular country’s tax compliance system.

The study looked at the cost of the taxes that were paid by the company in each country, as well as the administrative burden of the taxes. These were then measured using three subindicators, namely total tax rate (the cost of all the taxes paid); the time needed to comply with the major taxes, such as corporate income tax; and the number of tax payments.

Countries whose total tax rate was less than that of South Africa included Zambia, Namibia, Botswana, Rwanda and Ethiopia. Nigeria, Eritrea and Benin were some of the countries with the highest total tax rate on the continent.

South Africa was ranked 32 out of 179 economies that were measured in the study in terms of paying taxes, moving up from the 36th position in the previous year.

In terms of the total tax rate, we were ranked 59th out of all the economies, which is one move down. The country compared favourably, in terms of the number of payments, with the rest of Africa with a weighted average of nine payments, compared to the 37 payments in the rest of Africa.

Mr de Wet said the report aimed to encourage governments to increase their tax reforms, which would affect the ease of doing business.

He said while the time to comply and the number of payments had continued to decline from 2011, the rate of decline for the total tax rate had slowed, mainly due to the global economic slowdown.

Globally it took the case study company 267 hours to be compliant with all the major taxes; it made more than 27 payments; and it had a total tax rate of 44,7%.

Continued in article

Jensen Comment
South Africa is still a corrupt nation but has improved its corruption ranking somewhat relative to the most corrupt nations in the world.


"They have legislated themselves as untouchable as a political class . . . "
"The Wonk (Professor) Who Slays Washington," by Peter J. Boyer, Newsweek Magazine, November 21, 2011, pp. 32-37 ---
http://www.thedailybeast.com/newsweek/2011/11/13/peter-schweizer-s-new-book-blasts-congressional-corruption.html

Jensen Comment
The recent legislation preventing our elected officials is a sham since it does not preclude family members from inside trading.

"They have legislated themselves as untouchable as a political class . . . "
"The Wonk (Professor) Who Slays Washington," by Peter J. Boyer, Newsweek Magazine, November 21, 2011, pp. 32-37 ---
http://www.thedailybeast.com/newsweek/2011/11/13/peter-schweizer-s-new-book-blasts-congressional-corruption.html

"How Corruption Is Strangling U.S. Innovation," by James Allworth, Harvard Business Review Blog, December 7, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/12/how_corruption_is_strangling_us_innovation.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date 

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

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

 

"Profitable not-for-profits," New York Post, December 7, 2012 ---
http://www.nypost.com/p/news/opinion/editorials/profitable_not_for_profits_6tIH1u57fmmFSAW1SPJkMN

. . .

* Shirley Huntley, a state senator from Queens, founded an empty-shell nonprofit called The Parents Network right before she took office in 2006. She steered $30,000 in taxpayer money to her niece, who ran the group, and tried to send even more before she was arrested this year.

* Larry Seabrook, a former city councilman from Brooklyn, was convicted of funneling $1.5 million in taxpayer funds to his mistress, his sister, two brothers and other pals through a network of nonprofit groups he controlled. He faces up to 180 years in prison.

* Pedro Espada, the former state senator from The Bronx, was convicted of looting $545,000 from his federally funded nonprofit health clinic to pay for vacations, lavish birthday parties and theater tickets. He then tapped the nonprofit for another $1 million to cover his legal fees.

* Brian McLaughlin, a former Queens assemblyman and powerful labor leader, steered $95,000 meant for a local nonprofit Little League to pals of his, just one piece of the $3.1 million he stole from public and private enterprises. He got 10 years in prison for his crimes.

Weberman, of course, holds no elective office — but he is a leader in his community and has abused its trust.

Just like the others.

Happily, Gov. Cuomo has noticed the pattern, promoting legislation that would cap the often sky-high salaries at nonprofits that benefit from state funds.

But that won’t solve the whole problem.

Attorney General Eric Schneiderman has pursued abusers like Huntley, but since religious charities don’t have to register with the state, Weberman’s nonprofit wasn’t on the AG’s radar before this week.

That needs to change — fast.

Time to get cracking, Albany.


Read Deloitte's Glowing Audit Report o Autonomy
"H.P. Takes Huge Charge on ‘Accounting Improprieties’ by Michael J. De La Merced and Quentin Hardy, The New York Times, November 20, 2012 ---
http://dealbook.nytimes.com/2012/11/20/h-p-takes-big-hit-on-accounting-improprieties-at-autonomy/

"Where were the accountants in H-P’s Autonomy deal?" by Floyd Norris, New York Times, November 29, 2012 ---
http://www.nytimes.com/2012/11/30/business/auditors-clash-in-hp-deal-for-autonomy.html?ref=business

The battle over Hewlett-Packard’s claim that it was bamboozled when it bought Autonomy, a British software company, has been long on angry rhetoric and short on details about the accounting that was supposedly wrong and led to an $8.8 billion write-down.

¶ But the eternal question asked whenever a fraud surfaces — “Where were the auditors?” — does have an answer in this case.

¶ They were everywhere.

¶ They were consulting. They were advising, according to one account, on strategies for “optimizing” revenue. They were investigating whether books were cooked, and they were signing off on audits approving the books that are now alleged to have been cooked. They were offering advice on executive pay. There are four major accounting firms, and each has some involvement.

¶ Herewith a brief summary of the Autonomy dispute:

¶ Hewlett-Packard, a computer maker that in recent years has gone from one stumble to another, bought Autonomy last year. The British company’s accounting had long been the subject of harsh criticism from some short-sellers, but H.P. evidently did not care. The $11 billion deal closed in October 2011.

¶ Last week, H.P. said Autonomy had been cooking its books in a variety of ways. Mike Lynch, who founded Autonomy and was fired by H.P. this year, says the company’s books were fine. If the company has lost value, he says, it is because of H.P.’s mismanagement.

¶ Autonomy was audited by the British arm of Deloitte. H.P., which is audited by Ernst & Young, hired KPMG to perform due diligence in connection with the acquisition — due diligence that presumably found no big problems with the books.

¶ That covered three of the four big firms, so it should be no surprise that the final one, PricewaterhouseCoopers, was brought in to conduct a forensic investigation after an unnamed whistle-blower told H.P. that the books were not kosher. H.P. says the PWC investigation found “serious accounting improprieties, misrepresentation and disclosure failures.”

¶ That would seem to make the Big Four tally two for Autonomy and two for H.P., or at least it would when Ernst approves H.P.’s annual report including the write-down.

¶ But KPMG wants it known that it “was not engaged by H.P. to perform any audit work on this matter. The firm’s only role was to provide a limited set of non-audit-related services.” KPMG won’t say what those services were, but states, “We can say with confidence that we acted responsibly and with integrity.’

¶ Deloitte did much more for Autonomy than audit its books, perhaps taking advantage of British rules, which are more relaxed about potential conflicts of interest than are American regulations enacted a decade ago in the Sarbanes-Oxley law. In 2010, states the company’s annual report, 44 percent of the money paid to Deloitte by Autonomy was for nonaudit services. Some of the money went for “advice in relation to remuneration,” which presumably means consultations on how much executives should be paid.

¶ The consulting arms of the Big Four also have relationships that can be complicated. At an auditing conference this week at New York University, Francine McKenna of Forbes.com noted that Deloitte was officially a platinum-level “strategic alliance technology implementation partner” of H.P. and said she had learned of “at least two large client engagements where Autonomy and Deloitte Consulting worked together before the acquisition.” A Deloitte spokeswoman did not comment on that report.

¶ To an outsider, making sense of this brouhaha is not easy. In a normal accounting scandal, if there is such a thing, the company restates its earnings and details how revenue was inflated or costs hidden. That has not happened here, and it may never happen. There is not even an accusation of how much Autonomy inflated its profits, but if there were, it would be a very small fraction of the $8.8 billion write-off that H.P. took. Autonomy never reported earning $1 billion in a year.

¶ That $8.8 billion represents a write-off of much of the good will that H.P. booked when it made the deal, based on the conclusion that Autonomy was not worth nearly as much as it had paid. It says more than $5 billion of that relates to the accounting irregularities, with the rest reflecting H.P.’s low stock price and “headwinds against anticipated synergies and marketplace performance,” whatever that might mean.

Continued in article

 

"Business Autonomy:  Five ways in which Autonomy is alleged to have cooked the books," by Juliette Garside The Guardian, November 24, 2012 ---
http://www.guardian.co.uk/business/2012/nov/25/autonomy-five-ways-alleged-cooked-books

'CHANNEL STUFFING'

The most serious of the allegations HP has made against unnamed members of Autonomy's management team. A spokeswoman for Lynch has denied any suggestions that the tactic was used.

Channel stuffing involves offloading excessive amounts of product to resellers ahead of demand. Typically, the reseller is charged little or no money up front, and may not be obliged to pay unless they sell the product on. In accountancy terms, a line is crossed if those deals are booked as revenue before an end customer has actually bought the product.

Autonomy had hundreds of resellers, one of which was Tikit, which specialises in legal and accountancy software and has just been bought by BT. In December 2010, Tikit reported a surge in the amount of inventory on its books, up from £100,000 worth per half year to £4m.

Peel Hunt analyst Paul Morland says Tikit told him that it had done a big deal to acquire software at a discount.

Tikit declined to comment and there is no evidence that Autonomy booked the deal as revenue. A spokeswoman for Lynch insisted Autonomy never recognised revenue from resellers if there was a right of return, and that such a right was almost never granted.

US regulators have taken high-profile scalps in their efforts to stamp out channel stuffing. Drugs firm Bristol-Myers Squibb coughed up more than $800m in fines and legal settlements after admitting to pumping stocks of medicines onto wholesalers' books in order to inflate its own revenues. During the dotcom boom, the McAfee antivirus software company engaged in practices with a reseller called Ingram Micro which saw them eventually fined a combined $65m.

 

USING ACQUISITIONS AS A SMOKESCREEN

In Autonomy's last full year as an independent company, it claimed to be growing at 17%. This excluded the contribution of any acquisitions. But one financial analyst has claimed it was using its purchases to mask the fact that there was no growth at all.

Over six years, Autonomy bought at least eight sizeable businesses, culminating in May 2011 with the digital archiving arm of US group Iron Mountain. "Once they had bought the company they would close parts of the business down," says Daud Khan, who followed Autonomy while working at JP Morgan Cazenove, and is now at Berenberg Bank. "Closing down a business costs money but the restructuring charges were always very low. Through magic dust Autonomy managed to do it with very little cost and they did that again and again." He believed Autonomy was claiming the discontinued revenues from acquired companies as part of its own organic growth.

 

Lynch's spokeswoman says Autonomy's accountant, Deloitte, checked every acquisition. She said there were more than 30 analysts covering Autonomy's stock, and Khan's view was in the minority.

 

DESCRIBING HARDWARE SALES AS SOFTWARE SALES

HP said Autonomy sold hardware that was wrongly labelled in its accounts as software and sold hardware at "negative margin", in other words at a loss, and charged it as a marketing expense. The sale was then chalked up as licence revenue for growth calculations. HP said these sales accounted for up to 15% of Autonomy's total revenue, which was estimated at $1bn in 2011.

Lynch said it was "no secret" Autonomy sold hardware, and it accounted for around 8% of revenue. The company would sometimes supply desktop computers to clients as part of a package. In some cases, Lynch said, deals were struck at a slight loss, in exchange for the client agreeing to market Autonomy products. These losses were then charged as a marketing expense. Crucially, he claims those sales accounted for less than 2% of total revenues.

 

EXAGGERATING SEARCH REVENUES FROM OTHER SOFTWARE COMPANIES

Autonomy's client roster reads like a software hall of fame. Its website lists most of the biggest names, from Adobe to IBM and Oracle, and in its last financial results, it claimed more than 400 separate products were using its "core" technology.

Original equipment manufacturer (OEM) licences were one of Autonomy's growth engines, rising at 27% a year.

Autonomy's top product is a search engine called IDOL (Intelligent Data Operating Layer), but Autonomy has rebranded less expensive products as IDOL, such as the document filter produced by a company called Verity it bought in 2005.

A week after HP announced it was prepared to acquire Lynch's company at a 64% premium to its share price, Leslie Owens at Forrester Research published a piece entitled What is Autonomy, Without its Marketing?, in which she declared the development of IDOL was "stagnant", with no major release in five years.

Technology analyst Alan Pelz-Sharpe, who reported Autonomy to the Serious Fraud Office last year, claimed last August in his blog: "Where Autonomy is present in 3rd-party software, it is more typically the old (and very basic) Verity engine, not IDOL."

Autonomy would not be the first company to have overplayed the popularity of its products. Lynch's spokeswoman said there was no exaggeration of revenues from other software companies. The view of the analysts is simply that if sales of its flagship search software were not soaraway, Autonomy might not have been worth the premium HP paid.

 

FRONTLOADING REVENUES
 

Changing the payment model for storing large digital archives on behalf of customers is another way in which HP believes Autonomy boosted revenues. Autonomy was supposedly converting long-term "hosting" deals into short-term licensing deals.

Red flags were raised by analysts after Autonomy's 2007 acquisition of a US email archiving company called Zantaz, whose clients included nine of the world's top 10 law firms and JP Morgan and Deutsche Bank. Khan claims Autonomy renegotiated contracts so that instead of spreading payments over a three- or four-year contract, it would take a big lump sum upfront and smaller payments in subsequent years.

"There's nothing illegal with that but it generates growth that isn't real growth," says Khan. "If you value a business you have to ascertain whether it is growing."

Lynch's spokeswoman said this was not an accurate characterisation of the changes: Zantaz customers that had been pay-as-you-go committed to much larger deals once Autonomy took over, often including on-premises software.


Jensen Comment
I view attempts to whitewash Autonomy with very legalized interpretations of IFRS much like I view Ernst & Young's legalistic use of FAS 140 to justify the Repo 105 and 109 deceptions for Lehman Bros. Such a defense may get auditors off the hook in court, but use of such defenses simply justifies auditors intentionally being party to deceptive accounting. There's such a thing as underlying spirit and intent of an audit to avoid deception even when clients and their auditors can get away with deception due to defects in the standards.

The irony is that some financial analysts were raising red flags about Autonomy's accounting well in advance of when HP invested in that dubious company. I guess it boils  down to "buyers beware," and HP seems to have simply been ignorant of accounting tricks.
 

Teaching Case on Autonomy from The Wall Street Journal's Accounting Weekly Review on November 30, 2012

H-P Says It Was Duped, Takes $8.8 Billion Charge
by: Ben Worthen
Nov 28, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video
 

TOPICS: Goodwill, Intangible Assets, International Accounting, Mergers and Acquisitions, Revenue Recognition, Advanced Financial Accounting, Audit Quality, Financial Accounting

SUMMARY: H-P disclosed another $8 Billion Charge to write down its software segment which includes Autonomy, a company acquired by H-P for $11.1 billion in October 2011. H-P chief Meg Whitman says there was a willful effort to inflate Autonomy's revenue and profitability. Autonomy founder Mike Lynch, who was fired by H-P in May 2012 for underperformance of the unit after H-P's acquisition, denies these allegations. In a related article it is made clear that analysts have long questioned Autonomy's revenue recognition practices and questioned whether H-P overpaid for the acquisition in 2011. Deloitte Touche as Autonomy's auditor is now facing another situation in which the quality of its work is now being questioned.

CLASSROOM APPLICATION: The article includes topics in revenue recognition, IFRS versus U.S. GAAP, business combinations, and intangible asset write downs.

QUESTIONS: 
1. (Introductory) Summarize the announcement made by H-P on which this article reports. What types of assets do you think were written down in the total $8.8 billion charge?

2. (Advanced) Access the press release on which this article is based, available through its SEC filing on Form 8-K at http://www.sec.gov/Archives/edgar/data/47217/000004721712000033/0000047217-12-000033-index.htm. Confirm your answer to question number 1 above about the types of assets included in the write down.

3. (Advanced) How do classifications of revenue result in an asset write down by an acquirer one year after completion of an acquisition? Specifically describe how determining an asset account balance in a business acquisition that may involve past or future revenue amounts.

4. (Introductory) Refer to the first related article. What is the role of the Chief Financial Officer in assessing the propriety of accounting at a target/acquired firm, both before and after establishing a price to be paid by an acquirer?

5. (Advanced) Refer to the second related article. How is it possible that differences between U.S. GAAP and IFRS might result in different timing of revenue recognition?

6. (Introductory) What does analyst Dan Mahoney think are issues that led to H-P's allegations against Autonomy? How do both U.S.GAAP and IFRS handle these issues in timing revenue recognition?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
At H-P, Judgment Goes by the Board
by Rolfe Winkler
Nov 27, 2012
Page: C10

Long Before H-P Deal, Autonomy's Red Flag's
by Ben Worthen, Paul Sonne and Justin Scheck
Nov 27, 2012
Online Exclusive

 

"H-P Says It Was Duped, Takes $8.8 Billion Charge," by: Ben Worthen, The Wall Street Journal, November 28, 2012 ---
http://professional.wsj.com/article/SB10001424127887324352004578130712448913412.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

Hewlett-Packard Co. HPQ -0.50% said on Tuesday it had been duped into overpaying for one of its largest acquisitions, contributing to an $8.8 billion write-down and a huge quarterly loss.

The technology giant said that an internal investigation had revealed "serious accounting improprieties" and "outright misrepresentations" in connection with U.K. software maker Autonomy, which H-P acquired for $11.1 billion in October 2011.

"There appears to have been a willful sustained effort" to inflate Autonomy's revenue and profitability, said Chief Executive Meg Whitman. "This was designed to be hidden."

Michael Lynch, Autonomy's founder and former CEO, fired back hours later, denying improper accounting and accusing H-P of trying to hide its mismanagement. "We completely reject the allegations," said Mr. Lynch, who left H-P earlier this year. "As soon as there is some flesh put on the bones we will show they are not true."

H-P said Tuesday it alerted the U.S. Securities and Exchange Commission and the U.K. Serious Fraud Office and requested that they open investigations. The SEC and Federal Bureau of Investigation are launching inquiries, according to people familiar with the probes. Timeline: A History of Hewlett-Packard

View Interactive Bios: On H-P's Board for the Troubled Purchase

View Interactive

The accounting-fraud claim adds to a string of recent setbacks and controversies for Palo Alto, Calif.-based H-P, whose board faced criticism over its handling of the departures of its last two chief executives. Mark Hurd resigned in 2010 after he acknowledged having a personal relationship with a company contractor. His successor, Leo Apotheker, who spearheaded the Autonomy purchase, was forced out in 2011 and replaced by Ms. Whitman.

H-P General Counsel John Schultz said the internal investigation into the Autonomy deal began in May when he told Ms. Whitman he had just spoken with a senior executive in the Autonomy software business, who had alleged that executives at Autonomy had been cooking the books before the acquisition. The identity of that senior executive couldn't be determined.

A spokesman for Autonomy's accounting firm, Deloitte LLP, said Tuesday: "Deloitte UK categorically denies that it had any knowledge of any accounting improprieties or any misrepresentations in Autonomy's financial statements, or that it was complicit in any accounting improprieties or misrepresentations." [image]

Mr. Lynch, the former Autonomy CEO, said H-P is "completely and utterly wrong." He said of Autonomy: "It is a business we spent 10 years building. It was a world leader. It was destroyed in less than a year by the petty infighting at H-P."

The accounting-fraud allegations punctuated another grim set of financial results for H-P, one of the world's largest sellers of personal computers, printers and other technology products and services. In recent years, it has been hurt by executive turnover, cost cuts, mounting debt and slowing demand for some products.

H-P said Tuesday it swung to a $6.9 billion loss for its fiscal fourth quarter ended Oct. 31, while revenue fell 7% from a year earlier. The charge for writing down Autonomy totaled $8.8 billion, of which more than $5 billion is related to the accounting issues, with the balance related partly to the unit's performance. Revenue fell across H-P's PC, printer, services, and server and networking divisions.

Hewlett-Packard has claimed that the leadership at Autonomy, the software firm it acquired last year, misrepresented its performance as the deal was being negotiated. WSJ's Ben Rooney profiles the company and its founder, Mike Lynch. Photo: Bloomberg Related Coverage

Autonomy Founder: We Were Ambushed Deloitte in an Unwanted Spotlight Ex CEO Leo Apotheker: Due Diligence of Autonomy Was Meticulous Meg Whitman: Those Responsible for Autonomy Deal Are Gone CIO Report: CIOs to 'Keep an Eye' on H-P Amid Autonomy Write-Down Heard on the Street: Another Fine Mess Heard on the Street: Fresh Blow for London Law Blog: Should Lawyers Shoulder Any Blame? Corporate Intelligence: The Warning Signs at Autonomy Deal Journal: The Advisers on the Deal Digits: Players Behind the Buy Tech Europe: Mike Lynch Profile Deal Journal: Hewlett-Packard Takes Second $8 Billion Deal Charge This Year Deal Journal: Remember Oracle's Accusations Too Corporate Intelligence: Write Down Avoidable, With Autonomy Software Transcript of H-P's Earnings Call

Previously

Autonomy CEO Fires Back at Larry Ellison (9/27/11) Deal Profile: H-P Bids for Autonomy (8/18/11) Autonomy Shares Soar on H-P Offer (8/19/11) Search Is Over for Autonomy (8/19/11) Tech Europe: H-P and Autonomy: A Clash of Cultures (5/24/2012) Buyers Beware: The Goodwill Games (8/14/12) Tech Europe: Autonomy's Lynch Says H-P Deal Marks IT Shift (8/30/11) Europe Mixed Over Deal (8/19/11)

It was the technology giant's fifth straight quarter of big declines, a trend Ms. Whitman said is likely to continue.

H-P's stock, which was already trading near a 10-year low, ended 4 p.m. trading at $11.71, down $1.59, or 12%, on the New York Stock Exchange.

When the deal was announced in August 2011, Autonomy was Britain's biggest software company and second-largest in Europe, after Germany's SAP SAP.XE +0.38% AG. Its customers include intelligence agencies, big corporations, banks and law firms. H-P said then that Autonomy was key to its transformation into a higher-margin seller of software.

H-P said Tuesday that Autonomy, before it was acquired, had mischaracterized some sales of low-margin hardware as software and had recognized some deals with partners as revenue, even when a customer never bought the product.

At least one year before the H-P acquisition, an Autonomy executive brought concerns about the company's accounting practices to U.S. regulators including the SEC, according to people familiar with the matter. Autonomy didn't trade on U.S. exchanges prior to the H-P deal, so it is unclear whether U.S. agencies had jurisdiction.

H-P's internal team was aware of talk about accounting irregularities at the time the deal was struck, people familiar with the matter have said. At the time, one of these people said, H-P was looking for a way to unwind the deal before it closed, but couldn't find any material accounting issues.

Mr. Lynch, in an interview at the time, denied any accounting irregularities. On Tuesday, he blamed any problems at Autonomy on poor management by H-P and executive turnover.

Ms. Whitman said Tuesday the company relied on Autonomy's regular auditor Deloitte and had hired KPMG for an additional review before the deal closed. Neither firm found any irregularities then, she said. KPMG declined comment.

Mr. Schultz, H-P's general counsel, said H-P was shown "significant documentation from former Autonomy executives refuting the allegations" of any accounting issues. In hindsight, "it's fair to say those refutations were questionable," he said.

After H-P completed the deal, Autonomy's sales suffered. On several occasions, H-P said the unit didn't meet expectations.

In May 2012, Mr. Lynch left H-P. Shortly after, the unidentified Autonomy senior executive approached Mr. Schultz. Mr. Schultz said that during a phone call to discuss other matters, the Autonomy executive asked to speak with him in person.

The pair met in a conference room at H-P's Palo Alto headquarters, where the executive provided an outline of the alleged accounting fraud, Mr. Schultz said. The executive later provided some emails and financial information that Mr. Schultz said substantiated the claim.

Working with auditing firm PricewaterhouseCoopers LLP, an H-P team re-created Autonomy's books. People familiar with the investigation said that the team found that for at least two years, Autonomy booked sales of low-margin hardware products as software and would label the cost of that hardware as marketing or other expenses, which made products appear faster growing and more profitable than they really were.

Continued in article

Question
Was HP as naive as many of the buyers on eBay?

"From H.P., a Blunder That Seems to Beat All," by James B. Stewart, The New York Times, November 30, 2012 ---
http://www.nytimes.com/2012/12/01/business/hps-autonomy-blunder-might-be-one-for-the-record-books.html?pagewanted=1&_r=0

The dubious title of worst corporate deal ever had seemed to be held in perpetuity by AOL’s acquisition of Time Warner in 2000, a deal that came to define the folly of the Internet bubble. It destroyed shareholder value, ended careers and nearly capsized the surviving AOL Time Warner.

¶ The deal was considered so bad, and such an object lesson for a generation of deal makers and corporate executives, that it seemed likely never to be repeated, rivaled or surpassed.

¶ Until now.

¶ Hewlett-Packard’s acquisition last year of the British software maker Autonomy for $11.1 billion “may be worse than Time Warner,” Toni Sacconaghi, the respected technology analyst at Sanford C. Bernstein, told me, a view that was echoed this week by several H.P. analysts, rivals and disgruntled investors.

¶ Last week, H.P. stunned investors still reeling from more than a year of management upheavals, corporate blunders and disappointing earnings when it said it was writing down $8.8 billion of its acquisition of Autonomy, in effect admitting that it had overpaid by an astonishing 79 percent.

¶ And it attributed more than $5 billion of the write-off to what it called a “willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers,” adding, “These misrepresentations and lack of disclosure severely impacted H.P. management’s ability to fairly value Autonomy at the time of the deal.”

¶ In an unusually aggressive public relations counterattack, Autonomy’s founder, Michael Lynch, a Cambridge-educated Ph.D., has denied the charges and accused Hewlett-Packard of mismanaging the acquisition. H.P. asked Mr. Lynch to step aside last May after Autonomy’s results fell far short of expectations.

¶ But others say the issue of fraud, while it may offer a face-saving excuse for at least some of H.P.’s huge write-down, shouldn’t obscure the fact that the deal was wildly overpriced from the outset, that at least some people at Hewlett-Packard recognized that, and that H.P.’s chairman, Ray Lane, and the board that approved the deal should be held accountable.

¶ A Hewlett-Packard spokesman said in a statement: “H.P.’s board of directors, like H.P. management and deal team, had no reason to believe that Autonomy’s audited financial statements were inaccurate and that its financial performance was materially overstated. It goes without saying that they are disappointed that much of the information they relied upon appears to have been manipulated or inaccurate.”

¶ It’s true that H.P. directors and management can’t be blamed for a fraud that eluded teams of bankers and accountants, if that’s what it turns out to be. But the huge write-down and the disappointing results at Autonomy, combined with other missteps, have contributed to the widespread perception that H.P., once one of the country’s most admired companies, has lost its way.

¶ Hewlett-Packard announced the acquisition of Autonomy, which focuses on so-called intelligent search and data analysis, on Aug. 18, 2011, along with its decision to abandon its tablet computer and consider getting out of the personal computer business. H.P. didn’t stress the price — $11.1 billion, or an eye-popping multiple of 12.6 times Autonomy’s 2010 revenue — but focused on Autonomy’s potential to transform H.P. from a low-margin producer of printers, PCs and other hardware into a high-margin, cutting-edge software company. “Together with Autonomy we plan to reinvent how both structured and unstructured data is processed, analyzed, optimized, automated and protected,” Léo Apotheker, H.P.’s chief executive at the time, proclaimed.

¶ The deal was considered so bad, and such an object lesson for a generation of deal makers and corporate executives, that it seemed likely never to be repeated, rivaled or surpassed.

¶ Until now.

¶ Hewlett-Packard’s acquisition last year of the British software maker Autonomy for $11.1 billion “may be worse than Time Warner,” Toni Sacconaghi, the respected technology analyst at Sanford C. Bernstein, told me, a view that was echoed this week by several H.P. analysts, rivals and disgruntled investors.

¶ Last week, H.P. stunned investors still reeling from more than a year of management upheavals, corporate blunders and disappointing earnings when it said it was writing down $8.8 billion of its acquisition of Autonomy, in effect admitting that it had overpaid by an astonishing 79 percent.

¶ And it attributed more than $5 billion of the write-off to what it called a “willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers,” adding, “These misrepresentations and lack of disclosure severely impacted H.P. management’s ability to fairly value Autonomy at the time of the deal.”

¶ In an unusually aggressive public relations counterattack, Autonomy’s founder, Michael Lynch, a Cambridge-educated Ph.D., has denied the charges and accused Hewlett-Packard of mismanaging the acquisition. H.P. asked Mr. Lynch to step aside last May after Autonomy’s results fell far short of expectations.

¶ But others say the issue of fraud, while it may offer a face-saving excuse for at least some of H.P.’s huge write-down, shouldn’t obscure the fact that the deal was wildly overpriced from the outset, that at least some people at Hewlett-Packard recognized that, and that H.P.’s chairman, Ray Lane, and the board that approved the deal should be held accountable.

¶ A Hewlett-Packard spokesman said in a statement: “H.P.’s board of directors, like H.P. management and deal team, had no reason to believe that Autonomy’s audited financial statements were inaccurate and that its financial performance was materially overstated. It goes without saying that they are disappointed that much of the information they relied upon appears to have been manipulated or inaccurate.”

¶ It’s true that H.P. directors and management can’t be blamed for a fraud that eluded teams of bankers and accountants, if that’s what it turns out to be. But the huge write-down and the disappointing results at Autonomy, combined with other missteps, have contributed to the widespread perception that H.P., once one of the country’s most admired companies, has lost its way.

¶ Hewlett-Packard announced the acquisition of Autonomy, which focuses on so-called intelligent search and data analysis, on Aug. 18, 2011, along with its decision to abandon its tablet computer and consider getting out of the personal computer business. H.P. didn’t stress the price — $11.1 billion, or an eye-popping multiple of 12.6 times Autonomy’s 2010 revenue — but focused on Autonomy’s potential to transform H.P. from a low-margin producer of printers, PCs and other hardware into a high-margin, cutting-edge software company. “Together with Autonomy we plan to reinvent how both structured and unstructured data is processed, analyzed, optimized, automated and protected,” Léo Apotheker, H.P.’s chief executive at the time, proclaimed.

¶Autonomy had already been shopped by investment bankers by the time H.P. took the bait. But others who examined the data couldn’t come anywhere near the price that Autonomy was seeking. An executive at a rival software maker, Oracle, a company with many successful software acquisitions under its belt, told me: “We looked at Autonomy. After doing the math, we couldn’t make it work. We couldn’t figure out where the numbers came from. And taking the numbers at face value, even at $6 billion it was overvalued.” He didn’t want to be named because he was criticizing a competitor.

A former Autonomy executive laughed this week when I asked if even Autonomy executives thought H.P. had overpaid. “Let’s put it this way,” this person said. “H.P. paid a very full price. It was certainly our duty to our shareholders to say yes.” (Former Autonomy executives declined to be named because of the continuing investigation.)

Wall Street’s reaction to Hewlett-Packard’s announcement was swift and harsh. Mr. Sacconaghi wrote, “We see the decision to purchase Autonomy as value-destroying.” Richard Kugele, an analyst at Needham & Company, wrote “H.P. may have eroded what remained of Wall Street’s confidence in the company and its strategy” with “the seemingly overly expensive acquisition of Autonomy (cue the irony) for over $10B.”

¶ Mr. Apotheker addressed the issue two days later, at a Deutsche Bank technology conference. “We have a pretty rigorous process inside H.P. that we follow for all our acquisitions, which is a D.C.F.-based model,” he said, in a reference to discounted cash flow, a standard valuation methodology. “And we try to take a very conservative view.”

¶ He added, “Just to make sure everybody understands, Autonomy will be, on Day 1, accretive to H.P.,” meaning it would add to earnings. “Just take it from us. We did that analysis at great length, in great detail, and we feel that we paid a very fair price for Autonomy. And it will give a great return to our shareholders.”

Continued in article

 

Interestingly, Autonomy is blaming IFRS for the accounting deceptions.
"Autonomy Founder Lynch Blames Accounting Standards in HP Flap," by Arik Hesseldahl, November 23, 2012 ---
http://allthingsd.com/20121123/autonomy-founder-lynch-blames-accounting-standards-in-hp-flap

Mike Lynch says Hewlett-Packard has a problem with math. The founder and former CEO of the British software firm Autonomy says that at least some of the $5 billion written off by Hewlett-Packard earlier this week can be attributed to differences in international accounting standards.

In an interview with Reuters, Lynch, who was dismissed from running Autonomy by HP CEO Meg Whitman in May, says he’s gone through the books of his former firm and has found that differences between the accounting standards observed in the U.S. and in the United Kingdom can account for at least some of the differences in how things are interpreted.

Lynch made similar comments in an interview with AllThingsD Tuesday, though he hasn’t sought to put any numbers behind the contention.

Like most U.S.-based companies, HP followed GAAP, the Generally Accepted Accounting Principles put out by the U.S.-based non-profit Financial Accounting Standards Board (FASB). As a U.K. company, Autonomy had adhered instead to the International Financial Reporting Standards (IFRS) maintained by the International Accounting Standards Committee.

Lynch has maintained that differences in how revenue is recognized under the two systems leave a lot of room for interpretation in some of the matters in which he and his senior managers stand accused. One relates to licensing revenue. When a company bundles the cost of a software license, service and support into a single ongoing contract, GAAP accounting rules are more strict than IFRS rules in how the payments are accounted.

Answering one of the big accusations by HP, Lynch acknowledged that, at least some of the time, Autonomy did sell desktop machines with Autonomy software installed at a slight loss. In those cases, the customer would agree to help Autonomy market its product and, in those cases, the losses were recorded as marketing expenses. HP says that these improperly recorded hardware sales inflated Autonomy’s revenue by as much as 10 percent to 15 percent prior to its acquisition by HP.

Another difference:Cases where Autonomy would sell its software through 400 middleman companies known as Value Added Resellers (VAR), who turn around and sell the software as part of larger package deals. In Autonomy’s case, some of those VARs included both IBM and India’s Wipro. Under IFRS rules, a sale to a VAR can be booked as revenue before the resale takes place. Under GAAP, it’s not revenue to Autonomy until the resale takes place.

Lynch has also said that once HP took over at Autonomy, its own practices and bureaucracy slowed things down. Salespeople were paid commissions to sell products that compete with Autonomy, he said, but not for selling Autonomy products. On top of that, he accused HP of jacking up prices on the Autonomy software by 30 percent, driving loyal customers away.

He also said in numerous interviews that HP had “ambushed” him with all this, and that he had no idea what was coming. That’s not quite true, according to sources in HP’s camp, who say that the company had a conversation with him in mid-June, after a former member of Lynch’s senior management team is said to have come forward as a whistleblower. “He has been aware since then that we had questions about all of this,” one source told me. HP execs considered his answers to their questions to be “not satisfactory at all.”

At that point, I’m told, communications between HP and Lynch and other former Autonomy executives ended. After CEO Meg Whitman hinted, in remarks at an analysts meeting in San Francisco in October, that more restatements might be coming, certain former Autonomy executives started calling around to friends and former colleagues still working for HP, trying to find out what was coming. They had reason to expect a sizable impairment charge. What has apparently caught Lynch, et al, by surprise, is the referral to the authorities in the U.S. and the U.K. for possible criminal investigation. In the U.S., the FBI is said to be taking the lead.

One observation: Lynch tells Reuters he hasn’t yet lawyered up, which, if he hadn’t said it, would be pretty obvious anyway. Any lawyer worth their fee would have advised Lynch to stop talking publicly about all of this.

 

"Deloitte, HP And Autonomy: You Lose Some But You Win Some More, Much More," by Francine McKenna, re:TheAuditors, December 1, 2012 ---
http://retheauditors.com/2012/12/01/deloitte-hp-and-autonomy-you-lose-some-but-you-win-some-more-much-more/

When HP announced its intention to acquire Autonomy, the British data analysis firm now mired in accusations of serious fraud, Deloitte probably shed some enormous tears of joy. Deloitte was more than happy, I’m sure, to rid itself of the Autonomy audit albatross. That may surprise some of you, since Deloitte UK was the long time auditor of Autonomy, and would lose that job and its nice fees, to HP’s auditor Ernst & Young.

To the victor’s auditor go the audit spoils.

But that’s not how the Big Four audit industry game is played now that consulting is again King. What Deloitte would lose in audit fees – reportedly £5.422m for Autonomy’s audits during the last four years  – the firm could now openly replace with guilt-free consulting.

According to filings, Deloitte earned an additional £4.44m from Autonomy in the last four years for services such as tax compliance, due diligence for acquisitions and other services “pursuant to legislation”. As the preeminent Big Four tax services provider, HP’s auditor Ernst & Young, HP’s auditor, would likely start doing everything tax related for Autonomy. However, Deloitte was now free to team with Autonomy and all of its technology products as an alliance partner for systems integration engagements. That could be worth billions in consulting revenue that Deloitte’s UK firm, at least, had given up to be the auditor of a fast growing, highly acquisitive technology “Fast 50” firm.

There are differences in the legislation enacted to restore confidence in audits by the United States after Arthur Andersen’s Enron piggishness – Sarbanes-Oxley – and the regulations that govern UK listed companies and their auditors. For example, the UK does not bar an auditor from also providing internal audit services to a company it audits.

Regulations in the US and UK do prohibit business alliance relationships between an auditor and its audit client.  The Financial Reporting Council (FRC) is the UK’s lead audit regulator. APB Ethical Standard 2, Financial, Business, Employment and Personal Relationships, states:

Audit firms, persons in a position to influence the conduct and outcome of the audit and immediate family members of such persons shall not enter into business relationships with an audited entity, its management or its affiliates except where they involve the purchase of goods and services from the audit firm or the audited entity in the ordinary course of business and on an arm’s length basis and which are not material to either party or are clearly inconsequential to either party.

Business relationships, says the FRC, may create self-interest, advocacy or intimidation threats to the auditor’s objectivity and perceived loss of independence.

Examples of prohibited business relationships include “arrangements to combine one or more services or products of the audit firm with one or more services or products of the audited entity and to market the package with reference to both parties or distribution or marketing arrangements under which the audit firm acts as a distributor or marketer of any of the audited entity’s products or services, or the audited entity acts as the distributor or marketer of any of the products or services of the audit firm.”

In 2010 Autonomy was named a Deloitte UK Technology Fast 50 company, one of the UK’s fastest growing technology companies. Deloitte UK was officially prohibited from jointly marketing its consulting services with Autonomy or reselling Autonomy’s products such as IDOL or popular products acquired while it was the auditor of Autonomy.  Popular Autonomy software includes Interwoven, Verity, and Meridio for government and defense contractors.  That must have been tough.

But that didn’t stop the consulting practices of other Deloitte member firms all over the world from taking advantage of the popularity of Autonomy products to boost their revenues. In March of 2011, less than six months before HP announced its acquisition of Autonomy, Deloitte Luxembourg announced it had selected Autonomy’s Intelligent Data Operating Layer (IDOL) as a vendor  “to better manage information and knowledge within the firm to increase productivity.” In addition, Autonomy would further collaborate with Deloitte to “fast-track its technology to Deloitte Luxembourg’s extensive customer base…”

Deloitte UK, and its fellow Deloitte firms all over the world, are allowed to be customers of an audit client of one of them such as Autonomy “in the ordinary course of business”. They are customers of Autonomy. Autonomy lists Deloitte entities and Ernst & Young, HP’s auditor, as customers on numerous websites and in marketing materials and case studies. In 2011, digital agency Roundarch, founded in June 2000 by Deloitte and WPP, also selected Autonomy’s cloud-based comprehensive data backup and recovery solutions for its own operation. This privately owned company was operated by its senior management until February 2012 when Aegis Group plc acquired the digital agency. The Aegis Group plc auditor is Ernst & Young.

But were Deloitte non-UK member firms allowed to sign marketing and reselling contracts as Autonomy alliance partners while Deloitte UK audited this multinational company with customers all over the world? For example, given Autonomy’s extensive US operations and customer base including the US government, it’s likely Deloitte’s US audit firm supported the UK firm with the Autonomy audit. Email requests for comment from HP and Deloitte were not returned. When it comes to irresistible consulting revenue growth, an audit firm’s “network of seamless service providers” bound by independence and objectivity regarding the audit of a multinational listed company stops at each border.

In the largest market for Deloitte’s consulting services, the United States, Deloitte Consulting’s US arm and Autonomy worked together prior to HP’s acquisition and after on one of the most high profile e-discovery and document management cases ever – the litigation over the BP Gulf oil spill. Autonomy, or rather a version of an Autonomy acquisition called Introspect, was used for the enormous BP Deepwater Horizon review, which employed more than 800 review attorneys at one point.

The BP Deepwater Horizon review started in the summer of 2010, after the explosion in April of that year. Deloitte was the case management consultant working between the client (BP), the review team and the hosting vendor (Autonomy). It is not clear if this was a joint project between Deloitte and Autonomy, with Deloitte acting as a systems integrator for the software, or if the parties contracted separately.

According to a source close to the BP engagement, the Autonomy software was a total disaster. The larger the review got, the worse the software performed. “Searches would hang up for long periods of time, document images would get out of synch with their corresponding coding records, the entire system would crash or have to be taken offline to be reset.  You name it – when it came to software problems, Autonomy had them all at one time or another.”

Continued in article

Bob Jensen's threads on Autonomy ---
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

Search for "Autonomy"


Sarbanes-Oxley Legislation --- http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act

Teaching Case From The Wall Street Journal Accounting Weekly Review on December 13, 2012

Eyebrows Go Up as Auditors Branch Out
by: Michael Rapoport
Dec 07, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Audit Firms, Audit Quality, Auditing, Auditing Services, Public Accounting, Public Accounting Firms

SUMMARY: The article discusses the conflict of interest facing audit firms whose non-audit revenue is again growing faster than audit revenues. The author begins the article with the Autonomy/H-P example, but the related graphic clearly shows that Deloitte was earning less from non-audit services provided to Autonomy than it earned from audit services. Late in the article, a PwC lead partner is quoted as saying that 90% of nonaudit service fee revenues are generated at that firm from nonaudit clients. Both PwC and E&Y partners are further quoted in the article, pointing out that the non-audit services help the firms to provide the best audit quality.

CLASSROOM APPLICATION: The article may be used in an audit class to discuss professional services provided by public accounting firms, conflicts of interest in those activities, and audit quality.

QUESTIONS: 
1. (Advanced) Besides auditing annual financial statements, what types of services do public accounting firms provide?

2. (Introductory) Who has recently spoken out against auditing firms providing non-audit services? What are their concerns?

3. (Advanced) What is the impact of Sarbanes-Oxley on these audit firm activities? Why was Deloitte and Touche not subject to limitations of this law with respect to its work on Autonomy? (Note that Autonomy is the firm purchased by H-P for which H-P recently has taken significant write-downs.)

4. (Advanced) How do you think that the non-audit services provided by public accounting firms might help to improve the quality of audit work also provided by the firm?

5. (Advanced) Consider your possible career advancement in a public accounting firm. Do the consulting services provided by these firms seem attractive to you? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

SOX Down Rather Than Sox Up
"Eyebrows Go Up as Auditors Branch Out," by Michael Rapoport, The Wall Street Journal, December 6, 2012 ---
http://professional.wsj.com/article/SB10001424127887324705104578149222319470606.html?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno64-wsj

Auditing wasn't all Deloitte LLP did for Autonomy Corp., the software firm recently accused of accounting improprieties by its parent company. To many observers, that sort of multitasking is potentially an industry problem.

As auditor, the U.K. unit of Deloitte Touche Tohmatsu was in charge of signing off on Autonomy's financial statements before Hewlett-Packard Co. HPQ +0.07% bought the company in 2011. But Deloitte also was paid significant fees for other work it did for Autonomy, like due-diligence work on a potential acquisition. In 2010, Deloitte received $1.2 million from Autonomy for nonaudit work, close to the $1.5 million the firm was paid for the audit itself.

Nonaudit businesses form a steadily increasing portion of Deloitte's business, with 39.6% of revenue now coming from consulting or financial advisory, up nearly a third since 2006.

The rise in Deloitte's nonaudit revenue spotlights a recent resurgence in consulting and other nonaudit work by the Big Four accounting firms, a decade after conflict-of-interest concerns and corporate scandal sharply limited such work.

The firms—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—say that their nonaudit businesses operate within legal boundaries, and that their growth isn't cause for concern. They focus their nonaudit work on U.S. companies they don't audit, and on foreign companies that aren't U.S.-listed and thus aren't subject to the U.S. restrictions on nonaudit work.

Even so, the move has revived fears that an increased focus on nonaudit work compromises companies' capacity to sniff out fraud.

"If firms become too preoccupied with consulting, I think it hurts the authenticity of the audit," said former Federal Reserve Chairman Paul Volcker in an interview. Mr. Volcker spoke last week at a New York University roundtable on the comeback of consulting by accounting firms.

Plunging too far into nonaudit services can "distract" firms' attention from auditing and "weakens the public trust" in audits, Paul Beswick, the Securities and Exchange Commission's acting chief accountant, said at an accounting conference Monday. Even if it's only a matter of perception, "negative perceptions can undermine confidence in audits," he said.

The growing focus on consulting and other nonaudit services "threatens to weaken the strength of the audit practice in the firm overall," James Doty, chairman of the Public Company Accounting Oversight Board, the U.S. government's auditing regulator, said at the conference.

H-P alleged last week that Autonomy is riddled with accounting improprieties, though it hasn't alleged any wrongdoing by Deloitte and hasn't cited the firm's dual role as a problem.

Deloitte said much of its nonaudit fees for Autonomy were for "audit-related services" typically carried out by the auditor and actually classified by Deloitte as audit revenues. The firm says it didn't do any consulting work for Autonomy, and that Autonomy had procedures to ensure that any nonaudit services provided by Deloitte didn't compromise its independence.

A decade ago, there was widespread concern that the Big Four would get too cozy with their audit clients because the same companies also were paying them lucrative consulting fees. Those fears peaked when Arthur Andersen imploded after shredding company documents related to Enron Corp.; the auditor made more consulting for Enron than it did for auditing.

The Sarbanes-Oxley Act subsequently barred most consulting for audit clients, and all of the Big Four except Deloitte divested themselves of their consulting businesses.

The firms have since rebuilt those businesses by providing nonaudit services to other companies, within the new prescribed limits. Demand for Sarbanes-Oxley compliance, forensic investigations and merger-and-acquisition work have helped the growth in nonaudit services.

Consulting and other nonaudit lines of business are growing at rates far outpacing auditing. At PwC, for instance, advisory revenue rose 16.9% in fiscal 2012, versus 3.4% for auditing.

"The auditing market is pretty much saturated," said Martin G.H. Wu, an associate professor of accounting at the University of Illinois at Urbana-Champaign. "Consulting, on the other hand, is pretty unlimited."

If consulting growth continues to boom, the Big Four effectively could become consulting firms that "dabble" in auditing, said Joseph Carcello, a University of Tennessee accounting professor. "I think if we get to that point, we'd have a major, major problem."

The firms disagree. "We wouldn't jeopardize audit quality for anything," said Greg Garrison, clients and markets leader at PwC. "I don't think there's any chance we'd take our eye off the ball, and I don't think our competition would either."

At PwC, 90% of advisory work is for nonaudit clients, said Dana Mcilwain, PwC's U.S. advisory leader. The Big Four also argue that consulting provides synergies even if they don't consult for and audit the same companies. Offering consulting gives them expertise they can draw upon when related issues arise at their audit clients, they say.

"We believe the services we're in actually help us on the front of audit quality," said John Ferraro, Ernst & Young's global chief operating officer.
Jensen Question:  Did Andersen say the same thing about Enron when Andersen's billings were $25 million for auditing and #25 million for consulting?

Continued in article

 

Jensen Comment
Asking audit firms to resist consulting is like kids and senior citizens in the Littleton, NH downtown store that has the "world's longest candy counter." Even though parents, teachers, dentists, and physicians have warned them over and over again about the evils of candy, it's virtually impossible to leave that store without bags of candy both arms. Even though the SEC, the AICPA, the Courts, the laws like Sarbanes Oxley, and the professors all warn auditors over and over again, it's hard to leave an audit without bags of money in both arms from additional consulting. The buzz word is "rebranding" amongst auditing firms.

Video of the World's Longest Candy Counter ---
http://www.youtube.com/watch?v=hSxpebM6SUA

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

Lastly, I mention the post-Andersen speech of a former Andersen executive research partner:

Art Wyatt admitted:
"ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" ---

http://aaahq.org/AM2003/WyattSpeech.pdf

And they Still Don't Get It!


After PwC's Miserable 2012 PCAOB Inspection Reports
"PwC to Require More Robust Review and Supervision of Auditors, Although “Minimum Supervision" Still Has Its Place (in Court)," by Caleb Newquist, Going Concern, December 7, 2012 ---
http://goingconcern.com/post/pwc-require-more-robust-review-and-supervision-auditors-although-minimum-supervision-still-has

Bob Jensen's threads on PwC ---
http://www.trinity.edu/rjensen/Fraud001.htm

 


The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting (accounting history) ---
http://www.sechistorical.org/museum/galleries/rca/index.php
Thank you Jim McKinney for the heads up.

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

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


"The World’s Most and Least Livable Cities," 2417 Wall Street, December 6, 2012 ---
http://247wallst.com/2012/12/06/the-best-and-worst-cities-to-live-in-the-world/
 

Jensen Comment
There's something asymmetric in this ranking. The ranks for the worst cities are probably the same for rich and poor alike, except where those least-livable cities allow the wealthy to live untaxed like kings on the hill with teams of affordable servants and armed guards.

But the ranks for the "most livable" cities are definitely misleading for most people. For example, Honolulu may be the "most livable" city for very wealthy people. But Honolulu quickly becomes less livable as wealth declines, because living costs in virtually all categories (especially Honolulu real estate costs) are among the highest in the world. For example, a retirement income of $50,000 a year goes a long ways in Temple, Texas but retirees fare little better than street people on $50,000 a year in Honolulu. The same can be said for any city in Switzerland.

Hence, "livable cities" are like people --- beauty is in the eyes of the beholder.

In fairness this study also links to cities ranked by housing prices where some California cities are high on the list. Note that Proposition 13 in California makes some of these homes affordable to people who have lived in them for decades. Newer buyers, however, will get hammered with unbelievable property taxes. It may be better to rent with an option to buy from a long-time owner.


Credit Derivative --- http://en.wikipedia.org/wiki/Credit_derivative

But some things live in a level-3 world where there are no specific rules and no obvious markets and you rely on good faith and estimates and conversations with your auditors. Tailored credit derivatives where Deutsche Bank was “65 per cent of all leveraged super senior trades” clearly fall in that bucket, so they talked to their auditors and the auditors signed off on what they did and, that’s kind of the end. Was the model (or series of ad-hoc models and reserves and absences-of-models) blessed by the auditors worse than Ben-Artzi’s? Sure!
"Deutsche Bank Ignored Some “Losses” Until They Went Away," by Matt Levine, Deal Breaker, December 6, 2012 ---
http://dealbreaker.com/2012/12/deutsche-bank-ignored-some-losses-until-they-went-away/#call02

. . .

Here’s a synopsis of what seems to have been going on:

[T]he bank had at one point used a model but found it came up with “economically unfeasible” outcomes. Instead, it used two other measures. First, a 15 per cent “haircut” on the value of the trades … In 2008, during the crisis, instead of increasing the haircut, the bank scrapped it. The gap risk was now supposed to be covered by a reserve. The complainants say that the total of reserves held by the credit correlation desk was just $1bn-$2bn, which was supposed to cover all risks, not just the gap option. … Then, in October 2008, … Deutsche stopped any attempt to model, haircut or reserve for the gap option but says that the company took that action because of market disruption during the financial crisis. … At this time, to account for the gap risk, the bank hedged it by buying S&P “put” options.

“The valuations and financial reporting were proper, as demonstrated by our subsequent orderly sale of these positions,” Deutsche says. … A person familiar with the matter says that for all the sturm und drang over gap risk, at no time was the collateral jeopardised.3

So: did it? I don’t know. Is that an interesting question? Not really? A bank is just a collection of contracts entitling it to future cash flows in various states of the world; you don’t really know what those contracts are worth until those states of the world obtain, so you don’t really know what a bank is worth, ever. I submit that that – not “ooh they mismarked the gap option by $12 billion vs. the preferred model in the literature” or whatever – has to be your starting point in thinking about bank accounting.

When you start there, your accounting is pretty much “whatever the rules say and your auditors allow.” Some things get marked to an objective market even if that makes you sad – the publicly traded stocks in your cash equities trading book, for instance. Some things get marked to historical cost, with some fudge-y reserve, even if that looks crazy – your whole-loan mortgages, for instance. There are good arguments that banks should mark more things to market, and there are good arguments that they should mark fewer things to market.

But some things live in a level-3 world where there are no specific rules and no obvious markets and you rely on good faith and estimates and conversations with your auditors. Tailored credit derivatives where Deutsche Bank was “65 per cent of all leveraged super senior trades” clearly fall in that bucket, so they talked to their auditors and the auditors signed off on what they did and, that’s kind of the end. Was the model (or series of ad-hoc models and reserves and absences-of-models) blessed by the auditors worse than Ben-Artzi’s? Sure! But so what? The model blessed by the auditors for loans – “hold them at historical cost” – is clearly worse than a market-based model, in the sense of “less reflective of the expected probability distribution of future cash flows.” And loans are the bulk of most banks’ assets. Accounting isn’t supposed to be a correct representation of your most likely future cash flows. It’s just accounting.

Continued in article

Jensen Comment

Unlike many other nations that either did not have national accounting standards or had weak and incomplete sets of standards, the FASB over the years produced the best set of accounting standards in the world (although there is no such thing a perfect set since companies are always writing contracts to circumvent most any standard). The FASB standards were heavily rule-based due to the continual battles fought by the FASB in the trenches of U.S. firms seeking to manage earnings and keep debt of the balance sheet with ever-increasing contract complexities such as interest rate swaps invented in the 1980s, SPE ploys, securitization "sales," synthetic leasing, etc.
                     

"FASB Issues FSP Requiring Enhanced Disclosure for Credit Derivative and Financial Guarantee Contracts," by Mark Bolton and Shahid Shah, Deloitte Heads Up, September 18, 2008 Vol. 15, Issue 35 --- http://www.iasplus.com/usa/headsup/headsup0809derivativesfsp.pdf 

 The FASB recently issued FSP FAS 133-1 and FIN 45-4,1 which amends and enhances the disclosure requirements for sellers of credit derivatives (including hybrid instruments that have embedded credit derivatives) and financial guarantees. The new disclosures must be provided for reporting periods (annual or interim) ending after November 15, 2008, although earlier application is encouraged. The FSP also clarifies the effective date of Statement 161.2

The FSP defines a credit derivative as a "derivative instrument (a) in which one or more of its underlyings are related to the credit risk of a specified entity (or a group of entities) or an index based on the credit risk of a group of entities and (b) that exposes the seller to potential loss from credit-risk-related events specified in the contract." In a typical credit derivative contract, one party makes payments to the seller of the derivative and receives a promise from the seller of a payoff if a specified third party or parties default on a specific obligation. Examples of credit derivatives include credit default swaps, credit index products, and credit spread options.

The popularity of these products, coupled with the recent market downturn and the potential liabilities that could arise from these conditions, prompted the FASB to issue this FSP to improve the transparency of disclosures provided by sellers of credit derivatives. Also, because credit derivative contracts are similar to financial guarantee contracts, the FASB decided to make certain conforming amendments to the disclosure requirements for financial guarantees within the scope of Interpretation 45.3

Credit Derivative Disclosures

The FSP amends Statement 1334 to require a seller of credit derivatives, including credit derivatives embedded in hybrid instruments, to provide certain disclosures for each credit derivative (or group of similar credit derivatives) for each statement of financial position presented. These disclosures must be provided even if the likelihood of having to make payments is remote. Required disclosures include:

In This Issue:

• Credit Derivative Disclosures

• Financial Guarantee Disclosures

• Effective Date and Transition

• Effective Date of Statement 161

1 FASB Staff Position No. FAS 133-1 and FIN 45-4, "Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161."

2 FASB Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities.

3 FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.

4 FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

• The nature of the credit derivative, including:

o The approximate term of the derivative.

o The reason(s) for entering into the derivative.

o The events or circumstances that would require the seller to perform under the derivative.

o The status of the payment/performance risk of the derivative as of the reporting date. This can be based on a recently issued external credit rating or an internal grouping used by the entity to manage risk. (If an internal grouping is used, the entity also must disclose the basis for the grouping and how it is used to manage risk.)

• The maximum potential amount of future payments (undiscounted) the seller could be required to make under the credit derivative contract (or the fact that there is no limit to the maximum potential future payments). If a seller is unable to estimate the maximum potential amount of future payments, it also must disclose the reasons why.

• The fair value of the derivative.

• The nature of any recourse provisions and assets held as collateral or by third parties that the seller can obtain and liquidate to recover all or a portion of the amounts paid under the credit derivative contract.

For hybrid instruments that have embedded credit derivatives, the required disclosures should be provided for the entire hybrid instrument, not just the embedded credit derivative.

Financial Guarantee Disclosures

As noted previously, the FASB did not perceive substantive differences between the risks and rewards of sellers of credit derivatives and those of financial guarantors. With one exception, the disclosures in Interpretation 45 were consistent with the disclosures that will now be required for credit derivatives. To make the disclosures consistent, the FSP amends Interpretation 45 to require guarantors to disclose "the current status of the payment/performance risk of the guarantee."

Effective Date and Transition

Although it is effective for reporting periods ending after November 15, 2008, the FSP requires comparative disclosures only for periods presented that ended after the effective date. Nevertheless, it encourages entities to provide comparative disclosures for earlier periods presented.

Effective Date of Statement 161

After the issuance of Statement 161, some questioned whether its disclosures are required in the annual financial statements for entities with noncalendar year-ends (e.g., March 31, 2009). To address this confusion, the FSP clarifies that the disclosure requirements of Statement 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. However, in the first fiscal year of adoption, an entity may omit disclosures related to quarterly periods that began on or before November 15, 2008. Early application is encouraged.

Jensen Comment
Credit derivatives (usually credit default swaps that have a periodic premium paid for and pay periodically for credit insurance) are currently scoped into FAS 133. I think that this is a mistake. These contracts are really insurance contracts and financial guarantees that should be accounted for as such and not as derivatives scoped into FAS 133 and IAS 39. Be that as it may, these controversial contracts that brought AIG and other Wall Street banks to its knees are accounted for as derivative contracts.

I really don’t think credit derivatives are appropriately accounted for under either FAS 133. The problem is that the intermediary that brokers an interest rate risk swap can guarantee the interest rate risk swap payments since these swaps are only dealing with payments on the net changes in interest rates with the notionals not being at risk. It seems to me that with credit default swaps, the entire notionals themselves might be at risk and the intermediaries that broker the swaps are not guaranteeing the swap payments equal to complete wipeouts of notionals. Hence, I don’t thinks CDS swaps properly meet the definitions of derivatives since notionals are at risk. It seems to me that CDS contracts should be accounted for as insurance contracts.

This is one of those instances where I think auditors should look at the substance of the transactions rather than rules per se.

 

Bob Jensen's threads on credit derivatives ---
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#CreditDerivatives


Some words in English allow for multiple spellings of a word having one meaning
When I was younger the spelling of "alright" for "all right" got a red X on a term paper. That, it seems today, is no longer the case although I think "all right" is still preferred. And "XMAS" is more common than "Christmas" these days, although "XMAS" seems to be less formal.

Hanukkah begins soon, and you may be wondering why you see it spelled different ways. There are many acceptable spellings for the Jewish holiday also known as the Festival of Lights; the name of the celebration is translated from Hebrew and there are multiple credible ways to make the translation. (It's actually a transliteration rather than a straight translation because Hebrew and English use different alphabets.) Some acceptable spellings include Hanukkah, Chanukah, Hanukah, and Hannukah
Grammar Girl, December 4, 2012

Jensen Comment
My grandmother Regina Jensen delivered five baby boys in a Seneca, Iowa farm house. Later two of those boys changed the spelling to Jenson for some unknown reason. The name Jensen is more Danish although these boys were born to immigrants that were 100% Norwegian.


Pensions primed to hit year-end deficit record --- Click Here
http://blogs.wsj.com/cfo/2012/12/11/corporate-pensions-on-pace-to-hit-year-end-deficit-record/?mod=wsjpro_hps_cforeport


"How London became the money-laundering capital of the world," by Rowan Bosworth-Davies, IanFraser.org, July 15, 2012 ---
http://www.ianfraser.org/how-london-became-the-money-laundering-capital-of-the-world/
Note that this article first appeared on Roway's blog in March 26, well in advance of the revelations of LIBOR fixing scandals by U.K. banks

. . .

This article was written by Rowan Bosworth-Davies and first posted on his blog on March 26th 2012. It is reused with permission. Since then, it has emerged that HSBC faces a $1 billion penalty in the United States for weak anti money laundering controls by the US government. At a hearing in Washington this Tuesday, the US Senate Permanent Subcommittee on Investigations is poised to deliver a blistering attack on the London-headquartered bank’s anti-money laundering systems and controls, highlighting its role in transactions tied to Iran, terrorist financing and drug cartels. In a Reuters Special Report published July 13th 2012, Carrick Mollenkamp and Brett Wolf have detailed how the bank’s Delaware-based anti-money laundering hub pays lip-service to tackling the problem of money laundering.

 

The lure of money laundering for Iran and the big drug cartels and Bernie Madoff
"UK banks hit by record $2.6bn US fines," by Shahien Nasiripour and Kara Scannell, Financial Times, December 11, 2012 ---
http://www.ft.com/intl/cms/s/0/643a6c06-42f0-11e2-aa8f-00144feabdc0.html#axzz2EkcnrVk3

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/0/643a6c06-42f0-11e2-aa8f-00144feabdc0.html#ixzz2EkdS3jxh

HSBC and Standard Chartered, the two biggest UK banks by market value, have agreed to pay almost $2.6bn in fines as part of record settlements with US authorities over money laundering allegations.

HSBC announced on Tuesday that it would pay $1.92bn and enter a deferred-prosecution agreement to settle accusations it allowed itself to be used by money launderers in Mexico and terrorist financiers in the Middle East.

More On this story

Business blog Virtue and vice at HSBC and StanChart UK ready to ‘trust’ US over failing banks HSBC sells some Central American units Lex HSBC / StanChart – rap on the knuckles FT’s Year in Finance

On this topic

Fitch downgrades HSBC over expansion push HSBC sells Ping An stake to Thai group HSBC left holding Amadeus stake Lombard Ocado / HSBC and Ping An

IN Banks

Tokyo loses out as foreign banks refocus KBC to sell €1.23bn in shares US and UK unveil failing banks plan US banks in fresh structured finance spree

Stuart Gulliver, HSBC’s chief executive, said: “We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes.

“Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters.”

StanChart agreed on Monday to pay $327m to several authorities in the US to settle allegations it violated US sanctions law and impeded government inquiries. That sum comes on top of the $340m the UK bank agreed to pay in August to New York state’s Department of Financial Services.

Until the HSBC settlement was reached, StanChart’s total $667m was to be the largest combined penalty paid to US authorities by a financial institution for allegedly breaching sanctions policy.

The broad allegations against HSBC were detailed in a July report by the Senate permanent subcommittee on investigations. The bank was alleged to have stripped details from transactions that would have identified Iranian entities, which may have put the bank in breach of US sanctions against that country.

The bank was said to have also moved billions of dollars in cash from its affiliate in Mexico to the US – more than any other Mexican bank – despite concerns raised with HSBC by authorities that such sums could only involve proceeds from illegal narcotics.

Since then, HSBC has increased its reserves to some $1.5bn to cover an agreement with US regulators that would settle the allegations.

As noted in its agreement with US Department of Justice, HSBC said its US subsidiary had increased its spending on anti-money laundering approximately ninefold between 2009 and 2011, and increased its anti-money laundering staffing almost 10-fold since 2010.

HSBC also said it had revamped its Know Your Customer programme, including treating non-US HSBC group affiliates as third parties subject to the same due diligence as all other customers; ended 109 correspondent relationships for risk reasons; clawed back bonuses for a number of senior executives and spent more than $290m on remedial measures.

StanChart was accused in August of defrauding regulators, falsifying records and obstructing government inquiries after New York state’s banking supervisor alleged the bank hid from regulators key details involving transactions with entities in countries including Iran.

After settling with New York – following the regulator’s threat to revoke StanChart’s state banking licence – the bank settled on Monday with the Federal Reserve, Department of Justice, Treasury Department and the Manhattan district attorney.

Lanny Breuer, assistant US attorney-general, said: “The United States expects a minimum standard of behaviour from all financial institutions that enjoy the benefits of the US financial system. Standard Chartered’s conduct was flagrant and unacceptable.”

The bank was accused of stripping identifying information from hundreds of billions of dollars of transactions involving Iran. Benjamin Lawsky, New York state’s banking regulator, had called StanChart a “rogue institution”.

Continued in article

"HSBC auditor talks on career opportunities," by Kathleen Buechel, The Ticker, October 10, 2011 ---
http://www.theticker.org/about/2.8218/hsbc-auditor-talks-on-career-opportunities-1.2650560#.UMc7NfJXfDM

During the month of September, EOC Jobsmart Career Hour hosted Mark Martinelli as he spoke on emerging issues in the finance industry as well as some career opportunities in HSBC. The event was co-sponsored by the Baruch College Accounting Society.

Martinelli is Chief Auditor at HSBC North American Holding Inc., as well as the Chief Auditor at HSBC Bank USA, N.A. He is also a Certified Public Accountant and is a member of the Baruch College Board of Trustees which he was elected to in April 2010.

Getting straight to the pint, Martinelli immediately opened the floor up for student questions instead of spending more time talking about himself. Now and then though he used himself as an example.

He comes to Baruch because it gives students some exposure to opportunity as well as having someone external to give a different perspective on the things that he sees, as well as to give back.

"There is a real advantage of doing a diversity of different things," said Martinelli in his regard to the various finance careers he has held.

Martinelli believes it is extremely important to have a strong grasp of technology. If he had the chance to go back and get his Masters degree he would get the degree in a technology concentration.

There is a common thread in that area, whether someone goes into marketing, managing or another area, stated Martinelli.

Martinelli worked 10 years in public accounting, even though he made a decision early on that he wanted to work in financial services. This is because he enjoyed it and there was a lot of growth in financial services when he left school.

When it comes to public accounting he stated that a person will know a lot of public audit and won't know real accounting until they become a CFO. To be an effective CFO you need to know the product and service, which is how the company grows, not just debits and credits in Martinelli's opinion.

"Have a sight of what jobs you want. You can't wait for people to offer you a job. Ideally you want to know what your skillsets are, what you're strong at, what you're weak at and have a list of jobs you want to do in an organization. The goal is simple, keep yourself as financially marketable as possible," said Martinelli.

In being financial marketable as possible, he stated that if you don't land a job with a Big 4 firm you are not a failure. There are at least 100 firms within a few miles around Baruch that are considered large firms.

Through networking and keeping a short term plan, 18 months to three years, and a long term plan Martinelli himself figured out where he wanted to be in Republic National Bank (now HSBC).

According to Martinelli HSBC has about 300,000 employees, is in eight different countries and has been around for 200 years. Much of HSBC's growth has always been in emerging markets because of HSBC's want to be a global competitor.

Its international marketing employees have come to be known as international managers. The program is a high entry level position where members are trained for two years in different world locations. Martinelli stated these managers are groomed to be future leaders of HSBC.

When gaining a presence in other countries, HSBC will send international managers as well as hire local persons. This is because local people know the local markets.

"You'll be in Greece today as a deputy CEO and you'll decide to make an acquisition in Turkey and pretty much in 48 hours notice you'll fly to Turkey," said Martinelli of the challenges of being an International Manager.

Areas of interest for HSBC worldwide are in these emerging markets such as China, Singapore, Malasiya as well as some other countries. As for the United States growth areas are in commercial space, middle markets and small business lending. HSBC is looking for retail space for premier banking and moving away from credit cards.

Continued in article

HSBC's auditor KPMG had twice reported serious risks regarding Madoff's investment funds, but Picard alleged that the bank chose to ignore its accountant's warnings.
"HSBC sued for $9bn over Madoff fraud:  Banking giant accused of being "wilfully and deliberately" blind to Madoff's Ponzi scheme," New Statesman, December 2010 ---
http://www.newstatesman.com/banking-and-insurance/2010/12/ponzi-scheme-madoff-hsbc-bank

Europe's biggest bank HSBC is being sued for $9bn (£5.7bn) for being "wilfully and deliberately" blind to Bernard Madoff's multibillion-pound Ponzi scheme despite warnings from its own auditor.

Irving Picard, the court-appointed trustee charged with recouping assets for victims of the fraudster, has filed a lawsuit with the US Bankruptcy Court in New York, alleging that HSBC ignored "red flags" that could have brought the scam to light years earlier.

David J Sheehan, the lawyer representing Picard, said the bank "possessed a strong financial incentive to participate in, perpetuate, and stay silent about Madoff's fraudulent scheme."

But HSBC stated it would "defend itself vigorously" against the allegations and said the trustee's claims of wrongdoing were "unfounded". In the lawsuit, Picard has accused the bank of indulging in 24 counts of fraud and misconduct.

HSBC's auditor KPMG had twice reported serious risks regarding Madoff's investment funds, but Picard alleged that the bank chose to ignore its accountant's warnings.

HSBC is the third major bank to be named in the lawsuit over the fraudulent Ponzi scheme that has landed Bernard Madoff in jail for 150 years. Earlier, similar suits had been filed against JPMorgan and Swiss lender UBS for $6.4bn and $2bn respectively.

 

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


Question
What's the difference between insider trading in Congress versus private sector insider trading?

Answer
Private sector insider trading is enforced by both the SEC and the justice divisions of our 50 states. Congressional inside trading is enforced by Congressional inside traders that virtually never convict one another ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

"Insider-Trading Probe Widens U.S. Launches Criminal Investigation Into Stock Sales by Company Executives," by Susan Pulliam, Jean Eaglesham, and Rob Berry, The Wall Street Journal, December 10, 2012 ---
http://professional.wsj.com/article/SB10001424127887323339704578171703191880378.html?mod=djemCFO_h

Federal prosecutors and securities regulators are taking a deeper look into how executives use prearranged trading plans to buy and sell shares of their company stock.

The Manhattan U.S. attorney's office has launched a broad criminal investigation into whether seven corporate executives cited in a recent Wall Street Journal article traded improperly in shares of their own company's stock, according to a person familiar with the matter. These executives lead companies in industries ranging from retailing to energy to data processing.

Meanwhile, the Securities and Exchange Commission is examining trading by VeriFone Systems Inc. PAY +1.33% Chief Executive Officer Douglas Bergeron, according to a person familiar with that probe. VeriFone said Mr. Bergeron, one of those cited in the Journal article, did nothing wrong.

The probes illustrate that authorities have opened a new front in a three-year push to attack possible improper trading on Wall Street and in corporate America.

Until now, prosecutors and regulators were focused mainly on ferreting out traditional insider trading in the financial world, involving outside investors in companies. Some 70 convictions and guilty pleas from traders and others have resulted from such efforts.

Now, authorities, including the Federal Bureau of Investigation, are turning more attention to trading by corporate executives in their own company's shares. The probe follows the Nov. 28 Journal article, which focused on highly beneficial sales by executives that occurred before bad news about their companies hit, sparing them declines in the value of their holdings.

Besides Mr. Bergeron, the Journal reported last week federal prosecutors and the SEC were examining trading of another executive cited in the article, Big Lots Inc. BIG +1.49% CEO Steven Fishman. The company said his trades were "properly made" at a time when allowed.

Unlike many of those the federal authorities now are looking at, Mr. Fishman didn't make his sale using a prearranged corporate-executive trading plan. The plans, known as "10b5-1" plans, permit executives to trade their own company's stock despite possessing important, nonpublic information, by scheduling their trades in advance at particular times or prices.

Having used such a plan can be a strong defense against any suspicion that the trading was improper. But it isn't a complete defense: Executives are vulnerable if they set up a plan at a time when they are in possession of inside information. Executives don't have to disclose the plans or their provisions, and they can change or discontinue them, also without disclosure.

The Manhattan U.S. attorney's office is investigating the circumstances surrounding seven trades cited by the Journal, according to the person familiar with the criminal probe, most made under trading plans. They include:

• May 2012 trades by Body Central BODY -2.68% founder Jerrold Rosenbaum and chief merchandising officer Beth Angelo, his daughter, before the retailer cut its earnings estimate, sending the shares down 48.5% the next day. A Body Central spokeswoman declined to comment on the investigation but previously said both executives' trades were made under a 10b5-1 plan and that Ms. Angelo, who set up a plan for her father in March 2012, wasn't aware of the trend that led to the stock drop.

• November 2008 trades by Ronald Delnevo, former managing director of U.K. operations for Cardtronics Inc., CATM -2.98% before lower earnings that hammered the stock. A company spokesman declined to comment on the investigation but previously said Mr. Delnevo's sales were part of a 10b5-1 plan he amended two months before selling, which is permissible under the company's policies.

• July 2007 trades by Raymond Zinn, CEO of semiconductor maker Micrel Inc., MCRL +0.86% before lower-than-expected earnings, which sent the stock down 22%. Micrel said the sales were made under a 10b5-1 plan, the details of which it didn't disclose.

• March 2006 sales by Jeffrey Lorberbaum, CEO of flooring maker Mohawk Industries Inc., MHK -0.91% just days after he set up a 10b5-1 trading plan and also days before lower-than-expected earnings sent the stock down 5.4%. Mohawk didn't return calls or emails about either the probe or the trades.

• July 2011 trades by Cobalt International Energy CIE -2.36% co-founder Samuel Gillespie during the two weeks before the oil company said it had abandoned an exploratory well. The stock slumped 39% after nine trading days.

A Cobalt spokeswoman didn't return calls about the investigation but earlier said the sales were in accordance with a 10b5-1 plan amended before the sales. She said the change was "in complete compliance with our procedures and had at least a minimum of 30 days before trades occurred." She said the well issue wasn't encountered until Mr. Gillespie had already begun to sell shares.

In the Big Lots matter, the U.S. attorney's office and the SEC are examining the March 2012 trading of Mr. Fishman. He exercised stock options and sold a little over $10 million of Big Lots stock on March 20. On April 23, Big Lots disclosed that first-quarter sales had slowed, beginning in late March. The stock sank 24% on the news. The quarter ended on Apr. 28.

Continued in article

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


Shell pickers will find some of the biggest shells in Bermuda (e.g., Google and Accenture shells)
"Google Revenues Sheltered in No-Tax Bermuda Soar to $10 Billion," by Jesse Drucker, Bloomberg News, December 10, 2012 --- Click Here
http://www.bloomberg.com/news/2012-12-10/google-revenues-sheltered-in-no-tax-bermuda-soar-to-10-billion.html?mod=djemCFO_h

 

Google Inc. (GOOG) avoided about $2 billion in worldwide income taxes in 2011 by shifting $9.8 billion in revenues into a Bermuda shell company, almost double the total from three years before, filings show.

By legally funneling profits from overseas subsidiaries into Bermuda, which doesn’t have a corporate income tax, Google cut its overall tax rate almost in half. The amount moved to Bermuda is equivalent to about 80 percent of Google’s total pretax profit in 2011.

The increase in Google’s revenues routed to Bermuda, disclosed in a Nov. 21 filing by a subsidiary in the Netherlands, could fuel the outrage spreading across Europe and in the U.S. over corporate tax dodging. Governments in France, the U.K., Italy and Australia are probing Google’s tax avoidance as they seek to boost revenue during economic doldrums.

Last week, the European Union’s executive body, the European Commission, advised member states to create blacklists of tax havens and adopt anti-abuse rules. Tax evasion and avoidance, which cost the EU 1 trillion euros ($1.3 trillion) a year, are “scandalous” and “an attack on the fundamental principle of fairness,” Algirdas Semeta, the EC’s commissioner for taxation, said at a press conference in Brussels.

‘Deep Embarrassment’

“The tax strategy of Google and other multinationals is a deep embarrassment to governments around Europe,” said Richard Murphy, an accountant and director of Tax Research LLP in Norfolk, England. “The political awareness now being created in the U.K., and to a lesser degree elsewhere in Europe, is: It’s us or them. People understand that if Google doesn’t pay, somebody else has to pay or services get cut.”

Google said it complies with all tax rules, and its investment in various European countries helps their economies. In the U.K., “we also employ over 2,000 people, help hundreds of thousands of businesses to grow online, and invest millions supporting new tech businesses in East London,” the Mountain View, California-based company said in a statement.

The Internet search giant has avoided billions of dollars in income taxes around the world using a pair of tax shelter strategies known as the Double Irish and Dutch Sandwich, Bloomberg News reported in 2010. The tactics, permitted under tax law in the U.S. and elsewhere, move royalty payments from subsidiaries in Ireland and the Netherlands to a Bermuda unit headquartered in a local law firm.

Last year, Google reported a tax rate of just 3.2 percent on the profit it said was earned overseas, even as most of its foreign sales were in European countries with corporate income tax rates ranging from 26 percent to 34 percent.

Foreign Taxes

At a hearing last month in the U.K., members of Parliament pressed executives from Google, Seattle-based Amazon.com Inc. (AMZN) and Starbucks Corp. (SBUX) to explain why they don’t pay more taxes there.

The U.K., Google’s second-biggest market, was responsible for about 11 percent of its sales, or almost $4.1 billion last year, according to company filings. Google paid 6 million pounds ($9.6 million) in U.K. income taxes.

Matt Brittin, Google’s vice president for Northern and Central Europe, testified that the company pays taxes where it creates “economic value,” primarily the U.S.

Still, Google attributes some profit based on technology created in the U.S. to offshore subsidiaries, lowering its U.S. taxes, according to company filings and people familiar with its tax planning. Google paid $1.5 billion in income taxes worldwide in 2011.

‘Fair Share’

In the wake of the parliamentary hearing, the House of Commons issued a report last week declaring that multinationals “do not pay their fair share” of tax. The committee also criticized the U.K.’s tax collection agency, Her Majesty’s Revenue & Customs, for “not taking sufficiently aggressive action” and called on the agency to “get a grip” on corporate tax avoidance.

A spokesman for HMRC said the agency “ensures that multinationals pay the tax due in accordance with U.K. tax law.”

The French tax authority this year proposed increasing Google’s income taxes by about $1.3 billion. The agency searched Google’s Paris offices in June 2011 and removed computer files as part of an examination first reported by Bloomberg last year. Google is cooperating with French authorities and works with them “to answer all their questions on Google France and our service,” the company said.

Italian Audit

In Italy, the Tax Police began an audit of Google last month and recently searched the company’s Milan offices, as well as the offices of Facebook Inc. (FB), according to a person familiar with the matter. “It’s very common for companies to be audited, and we have been working closely with the Italian authorities for some time,” Google said. “So far we have not had any demands for additional tax in Italy.”

Facebook, based in Menlo Park, California, is cooperating with the Italian tax authority and “we take our obligations under the Italian tax code very seriously,” a company spokeswoman said.

In Australia, the country’s assistant treasurer gave a speech last month outlining Google’s tax avoidance strategies.

The use of offshore shelters to avoid corporate taxes has prompted calls for reform in the U.S. as well. The Treasury Department has repeatedly proposed since 2009, with little success, to make it harder for multinationals to bypass taxes by shifting profit into tax havens.

Transfer Pricing

Multinational companies cut their tax bills using “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens and expenses to higher-tax countries.

In Google’s case, an Irish subsidiary collects revenues from ads sold in countries like the U.K. and France. That Irish unit in turn pays royalties to another Irish subsidiary, whose legal residence for tax purposes is in Bermuda.

The pair of Irish units gives rise to the nickname “Double Irish.” To avoid an Irish withholding tax, Google channeled the payments to Bermuda through a subsidiary in the Netherlands -- thus the “Dutch Sandwich” label. The Netherlands subsidiary has no employees.

Continued in article

Jensen Comment
If a giant hurricane ever wipes out Bermuda, the shell corporations won't lose much from their nearly-empty offices in Burmuda.

 


PCAOB faults auditor staffing, training for deficiencies
"'Control' Problems Cited," by Michael Rapoport, The Wall Street Journal, December 10, 2012 ---
http://professional.wsj.com/article/SB10001424127887324478304578171280865613110.html?mod=djemCFO_h

A U.S. regulator reported an increase in the percentage of audits of "internal controls" at companies that were flawed because of inadequate work by major accounting firms.

The Public Company Accounting Oversight Board said the eight biggest accounting firms failed in 22% of the audits it reviewed last year to gather enough evidence to support opinions issued by the firms that claimed a company's internal controls were effective.

The percentage was up from 15% of the audits the PCAOB reviewed in 2010. PCAOB officials said the increase shows auditors are at greater risk of letting serious financial errors or even fraud slip through undetected.

"When audit firms do not approach their work appropriately, they are increasing their own risk of not detecting problems," PCAOB member Jeanette Franzel said after the findings were released Monday. The PCAOB regulates and inspects firms that audit public companies, while setting and enforcing standards that govern audits.

The Center for Audit Quality, which represents major accounting firms, said in a statement that the industry "recognizes the need to improve performance in this important area" and has already poured "significant" resources into doing so.

"Internal controls" are safeguards meant to insure that a company's financial statements are accurate. At all but the smallest public companies, auditors are required by U.S. law to evaluate those controls annually for effectiveness.

The PCAOB's conclusion that an accounting firm's review of internal controls was deficient doesn't necessarily mean the controls were inadequate or a company's finances are shaky. The findings are a sign that auditors haven't done the job needed to tell. To fix the problem, accounting firms should consider providing more training and guidance to auditors, the PCAOB said Monday.

PCAOB members said the percentage of audits where they found problems is too high. And when an audit of internal controls isn't done properly, it usually means the corresponding audit of a company's financial statements also is deficient, the PCAOB said.

The results released Monday are based on annual inspections by the PCOAB of big accounting firms to evaluate their audit work and compliance with professional standards.

No firms were singled out for criticism in the report, but the findings were based on inspections of BDO Seidman LLP, Crowe Horwath LLP, Deloitte & Touche LLP, Ernst & Young LLP, Grant Thornton LLP, KPMG LLP, McGladrey LLP and Pricewaterhouse Coopers LLP. The regulator's board said it has found similar problems at other auditing firms.

Continued in article

Bob Jensen's threads on audit firm professionalism are at
http://www.trinity.edu/rjensen/Fraud001c.htm


"Citigroup to Cut 11,000 Jobs, Take $1 Billion Charge," by Donal Griffin, Bloomberg News, December 5, 2012 ---
http://www.bloomberg.com/news/2012-12-05/citigroup-to-take-1-billion-charge-cut-11-000-jobs.html

Jensen Comment
And this is even before Sen. Elizabeth Warren takes her new seat on the Banking Committee.


Behavioral Finance: Herding Video --- http://www.youtube.com/watch?v=BXR2PrULyW0
Thank you Jim Mahar for the heads up.


"SEC Says Big Four Audit China-Affiliates Blocked Probe," by Joshua Gallu, Bloomberg News, December 3, 2012 ---
http://www.bloomberg.com/news/2012-12-03/sec-says-big-four-audit-china-affiliates-blocked-probe.html

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


"Who Will Be the Next Hewlett-Packard?" by Jonathan Weil, Bloomberg, November 29, 2012 ---
http://www.bloomberg.com/news/2012-11-29/who-will-be-the-next-hewlett-packard-.html 

During the technology-stock bubble of the 1990s, it would have been a compliment to say a company had the potential to become the next Hewlett-Packard Co. That same line would have a very different meaning now.

Today, if someone called a company the next Hewlett- Packard, this would probably mean it is a prime candidate to book huge losses because of disastrous acquisitions. What might such a company look like? Consider Xerox Corp. (XRX)

At the start of 2007, Xerox had a stock-market value of $16 billion. Since then, the Norwalk, Connecticut-based printer and copier pioneer has paid about $9.1 billion to acquire 41 other companies. It has destroyed more value than it created. At $6.79 a share, Xerox’s market value is $8.6 billion -- equivalent to 71 percent of its common shareholder equity, or book value.

The most glaring sign that large writedowns may be needed at Xerox is a line on its books called goodwill, which is the intangible asset that a company records when it pays a premium in a takeover. Xerox’s balance sheet would have investors believe that its goodwill alone, at $9 billion, is more valuable than what the market says the whole company is worth.

Xerox’s goodwill obviously isn’t worth that in reality. Goodwill exists only on paper and can’t be sold by itself. It’s a plug number, defined under the accounting rules as the difference between the purchase price for an acquisition and the fair value of the acquired company’s net assets. ‘Reference Points’

Asked about the possible need for large writedowns, a Xerox spokeswoman, Karen Arena, noted that the company will conduct its annual goodwill-impairment test this quarter.

“Share price is just one of several reference points we use to validate our assumptions,” she said. “We also look to our operational results, including cash flows, revenue growth and profit margins.”

Most of the goodwill on Xerox’s balance sheet arose from the company’s $6.5 billion acquisition in 2010 of Affiliated Computer Services Inc., a provider of information-technology services. Xerox allocated $5.1 billion of the purchase price in that deal to goodwill. Xerox’s latest balance sheet also showed $2.9 billion of other intangible assets, the bulk of which are customer relationships acquired from Affiliated Computer.

Suspiciously high goodwill was the same indicator I pointed to in an Oct. 4 blog post suggesting that more large writedowns were needed at Hewlett-Packard. (HPQ) The Palo Alto, California-based maker of computers and printers traded for a significant discount to book value at the time, and its goodwill exceeded its market value by $7.5 billion.

Hewlett-Packard last week disclosed an $8.8 billion writedown of goodwill and other intangible assets from its 2011 purchase of the U.K. software maker Autonomy Corp. It said more than $5 billion of the charge was related to financial-reporting improprieties by Autonomy. The disclosure sent Hewlett-Packard’s shares down 12 percent in a day.

Regardless of whether the allegation proves correct, Hewlett-Packard paid way too much for Autonomy, which had a reputation for aggressive accounting long before it was bought. (Just ask the analysts at the financial-research firm CFRA in New York, who wrote 14 reports from 2001 to 2010 raising doubts about Autonomy’s accounting and disclosure practices.)

Hewlett-Packard had allocated $6.9 billion of its $11 billion purchase price for Autonomy to goodwill. The writedowns disclosed last week were only the latest of their kind. Three months earlier, Hewlett-Packard recorded a $9.2 billion writedown largely related to its buyout of Electronic Data Systems Corp. in 2008. Dubious Leaders

A search for other companies with strangely high goodwill values turned up several notable examples. Credit Agricole SA (ACA), the French bank that trades for about a third of its book value, shows goodwill of 16.9 billion euros ($21.9 billion). By comparison, its stock-market value is 14.6 billion euros.

Telecom Italia SpA (TIT), which trades for about 60 percent of its book value, has goodwill of 36.8 billion euros and a market capitalization of only 13.2 billion euros. Fiat SpA (F), the Italian automaker, trades for less than half of book and shows goodwill of 10.4 billion euros -- more than twice its market value. Nasdaq OMX Group Inc. trades for 78 percent of book and shows $5.3 billion of goodwill; its market cap is $4 billion.

Those kinds of numbers -- where the balance sheets are clearly out of whack with market sentiments -- don’t necessarily mean the companies will be required to slash asset values. But they are strong indicators that big writedowns may be needed. The test under the rules ultimately comes down to management’s cash-flow projections, and whether they are strong enough to justify the goodwill on the books. That’s why goodwill writedowns can be an important signal about the future.

Continued in article


Question
What does Joe Hoyle mean by "Be the Stream and Not the Rock?"

Hint
He's not discussing the painful passing of a kidney stone.
The context is how perseverance prevails.

"BE THE STREAM AND NOT THE ROCK," by Joe Hoyle, Teaching Blog, November 26, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/11/be-stream-and-not-rock.html

 


Deloitte Releases Sixth Edition of “SEC Comment Letters-Including Industry Insights” --- 
http://deloitte.wsj.com/cfo/files/2012/11/SEC_comment_letters_highlighting_risks.pdf 

"Two-thirds of millionaires left Britain to avoid 50% tax rate:  Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50% top rate of tax, figures have disclosed," by Robert Winnett, The Telegraph, November 27, 2012 ---
http://www.telegraph.co.uk/news/politics/9707029/Two-thirds-of-millionaires-left-Britain-to-avoid-50p-tax-rate.html

Jensen Comment
The article doesn't reveal where the 10,000 wealthy taxpayers went, but it certainly wasn't France or Scandinavia. I suspect that many of them moved to Ireland and Switzerland, although they perhaps still have real estate in England. Perhaps some sold residences with leaseback provisions for visiting their old homes. Artists and writers can live tax free in Ireland. And just about anybody can live tax free in Greece since Greece hasn't yet figured out how to enforce tax laws. But Greece might make an exception by hammering down on wealthy immigrants fleeing U.K. taxes. Then again Greece might might prefer that the wealth is re-invested in Greece.

I suspect some of the super wealthy don't much care since they have more than they can spend after taxes. I wonder if taxpayers living on yachts can avoid taxes altogether if those boats are constantly on the move between nations?

 


Teaching Case from The Wall Street Journal Accounting Weekly Review on November 30, 2012

Obama Sets Steep Tax Targets
by: Janet Hook and Carol E. Lee
Nov 14, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video
 

TOPICS: Governmental Accounting, Tax Law, Tax Policy, Tax Reform, Taxes

SUMMARY: President Obama has proposed a budget to Congress that includes $1.6 Trillion in tax increases over ten years as part of the package needed to close the federal budget deficits as required by the legislation which created the "fiscal cliff." House Speaker John Boehner "hasn't specified a revenue target that would be his opening bid. He has said he would be willing to accept new tax revenues, not higher tax rates if Democrats accept structural changes to entitlement programs...." This acceptance stems from the election results in which Mr. Obama won on a platform including increased taxes for Americans earning more than $250,000 per year. Treasury Secretary Tim Geithner has said he cannot see how to raise taxes sufficiently to meet these goals without implementing higher tax rates, rather than limiting or eliminating tax deductions.

CLASSROOM APPLICATION: The article may be used in a tax class or in a governmental accounting class.

QUESTIONS: 
1. (Advanced) What is the fiscal cliff? Specifically state the objective of the laws that set up these automatic, drastic actions that are taking effect in January 2013.

2. (Introductory) Refer to the related video. What are the major components of U.S. government spending? Why must the five components be included in any plan to cut spending in order to reduce our federal government's deficits?

3. (Advanced) What is the difference between generating new tax revenues, which Republican House Majority Leader John Boehner is accepting in negotiations, and raising tax rates, which Mr. Boehner opposes? Why is Mr. Boehner asserting this position about the source of tax revenue increases to close the federal deficits?

4. (Introductory) Refer to the related article. Why are U.S. business leaders taking steps to have their voices heard as government wrangles with plans to avoid the fiscal cliff? What steps are they taking?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
CEOs Flock to Capital to Avert 'Cliff'
by Damian Paletta and Kristina Peterson
Nov 28, 2012
Page: A4

 

"Obama Sets Steep Tax Targets," by Janet Hook and Carol E. Lee, The Wall Street Journal, November 14, 2012 ---
http://professional.wsj.com/article/SB10001424127887323551004578117152861144968.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

President Barack Obama will begin budget negotiations with congressional leaders Friday by calling for $1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.

Mr. Obama, in a meeting Tuesday with union leaders and other liberal activists, also pledged to hang tough in seeking tax increases on wealthy Americans. In one sign of conciliation, he made no specific commitment to leave unscathed domestic programs such as Medicare, leaving the door open to spending cuts many fellow Democrats oppose.

Kevin Smith, a spokesman for House Speaker John Boehner (R., Ohio), dismissed the president's opening position for the negotiations. He said Mr. Boehner's proposal to revamp the tax code and entitlement programs is "consistent with the president's call for a 'balanced' approach."

Enlarge Image image image Associated Press

AFL-CIO President Richard Trumka, second from left, speaks to reporters outside the White House Tuesday after meeting with the president. Full Coverage: The Fiscal Cliff

Capital: Writing the Next Act in the Budget Drama Obama to Meet With CEOs When Congress Ties Its Hands Capital Journal: Past the Cliff to Fixing Taxes Ask Seib & Wessel: The 'Fiscal Cliff' Washington Wire: What Do CEOs Think? Live Updates: Fiscal Cliff Stream

Mr. Boehner hasn't specified a revenue target that would be his opening bid. He has said he would be willing to accept new tax revenues—not higher tax rates—if Democrats accept structural changes to entitlement programs, the ultimate source of the U.S.'s long-term budget woes.

The president's opening gambit, based on his 2013 budget proposal, signals Mr. Obama's intent to press his advantage on the heels of his re-election last week. However, before gathering at the White House with lawmakers on Friday, he will meet with chief executives of a dozen companies Wednesday. Many executives have aired concerns about the economic consequences of the looming "fiscal cliff"—and the risk of another standoff.

Maryland Rep. Chris Van Hollen joins WSJ's Alan Murray at the CEO Council to discuss how Congress and President Obama can avoid falling over the fiscal cliff.

At The Wall Street Journal CEO Council in Washington, 73% of conference participants surveyed said their primary concern was the fiscal cliff.

One conference participant, David Crane, chief executive of NRG Energy Inc., NRG +0.74% a power-generation and electricity firm, said, "I think everyone just has this fear that they just do as they've done the last four years and just lob grenades at each other."

Speaking to reporters about Mr. Obama's plans for Friday's talks, White House spokesman Jay Carney said, "the president has put forward a very specific plan that will be what he brings to the table when he sits down with congressional leaders."

"We know what a truly balanced approach to our fiscal challenges looks like," said Mr. Carney, using Democrats' language to mean spending cuts combined with tax increases.

Republicans already have appeared willing to cut a deal that results in Americans paying more taxes if it averts the scheduled spending cuts and tax increases due to take effect at year-end.

"New revenue must be tied to genuine entitlement changes," Senate Minority Leader Mitch McConnell (R., Ky.) said Tuesday. "Republicans are offering bipartisan solutions and now it's the president's turn. He needs to bring his party to the table."

Treasury Secretary Timothy Geithner said higher tax rates on upper-income Americans were a central part of the White House's deficit-reduction proposal because there was no way to raise enough revenue by only limiting tax breaks. Mr. Geithner's comments, made at the Journal's CEO gathering, marked the White House's most forceful defense of its tax proposal since the election.

The president is "not prepared to extend the upper-income tax cuts," Mr. Geithner said, referring to the White House proposal to allow expiration of the Bush-era tax cuts on income over $200,000 for individuals and $250,000 for couples.

The year-end budget problems represent a major test of how Mr. Obama will lead in his second term, not just in negotiating with Republicans but in managing his own political base.

He is under pressure to take a hard line from activist groups as well as from many congressional Democrats, who returned Tuesday for a lame-duck session elated by their party's gains in last week's elections. Democrats picked up at least six seats in the House and dashed expectations they might lose their Senate majority by picking up two more seats in the chamber.

Senate Majority Leader Harry Reid (D., Nev.), in his first floor speech of the session, signaled little interest in concessions and reiterated President Obama's demand that the House pass a Senate-approved bill extending current tax rates for middle-income taxpayers, but not for the wealthiest 2% of taxpayers.

Mr. Obama is expected to open a Wednesday news conference, his first since re-election, by calling on the House to pass that bill.

The White House calls that a "partial solution," creating certainty for businesses and minimizing potential harm to the economy. Absent action, all the tax rates will rise Jan. 1.

In negotiations between Messrs. Boehner and Obama in mid-2011, the two sides neared agreement on a plan to cut the deficit by $4 trillion over 10 years, including $800 billion in new revenue.

The deal fell apart after Mr. Obama asked to raise the revenue component to $1.2 trillion, and to this day each side blames the other for the collapse. Based on that history, some senior GOP aides said they believed a likely compromise would call for about $1 trillion in new tax revenue, possibly from capping deductions for wealthier taxpayers.

On Capitol Hill, it isn't clear how strenuously Democrats will resist cutting entitlements. Rep. Chris Van Hollen (D., Md.) said he and others were open to changes as long as they were done in a measured way and were part of deal that included tax increases. Mr. Van Hollen also said changing Social Security and increasing the Medicare eligibility age above 65 should be part of negotiations.

"I'm willing to consider all of these ideas as part of an overall plan," Mr. Van Hollen said Tuesday at the Journal's CEO Council.

White House officials in 2011 were in advanced talks with Mr. Boehner that would have agreed to some of these changes, notably raising Medicare's eligibility age. That is one cause of liberals' anxiety about how the coming talks may unfold.

Mr. Obama's Tuesday meeting was the first of several this week with outside groups. He is set to meet with civic leaders Friday before sitting down with Democratic and Republican congressional leaders. The president's aides have said these meetings aren't meant for negotiating but rather listening to leaders with a stake in the process.

In his meeting with leaders from liberal and labor groups, Mr. Obama fielded questions about whether a final budget deal would hurt recipients of Medicare and Medicaid. He made no assurances, one attendee said, and instead pointed to his budget to explain his stance on such changes. The president said, "You know where I am on this," the attendee said. The budget includes some modest Medicare changes but no big cuts to the program.

Mr. Obama reiterated his demand that the Bush tax cuts expire for the wealthiest individuals, and asked the groups to focus their members on getting Congress, in particular House Republicans, to pass the tax cuts for everyone else.

Continued in article

Paying Taxes 2013: The global picture - How does your tax system compare with other economies?

Source: PwC
Author name: US tax services
Published: 11/28/2012

Summary:
This is a unique study from PwC, World Bank and IFC. Now in its eighth year, the study provides data on tax systems in 185 economies around the world, with an ability to monitor tax reform.

It is unique because it generates a set of indicators (the Total Tax Rate, the time to comply and the number of payments) that measure the world’s tax systems from the point of view of a standardized business (using a case-study scenario).

This PwC publication is also unique in that it covers the full range of taxes paid in 185 economies by the company, measuring how the business complies with the different tax laws and regulations in each economy. The study not only looks at corporate income tax, but at all of the taxes and contributions that a domestic medium-size case study company must pay. It considers the full impact of all these taxes in terms of both their tax cost and their compliance burden on business.

This publication can be useful in:

This is the eighth year that the study indicators have been included in the Doing Business project, which is run by the World Bank Group.

Download this PwC publication ---
http://www.pwc.com/en_GX/gx/paying-taxes/assets/pwc-paying-taxes-2013-full-report.pdf




The Rain

It was a busy
Morning, about 8:30, when an elderly

Gentleman in his 80's arrived to have
Stitches removed from his thumb.

He said he was in a hurry as he had an
Appointment at 9:00 am.

I took his vital
Signs and had him take a seat,

Knowing it would be over an hour

Before someone
Would to able to see him.

I saw him looking at his watch and

Decided, since I
Was not busy with another patient,

I would evaluate his wound.

On exam, it was
Well healed, so I talked to one of the

Doctors, got the needed supplies to
Remove his sutures and redress his wound.

While taking care of
His wound, I asked him if he

Had another doctor's appointment

This morning, as
He was in such a hurry.

The gentleman told me no, that he

Needed to go to
The nursing home to eat breakfast

With his wife. I enquired as to her
Health.

He told me that
 she had been there
For a while and that she

Was a victim of Alzheimer's Disease.

As we
Talked, I asked if she would be

Upset if he was a bit late.

He
Replied that she no longer knew

Who he was, that she had not

Recognized him in
Five years now


I was surprised, and asked him,

'And you still go every
Morning, even though she

Doesn't know who you are?'

He smiled as he
Patted my hand and said,

'She doesn't
Know me, but I still know who she is.'

I had to hold back
Tears as he left, I had goose bumps

On my arm, and thought,

'That is
The kind of love I want in my life.'

True love is
Neither physical, nor romantic.

True love is an
Acceptance of all that is,

Has been, will be, and will not
Be.

With all the jokes
And fun that are in e-mails,

Sometimes there is one that comes

Along that has an
Important message..

This one I thought I could share with you.

The
Happiest people don't necessarily

Have the best of everything;

They just make 
The best of everything they have.

I hope you share this with someone you
Care about. I just did.
 

 

 




 

Humor December 31, 2012

Humor Pictures and Cartoons

Set 01 --- http://www.trinity.edu/rjensen/tidbits/Humor/2011/Set01/Humor2011Set01.htm

Set 02 --- www.trinity.edu/rjensen/tidbits/Humor/2011/Set02/Set02.htm

Set 03 --- http://www.trinity.edu/rjensen/Tidbits/Humor/2012/Set03/HumorSet03.htm


 


Humor Video:  Accounting Updates for 2012 --- http://www.youtube.com/watch?v=JgW3ATYW9F4&feature=youtu.be
Not so Funny Sidebar:  One of the biggest reasons 17% of employed taxpayers pay no income is the earned income credit
Also it's not clear why he has to yell into a microphone --- that is really tiresome in a comedy dialog.

 


The Darwin Awards:  Favorite Female Fatales --- http://www.darwinawards.com/

Darwin Award Archives --- http://www.darwinawards.com/darwin/


Hilarious Video Proof: Your Ability to Make Realistic Sound Effects Is Gender-Based ---
http://www.openculture.com/2012/12/hilarious_video_proof_your_ability_to_make_realistic_sound_effects_is_gender-based.html


Forwarded by Gene and Joan

Punography
 
 
 When chemists die, they barium.
 
 Jokes about German sausage are the wurst.
 
 I know a guy who's addicted to brake fluid. He says he can stop any time.
 
 How does Moses make his tea? Hebrews it.
 I stayed up all night to see where the sun went. Then it dawned on me.
 
 This girl said she recognized me from the vegetarian club, but I'd never met
 herbivore.
 
 I'm reading a book about anti-gravity. I just can't put it down.
 
 I did a theatrical performance about puns. It was a play on words.
 
 They told me I had type-A blood, but it was a Type-O.
 
 PMS jokes aren't funny; period.
 Why were the Indians here first? They had reservations.
 
 We're going on a class trip to the Coca-Cola factory. I hope there's no pop
 quiz.
 
 I didn't like my beard at first. Then it grew on me.
 
 Did you hear about the cross-eyed teacher who lost her job because she
 couldn't control her pupils?
 
 When you get a bladder infection urine trouble.
 Broken pencils are pointless.
 
 I tried to catch some fog, but I mist.
 
 What do you call a dinosaur with an extensive vocabulary? A thesaurus.
 
 England has no kidney bank, but it does have a Liverpool.
 
 I used to be a banker, but then I lost interest.
 
 I dropped out of communism class because of lousy Marx.
 
 All the toilets in New York 's police stations have been stolen. The police have nothing to go on.
 
 I got a job at a bakery because I kneaded dough.
 
 Haunted French pancakes give me the crepes.
 
 Velcro - what a rip off!
 
 A cartoonist was found dead in his home. Details are sketchy.
 
 Venison for dinner again? Oh deer!


Forwarded by Paula

To help save the economy, next month the Government will announce that the Immigration Department will start deporting Seniors (instead of illegals) in order to lower Social Security and Medicare costs.

Older people are easier to catch and will not remember how to get back home.

I started to cry when I thought of you. Then it dawned on me ...... I'll see you on the bus!


Forwarded by Maureen

   Us  older people need to learn something new every  day...

Just to keep the grey matter tuned  up.

Where did "Piss Poor" come from?  Interesting history.

They used to use  urine to tan animal skins, so families used to  all pee in a pot.

And then once it was  full it was taken and sold to the  tannery...

if you had to do this to  survive you were "Piss Poor".
But worse than  that were the really poor folk who couldn't even  afford to buy a pot...

They "didn't have  a pot to piss in" and were the lowest of the  low.

The next time you are washing your  hands and complain because the water  temperature
Isn't just how you like it, think  about how things used to be.

Here are  some facts about the 1500's

Most people  got married in June because they took their  yearly bath in May,

And they still  smelled pretty good by June.. However, since  they were starting to smell,
brides carried a  bouquet of flowers to hide the body  odor.

Hence the custom today of carrying  a bouquet when getting married.

Baths  consisted of a big tub filled with hot  water.

The man of the house had the  privilege of the nice clean water,

Then  all the other sons and men, then the women and  finally the children.

Last of all the  babies.

By then the water was so dirty  you could actually lose someone in  it.
Hence the saying, "Don't throw the  baby out with the bath water!"

Houses had  thatched roofs-thick straw-piled high, with no  wood underneath.

It was the only place  for animals to get warm, so all the cats and  other small animals
(mice, bugs) lived in the  roof.

When it rained it became slippery  and sometimes the animals would slip and fall  off the roof.
Hence the saying, "It's raining  cats and dogs."
There was nothing to stop  things from falling into the house.

This  posed a real problem in the bedroom where bugs  and other droppings

Could mess up your  nice clean bed.

Hence, a bed with big  posts and a sheet hung over the top afforded  some protection.

That's how canopy beds  came into existence.

The floor was dirt.  Only the wealthy had something other than  dirt.

Hence the saying, "Dirt poor." The  wealthy had slate floors that would get  slippery
In the winter when wet, so they  spread thresh (straw) on the floor to help keep  their footing..

As the winter wore on,  they added more thresh until, when you opened  the door,
It would all start slipping  outside. A piece of wood was placed in the  entrance-way.
Hence: a thresh  hold.

(Getting quite an education, aren't  you?)

In those old days, they cooked in  the kitchen with a big kettle that always hung  over the fire.

Every day they lit the  fire and added things to the pot. They ate  mostly vegetables
And did not get much meat.  They would eat the stew for dinner, leaving  leftovers
In the pot to get cold overnight  and then start over the next  day.

Sometimes stew had food in it that  had been there for quite a while.

Hence  the rhyme:

“Peas porridge hot, peas  porridge cold, peas porridge in the pot nine  days old."
Sometimes they could obtain pork,  which made them feel quite special.

When  visitors came over, they would hang up their  bacon to show off.

It was a sign of  wealth that a man could, "bring home the  bacon."

They would cut off a little to  share with guests

And would all sit  around and chew the fat.

Those with money  had plates made of pewter.

Food with high  acid content caused some of the lead to leach  onto the food, causing lead poisoning  death.

This happened most often with  tomatoes,
so for the next 400 years or so,  tomatoes were considered poisonous.

Bread  was divided according to status..

Workers  got the burnt bottom of the loaf, the family got  the middle,

and guests got the top, or  the upper crust.

Lead cups were used to  drink ale or whisky.
The combination would  sometimes knock the imbibers out for a couple of  days...
Someone walking along the road would  take them for dead and prepare them for  burial.
They were laid out on the kitchen  table for a couple of days and the family would  gather around
and eat and drink and wait and  see if they would wake up.

Hence the  custom; “holding a wake."

England is old  and small and the local folks started running  out of places to bury people.

So they  would dig up coffins and would take the bones to  a bone-house, and reuse the grave.

When  reopening these coffins, 1 out of 25 coffins  were found to have scratch marks on the inside  and they realized they had been burying people  alive.
So they would tie a string on the  wrist of the corpse, lead it through the coffin  and up through the ground and tie it to a  bell.

Someone would have to sit out in  the graveyard all night (the graveyard shift) to  listen for the bell; thus, someone could  be,
“saved by the bell" or was "considered a  dead ringer."

And that's the  truth.

Now, whoever said history was  boring!!!

So get out there and educate  someone!
Share these facts with a  friend.
Inside every older person is a  younger person wondering,
"What the heck  happened?"
We'll be friends until we  are old and senile.
Then we'll be new  friends.

Smile, it gives your face  something to  do!


Forwarded by Auntie Bev

British humour- ABSOLUTELY POLITICALLY INCORRECT AND HILARIOUS. THE LAST ONE ROCKS

Police in London have found a bomb outside a mosque.. They've told the public not to panic as they've managed to push it inside. ============================================

During last night's high winds an African family were killed by a falling tree. A spokesman for the Birmingham City council said "We didn't even know they were living up there".
=============================================

Jamaican minorities in the UK have complained that there are not enough television shows with minorities in mind, so Crimewatch is being shown 5 times a week now.
=============================================

I was reading in the paper today about this dwarf that got pick pocketed. How could anyone stoop so low.
=============================================

I was walking down the road when I saw an Afghan bloke standing on a fifth floor balcony shaking a carpet. I shouted up to him, "what's up Abdul, won't it start?"
=============================================


 

Do you think these Dear Santa letters were actually written by kids?
If so then you probably believe that Santa wrote the replies.

Dear Santa,

How are you? How is Mrs. Claus? I hope everyone, from the reindeer to the elves, is fine. I have been a very good boy this year. I would like an X-Box 360 with Call of Duty IV and an iPhone 4 for Christmas. I hope you remember that come Christmas Day..

Merry Christmas,

Timmy Jones

* *

Dear Timmy,

Thank you for you letter. Mrs. Claus, the reindeer and the elves are all fine and thank you for asking about them. Santa is a little worried all the time you spend playing video games and texting. Santa wouldn’t want you to get fat. Since you have indeed been a good boy, I think I’ll bring you something you can go outside and play with.*

Merry Christmas,

Santa Claus

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

Mr. Claus,

Seeing that I have fulfilled the “naughty vs. nice” contract, set by you I might add, I feel confident that you can see your way clear to  granting me what I have asked for. I certainly wouldn’t want to turn this joyous season into one of litigation. Also, don’t you think that a jibe at my weight coming from an overweight man who goes out once a year is a bit trite?

Respectfully,

Tim Jones

* *

Mr. Jones,

While I have acknowledged you have met the “nice” criteria, need I remind you that your Christmas list is a request and in no way is it a guarantee of services provided. Should you wish to pursue legal action, well that is your right. Please know, however, that my attorney’s have been on retainer ever since the Burgermeister Meisterburger incident and will be more than happy to take you on in open court. Additionally, the exercise I alluded to will not only improve your health, but also improve your social skills and potentially help clear up a complexion that looks like the bottom of the Burger King fry bin most days.

Very Truly Yours,

S Claus

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

Now look here Fat Man, I told you what I want and I expect you to bring it. I was attempting to be polite about this but you brought my looks and my friends into this. Now you just be disrespecting me. I’m about to tweet my boys and we’re gonna be waiting for your fat ass and I’m taking my game console, my game, my phone, and whatever else I want. WHAT EVER I WANT, MAN!

T-Bone

* *

Listen Pizza Face,

Seriously??? You think a dude that breaks into every house in the world on one night and never gets caught sweats a skinny G-banger wannabe? “He sees you when you’re sleeping; He knows when you’re awake”. Sound familiar, genius? You know what kind of resources I have at my disposal. I got your shit wired, Jack. I go all around the world and see ways to hurt people that if I described them right now, you’d throw up your Totino's pizza roll all over the carpet of your mom’s basement. You’re not getting what you asked for, but I’m still stopping by your crib to stomp a mud hole in you’re ass and then walk it dry. Chew on that, Petunia.

S Clizzy

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

Dear Santa,

Bring me whatever you see fit. I’ll appreciate anything.

Timmy

* *

Timmy,

That’s what I thought you little bastard.

Santa

 

 

 





 

Humor Between December 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor123112

Humor Between November 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor113012

Humor Between October 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor103112

Humor Between September 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor093012

Humor Between August 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor083112

Humor Between July 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor073112

Humor Between June 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor063012

Humor Between May 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor053112  

Humor Between April 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor043012

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 December 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

 

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/

 

 

 

November 30, 2012

Bob Jensen's New Bookmarks November 1-30, 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/

FASB Accounting Standards Updates ---
http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB/Page/SectionPage&cid=1176156316498

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 
 

2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view these videos.
Bob Jensen is an obscure speaker following Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc

Links to IFRS Resources (including IFRS Cases) for Educators ---
http://www.iasplus.com/en/binary/resource/0808aaaifrsresources.pdf
Prepared by Paul Pacter: ppacter@iasb.org

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

American Accounting Association  Past Presidents are listed at
http://www.cs.trinity.edu/~rjensen/temp/PastPresidentsAAA.htm 

"2012 tax software survey:  Which products and features yielded frustration or bliss?" by Paul Bonner, Journal of Accountancy, September 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Sep/20125667.htm

Center for Financial Services Innovation --- http://cfsinnovation.com/

"Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
Note this has a good explanation of how the inspection process works.

PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx

 

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


 

Humor Between November 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor113012

Humor Between October 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor103112

Humor Between September 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor093012

Humor Between August 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor083112

Humor Between July 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor073112

Humor Between June 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor063012

Humor Between May 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor053112  

Humor Between April 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor043012

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




But having a good idea is only the start. What you have to do is make it
into a story. Some people think that all they need in order to be a writer is
inspiration. Not a bit of it! Plenty of people have good ideas, but very few of them
actually go on and write  story. That's where the hard work starts.

Phillip Pullman, "How do Writers Think of Their Ideas?"
Big Questions From Little People, Edited by Gemma Elwin Harris, Faber & Faber, Ltd., ISBN 978-0-16-222322-7, 2012, Page 168
Also see the video at
http://www.openculture.com/2012/11/adam_savage_host_of_mythbusters_explains_how_simple_ideas_become_great_scientific_discoveries.html

Every today that is, and that will be, Is sculptured by all that was
Bob Schlag - January 24, 1982
Thank you Auntie Bev for the heads up


Question
Why are accounting professors and medical school professors likely to receive higher compensation in the Academy?

Hint
The answer varies.
 

"Eating an Elite Education at McDonald's," by Jerry Dickens, Chronicle of Higher Education, November 7, 2012 ---
http://chronicle.com/article/Eating-an-Elite-Education-at/135578/

. . .

As I bite into my first Big Mac, all of that resonates along with some intriguing and basic facts. I can readily obtain the average salaries for academics at public universities across America. I can categorize the salaries by field and university profile. I can understand the metrics for pay in many cases. I can imagine why different academics receive different salaries. I also can read my university's extraordinary goals, lofty visions, and glossy brochures, filled with crisply manufactured blurbs espousing greatness, several with exclamation points. I can pull all the sticky tabs within this framework. I can even dig deep into the garbage for more data.

However, no matter how one minces the patties, my salary is significantly below average compared with those of commensurate positions across public research universities, including in my state. Other than a few good colleagues, who have assured me that they make slightly less or slightly more than me, I have no direct information on how my salary compares with other faculty members' pay at my university or other private universities. What several of us know, however, is that we, at least in earth science, make about 10 to 12 percent less than what's reported for similar positions in our field at public universities.

Continued in article

Jensen Comment
I wonder if this article would've ever been written by an accounting professor or a medical school professor at Rice?

I say this remembering that Emory recently dropped its Geology (Earth Science) Program due to lack of majors to sustain advanced courses. In turn, the program lacked majors due to a surplus of geology graduates at both the undergraduate and graduate levels across the U.S.

I conclude that the article may well have been written by an accounting professor or medical school professor even if they are on the high end of compensation due to shortages of faculty to meet increase majors in those programs. But for them it might be more of an academic exercise rather than a total gut experience at McDonalds. You have to read the entire article to really, really appreciate the McDonalds metaphor.

Question
Why do accounting professors and medical school professors probably make more than geology professors on average for professors who are successful in research and publication in their respective disciplines?

Answer
The answer varies after factoring out the necessary condition of having rising student demand.

Medical school professors make more largely because they have so many opportunities to make enormously higher salaries and benefits by going to work in private practice.

Accounting professors make higher salaries because accounting Ph.D. programs artificially restrain supply with length of time (over five years to graduate) and by discouraging solid accountants from applying unless they are also interested in becoming mathematicians and statisticians.

"Exploring Accounting Doctoral Program Decline:  Variation and the Search for Antecedents," by Timothy J. Fogarty and Anthony D. Holder, Issues in Accounting Education, May 2012 ---
Not yet posted on June 18, 2012

ABSTRACT
The inadequate supply of new terminally qualified accounting faculty poses a great concern for many accounting faculty and administrators. Although the general downward trajectory has been well observed, more specific information would offer potential insights about causes and continuation. This paper examines change in accounting doctoral student production in the U.S. since 1989 through the use of five-year moving verges. Aggregated on this basis, the downward movement predominates, notwithstanding the schools that began new programs or increased doctoral student production during this time. The results show that larger declines occurred for middle prestige schools, for larger universities, and for public schools. Schools that periodically successfully compete in M.B.A.. program rankings also more likely have diminished in size. of their accounting Ph.D. programs. Despite a recent increase in graduations, data on the population of current doctoral students suggest the continuation of the problems associated with the supply and demand imbalance that exists in this sector of the U.S. academy.

September 5, 2012 reply from Dan Stone

This is very sad and very true.

Tim Fogarthy talks about the "ghettoization" of accounting education in some of his work and talks. The message that faculty get, and give, is that if a project has no chance for publication in a top X journal, then it is a waste of time. Not many schools are able to stand their ground, and value accounting education, in the face of its absence in any of the "top" accounting journals.

The paradox and irony is that accounting faculty devalue and degrade the very thing that most of them spend the most time doing. We seem to follow a variant of Woody Allen's maxim, "I would never join a club that would have me as a member." Here, it is, "I would never accept a paper for publication that concerns what I do with most of my time."

As Pogo said, "we have met the enemy and they is us."

Dan Stone

Bob Jensen's threads on the sad state of accountancy doctoral programs in North America ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms


What a surprise. I thought she could gallop faster than the posse.
"U.S. Attorney: Ex-Dixon comptroller to plead guilty," Chicago Tribune, November 13, 2012 ---
http://www.chicagotribune.com/news/local/breaking/chi-us-atorney-exdixon-comptroller-to-plead-guilty-20121113,0,227018.story

Former Dixon comptroller Rita Crundwell plans to plead guilty Wednesday to a federal fraud charge that alleges she siphoned more than $53 million from the small northwestern Illinois city’s coffers, according to the U.S. Attorney's office.

The office released a statement saying Crundwell will change her plea to guilty at a hearing Wednesday morning before U.S. District Judge Philip G. Reinhard in federal court in Rockford.

It was unclear from the release how Crundwell’s guilty plea to the federal charge will impact separate state charges she faces for the same wrongdoing. She also faces 60 counts of theft tied to her alleged embezzlement from the city's accounts.

Crundwell is accused of stealing the money over two decades and using it to sustain a lavish lifestyle and a nationally renowned horse-breeding operation.

Federal authorities have auctioned off about 400 horses and a luxury motor home that Crundwell allegedly bought with the stolen city funds. If Crundwell is convicted, much of the money will be returned to Dixon – after the federal government takes its cut for caring for the horses for months.

How true can you get?
As (Commissioner) Bridgeman left office last year, he praised (Controller) Rita Crundwell for being an asset to the city and said she "
looks after every tax dollar as if it were her own," according to meeting minutes.

As quoted by Caleb Newquest on April 27, 2012 ---
http://goingconcern.com/post/heres-ominous-statement-former-dixon-city-finance-commissioner-made-about-accused-embezzler

She was mostly just horsing around
"Somehow the City of Dixon, Illinois Just Noticed (after six years) That $30 Million Was Missing," Going Concern, April 19, 2012 ---
http://goingconcern.com/post/somehow-city-dixon-illinois-just-noticed-30-million-was-missing


When you adopt the standards and the values of someone else … you surrender your own integrity. You become, to the extent of your surrender, less of a human being.
Eleanor Roosevelt (see below)

The following link would make an interesting debate, especially in the context of Kant's Categorical Imperative---
http://en.wikipedia.org/wiki/Categorical_imperitive

It is of interest in accounting theory where we are confronted with conformity (standards) issues that sometimes stand in the way of innovation and utility maximization.

"Eleanor Roosevelt on Happiness, Conformity, and Integrity," by Maria Popova, Brain Pickings, November 16, 2012 ---
http://www.brainpickings.org/index.php/2012/11/16/eleanor-roosevelt-on-happiness-conformity-and-integrity/


"Holiday Gadget Wish List 2012," by Terri Eyden, AccountingWeb, November 19, 2012 ---
http://www.accountingweb.com/article/holiday-gadget-wish-list-2012/220246?source=technology

Roku Streaming Stick
This great item comes from Roku and is a new format for their streaming media device. Simply plug in the USB stick to the HDMI port of your Roku Ready TV, and the self-powered unit will allow access to numerous services. Netflix, Hulu Plus, and Amazon Video (including prime video access) are all available, among hundreds of other apps for streaming movies, music, news content, games, and more. For the money, Roku's products give you more flexibility than the equivalent Apple TV line.
 
Boxee TV
Another new "cut-the-cable" addition in the streaming media category is the new version of the Boxee TV box, which for the first time offers a DVR function. This first-of-its-kind service is currently boasting unlimited online storage for recorded media from your antenna or cable. The service fee of $15 (currently discounted at $10) is comparable to other TiVo style services, but the unlimited storage will be a tempting offer for many users who would like to start cataloging their media online. It remains to be seen how this offer holds up and what limitations exist to file access.
 
Kindle Paperwhite
The most recent offering from Amazon, the Kindle Paperwhite, is a great upgrade over the previous units. Eliminating one of the few downfalls of their previous e-readers, low-light reading, the new Paperwhite technology allows for low or no light use. This front-lit screen gives the reader the ability to read in complete darkness while maintaining the e-ink-enabled benefit of reading for long periods with limited eye strain. Granted, some users may not be prone to reading over long periods; this is a great product for readers who seek to get lost in a good read.
 
iPad mini
If that's not your preference, Apple's newest toy might suit you for a lower price than its previous tablets. Still not matching the price of the Kindle Fire HD (another new viable option in this category), the iPad mini takes a new shape to Apple's tablet line. Shrinking the 9.7 inch screen of previous iPads to 7.9 inches, Apple has answered a common request for a smaller version of their market-dominating line. Interestingly, the iPad mini is actually a smaller version of multiple generations of the iPad that combines the display quality and processor of the second gen, with the camera of the third/fourth gen iteration. As such, the retina display is missing, but the mini is much lighter and slimmer than previously available versions. Additionally, cellular versions are available, giving flexibility to users on the go.
 
LG Tone (HBS-700) Wireless Stereo Headset
Though not a new product or a new technology, the LG Tone (HBS-700) Wireless Stereo Headset delivers on an idea that many other brands seem unable to. A favorite around the Xcentric office, this would make an excellent gift for anyone looking for wireless flexibility for both calls and music. Seemingly unconventional, the chosen design circumvents common complaints with headsets of this kind. They will fit on anybody, are comfortable, provide the needed control functions, and are more durable than they seem at first glance. The sound quality while listening to music won't cut it for an audiophile, but is more than adequate for most users. Stereo ear buds for calling gives more sound isolation than the standard Bluetooth headset, and the mic quality seems to be on par with other headsets. For portable wireless listening on a larger budget, the Bose SoundLink® Bluetooth® Mobile
Speaker II was released in September and is an excellent alternative.
 
Chromebook
The newly released Chromebook is another intriguing product available in time for the 2012 holidays. This third gen lighter/smaller version comes with some great features for a price point just above the Kindle Fire HD and lower than all Apple tablets. It remains to be seen if Google is creating a new category or if this line will fade away. However, the newest release might be worth a look for certain users. Primarily a browser-based system, the newest Chromebook does include HDMI, USB 3.0, USB 2.0, Bluetooth, a webcam, and dual band Wi-Fi, while boasting 6.5 hours of battery, all in a slim, lightweight package. Though primarily based on using Google's services on the web, a Citrix plug-in is available to access more complete Cloud services. I'd want to try this out to before banking on it, but for the price tag, Google is clearly trying to break into this market.
 
Other Mentions
Here are a few other great gift ideas:

Bob Jensen's threads on gadgets ---
http://www.trinity.edu/rjensen/Bookbob4.htm#Technology

 


Tax --- http://en.wikipedia.org/wiki/Tax

"Tax Time:  Why we pay," by Jill Lepore, The New Yorker, November 26, 2012 ---
http://www.newyorker.com/reporting/2012/11/26/121126fa_fact_lepore

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


"Why using cash may not protect your privacy in the future–game theory," Mind Your Decisions, November 11, 2012 --- Click Here
http://mindyourdecisions.com/blog/2012/11/13/why-using-cash-may-not-protect-your-privacy-in-the-future-game-theory/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+mindyourdecisions+%28Mind+Your+Decisions%29&utm_content=Google+Reader

Jensen's Comment
This stretches the point to fit into a game theory context. For example, I use cash in restaurants and gas stations. I figure that in those places the odds are quite high of geting a credit card number stolen. Using cash protects my privacy.

But I use a credit card for Amazon, but I do use a credit card with a relatively low credit ceiling.

I think using cash protects my privacy except in places where I cannot do business without a credit card such as for rental cars, hotels, 800 numbers (Erika), and Amazon (me).


Oh my!  Please don't shoot the messenger.
"Finance Execs Find XBRL Useless:  The SEC and other regulators had hoped for a wider use for XBRL than just financial reporting. But finance execs can't see past the cumbersome filing," by Kathleen Hoffelder CFO.com, November 21, 2012 ---
http://www3.cfo.com/article/2012/11/gaap-ifrs_sec-xbrl-general-motors-mccormick-company-johnson-johnson-financial-reporting

Jensen Comment
These are the clients that provide the XBRL markups. The survey will not be complete until we also here from financial analysts and investors.

November 24, 2012 reply from Rick Lillie

Hi Bob and AECM,

 

I teach a Seminar in Accounting Information Systems class for our Master of Science in Accountancy (MSA) program at Cal State San Bernardino.  XBRL is one of the topics explored during the course.  I worked with Skip White to develop the approach taken in the course and used Skip's XBRL workbook.

 

I partnered with I-Metrix, a product offered EDGR, to develop XBRL materials and research/analysis activities for the course.  I-Metrix allowed my students to use the "ActiveFinancials for Investors software to analyze XBRL-based financial reports as one of the XBRL activities.  I-Metrix was absolutely amazing to work with.

 

I-Metrix developed an Excel plug-in tool.  You can develop analysis models in Excel and then relate components of the analysis model to a company's financial statements found through I-Metrix/EDGR.  When a company's financial information updates, I-Metrix automatically updates the analysis model(s) in Excel.

 

From what I understand, the SEC is using something similar to this process to analyze quarterly reports submitted by publicly-traded companies.  The SEC's analysis process that used to take a significant amount of time is now completed much quicker, resulting in analysis information much more relevant and timely.

 

To acquaint students with XBRL-tagged financial information, I created a team-based "seek-and-find" XBRL project.  The exercise included three sections.

 

·       Section #1 included 20 things to find regarding Microsoft 2011 and 2012 financial information.

·       Section #2 included 5 additional pieces of information about Microsoft 2011 financial information.

·       Section #3 required a comparative analysis of selected items for Apple Inc. (Y/E 9/25/11) and Microsoft Inc. (Y/E 6/30/11).  Students were asked to build a "Selective Data Comparison Table" based on information found in XBRL filings by both companies.

 

By the time the XBRL project was completed, class members had a reasonable understanding regarding differences between traditional and XBRL-related financial information.  They also developed skills working with I-Metrix and the EDGR financial statement database.

 

Below are some of the resources students used to learn about XBRL.

 

·       Introduction to I-Metrix (ActiveFinancials for Investors)

·       Financial Analysis - Made Easy

·       Working with I-Metrix (EDGR Online)

·       XBRL Cloud:  Dashboard of EDGR SEC Filings

 

Students really liked learning how to use XBRL and I-Metrix.  I contacted I-Metrix about being able to use the software in my next ACCT 625 class.  Unfortunately, I-Metrix said "no" to my request.  They were disappointed that my department had not purchased a subscription to I-Metrix.

 

My department includes both Accounting and Finance.  I tried to get support for purchasing an I-Metrix subscription that could be used in both Accounting and Finance courses.  Unfortunately, faculty members in my department were more interested in archival databases that fit their research models than working with "live, interactive financial information."

 

I attended Skip White's XBRL workshop at the AAA Annual Meeting a couple of years ago.  The workshop was an intense three-day experience. 

 

After completing the workshop, I told Skip that I understood the benefit of XBRL-tagged financial information; however, I felt that "hand tagging" of data would be XBRL's "Achilles' heel" when it came to wide spread adoption in accounting practice.  I told Skip that in my opinion XBRL would not "really take off" until accounting software companies include the XBRL tagging process "behind the scenes" (i.e., tagging would happen automatically as transactions and reports were processed).  Once this can happen, any company (large or small) should be able to generate financial statements in both traditional and XBRL formats.

 

I hope my comments have added to the conversation.  I don't wear my heart on my sleeve.  I would appreciate your feedback comments regarding the XBRL "seek-and-find" project.

 

Best wishes,

 

Rick Lillie

 

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

 

Email:  rlillie@csusb.edu

Telephone:  (909) 537-5726

Skype (Username):  ricklillie

 

November 26, 2012 reply from Louis Matherne

Bob,

While there are tools available such as EDGAR Online, CSuite (XBRL US), and many others, I’d suggest an alternate approach that may be more valuable from an academic perspective – build your own.

There are two keys components to accessing XBRL data. 

First, you need to consume the XBRL data you are interested into a database.  I’m using database generically here as there are a variety of ways to hold the data but your plain vanilla relational database works fine.  This database can be setup to consume the XBRL data as provided by the SEC as the SEC makes it available, which is very close to real time with the filings, i.e., the registrant files and it is close to instantaneously available.  Now there are a variety of things you can do with this data once you have it in a database structure.  Data aggregators will typically add additional metadata that they find useful and they will do some data cleansing as the XBRL data as provided by filers contains errors. 

Second, once you have this database in place you can search it using SQL Query or link it directly into Excel and take advantage of pivot tables and other XBRL functions to perform your analysis.  Once these Excel templates are setup you can refresh them simply by pushing a button. 

I think both portions would make for a great research project for any university with both an Accounting and IS College.


J. Louis Matherne
Chief of Taxonomy Development
Financial Accounting Standards Board
LMatherne@fasb.org | 203-956-5229 | www.fasb.org

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


"Global Steel Industry Faces Capacity Glut," by John W. Miller, The Wall Street Journal, November 27, 2012 ---
http://professional.wsj.com/article/SB10001424127887324595904578116761144046732.html?mod=ITP_marketplace_0&mg=reno-wsj

Jensen Comment
In the November 2019 issue of TAR (pp. 2181-2182) there's really interesting review of a book by Ron Huefner that deals heavily on accounting for idle capacity. Since TAR book reviews are free to the world, I quote the entire book review by Dennis Campbell (Harvard) below.

Revenue Management: A Path to Increased Profits, by Ronald J. Huefner (New York, NY: Business Expert Press, 2011, ISBN 13: 978-1-60649-141-6).

In reading Ronald Huefner's book, I could not help but be reminded of my own experiences in teaching cost accounting and management. Teaching materials and plans in this area inevitably revolve heavily around concepts and techniques for allocating costs and measuring the profitability of products, services, and customers, leaving comparatively little time for the “so what?” questions. Once the measurement is done, how should we use the information to improve profitability?

Without a systematic framework, this part of the discussion can quickly become a generic exercise in developing a “laundry list” of broad approaches—such as discount pricing for large and predictable orders, preferential pricing for “strategic” customers, and even the wholesale “firing” of customers—with little in the way of prescription for how to choose among these approaches, let alone facilitate their implementation. These approaches are all variants of differential pricing, and Huefner's book reminds us that the field of revenue management provides the appropriate systematic framework for making these choices optimally. In doing so, the book makes a strong case for the need to better integrate cost and revenue management processes within organizations.

Huefner's target audience is practitioners, and the book seems to be particularly aimed at accounting and financial managers. Perhaps appropriately, given this target audience, the book is written at a relatively high level and focuses on providing a general introduction to revenue management applications and techniques as well as methods for measuring and monitoring their efficacy. The “30,000 foot” view taken in the book, however, presents both strengths and weaknesses. On the one hand, it makes the topic of revenue management in all its various forms accessible at an introductory level. On the other, it allows little in the way of detailed guidance for developing or implementing revenue management practices within organizations.

It is, of course, difficult to accomplish both tasks in one book. Huefner's focus on the former makes the book most appropriate for financial and accounting managers who need a general introduction to the topic of revenue management. It may also be useful for marketing and operations managers who need a general introduction to cost accounting concepts that can be utilized to evaluate and ensure the profitability of revenue management processes.

The first two chapters highlight the importance of revenue management as a field and provide a brief historical overview of its origins in airlines, along with its subsequent development and application in a variety of other service industries. Chapter 2 provides a particularly useful overview of industry- and firm-level characteristics that give rise to the demand for revenue management, including the presence of fixed and perishable capacity (e.g., airline seats, hotel rooms), high fixed costs, and uncertain but predictable demand patterns.

Chapters 3–6 focus on the integration of revenue management with various cost measurement and analysis techniques, ranging from contribution margin and capacity analysis to opportunity costs and the theory of constraints. Huefner provides a strong case in this section for the role of cost systems in ensuring the success of revenue management efforts. In drawing a much-needed link between cost and revenue management techniques, this is perhaps the strongest portion of the book. However, given the target audience of finance and accounting managers who are likely to understand cost accounting concepts comparatively well, these chapters tilt too heavily toward cost measurement rather than revenue management. This is most notable in Chapter 5, where Huefner provides a very good, and relatively detailed, overview of the CAM-I capacity model, but devotes less than a paragraph to applying the model in revenue management decisions.

Despite this, Huefner should certainly be given some credit for drawing the link between capacity cost analysis and revenue management. Detailed models of an organization's cost structure should allow managers to proactively assess, for any given level of revenue-generating activity, the appropriate level of capacity required in various types of resources (personnel, office space, hardware, and other indirect support resources). In this vein, his work in Chapter 5 appropriately articulates a view similar to that of Cooper and Kaplan's (1999) “fundamental equation of activity-based costing,” which goes something like the following:

Cost of Resources Supplied = Cost of Revenues Used + Cost of Unused Capacity

The left-hand side of this equation captures the cost of resources committed during a particular accounting period, while the right-hand side simply partitions this cost into the costs of resources utilized in productive and non-productive activities. As Cooper and Kaplan point out, cost systems like activity-based costing are focused on the right-hand side of this equation—modeling the costs of resources used and, by extension, providing transparency into where unused capacity exists in the organization. With information from such cost systems in hand, managers need to decide whether to reduce unused capacity by reducing the cost of resources supplied (cost management) or by reallocating that capacity to productive revenue-generating use (revenue management).

Chapters 7–9 focus on the “bread and butter” issue of revenue management—differential pricing. These chapters provide a broad overview of different approaches to segregated pricing (e.g., by customer, location, distribution channel, or product) and more specific techniques such as discounting, bundling, and markdowns. While these chapters are useful in providing a review of different pricing approaches that fall under the broad umbrella of revenue management, the weakness of the “30,000 foot” approach is apparent here, as no guidance or framework is offered for choosing which approaches work best and under what circumstances.

Chapters 10–12 point to potentially important roles for accounting and finance professionals to play in measuring and monitoring the efficacy of revenue management efforts within organizations. These chapters highlight the importance of considering the effects of current revenue management efforts on future customer behavior and profitability. The price discrimination at the heart of many revenue management techniques carries potential risks for organizations in the form of customer perceptions of unfairness, eroded trust, and reduced loyalty (Chapter 10). Revenue management decisions, in the form of price discounting, bundling, and other techniques also need not necessarily result in more profitable customers (Chapter 11).

Huefner begins to address the issue of how to measure all of these effects in Chapter 12, where he advocates a detailed analysis of different revenue sources. Overall, these chapters do a good job in highlighting the importance of these issues, but the ideas could be pushed further—particularly with regard to what type of management reports and reporting processes would be necessary to monitor, evaluate, and manage the risks and benefits of revenue management efforts over time.

In sum, the book serves as a good introduction to revenue management concepts for finance or accounting professionals who are unfamiliar with this field. More importantly, it provides a call to arms for better integration of revenue and cost management systems and points to an important and relatively unexplored role for these professionals in monitoring, evaluating, and managing ongoing revenue management efforts within organizations.

REFERENCES
Cooper, R., and Kaplan. R. S. 1999. The Design of Cost Management Systems: Text and Cases. Second edition. Upper Saddle River, NJ: Prentice Hall. Reporting Business Risks: Meeting Expectations (London, U.K.:

ICAEW Financial Reporting Faculty, 2011, ISBN 978-0-85760-291-6, pp. v, 79). Downloadable at http://www.icaew.com .

Dennis Campbell
Associate Professor of Business Administration
Harvard University

Jensen Comment
There is an error in the hard copy version of this book review in that the ICAEW reference included in the electronic version was omitted from the hard copy version on Page 2182

There's an error in the electronic version of this book review in that the reviewer (Dennis Campbell) is erroneously omitted and credit for the review is  Timothy B. Bell in the electronic version. The correct credit to Dennis Campbell is given in the hard copy version on Page 2182.

Timothy Bell is actually the reviewer of another book pp. 2183-2185.

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


Question
How does one become a Professor of Pricing?

This is already starting to happen at the University of Rochester’s Simon School of Business, which now offers about a dozen full-time and part-time specialty master’s business programs. The school is introducing two new MS programs in January, one in pricing and another in business analytics. This year, seven students from the school’s MS programs went directly into the school’s MBA program, and about five others have indicated they have plans to do so in the future, says Simon School Dean Mark Zupan.
See below

 

"The Booming Market for Specialized Master’s Degrees," Bloomberg Business Week, November 21, 2012 ---
http://www.businessweek.com/articles/2012-11-21/the-booming-market-for-specialized-masters-degrees

About five years ago, the University of Maryland’s Smith School of Business had an approach to one-year specialized master’s degrees that was fairly typical among business schools. It offered just one MS in Business program, a degree in accounting that helped students get specialized knowledge about the industry and a leg up in the job market. The program was so large and thriving that the school’s leadership soon started thinking about dipping its toe further into the marketplace, says Ken White, the school’s associate dean of MBA and MS programs.

First, in 2009 they created an MS program for students who wanted to specialize in finance. Buoyed by its success, the school added two new MS degrees to its roster in 2011, one in supply chain management and another in information systems. Today, there are 522 students enrolled in specialized master’s programs at Smith, and plans are in the works for a fifth program in marketing analytics, set to launch in the fall of 2013.

“This is a new frontier for a lot of schools,” White says. “We’ve been surprised by how quickly these programs and the demand for these programs have grown. It has been almost extraordinary.”

The market for specialized master’s programs in accounting, management, finance, and a number of other business disciplines has never been stronger. A growing number of business schools, from the Smith School to Michigan State University’s Broad Graduate School of Management, are riding on that wave of interest. They’re creating a whole new suite of MS degrees, sometimes as many as half a dozen or more, in response to a new generation of students, the vast majority of whom are either straight out of college or just a year or two out of school. The MS students are hungry for the specialized knowledge these programs offer and are looking to distinguish themselves in an increasingly competitive job market, administrators and recruiters say. Administrators are hoping some of them will build lasting relationships with the school, and consider them for other full-time degree programs down the road.

The surge in interest in these programs comes at a time when many business schools are at a crossroads, with their flagship MBA programs struggling to attract students. Nearly two-thirds of full-time, two-year MBA programs in the U.S., or 62 percent, are reporting a decline in applications this year, according to the Graduate Management Admission Council’s (GMAC) 2012 Application Trends Survey.

At the same time, specialized master’s programs in business are experiencing robust growth, making it a wise move for B-schools to invest in these programs. There were 160,500 GMAT score reports sent to U.S. specialized master’s programs in 2012, up 15 percent from last year, and 86 percent from five years ago, according to GMAC.

The surge in applications is being driven by several factors. Many applicants are international students looking for a degree from a U.S. school to help advance their careers back home. Others are seeking additional credit hours now required for a CPA credential in states such as New York and Massachusetts that have increased the requirements beyond what a typical bachelor’s degree provides. Many are simply doing the math and concluding that the five years of work experience required at most MBA programs is a luxury they can’t afford. Getting a one-year degree straight out of college is less expensive, results in no career disruption, and leads to higher immediate post-college earnings.

The most popular programs by far are accounting, finance, and business or management, but increasingly schools are expanding to other hot emerging fields, such as data analytics, information technology, supply chain management, and others, says Michelle Sparkman-Renz, GMAC’s director of research communications.

“It’s appealing for them because the relationship they begin with a candidate very early on is one that could possibly continue through MBA or executive MBA programs,” Sparkman-Renz says.

This is already starting to happen at the University of Rochester’s Simon School of Business, which now offers about a dozen full-time and part-time specialty master’s business programs. The school is introducing two new MS programs in January, one in pricing and another in business analytics. This year, seven students from the school’s MS programs went directly into the school’s MBA program, and about five others have indicated they have plans to do so in the future, says Simon School Dean Mark Zupan.

Continued in article

Jensen Comment
In my opinion, these specialty programs are mostly attempts to bolster faltering conventional MBA programs. They are typical of business firms that offer newer products to bolster a declining product. But specialty programs have drawbacks as well as advantages. For example, if the Simon School offers a new MS program in Pricing, it may have to bolster faculty with some experts on pricing. And there are no Ph.D. graduates in "pricing." Prospective faculty in pricing are most likely economists, accountants, and production managers who have real-world experience in pricing. Students entering this program are expecting to graduate with knowledge of tools (including software) on pricing. The typical accountics scientis who has run some regression studies on the impacts of pricing on stock prices but has zero real-world experience in product pricing is not likely to be suited to what students are expecting from a MS in Pricing.

And the concept of "pricing" can become further specialized. For example, there's a world of difference when setting the price of Twinkies versus setting the price of a new structured financing product in a Wall Street investment bank. For one thing, Twinkies have millions of customers wanting low prices. Buyers of structured financing products are fewer in numbers and concerned more with return and risk as opposed to a quick sugar fix.

 


Question
When asked about the meaning of life, how should Siri reply?

One the AECM I recently asked Barry Rice what happens when he asks Siri about the meaning of life ---
http://en.wikipedia.org/wiki/Siri_%28software%29
Siri's answer was too superficial.

Now there is a Website that should probably programmed by Apple into Siri software.

"Scientists and Philosophers Answer Kids’ Most Pressing Questions About How the World Works"" by Maria Popova, Brain Pickings, November 5, 2015 ---
http://www.brainpickings.org/index.php/2012/11/05/big-questions-from-little-people/

“If you wish to make an apple pie from scratch,” Carl Sagan famously observed in Cosmos, you must first invent the universe.” The questions children ask are often so simple, so basic, that they turn unwittingly yet profoundly philosophical in requiring apple-pie-from-scratch type of answers. To explore this fertile intersection of simplicity and expansiveness, Gemma Elwin Harris asked thousands of primary school children between the ages of four and twelve to send in their most restless questions, then invited some of today’s most prominent scientists, philosophers, and writers to answer them. The result is Big Questions from Little People & Simple Answers from Great Minds (public library) — a compendium of fascinating explanations of deceptively simple everyday phenomena, featuring such modern-day icons as Mary Roach, Noam Chomsky, Philip Pullman, Richard Dawkins, and many more, with a good chunk of the proceeds being donated to Save the Children.

Big Questions from Little People ---
http://www.amazon.com/Big-Questions-Little-People-Answers/dp/0062223224/ref=sr_1_3?tag=braipick-20
One child's question I might ask is why used copies cost a penny more than new copies as of November 12, 2012?

"Noam Chomsky Spells Out the Purpose of Education," by Josh Jones, Open Culture, November 2012 ---
http://www.openculture.com/2012/11/noam_chomsky_spells_out_the_purpose_of_education.html

Bob Jensen's links to the meaning of life ---
http://www.trinity.edu/rjensen/Bookbob2.htm
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I have the same criticism of Dan Ariely and President Obama --- they both suffer from overexposure in the media. They have good messages, but sometimes we tire hearing about it. A psychology top researcher friend of mine also criticizes Dan Ariely of conducting some research that seems to be more replication of earlier studies in the social sciences, particularly psychology. This would be great except that Professor Ariely purportedly does not always cite those earlier studies.

Be that as it may, Dan Ariely is certainly value added to our Academy.

Dan Ariely Presents “A Beginner’s Guide to Irrational Behavior” in Upcoming MOOC, Open Culture, November 12, 2012 ---
http://www.openculture.com/2012/11/a_beginners_guide_to_irrational_behavior.html

Here’s one thing you can look forward to early next year. Dan Ariely, a well-known professor of psychology and behavioral economics at Duke University, will present A Beginner’s Guide to Irrational Behavior as a Massive Open Online Course (MOOC). If you’ve been with us for a while, you’re already familiar with Ariely’s work. You’ve seen his videos explaining why well-intentioned people lie, or why CEOs repeatedly get outsized bonuses that defy logic. And you know that economics, when looked at closely, is a much messier affair than many rational choice theorists might care to admit.

Now is your chance to delve into Ariely’s research and discover precisely how emotion shapes economic decisions in financial and labor markets, and in our everyday lives. The six-week course (described in more detail here) doesn’t begin until March 25th, but you can reserve your seat today. It’s all free. And keep in mind that students who master the materials covered in the class will receive a certificate at the end of the course.

Other potentially interesting MOOCs coming early next year include:

Bob Jensen's threads on MOOCs, MITx, and EdX courses available from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI


Question
How would this differ from "The Making of an Accounting Professor?"

"The Making of a Philosophy Professor," by John Kaag, Chronicle of Higher Education's Chronicle Review, November 26, 2012 ---
http://chronicle.com/article/The-Making-of-a-Philosophy/135876/?cid=cr&utm_source=cr&utm_medium=en

 


The Institute of Internal Auditors has issued revisions to the International Standards for the Professional Practice of Internal Auditing that will go into effect January 1. The standards are mandatory under the IIA's International Professional Practices Framework ---
http://www.accountingweb.com/article/iia-approves-revised-standards/220189?source=aa


AICPA Honors Top Accounting Educators ---
http://www.accountingweb.com/article/aicpa-honors-top-accounting-educators/220175?source=education

"Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
Note this has a good explanation of how the inspection process works.

PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx

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


The booked National Debt in August 2012 went over $16 trillion --- 
U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/

Question
How does the U.S. government hide its true debt total?

Answer
Firstly, there are $100-$200 trillion in unbooked entitlements. Nobody has an accurate estimate of those future obligations, especially for the Medicare gorilla.

The U.S. currently has "booked" National Debt slightly over $16 trillion that is a more accurate estimate of the debt coming due soon?
Or is this an accurate number by any stretch of the imagination?

"Why $16 Trillion Only Hints at the True U.S. Debt:  Hiding the government's liabilities from the public makes it seem that we can tax our way out of mounting deficits. We can't," by Chris Cox (former SEC Director) and Bill Archer (PwC), The Wall Street Journal, November 26, 2012 ---
http://professional.wsj.com/article/SB10001424127887323353204578127374039087636.html?mod=djemEditorialPage_t&mg=reno64-wsj

A decade and a half ago, both of us served on President Clinton's Bipartisan Commission on Entitlement and Tax Reform, the forerunner to President Obama's recent National Commission on Fiscal Responsibility and Reform. In 1994 we predicted that, unless something was done to control runaway entitlement spending, Medicare and Social Security would eventually go bankrupt or confront severe benefit cuts.

Eighteen years later, nothing has been done. Why? The usual reason is that entitlement reform is the third rail of American politics. That explanation presupposes voter demand for entitlements at any cost, even if it means bankrupting the nation.

A better explanation is that the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. How else could responsible officials claim that Medicare and Social Security have the resources they need to fulfill their commitments for years to come?

As Washington wrestles with the roughly $600 billion "fiscal cliff" and the 2013 budget, the far greater fiscal challenge of the U.S. government's unfunded pension and health-care liabilities remains offstage. The truly important figures would appear on the federal balance sheet—if the government prepared an accurate one.

But it hasn't. For years, the government has gotten by without having to produce the kind of financial statements that are required of most significant for-profit and nonprofit enterprises. The U.S. Treasury "balance sheet" does list liabilities such as Treasury debt issued to the public, federal employee pensions, and post-retirement health benefits. But it does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.

As a result, fiscal policy discussions generally focus on current-year budget deficits, the accumulated national debt, and the relationships between these two items and gross domestic product. We most often hear about the alarming $15.96 trillion national debt (more than 100% of GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As dangerous as those numbers are, they do not begin to tell the story of the federal government's true liabilities.

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.

Why haven't Americans heard about the titanic $86.8 trillion liability from these programs? One reason: The actual figures do not appear in black and white on any balance sheet. But it is possible to discover them. Included in the annual Medicare Trustees' report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage).

As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.

Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities imply. Borrowing on this scale could eclipse the capacity of global capital markets—and bankrupt not only the programs themselves but the entire federal government.

These real-world impacts will be felt when currently unfunded liabilities need to be paid. In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected.

In exchange for the payroll taxes that aren't paid out in benefits to current retirees in any given year, the trust funds got nonmarketable Treasury debt. Now, as the baby boomers' promised benefits swamp the payroll-tax collections from today's workers, the government has to swap the trust funds' nonmarketable securities for marketable Treasury debt. The Treasury will then have to sell not only this debt, but far more, in order to pay the benefits as they come due.

When combined with funding the general cash deficits, these multitrillion-dollar Treasury operations will dominate the capital markets in the years ahead, particularly given China's de-emphasis of new investment in U.S. Treasurys in favor of increasing foreign direct investment, and Japan's and Europe's own sovereign-debt challenges.

When the accrued expenses of the government's entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

 

In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities. Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon. Only by addressing these unsustainable spending commitments can the nation's debt and deficit problems be solved.

Neither the public nor policy makers will be able to fully understand and deal with these issues unless the government publishes financial statements that present the government's largest financial liabilities in accordance with well-established norms in the private sector. When the new Congress convenes in January, making the numbers clear—and establishing policies that finally address them before it is too late—should be a top order of business.

Mr. Cox, a former chairman of the House Republican Policy Committee and the Securities and Exchange Commission, is president of Bingham Consulting LLC. Mr. Archer, a former chairman of the House Ways & Means Committee, is a senior policy adviser at PricewaterhouseCoopers LLP.

Jensen Comment
Let's forget about this debt and entitlement nonsense.
President Obama should appoint Nobel Laureate Professor Paul Krugman as his only economic advisor and print all the money we owe without having to worry about taxes and spending and cliffs. It's called Quantitative Easing but by any other name it's just printing greenbacks to scatter over the money supply ---
http://en.wikipedia.org/wiki/Quantitative_easing

Not because we will need the money, but let's also confiscate the wealth of the top 25% as punishment for their abuses of the tax and regulation laws. Greed is a bad thing, and they need to be knocked to ground level because of their greed.

 

Bob Jensen's threads on the sad state of governmental accounting (it's all done with smoke and mirrors) ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

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

Whether or not you love or hate the scholarship and media presentations of the University of Chicago's Milton Friedman, I think you have to appreciate his articulate response on this historic Phil Donohue Show episode. Many of the current dire warnings about entitlements were predicted by him as one of the cornerstones in his 1970's PBS Series on "Free to Choose." We just didn't listen as we poured on unbooked national debt (over $100  trillion and not counting) for future generations to deal with rather than pay as we went so to speak! .
The Grand Old Scholar/Researcher on the subject of greed in economics
Video:  Milton Friedman answers Phil Donohue's questions about capitalism.--- http://www.cs.trinity.edu/~rjensen/temp/MiltonFriedmanGreed.wmv

Bob Jensen's health care messaging updates --- http://www.trinity.edu/rjensen/Health.htm

 


GM sets the Spark off
"General Motors Raises Its Ante on Electric Cars:  The Detroit automaker will soon debut its first all-electric vehicle, a fast-charging vehicle that also rides well," by Jessica Leber, MIT's Technology Review, November 16, 2012 --- Click Here
http://www.technologyreview.com/news/507566/general-motors-raises-its-ante-on-electric-cars/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20121119

Why It Matters

Initial sales of electric cars have been sluggish, so the next generation of the vehicles will be crucial for the future of the technology.

Charged up: The compact electric Chevrolet Spark is due to hit dealerships in 2013.

The Chevrolet Spark EV isn’t General Motors’ first pure electric vehicle—that would be the EV1, which was quashed in 2003. But this time around, GM is more serious about these vehicles.

GM showed off the battery-powered car and let journalists make test drives this week prior to its debut November 28 at the Los Angeles Auto Show. Compact, powerful, and easy to maneuver, the Spark EV looks like a good next step for GM into plug-in vehicles. However, its price has yet to be revealed. That will be crucial, because there has been limited demand for costly electric cars that can’t go long distances without being recharged.

The Spark joins a list of all-electric cars that includes the Nissan Leaf, the Ford Focus Electric, and Tesla’s Model S. Sales of these plug-in electric vehicles, as well as electric-and-gas models like the Chevy Volt, are important not only for the carmakers, but also to establish markets for advanced battery technologies and battery charging infrastructure.

By 2017, GM wants to build as many as 500,000 cars a year with electrification technologies, said Mary Barra, senior vice president for global product development. That’s not trivial, considering that today GM sells nine million vehicles annually. In addition to the Spark EV, which will begin with small production runs for limited U.S. and Korean markets, GM plans to make plug-in hybrids like the Chevy Volt and cars with “eAssist technology,” which is a form of hybrid technology. However, Barra says, GM will focus mainly on developing plug-in technologies rather than the traditional gasoline engine hybrids, where Toyota and Ford have made larger investments.

Even as GM plans to send the Chevy Spark EV to dealerships in the middle of next year, the company is still struggling with the Volt, which, unlike the Spark, has a small gasoline tank to extend its battery range. The Volt has had a slow start since its 2010 debut (see “As GM Volt Sales Increase, That Doesn’t Mean It’s Successful”). GM won’t be close to its goal of selling 60,000 Volts this year. Last month it sold fewer than 3,000.

But the Spark could help justify GM’s earlier investments. Its electric powertrain, which will be manufactured in Maryland, borrows heavily from the Volt. GM engineers tinkered with the design to achieve more horsepower and faster acceleration. For example, they custom-shaped each square copper wire inside the motor’s coil. Their goal is to broaden the car’s appeal by selling its “fun-to-drive factor.” I found that getting the car from 0 to 45 miles an hour down a short stretch of road required only a pleasantly light touch on the pedal.

. . .

In hopes of reducing “range anxiety,” or the worry about running out of charge, GM is making the Spark the first car on the market to use a new North American “fast-charging” standard, approved in October. In special charging stations equipped with the technology, a driver could power 80 percent of the battery in 20 minutes—compared to seven hours for a full charge at home. None of these fast-charging stations are on the road yet, but General Motors expects some will come online by the time the Spark gets into dealerships.

Jensen Comment
The Spark may make an excellent commuting alternative for many persons, but for distance travel there are serious drawbacks. The biggest worry is getting stranded where there are no power outlets for miles and miles. Tow trucks of the future may well have emergency charging technology, but it's still a pain waiting a hour or more for a tow truck to bring you some juice. The Volt looks like a better alternative except that the luxury-car price of a Volt, the limited electric power range that drops to less than 30 miles in cold weather, and the poor gas mileage have virtually eliminated the future of Volt production and sales.

Cost savings are dubious for people who are single and now get by with only one car. The only alternatives are to invest in two cars or use gasoline car rental services when longer trips are planned.

The bottom line is that, at this point in time, the Spark might be more trouble than it's worth for most car buyers except for commuters who already own multiple cars for their families.

Possible Cost Accounting Student Projects
Cost accounting students in teams might be assigned the task of comparing the Spark versus the Volt versus gasoline and diesel automobile alternatives under various lifestyle scenarios. One uncertainty in this equation is how states will adjust licensing fees for electric cars and serious hybrids that no longer contribute toward road maintenance costs with each gallon of gas purchased.

Another complication is the varying cost of electric power across the 50 states. California, with its new carbon tax, will have very high electric charging rates and gasoline prices. It will be hard to compare the cost of Spark ownership in California with other states like Delaware. And then there are states like Texas where there are miles and miles of open spaces having no towns. It will take a very long time before Texas lines its highways with emergency charging stations. The same can be said for many other states like New Mexico, Arizona, Nevada, Utah, Montana, Alaska, etc.

Another complication is the varying cost of electric power across the 50 states. California, with its new carbon tax, will have very high electric charging rates and gasoline prices. It will be hard to compare the cost of Spark ownership in California with other states like Delaware. And then there are states like Texas where there are miles and miles of open spaces having no towns. It will take a very long time before Texas lines its highways with emergency charging stations. The same can be said for many other states like New Mexico, Arizona, Nevada, Utah, Montana, Alaska, etc.


Read Deloitte's Glowing Audit Report on Autonomy
"H.P. Takes Huge Charge on ‘Accounting Improprieties’," by Michael J. De La Merced and Quentin Hardy, The New York Times, November 20, 2012 ---
http://dealbook.nytimes.com/2012/11/20/h-p-takes-big-hit-on-accounting-improprieties-at-autonomy/

Hewlett-Packard said on Tuesday that it had taken an $8.8 billion accounting charge, after discovering “serious accounting improprieties” and “outright misrepresentations” at Autonomy, a British software maker that it bought for $10 billion last year.

It is a major setback for H.P., which has been struggling to turn around its operations and remake its business.

The charge essentially wiped out its profit. In the latest quarter, H.P. reported a net loss of $6.9 billion, compared with a $200 million profit in the period a year earlier. The company said the improprieties and misrepresentations took place just before the acquisition, and accounted for the majority of the charges in the quarter, more than $5 billion.

Shares in H.P. plummeted nearly 11 percent in early afternoon trading on Tuesday, to less than $12.

Hewlett-Packard bought Autonomy in the summer of 2011 in an attempt to bolster its presence in the enterprise software market and catch up with rivals like I.B.M. The takeover was the brainchild of Léo Apotheker, H.P.’s chief executive at the time, and was criticized within Silicon Valley as a hugely expensive blunder.

Mr. Apotheker resigned a month later. The management shake-up came about one year after Mark Hurd was forced to step down as the head of H.P. after questions were raised about his relationship with a female contract employee.

“I’m both stunned and disappointed to learn of Autonomy’s alleged accounting improprieties,” Mr. Apotheker said in a statement. “The developments are a shock to the many who believed in the company, myself included. ”

Since then, H.P. has tried to revive the company and to move past the controversies. Last year, Meg Whitman, a former head of eBay, took over as chief executive and began rethinking the product lineup and global marketing strategy.

But the efforts have been slow to take hold.

In the previous fiscal quarter, the company announced that it would take an $8 billion charge related to its 2008 acquisition of Electronic Data Systems, as well as added costs related to layoffs. Then Ms. Whitman told Wall Street analysts in October that revenue and profit would be significantly lower, adding that it would take several years to complete a turnaround.

“We have much more work to do,” Ms. Whitman said at the time.

Hewlett-Packard continues to face weakness in its core businesses. Revenue for the full fiscal year dropped 5 percent, to $120.4 billion, with the personal computer, printing, enterprise and service businesses all losing ground. Earnings dropped 23 percent, to $8 billion, over the same period.

“As we discussed during our securities analyst meeting last month, fiscal 2012 was the first year in a multiyear journey to turn H.P. around,” Ms. Whitman said in a statement. “We’re starting to see progress in key areas, such as new product releases and customer wins.”

The strategic troubles have weighed on the stock. Shares of H.P. have dropped to less than $12 from nearly $30 at their high this year.

The latest developments could present another setback for Ms. Whitman’s efforts.

When the company assessed Autonomy before the acquisitions, the financial results appeared to pass muster. Ms. Whitman said H.P.’s board at the time – which remains the same now, except for the addition of the activist investor Ralph V. Whitworth – relied on Deloitte’s auditing of Autonomy’s financial statements. As part of the due diligence process for the deal, H.P. also hired KPMG to audit Deloitte’s work.

Neither Deloitte nor KPMG caught the accounting discrepancies. Deloitte said in a statement that it could not comment on the matter, citing client confidentiality. “We will cooperate with the relevant authorities with any investigations into these allegations,” the accounting firm said.

Hewlett-Packard said it first began looking into potential accounting problems in the spring, after a senior Autonomy executive came forward. H.P. then hired a third-party forensic accounting firm, PricewaterhouseCoopers, to conduct an investigation covering Autonomy sales between the third quarter 2009 and the second quarter 2011, just before the acquisition.

The company said it discovered several accounting irregularities, which disguised Autonomy’s actual costs and the nature of the its products. Autonomy makes software that finds patterns, data that is used by companies and governments.

H.P. said that Autonomy, in some instances, sold hardware like servers, which has higher associated costs. But the company booked these as software sales. It had the effect of underplaying the company’s expenses and inflating the margins.

“They used low-end hardware sales, but put out that it was a pure software company,” said John Schultz, the general counsel of H.P. Computer hardware typically has a much smaller profit margin than software. “They put this into their growth calculation.”

An H.P. official, who spoke on background because of ongoing inquiries by regulators, said the hardware was sold at a 10 percent loss. The loss was disguised as a marketing expense, and the amount registered as a marketing expense appeared to increase over time, the official said.

H.P. also contends that Autonomy relied on value-added resellers, middlemen who sold software on behalf of the company. Those middlemen reported sales to customers that didn’t actually exist, according to H.P.

H.P. also claims that that Autonomy was taking licensing revenue upfront, before receiving the money. That improper assignment of sales inflated the company’s gross profit margins.pfront, before receiving the money. It had the effect, the company said, of significantly bolstering Autonomy’s gross margin.

Continued in the article

"Deloitte's 2011 Autonomy Independent Auditor "All Clear" Sign Off," by Tyler Durden, Zero Hedge, November 20, 2012 ---
http://goingconcern.com/post/accounting-news-roundup-accounting-improprieties-hit-hp-deloittes-all-clear-sign-stanford
Thank you Caleb Newquist for the heads up.

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF AUTONOMY CORPORATION PLC

 

"Analysts Had Questioned Autonomy’s Accounting Years Ago," by Holly Ellyatt and Deepanshu Bagchee, CNBC, November 21, 2012 ---
http://www.cnbc.com/id/49914072

Hewlett Packard’s surprising announcement of accounting irregularities at Autonomy caught the market by surprise on Tuesday and led to a nearly 12 percent decline in the company’s stock. But Autonomy’s accounting had been questioned by analysts years ago.

Paul Morland, technology research analyst at broking and advisory house Peel Hunt, told CNBC that he had noticed three red flags in Autonomy’s accounts in the years leading up to the HP [HPQ 11.71 ] acquisition: poor cash conversion, an inflated organic growth rate, and the categorizing of hardware sales as software.

Indeed, Morland said that in the six reports he had produced since 2008 in which he had mentioned Autonomy, the U.K.-based maker of data analysis software, he had mostly recommended selling the stock.

“There were periods when I wasn’t a seller,” he told CNBC on Wednesday, saying that his work as an analyst meant he had to be mindful of what the share price was discounting at the particular time of analysis — but his opinion changed in 2008.

“Sometime in 2009, I began to find out about the things we’ve been talking about and I moved towards a more negative stance. … I had a ‘sell’ recommendation on the stock for most of the three years leading up to the deal.”

Continued in article

"In HP-Autonomy debacle, many advisers but little good advice," by Nadia Damouni and Nicola Leske, Reuters, November 21, 2012 ---
http://www.chicagotribune.com/business/sns-rt-us-hp-results-advisersbre8ak0hl-20121121,0,1336024.story

. . .

HP Chief Executive Meg Whitman, who was a director at the company at the time of the deal, said the board had relied on accounting firm Deloitte for vetting Autonomy's financials and that KPMG was subsequently hired to audit Deloitte.

HP had many other advisers as well: boutique investment bank Perella Weinberg Partners to serve as its lead adviser, along with Barclays. Banking advisers on both sides of the deal were paid $68.8 million, according to data from Thomson Reuters/Freeman Consulting.

Barclays pocketed the biggest banker fee of the transaction at $18.1 million and Perella was paid $12 million. The company's legal advisers included Gibson, Dunn & Crutcher; Freshfields Bruckhaus Deringer; Drinker Biddle & Reath; and Skadden, Arps, Slate, Meagher & Flom, which advised the board.

On Autonomy's side of the table were Frank Quattrone's Qatalyst Partners, which specializes in tech deals and which picked up $11.6 million.

UBS, Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America were also advising Autonomy and were paid $5.4 million each. Slaughter & May and Morgan Lewis served as the company's legal advisers.

Continued in article

Jensen Question
Where have AECMers encountered the name "Frank Quattrone" in the past?

Answer
Largely in my postings concerning his trials on fraud charges ---
http://en.wikipedia.org/wiki/Quattrone

Mr. Quattrone's rise shows how some who were on the inside during the tech boom piled up huge fortunes in part through special access, unavailable to other investors, to the machinery of that era's frenzied stock market. But now he faces a crunch. The steep yearlong downturn in tech stocks has hurt the profits of his technology group. And in recent weeks, the group he heads has come under scrutiny in connection with a federal probe into whether some investment-bank employees awarded shares of hot IPOs in exchange for unusually high commissions, and whether those commissions amounted to kickbacks.
Susan Pulliam and Randall Smith, The Wall Street Journal, May 3, 2003 --- http://online.wsj.com/article/0,,SB988836228231147483,00.html?mod=2_1040_1

Question
Why couldn't Autonomy's auditor, Deloitte, see those red flags?

Read Deloitte's Glowing Audit Report on Autonomy
"H.P. Takes Huge Charge on ‘Accounting Improprieties’," by Michael J. De La Merced and Quentin Hardy, The New York Times, November 20, 2012 ---
http://dealbook.nytimes.com/2012/11/20/h-p-takes-big-hit-on-accounting-improprieties-at-autonomy/

"Long Before H-P Deal, Autonomy's Red Flags," by Ben Worthen, Paul Sonne, and Justin Scheck, The Wall Street Journal, November 26, 2012 ---
http://professional.wsj.com/article/SB10001424127887324784404578141462744040072.html?mod=WSJ__LEFTTopStories&mg=reno-wsj

When Autonomy Corp. was starting up in this historic university town, founder Mike Lynch stuck a sign on an office door that read "Authorized Personnel Only." Behind the door, he told visitors, were 500 engineers working on "hush-hush" projects.

The door, in fact, led to a broom closet, Mr. Lynch recounted in a 2010 speech. By then, Autonomy had grown from its founding in 1996 to one of Europe's largest and fastest-growing software companies. Hewlett-Packard Co. HPQ +2.35% bought it in October 2011 for more than $11 billion.

Now, following allegations last week by H-P that Autonomy made "outright misrepresentations" to inflate its financial results, U.S. authorities are trying to establish whether much of the company's business may also have been a facade. Meanwhile, questions are mounting about how H-P failed to uncover the alleged irregularities ahead of buying Autonomy, particularly as some outside analysts raised concerns about Autonomy's accounting for years.

In May, H-P fired Mr. Lynch, citing poor performance by his unit. Last week, the company wrote down the value of Autonomy by $8.8 billion, blaming more than half the charge on what it said was Autonomy's misleading accounting.

Mr. Lynch has come out swinging, denouncing H-P's assertions as "completely and utterly wrong." In an interview Monday, he defended Autonomy's practices and said that many of the allegations stem from the difference between U.S. accounting standards and the international ones Autonomy followed. He said it mostly amounted to "a lot of nitty-gritty about small amounts of revenue on certain deals." He said every sale valued at more than $100,000 would have been reviewed by Autonomy's auditors.

"H-P made a series of assertions without providing any evidence. We'd like to see some evidence," Mr. Lynch said. "Where's the beef in this?" he added.

Interviews in California and England with former Autonomy employees, business partners and attorneys close to the case paint a picture of a hard-driving sales culture shaped by Mr. Lynch's desire for rapid growth. They describe him as a domineering figure, who on at least a few occasions berated employees he believed weren't measuring up.

Along the way, these people say, Autonomy used aggressive accounting practices to make sure revenue from software licensing kept growing—thereby boosting the British company's valuation. The firm recognized revenue upfront that under U.S. accounting rules would have been deferred, and struck "round-trip transactions"—deals where Autonomy agreed to buy a client's products or services while at the same time the client purchased Autonomy software, according to these people.

"The rules aren't that complicated," said Dan Mahoney of accounting research business CFRA, who covered Autonomy until it was acquired. He said that Autonomy had the hallmarks of a company that recognized revenue too aggressively. He said neither U.S. nor international accounting rules would allow companies to recognize not-yet collected revenue from customers that might be at risk not to pay, which he said appears to be the case in some of Autonomy's transactions.

A person familiar with H-P's investigation said the company is confident the deals are improper even under the international accounting standards Mr. Lynch cites. "We've looked at this very closely," this person said.

In a statement issued Saturday, H-P said its "ongoing investigation into the activities of certain former Autonomy employees has uncovered numerous transactions clearly designed to inflate the underlying financial metrics of the company before its acquisition" including several using the tactics and techniques described in this article.

Autonomy's practices are being reviewed at H-P's urging by the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation. Meg Whitman, H-P's CEO, said she expects the process will prompt a "multiyear journey through the courts" in both the U.S. and the U.K.

On Monday, Mr. Lynch said he hasn't been formally notified of any lawsuits or investigations.

Mr. Lynch was raised in England, the son of a firefighter. He went on to study engineering at Cambridge University and obtain a Ph.D. in mathematical computing.

Autonomy, founded at a startup incubator in Cambridge, developed a computer program to sift through documents, Web pages, presentations, videos, phone conversations and emails. The technology could understand words' meanings and find data accordingly, Mr. Lynch has said. A search within a company's servers for "profanity," for instance, would turn up results featuring a variety of swear words, not just the term itself.

Dow Jones & Co., publisher of The Wall Street Journal, has used Autonomy's search software on its consumer websites.

Mr. Lynch was as effective at selling and marketing as he was at software development, recall former employees, customers and business partners. "It was a very sales-oriented culture with a very business-savvy CEO," contrary to the norm in Cambridge, says Simon Galbraith, the founder and CEO of Red Gate Software Ltd., which is based across the street from Autonomy.

Mr. Lynch named Autonomy's conference rooms after references from James Bond movies—one of the big ones was called "GoldenEye"—and found ways to mention the spy in speeches or presentations. He drove an Aston Martin, a quintessential Bond car.

In another touch worthy of Ian Fleming, Autonomy stocked piranhas for a while in the office fish tank. At times, Autonomy's culture was combative as a Bond movie and at other times demeaning, former employees say.

One former marketing employee was sent outside the Cambridge office to collect cigarette butts from the ground, according to two people familiar with the incident. Another former marketing employee recalled being asked to buy Sushovan Hussain, Autonomy's finance chief, underwear during a company trip to Miami, because he had failed to pack a sufficient supply. Turnover on the sales and marketing staffs was high. A spokeswoman for Mr. Hussain acknowledged the incident had happened, but said the CFO was simply late for a meeting and had lost his luggage.

On Monday, Mr. Lynch said many people thrived on Autonomy's aggressive atmosphere, while others did not.

According to legal filings and former employees, senior members of Autonomy's management sometimes would swoop in at the last minute and complete deals—an arrangement that, in some cases, cut salespeople's commissions and in other cases allowed the senior executives to negotiate other arrangements with clients.

A spokeswoman for Mr. Lynch said the deal-making didn't result in cut commissions.

At times, Autonomy salespeople appeared to close deals by offering to buy customers' products. In July 2009, Autonomy sold $9 million in software to New York-based data provider VMS Information, according to ex-VMS Chief Executive Peter Wengryn and three former Autonomy employees. At the same time, Autonomy agreed to buy about $13 million worth of licenses for data from VMS, say Mr. Wengryn and the ex-Autonomy employees.

Continued in article

Bob Jensen's threads on Autonomy ---
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

Search for "Autonomy"

"With Autonomy, H-P Bought An Old-Fashioned Accounting Scandal. Here's How It Worked," by Daniel Fisher, Forbes, November 20, 2012 ---
http://www.forbes.com/sites/danielfisher/2012/11/20/with-autonomy-h-p-bought-an-old-fashioned-accounting-scandal/

The story was first told to me late last year, and like a lot of stories of financial impropriety inside a huge company, it was almost impossible to nail down. Hewlett-Packard‘s Autonomy division, my source told me, was vaporware writ large: An $11 billion software company with an overhyped flagship product that was literally being given away because customers didn’t have a use for it.

Today, Meg Whitman admitted as much. H-P announced it was writing off 80% of the purchase price for Autonomy and accused “some former members of Autonomy’s management team” of using “accounting improprieties, misrepresentations and disclosure failures” to hide the software company’s true performance and value.

In the release, H-P identified one of the oldest accounting tricks in the book, a variation on the one “Chainsaw Al” Dunlap used to accelerate revenue at Sunbeam — by getting customers to “buy” products now, under terms that really just borrowed from the future.

I spoke to my source again this morning and he detailed what he saw at H-P, from his position deep within the 300,000-employee company.

“What I saw was exactly what Meg Whitman wrote in her internal memo to employees,” my source said. “There was really sketchy accounting going on.”

Autonomy was founded as Cambridge Neurodynamics in 1991 by Michael Lynch, a Cambridge-educated computer scientist, according to this flattering profile by the Guardian after he left H-P in May. The company was based on the then-hot concept of Bayesian search, named after 18th-century mathematician Thomas Bayes, and ultimately developed an all-encompassing software package it called IDOL — Intelligent Data Operating Layer.

H-P today said it stands behind IDOL and well it should. Otherwise it would have to write off the entire $11 billion it paid for Autonomy last year. But my source doesn’t think much of the product, which is supposed to find all of a company’s data, wherever it resides, and whether or not it can be identified by specific words. (Typical example: Finding documents that contain the phrase “flightless bird” when you’re looking for “penguin.”)

“It’s the primary smoke and mirrors that Autonomy has used to make people think they’ve got something very impressive,” he told me. “It’s a fancy search engine.”

I attempted to reach Lynch this morning, unsuccessfully. His spokeswoman told Reuters he is still reviewing H-P’s allegations. H-P said it has referred the information it uncovered in a forensic accounting to fraud officials in the U.S. and the U.K.

Here’s what my source observed personally. Autonomy grew through acquisitions, buying everything from storage companies like Iron Mountain to enterprise software firms like Interwoven. They’d then go to customers and offer them a deal they couldn’t refuse. Say a customer had $5 million and four years left on a data-storage contract, or “disk,” in the trade. Autonomy would offer them, say, the same amount of storage for $4 million but structure it as a $3 million purchase of IDOL software, paid for up front, and $1 million worth of disk. The software sales dropped to the bottom line and burnished Autonomy’s reputation for being a fast-growing, cutting-edge software company a la Oracle, while the revenue actually came from the low-margin, commodity storage business.

“They would basically give them software for free but shift the costs around to make it look like they got $3 million in software sales,” said my source, who directly observed such deals.

Lynch’s management team also was practiced at the art of wringing attractive-looking growth out of a string of ho-hum acquisitions. The typical strategy was to bolt IDOL and other software onto a company’s existing products and try and convince customers to pay more for the “new” products. If that failed, they’d milk the existing customer base by halting development and outsourcing support, my source says, using the cash from the runoff business to fund more acquisitions.

“Mike Lynch was famous for saying Autonomy never put an end of life on any product,” said my source. “But the customers were screaming.”

Now, my source has never been a Mike Lynch fan. In sales meetings, he says, Lynch “loved to do vague and theoretical academic-type presentations to show what a visionary he was.”

And Autonomy may have some powerful features my source didn’t appreciate. The Defense Department reportedly is a customer. But from his perch within the company, it looked like a lot of vaporware wrapped up in fancy Cambridge talk and the kind of accounting tricks managers have engaged in since the dawn of publicly traded stock.

With its announcement today, H-P seems to agree. The company accused former managers of “a willful effort” “to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers. These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal.”

Calling customers wouldn’t necessarily have uncovered the problem, my source says.

“I think these companies are embarrassed to admit they spent $10 million on software that doesn’t actually work,” he said.

 

Q&A With Autonomy Founder Mike Lynch on H-P Allegations ---
http://blogs.wsj.com/digits/2012/11/20/qa-with-autonomy-founder-mike-lynch-on-h-p-allegations/

Hi Tom and Pat,

One of the various charges HP is raising about the the Autonomy fraud is channel stuffing. This charge makes some companies in the software industry very nervous since something akin to channel stuffing is not all that unusual in the software industry. Autonomy will probably not have trouble finding friendly expert witnesses. Personally, I think accounting in the software industry is not a good model of transparency for our students.
 

"Business Autonomy:  Five ways in which Autonomy is alleged to have cooked the books," by Juliette Garside The Guardian, November 24, 2012 ---
http://www.guardian.co.uk/business/2012/nov/25/autonomy-five-ways-alleged-cooked-books

'CHANNEL STUFFING'

The most serious of the allegations HP has made against unnamed members of Autonomy's management team. A spokeswoman for Lynch has denied any suggestions that the tactic was used.

Channel stuffing involves offloading excessive amounts of product to resellers ahead of demand. Typically, the reseller is charged little or no money up front, and may not be obliged to pay unless they sell the product on. In accountancy terms, a line is crossed if those deals are booked as revenue before an end customer has actually bought the product.

Autonomy had hundreds of resellers, one of which was Tikit, which specialises in legal and accountancy software and has just been bought by BT. In December 2010, Tikit reported a surge in the amount of inventory on its books, up from £100,000 worth per half year to £4m.

Peel Hunt analyst Paul Morland says Tikit told him that it had done a big deal to acquire software at a discount.

Tikit declined to comment and there is no evidence that Autonomy booked the deal as revenue. A spokeswoman for Lynch insisted Autonomy never recognised revenue from resellers if there was a right of return, and that such a right was almost never granted.

US regulators have taken high-profile scalps in their efforts to stamp out channel stuffing. Drugs firm Bristol-Myers Squibb coughed up more than $800m in fines and legal settlements after admitting to pumping stocks of medicines onto wholesalers' books in order to inflate its own revenues. During the dotcom boom, the McAfee antivirus software company engaged in practices with a reseller called Ingram Micro which saw them eventually fined a combined $65m.

 

USING ACQUISITIONS AS A SMOKESCREEN

In Autonomy's last full year as an independent company, it claimed to be growing at 17%. This excluded the contribution of any acquisitions. But one financial analyst has claimed it was using its purchases to mask the fact that there was no growth at all.

Over six years, Autonomy bought at least eight sizeable businesses, culminating in May 2011 with the digital archiving arm of US group Iron Mountain. "Once they had bought the company they would close parts of the business down," says Daud Khan, who followed Autonomy while working at JP Morgan Cazenove, and is now at Berenberg Bank. "Closing down a business costs money but the restructuring charges were always very low. Through magic dust Autonomy managed to do it with very little cost and they did that again and again." He believed Autonomy was claiming the discontinued revenues from acquired companies as part of its own organic growth.

 

Lynch's spokeswoman says Autonomy's accountant, Deloitte, checked every acquisition. She said there were more than 30 analysts covering Autonomy's stock, and Khan's view was in the minority.

 

DESCRIBING HARDWARE SALES AS SOFTWARE SALES

HP said Autonomy sold hardware that was wrongly labelled in its accounts as software and sold hardware at "negative margin", in other words at a loss, and charged it as a marketing expense. The sale was then chalked up as licence revenue for growth calculations. HP said these sales accounted for up to 15% of Autonomy's total revenue, which was estimated at $1bn in 2011.

Lynch said it was "no secret" Autonomy sold hardware, and it accounted for around 8% of revenue. The company would sometimes supply desktop computers to clients as part of a package. In some cases, Lynch said, deals were struck at a slight loss, in exchange for the client agreeing to market Autonomy products. These losses were then charged as a marketing expense. Crucially, he claims those sales accounted for less than 2% of total revenues.

 

EXAGGERATING SEARCH REVENUES FROM OTHER SOFTWARE COMPANIES

Autonomy's client roster reads like a software hall of fame. Its website lists most of the biggest names, from Adobe to IBM and Oracle, and in its last financial results, it claimed more than 400 separate products were using its "core" technology.

Original equipment manufacturer (OEM) licences were one of Autonomy's growth engines, rising at 27% a year.

Autonomy's top product is a search engine called IDOL (Intelligent Data Operating Layer), but Autonomy has rebranded less expensive products as IDOL, such as the document filter produced by a company called Verity it bought in 2005.

A week after HP announced it was prepared to acquire Lynch's company at a 64% premium to its share price, Leslie Owens at Forrester Research published a piece entitled What is Autonomy, Without its Marketing?, in which she declared the development of IDOL was "stagnant", with no major release in five years.

Technology analyst Alan Pelz-Sharpe, who reported Autonomy to the Serious Fraud Office last year, claimed last August in his blog: "Where Autonomy is present in 3rd-party software, it is more typically the old (and very basic) Verity engine, not IDOL."

Autonomy would not be the first company to have overplayed the popularity of its products. Lynch's spokeswoman said there was no exaggeration of revenues from other software companies. The view of the analysts is simply that if sales of its flagship search software were not soaraway, Autonomy might not have been worth the premium HP paid.

 

FRONTLOADING REVENUES
 

Changing the payment model for storing large digital archives on behalf of customers is another way in which HP believes Autonomy boosted revenues. Autonomy was supposedly converting long-term "hosting" deals into short-term licensing deals.

Red flags were raised by analysts after Autonomy's 2007 acquisition of a US email archiving company called Zantaz, whose clients included nine of the world's top 10 law firms and JP Morgan and Deutsche Bank. Khan claims Autonomy renegotiated contracts so that instead of spreading payments over a three- or four-year contract, it would take a big lump sum upfront and smaller payments in subsequent years.

"There's nothing illegal with that but it generates growth that isn't real growth," says Khan. "If you value a business you have to ascertain whether it is growing."

Lynch's spokeswoman said this was not an accurate characterisation of the changes: Zantaz customers that had been pay-as-you-go committed to much larger deals once Autonomy took over, often including on-premises software.


Jensen Comment
I view attempts to whitewash Autonomy with very legalized interpretations of IFRS much like I view Ernst & Young's legalistic use of FAS 140 to justify the Repo 105 and 109 deceptions for Lehman Bros. Such a defense may get auditors off the hook in court, but use of such defenses simply justifies auditors intentionally being party to deceptive accounting. There's such a thing as underlying spirit and intent of an audit to avoid deception even when clients and their auditors can get away with deception due to defects in the standards.

The irony is that some financial analysts were raising red flags about Autonomy's accounting well in advance of when HP invested in that dubious company. I guess it boils  down to "buyers beware," and HP seems to have simply been ignorant of accounting tricks.
 

Bob Jensen's threads on Deloitte's audits ---
http://www.trinity.edu/rjensen/Fraud001.htm

I'm giving thanks for many things this Thanksgiving Day on November 22, 2012, including our good friends who invited us over to share in their family Thanksgiving dinner. Among the many things for which I'm grateful, I give thanks for accounting fraud. Otherwise there were be a whole lot less for me to study and write about at my Website ---

 


The Complete 2012 Business Schools Ranking
Bloomberg Business Week
, November 2012 ---
http://www.businessweek.com/articles/2012-11-15/the-complete-2012-business-schools-ranking

There are so many business school rankings by Bloomberg Business Week that it boggles my mind, to say nothing of the other media rankings of business schools by U.S. News, The Wall Street Journal, Financial Times, The Economist, etc.

The above link is one of the more interesting rankings because it vividly illustrates what I call the "Vegetable Problem of Aggregation" in the context of accounting number aggregations at
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

Take a look at how your favorite greens stack up in the chart below:

Green (Raw - per 100 g serving) Vitamin A Vitamin C Fiber Folate Calories
Arugula 2,373 IU 15 mg 1 g 97 mcg 25
Chicory 4,000 IU 24 mg 4 g 109.5 mg 23
Collards 3,824 IU 35.3 mg 3 g 166 mcg 30
Endive 2,050 IU 6.5 mg 3 g 142 mcg 17
Kale 8,900 IU 120 mg 2 g 29.3 mcg 50
Butterhead (includes Boston and Bibb) 970 IU 8 mg 1 g 73.3 mcg 13
Romaine 2,600 IU 24 mg 1 g 135.7 mcg 14
Iceberg 330 IU 3.9 mg 1 g 56 mcg 12
Loose leaf (red, green) 1,900 IU 18 mg 1 g 49.8 mcg 18
Radicchio 27 IU 8 mg 0 g 60 mcg 23
Spinach 6,715 IU 28.1 mg 2 g 194.4 mcg 22
Source: U.S. Department of Agriculture, 1999

Also see
Examination of Front-of-Package Nutrition Rating Systems and Symbols --- http://iom.edu/Activities/Nutrition/NutritionSymbols.aspx

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

While looking at the following diet guides, it dawned on me that perhaps accounting reports should be more like food labeling and comparison tables/charts rather than the traditional bottom line reporting.  The problem with accounting is bottom-line reporting of selective and ill-conceived aggregates such as earnings-per-share or debt/equity.  Suppose spinach has an e.p.s. of 4.67 in comparison to 5.62 for Kale.  The aggregations all depend upon how components are measured, how they are weighted (e.g., Vitamin A versus Folate weighting coefficients), and what components are included/excluded (e.g., Vitamin A is included below, but Vitamin B components are ignored).  The same is true of e.p.s. in financial reporting.   The "bottom line" depends in a complex way upon how components are measured and weighted as well as upon what components are included/excluded.  

In a similar manner, accounting aggregations all depend upon how components are measured, weighted, and included/excluded.  Cash is measured with great accuracy whereas goodwill impairment is highly inaccurate, thereby causing greater error range when cash and goodwill are added together in balance sheets.   Similarly, in the "New Economy" where intangible intellectual capital is soaring in value relative to traditional tangible assets, the intangibles left off the balance sheet may be far more important that the combined value of everything included in the balance sheet.

An even larger problem is that the value and risk of diet components depend heavily upon complex and synergistic relationships.  For example, research shows that after the body hits its maximum threshold of Vitamin C, it simply throws off the excess.  Kale far surpasses endive in Vitamin C content, but this is irrelevant in a diet overflowing in Vitamin C from other sources such as citrus fruits.  Some persons may be allergic to components that are of greater value to other persons.

In a similar manner accounting valuations are greatly complicated by synergistic complexities.  A patent in the hands of one company may be all but useless in the hands of another company.  Indeed some companies buy up patents just to squelch newer technology that threatens existing products.  Similarly, financial risk is not a fixed thing.  It is a very dynamic threat that is based upon all sorts of contingencies such as world events and media coverage that can interact heavily with the level of risk at any point in time.

For similar reasons disaggregating of values/costs is generally arbitrary.  Firstly there is the famous problem of joint production cost allocation arbitrariness noted in the early writings of John Stuart Mill (The Principles of Political Economy) and Alfred Marshall (The Principles of Economics).  Then there is the problem of synergistic complexities noted above.  For example, suppose spinach sells for $5 per bunch.  Any attempt to disaggregate that $5 into additive values of nutrients will be arbitrary, because nutrients in combination may be worth more or less than the sum of disaggregated values of each nutrient.  This gives rise to the systemic problem of consolidation goodwill when two or more companies are combined into one whole.

Bob Jensen's threads on media rankings of colleges and universities ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

 


Accounting Crossword Puzzles

Video
How a Crossword Puzzle is Made: Behind the Scenes with The New York Times
---
http://www.openculture.com/2012/11/how_a_crossword_puzzle_is_made_behind_the_scenes_with_the_new_york_times_.html

Bob Jensen's threads on accounting crossword puzzles and other edutainment games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment

Make Your Own Crosswords for Fun and Learning

June 4. 2008 message from Andrew PRIEST [a.priest@ECU.EDU.AU]

I thought I would share this email which came from one of our librarians. It may be of interest.

Regards

Andrew

Hi Andrew

I came across this free website http://www.eclipsecrossword.com/samples.html  which allows you (anyone) to make up a crossword on any topic.

They had examples of crosswords which have been setup for Accounting which I thought was rather cute & an alternative to quizzes http://www.accountingcrosswords.com /

Regards

Maureen

Jensen Comment
Here's a neat interactive Javascript crossword made using Eclipse --- http://lschwake.tripod.com/crosswords/acc22cross.html
Click on one of the boxes to get started.

Some of Bob Jensen's Former Tidbits:

Somewhat related is the Crossword Construction Kit (not free) --- http://www.crosswordkit.com/
Other word games --- http://www.puzzleconnection.com/

Discovery Channel School's PuzzleMaker (free) --- http://puzzlemaker.school.discovery.com
This puzzle-generation tool helps create and print customized word search, crossword and math puzzles using your own word lists.

AccountingCrosswords.com (with many subtopics) --- http://www.accountingcrosswords.com/
Example:  Payroll Accounting Crossword Puzzle --- http://www.accountingcoach.com/crossword-puzzles/payroll-empty.html

Brenda Kennedy's k-12 Accounting Crosswords ---
http://ww2.nps.k12.va.us/education/components/docmgr/default.php?sectiondetailid=34838

Crossword Bank (with a section on taxation) --- Click Here 

Payroll Accounting Crossword Puzzle --- http://www.accountingcoach.com/crossword-puzzles/payroll-empty.html

Basic Accounting Example --- Click Here

Computer defeats humans at the NYT’s crossword Puzzles
Crossword-solving computer program WebCrow has defeated 25 human competitors in a puzzle competition in Riva del Garda, Italy. The program took both first- and second-place honors in the contest, which was staged as part of the European Conference on Artificial Intelligence, New Scientist reported Thursday. The two English puzzles were taken from The New York Times and The Washington Post, while two Italian puzzles were taken from newspapers in the country. A fifth puzzle featured clues in both languages taken from all four sources. "It exceeded our expectations because there were around 15 Americans in the competition," said Marco Ernandes, who created WebCrow along with Giovanni Angelini and Marco Gori. "Now we'd like to test it against more people with English as their first language."
"Computer defeats humans at crossword," PhysOrg, September 1, 2006 --- http://physorg.com/news76345125.html

Question
Will daily working of crossword puzzles and similar mental exercise deter the rate of cognitive decline in older brains?

The last two paragraphs below are important.

"Oops! Mental Training, Crosswords Fail to Slow Decline of Aging Brain," by Sharon Begley, The Wall Street Journal, April 21, 2006; Page B1 --- http://online.wsj.com/article/science_journal.html

If you thought recent clinical trials of reduced-fat diets and breast cancer, or calcium/vitamin D and hip fractures, were disappointing when the intervention failed to live up to its billing, you haven't seen studies of whether mental training slows the rate of cognitive decline resulting from aging.

The largest such study, called Active, was launched in 1998 and is still going. It trained 2,832 adults, aged 65 years old to 94, in memory, reasoning or visual attention and perception. Disappointment ensued. Though the trainees did better on the skill they practiced, that didn't translate to improvement on the others (memory training didn't sharpen reasoning, for instance).

Worse, when the trainees were tested years later, performance fell more than it did in the untrained group, according to a new analysis by Timothy Salthouse of the University of Virginia, a veteran of studies on aging and cognition. That probably reflects the fact that if performance rises it has further to fall, he says.

But there is a larger issue. "There is no convincing empirical evidence that mental activity slows the rate of cognitive decline," he concludes from an exhaustive review of decades of studies. "The research I reviewed is just not consistent with the idea that engaging in mentally stimulating activities as you age prevents or slows cognitive decline."

Many scientists, not to mention the rest of us, believe it does. The "mental exercise" hypothesis has been around since 1920, and studies find that higher mental activity -- more hours per week spent reading, doing crossword puzzles, learning a language or the like -- is associated with better cognitive function. That has spawned the idea that, to keep your brain young(ish), you should partake of intellectual challenges.

But this logic has a hole big enough to drive a truck through. Just because older adults who are more mentally active are sharper than peers who are cognitive couch potatoes doesn't mean mental activity in old age raises cognitive performances, let alone slows the rate of decline. To conclude that it does confuses correlation with causation.

Consider an alternative that is gaining scientific support. Say you enter old age (by which I mean your 30s, when mental functioning starts heading south, accelerating in your 50s) with a "cognitive reserve" -- a cushion of smarts. If so, you are likely to be able to remember appointments, balance a checkbook and understand Medicare Part D (OK, maybe not) well into your 60s and 70s. But not because your brain falls apart more slowly. Instead, you started off so far above the threshold where impaired thinking and memory affect your ability to function that normal decline leaves you still all right.

The Active study isn't the only reason scientists are rethinking the use-it-and-you-won't-lose-it idea. In the Seattle Longitudinal Study, older adults received five hours of training on spatial rotation (what would a shape look like if it turned?) or logic (given three patterns, which of four choices comes next?). As in Active, people got better on what they practiced.

But seven years later, their performance had declined just as steeply (though, again, from a higher starting point) as the performance of people with no training, scientists reported last year. That supports the cognitive reserve idea -- if you enter middle age with a good memory and reasoning skills you stay sharp longer -- not the mental-exercise hypothesis.

Even in the most mentally engaged elderly -- chess experts, professors, doctors -- mental function declines as steeply as in people to whom mental exercise means choosing which TV show to watch. Again, profs and docs enter old age with a brain functioning so far above the minimum that even with the equal rate of decline they do better than folks with no cognitive cushion.

Crossword puzzles do not live up to the hope people invest in them, either. Age-related decline is very similar in people whether or not they wrestled with 24 Downs, Prof. Salthouse and his colleagues find in a recent study. There is "no evidence" that puzzle fans have "a slower rate of age-related decline in reasoning," he says.

Evaluating use-it-and-you-won't-lose-it in a new journal, Perspectives on Psychological Science, he ends on a grim note: There is "little scientific evidence that engagement in mentally stimulating activities alters the rate of mental aging." He regards the belief as "more of an optimistic hope than an empirical reality."

But don't write off mental exercise yet. True, neither one-time training nor regular mental challenges such as crosswords slow the rate of cognitive decline. But they do show that "older adults can be made to perform better on almost anything they can be trained on," says Michael Marsiske of the University of Florida, who helped run the Active study. "We're still detecting differences seven years after the training."

In practical terms, although mental function continues to decline even after mental training, the latter can give old brains enough of a boost that they nevertheless remain higher functioning than untrained brains. A number of scientists think they understand what kind of training provides the biggest, most enduring boost. Next week, I'll look at their ideas.

 

Bob Jensen's threads on Edutainment ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment


Whistleblowers sound alarm on corporate disclosures. Whistleblowers contacted the SEC about corporate disclosures and financials more than anything else in fiscal 2012, Emily Chasan reports. Of the 3,001 complaints received during the period, 18.2% were about disclosure and financials, 15.5% pertained to offering fraud and 15.2% were about market manipulation, according to the annual report of the SEC’s Office of the Whistleblower. On a geographic basis, California, New York, Florida and Texas were the sources for the biggest number of complaints. And about 10% came from outside the U.S., led by the U.K. with 74 complaints.
https://reach.dowjones.com/,DanaInfo=on.wsj.com+RO8GoS

Also see
http://blogs.wsj.com/corruption-currents/2012/11/15/sec-receives-3000-tips-in-the-past-year/?KEYWORDS=Whistleblowers

Bob Jensen's threads on whistleblowing are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing


"My Big Fat Overrated CEO: McKenna On Dimon On The Keiser Report," by Francine McKenna, re:TheAuditors, November 18, 2012 ---
http://retheauditors.com/2012/11/18/my-big-fat-overrated-ceo-mckenna-on-dimon-on-the-keiser-report/

I taped an episode of the Keiser Report last week while in New York. The focus was Jamie Dimon with a bit of MF Global thrown in for heat. Max Keiser, the host, asked me, “Why does Jamie Dimon of JPMorgan still have a job?”

Hard to say.

When I predicted in January that Dimon would have his “comeuppance” in 2012, the prognostication was predicated on backlash from the bank’s involvement, as MF Global’s main banker, in the failure of that broker/dealer and FCM.

The broker-dealer’s customers have accused JPMorgan of taking advantage of MF Global’s weak position to hold onto hundreds of millions of their funds, but JPMorgan says it was not the culprit. The MF Global story is one-year old but so far the trustees haven’t directly sued anyone. The backlash to JPMorgan and Dimon has been practically nil. Jon Corzine, CEO of MF Global, and his banker Jamie Dimon, have not suffered the consequences I thought they would.

The customers have finally sued PricewaterhouseCoopers, the MF Global auditor, for its role in the failure. The MF Global Trustee assigned its claims against several parties to the customers, partly, I believe, to avoid the conflicts the Trustee has with PricewaterhouseCoopers, the auditor, and JPMorgan. But JPMorgan was dropped from the suit and is, for now, not a defendant. I suspect the bank is negotiating a settlement so it can scratch this mess off its long list of “litigation to dispose of”.

Because Jamie Dimon is facing a very long list of regulatory and legal challenges.

JPMorgan took advantage of the break from MF Global to make more trouble for itself. The toll for the “London whale” trades is a $5.8 billion loss, making Dimon’s early dismissal of the issue as a “tempest in a teapot” quite embarrassing. Initial estimates of the loss hit first-quarter results but those numbers were wrong. An expedited internal investigation found that traders mismarked trades to minimize the reported loss. The quarterly securities filing had to be formally restated. The “whale” loss has also attracted shareholder suits from six public pension funds.

Dimon did face some music at the annual meeting in May. He admitted the “whale” trades were “poorly constructed, poorly reviewed, poorly executed and poorly monitored.” But he doesn’t seem to be losing any sleep over them and, so far, holds on to his compensation package. Investors, the board and regulators did not become aware of the trade price manipulation until August. The SEC and Department of Justice are still investigating the loss.

Jamie Dimon’s perceived stellar stewardship of the bank’s stock price – I called it a “results reprieve” in the Keiser report interview – has shielded him, and the bank, from serious compliance and controls complaints in the past. But now several media outlets are reporting JPM, like all the big banks, is under investigation for Libor rate manipulation and anti-money laundering violations, too. JPM is reportedly one of many subpoenaed by New York, Connecticut and Florida Attorneys General regarding Libor rate manipulation. JPM is also reportedly the subject of an OCC probe for suspicious money transfers. JPMorgan Chase, along with other big banks, will probably pay big money for its “get out of jail card”, as Barclays did for its Libor scandal and Standard Chartered did for its settlement for suspicious transactions with Iran.

Dimon has been sanguine in the past about the bank’s exposure to mortgage-related losses and liability for transgressions by its crisis-era acquisitions Bear Stearns and Washington Mutual. The Wall Street Journal quoted Dimon in December saying the bank was “facing fewer mortgage problems than competitors.” Dimon’s luck on mortgage liability has changed.

New York Attorney General Eric Schneiderman filed suit against the bank regarding the quality, or lack of thereof, of the mortgages stuffed into securities sold by Bear Stearns prior to its acquisition. If you think JPM isn’t liable for the sins committed by a company it bought “as a favor to the Fed,” take a look at this lawsuit, Assured Guaranty vs. Bear Stearns EMC.

Continued in article

Bob Jensen's threads on how white collar crime is treated so lightly ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

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


Hi Pat,

Certainly expertise and dedication to students rather than any college degree is what's important in teaching.


However, I would not go so far as to detract from the research (discovery of new knowledge) mission of the university by taking all differential pay incentives away from researchers who, in addition to teaching, are taking on the drudge work and stress of research and refereed publication.


Having said that, I'm no longer in favor of the tenure system since in most instances it's more dysfunctional than functional for long-term research and teaching dedication. In fact, it's become more of an exclusive club that gets away with most anything short of murder.


My concern with accounting and business is how we define "research," Empirical and analytical research that has zero to say about causality is given too much priority in pay, release time, and back slapping.

"How Non-Scientific Granulation Can Improve Scientific Accountics"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf
By Bob Jensen
This essay takes off from the following quotation:

A recent accountics science study suggests that audit firm scandal with respect to someone else's audit may be a reason for changing auditors.
"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J. Skinner and Suraj Srinivasan, The Accounting Review, September 2012, Vol. 87, No. 5, pp. 1737-1765.

Our conclusions are subject to two caveats. First, we find that clients switched away from ChuoAoyama in large numbers in Spring 2006, just after Japanese regulators announced the two-month suspension and PwC formed Aarata. While we interpret these events as being a clear and undeniable signal of audit-quality problems at ChuoAoyama, we cannot know for sure what drove these switches (emphasis added). It is possible that the suspension caused firms to switch auditors for reasons unrelated to audit quality. Second, our analysis presumes that audit quality is important to Japanese companies. While we believe this to be the case, especially over the past two decades as Japanese capital markets have evolved to be more like their Western counterparts, it is possible that audit quality is, in general, less important in Japan (emphasis added) .

 


"The Idiocy of Promotion-and-Tenure Letters," by Don M. Chance, Chronicle of Higher Education, November 14, 2012 ---
http://chronicle.com/article/The-Idiocy-of/135740/

Ah, autumn. The falling of leaves. A new batch of excited freshmen and graduate students. Some different faces among colleagues, perhaps. The roar of a football crowd. And alas, the reading and writing of promotion-and-tenure letters.

For some fortunate reason, I have none to write this year, which must be a first, but unfortunately, I have 11 to read. And after many years of serving on promotion-and-tenure committees, I have finally come to the conclusion that these letters are nearly worthless. The ones I read and the ones I have written.

Think about it. We hardly need letters to evaluate candidates within our own discipline. We are capable of evaluating their research. Letters are strictly for the members of collegewide and universitywide committees, who, through lack of discipline-specific knowledge but mostly lack of time, cannot evaluate the research of candidates outside of their fields. So we call on experts, those renowned scholars from distinguished and preferably higher-ranked institutions, who can vouch for the quality of the candidate's record. They have, for lack of a better term, letterhead value.

And they write so well and so cogently. Today I have read the expressions "highly commendable," "groundbreaking," "impeccably rigorous," "carefully designed," and "recognized nationally"—all phrases I wish I could think of when I am the writer. Instead, I come up with "doing good work," "interesting," and "innovative." At least I didn't say "cool."

This process is absurd. Consider that the evaluators are selected by the candidate's department, sometimes with input from the candidate. They are not a random sampling of experts. Indeed, they are far from random and are often biased, whether subtly or blatantly. The most egregious cases of bias involve choosing the candidate's former professors or the department head's former colleagues and friends, but other, subtler forms exist as well.

Suppose the candidate has an article accepted for publication in the most prestigious journal in her field. Her department head asks the journal's editor to write a letter on her behalf. The editor, of course, believes that the paper he accepted is excellent. What else would he think? Is he going to change his mind and say he made a mistake in accepting the paper? Ideally the editor would look at the candidate's entire corpus of work, but that is too much trouble. The editor, after all, has numerous letter requests, not to mention many manuscripts, awaiting his attention. So in addition to a few casual observations about the candidate's other research, he writes a detailed review of the paper he accepted, heaping dollops of laudation, knowing that any future success of the paper is a shared success. Kind of like having your kid get into Harvard when you went to a third-tier state university. You, too, get credit.

I once read a letter from a journal editor concerning a candidate up for promotion to full professor who had published four articles in that journal and was on its editorial board. The editor noted that the journal was A-level (in fact it was clearly B-level), and that the candidate had done an extensive amount of refereeing for the editor. Naturally the letter was favorable. Naturally I wanted to transfer it into the "stuff that should never have been written" folder, also known as my recycle bin.

Not only are external letters nearly useless, but the whole process is flawed.

At least half of all academics are exposed to the scientific method of research: stating a testable hypothesis, collecting data, analyzing those data, and drawing a conclusion with the admission that we could be wrong. That process is widely accepted as the correct way to investigate an issue.

In the promotion-and-tenure process, we try to do the same thing. Whereas a scientist might hypothesize that a drug has no positive benefit, we might hypothesize that someone should not be promoted. Whereas the scientist goes about collecting data, we do the same thing in gathering information about the candidate's research record. Whereas the scientist, upon obtaining statistical evidence that admits only a small possibility of error, concludes perhaps that a drug is effective, we often likewise analyze the data and conclude that the candidate should be promoted. In our case, there is no admission of a margin of error.

The scientist does it correctly. We do not. Our margin of error in evaluating tenure candidates is pretty high, because our sample is not random and far too small. Nonetheless, on that basis, we make a case to the higher authorities that this candidate should be promoted.

If we conducted our research like that, we would be laughed out of the profession.

What we ought to do is make the process more random. For example, each department could compile an extensive list of experts, perhaps at least 100. It could then randomly choose a set. A random sample of experts would at least attempt to remove the subtle biases.

Naturally, I cannot tell you what percentage of letters I have read that are favorable, but my estimate is more than 90 percent. Random letters would very likely produce favorable percentages a good bit lower. Would that result in a smaller percentage of candidates being tenured? Possibly, but after all, tenure is a lifetime contract. The hurdle should be high.

If promotion to full professor is not granted, it is not the end of the world for the candidate. Could a good candidate get three or four negative letters simply because the luck of the draw chose some hard-nosed experts? It could. I suspect that four letters is not enough. Frankly, I would prefer to see six to 10. I cannot imagine a deserving candidate's being denied promotion with 10 letters.

Perhaps there are other solutions, and I would like to hear some. I just know that we are trying to answer an important question, and doing it poorly.

Continued in article

Jensen Comment
Not only do I agree with this article, I think that tenure has become dysfunctional to long-term teaching and research performance. It's like the newlywed thinking about sex:  "Now that I'm married I won't have to do that anymore, at least not as often or as enthusiastically."

When I participated in a study (Jean Heck and Phil Cooley) of top accounting journals, rates of publication tumbled dramatically after tenure. There are of course exceptions, but all too often accounting professors game the tenure system and then back off the game after tenure.

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

Teaching Excellence Secondary to Research for Promotion, Tenure, and Pay
http://www.trinity.edu/rjensen/HigherEdControversies.htm#TeachingVsResearch

Bob Jensen's threads on Rethinking Tenure ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#MLA

 


Best and Worst 2012 MBA Job Placement - Job Offers Abundant, for Most - Business Week
http://images.businessweek.com/slideshows/2012-11-01/best-and-worst-2012-mba-job-placemen

Jensen Comment
Placement data can be somewhat misleading, especially for very small programs. For example, before Trinity University dropped its MBA program a significant proportion of the graduates were full-time military employees. At the time San Antonio's major employers were five military bases, two of which like Lackland and Kelly were enormous, although many of our MBA students were medical military from the Brooke Army Hospital. But placement of other graduates was really problematic. Also the MBA program did not coincide with Trinity's goal of having only full-time students in both undergraduate and graduate programs. Enrollments and placements of full-time MBA students were weak, and the MBA program was dropped. Later a MS program in accountancy was added after Texas passed the 150-credit rule.

The above Bloomberg Business Week link has a somewhat dubious advertisement from Thunderbird. In that advertisement, Thunderbird rightly claims to be the Number 1 School for Global Business in various international-specialty rankings ---
http://www.thunderbird.edu/about-thunderbird/rankings
But Thunderbird does not even make the Top 30 in terms of the above MBA placement rankings where Thunderbird advertises itself as being Number 1.

Slide Show From Bloomberg Business Week, November 2012
Top B-Schools With the Highest-Paid MBAs --- http://images.businessweek.com/slideshows/2012-11-01/top-b-schools-with-the-highest-paid-mbas

Jensen Comment
This is one of those reports where it pays to look at the variance and kurtosis as well as a measure of central tendency (mean or median).

Also it's not clear how variable compensation (sales commissions and bonuses) are factored in with fixed portions of salaries. For example, many of the best entry-level jobs on Wall Street are variable, performance-based compensation jobs.

And how are benefits factored into the study?
For example, some employees who travel most of the time don't make big sacrifices for personal housing. I know one, for example, who uses her parent's address for "home" since she's almost never home. In reality, she lives most of the year in luxury hotels at the expense of her employer and dines in the finest restaurants. Is this added "compensation?"

And note that if your NYC employer sends you to London or Los Angeles for a long-term consulting engagement, your luxury hotel bill may be paid for seven days a week even if you only work five days a week. This is because paying taxi and travel expenses to bring you back to NYC every week end is more expensive than paying your luxury hotel bill for those days when your not on the job.

Bob Jensen's threads on business school rankings by Bloomberg Business Week, US News, the WSJ, The Economist, Financial Times, etc. ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

 


Apple paid 1.9% income tax on $36.8 billion in 2012 (fiscal-year) profits outside the U.S., down from the 2.5% paid in 2011 ---
http://www.sec.gov/Archives/edgar/data/320193/000119312512444068/d411355d10k.htm

Virtually all those iPhones are made in China, and Macs are made in such places as tax-friendly Ireland. In order not to rile Congress too much, some parts are expensively made in the United States


Teaching Case on Corporate Tax Rates from The Wall Street Journal Accounting Weekly Review on November 16, 2012

Tax Twist: At Some Firms, Cutting Corporate Rates May Cost Billions
by: Michael Rapoport
Nov 09, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Advanced Financial Accounting, Income Tax

SUMMARY: "President Obama has said...that the 35% U.S. corporate tax rate should be cut. That would mean lower tax bills for many companies. But it also could prompt large write-downs by Citigroup, AIG, Ford, and other companies that hold piles of 'deferred tax assets,' or DTAs."

CLASSROOM APPLICATION: The article is an excellent one for covering deferred tax assets, net operating loss carryforwards, and the effects of changes in future tax rates on accounting for deferred taxes.

QUESTIONS: 
1. (Advanced) Summarize the accounting for deferred taxes. In your answer, cite the authoritative accounting literature that establishes these requirements.

2. (Advanced) How are changes in corporate tax rates handled in accounting for deferred tax assets? Answer not only with the effect on the amount of deferred tax assets but also by describing how the change affects the income statement. You may present your answer in a narrative or may refer to summary journal entries.

3. (Advanced) What types of items typically result in deferred tax assets in particular? How do you think that financial firms Citigroup and AIG as well as Ford Motor Corp. have amassed significant deferred to assets?

4. (Advanced) Why would Citigroup have to answer now, in a conference call with analysts, for the effects of a corporate tax rate change that hasn't even yet occurred?

5. (Introductory) According to the article, what is tangible book value? Why are bank investors interested in this number?

6. (Advanced) According to the article, "some tax watchers [are] wondering whether companies may pressure Congress for a provision enabling them to avoid writedowns if rates are lowered." Does Congress set this requirement related to deferred tax assets ? Explain.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Tax Twist: At Some Firms, Cutting Corporate Rates May Cost Billions," by Michael Rapoport, The Wall Street Journal, November 9, 2012 ---
http://professional.wsj.com/article/SB10001424052970204789304578086942601404324.html?mg=reno-wsj

What Uncle Sam has given to the earnings of companies like Citigroup Inc., C -0.75% American International Group Inc. AIG -0.77% and Ford Motor Co., F -0.14% he soon might take away.

President Barack Obama has said, most recently during last month's presidential debates, that the 35% U.S. corporate tax rate should be cut. That would mean lower tax bills for many companies. But it also could prompt large write-downs by Citigroup, AIG, Ford and other companies that hold piles of "deferred tax assets," or DTAs.

After posting big losses, these companies have tax credits and deductions they can use to defray future tax bills, thus providing a boost to earnings.

But a tax-rate reduction means some of those credits and deductions, counted as assets on the balance sheet, would be worth less, since lower tax bills would mean fewer opportunities to use them before they expire. That would force the companies to write down their value, resulting in charges against earnings.

Citigroup, for instance, acknowledged during its recent third-quarter earnings conference call that a cut in the tax rate could lead to a DTA-related charge of $4 billion to $5 billion against earnings. Lockheed Martin Corp. LMT -0.57% said in its latest quarterly report that a write-down of its DTAs was possible.

Any write-down also would reduce a company's "tangible book value," the sum it could realize by selling its assets in a fire sale. That could further weigh on banks' stock prices. Most large banks already trade at a discount to tangible book value because of investor concerns about their growth prospects and wariness of reported asset values.

"Investors are focused on tangible book value," said Mike Mayo, a CLSA Securities banking analyst who criticized Citigroup's accounting and asked about the possibility of a write-down on Citigroup's recent earnings call.

Companies other than Citigroup haven't disclosed the size of possible write-downs from a tax cut. "I think this is going to be pretty much a surprise" to investors, said Robert Willens, a tax and accounting expert.

Some companies have enormous piles of these assets. Citigroup has $53.3 billion, the most of any U.S. company. Ford has $12.9 billion.

But those numbers would be reduced under Mr. Obama's proposal to cut the corporate rate to 28% with an added break for manufacturers. The proposal would require congressional action.

Of Citigroup's deferred tax assets, the bank said about $20 billion to $25 billion are federal DTAs that could be hit by tax-rate change. A cut in the corporate tax rate to 28%, or one-fifth below the current rate, could cause a similar one-fifth write-down of its DTAs. A Citigroup spokesman said the value of the New York company's deferred tax assets "could be reduced" if the corporate tax rate falls.

AIG had about $12.8 billion in U.S. deferred tax assets at the end of 2011 that would be affected by a tax-rate reduction, suggesting AIG could face a write-down of as much as $2.6 billion. An AIG spokesman declined to comment.

About three-quarters of Ford's net DTAs are in the U.S., the company said. That suggests a tax-rate cut to 28% could prompt the auto maker to take a write-down of $1.9 billion.

A Ford spokesman said he can't speculate on the size of a write-down, but "as you would expect, if the corporate tax rate is reduced, net deferred tax assets would also decrease."

Companies that have deferred tax assets but aren't currently posting profits might have it even worse. They would have to take big write-downs immediately if the tax rate were cut, but they wouldn't see the benefits until after they start posting taxable profits again and use up their stored credits and deductions, noted Michelle Hanlon, a professor of accounting at the Massachusetts Institute of Technology.

For instance, Navistar International Corp. NAV -0.62% has $2.4 billion in deferred tax assets and posted a $616 million pretax loss for the nine months ended July 31. A Navistar spokeswoman said the truck maker's immediate results would be hurt by a rate reduction, but that Navistar still would welcome such a cut, because it "would ultimately help U.S. companies be more competitive in the global marketplace."

Continued in article


Drake Tax Software --- http://www.drakesoftware.com/site/

Download a free copy of this software for individuals and businesses (registration required) ---
http://www.drakesoftware.com/site/Products/TrialSoftware.aspx/?kme=IA&km_subcategory=CPALD&km_id=DRS-2475

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


Education Tutorials

Wiley Teams Up With TED to Create Lecture Materials for Big-Idea Videos ---
http://chronicle.com/blogs/ticker/jp/wiley-teams-up-with-ted-to-create-lecture-materials-for-big-idea-videos?cid=wc&utm_source=wc&utm_medium=en
Jensen Warning:  Watch out for some TED speakers who know the difference between causation and correlation but don't reveal what they know in the videos.
Many of these videos are more suited to debate seminars than lecture courses.

YouTube Education Channels --- http://www.youtube.com/education?b=400

An Absolute Must Read for Educators
One of the most exciting things I took away from the 2010 AAA Annual Meetings in San Francisco is a hard copy handout entitled "Expanding Your Classroom with Video Technology and Social Media," by Mark Holtzblatt and Norbert Tschakert. Mark later sent me a copy of this handout and permission to serve it up to you at
http://www.cs.trinity.edu/~rjensen/temp/Video-Expanding_Your_Classroom_CTLA_2010.pdf

Experiment in Ultra Learning (some amazing stories) --- Click Here
http://calnewport.com/blog/2012/10/26/mastering-linear-algebra-in-10-days-astounding-experiments-in-ultra-learning/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+StudyHacks+%28Study+Hacks%29 

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

 

Arts at the Core --- http://advocacy.collegeboard.org/preparation-access/arts-core

Invent with Python (make your own computer games) --- http://inventwithpython.com/

Computer Science for Dummies
Computer Science Unplugged --- http://www.youtube.com/csunplugged

According to Hoyle:  Advice to Teachers
JOE'S TOP TWELVE LIST
http://joehoyle-teaching.blogspot.com/2012/11/joes-top-ten-list.html

Bob Jensen's threads on general education tutorials are at http://www.trinity.edu/rjensen/Bookbob2.htm#EducationResearch


"Banks Need Long-Term Rainy Day Funds: Accounting rules prevent banks from building loss reserves until shortly before a bad loan is actually written off. That's just too late," by Eugene A. Ludwig and Paul A. Volcker, The Wall Street Journal, November 16, 2012 ---
http://professional.wsj.com/article/SB10001424127887324556304578120721147710286.html?mg=reno64-wsj#mod=djemEditorialPage_t

Governments around the world are taking bold steps to minimize the likelihood of another catastrophic financial crisis. Regulators and financial institutions already have their hands full, so the bar for adding anything to the agenda should be high.

However, one relatively simple but critically important item should move to the top of the list: reforming the accounting rules that inexplicably prevent banks from establishing reasonable loan-loss reserves. If reserve rules had been written correctly before 2008, banks could have absorbed bad loans more easily, and the financial crisis probably would have been less severe. It is now time, before the next crisis, to recognize that reality.

Loan-loss reserves get far less attention than capital or liquidity requirements, which are subject to specific government regulations. Nevertheless, the "Allowance for Loan and Lease Losses" should be an essential part of assessing the safety and soundness of any bank. The ALLL—not Tier 1 capital or even cash-on-hand—is the most direct way a bank recognizes that lending, including necessary and constructive lending, entails risk. Those risks should be recognized in both accounting and tax practices as a reasonable cost of the banking business.

However, banks are now only allowed to build their loan-loss reserves according to strict accounting conventions, enforced by the Securities and Exchange Commission. Reserves have to be based on losses that are strictly "incurred," in effect shortly before a bad loan is written off. Bankers have been prohibited from establishing reserves based on their own expectations of future losses.

The practical result is that in good times real earnings are overrated. Conversely, the full impact of loan losses on earnings and capital is concentrated in times of cyclical strain.

Why have accounting conventions created this perverse result? Some accountants claim that giving banks flexibility with their reserves is bad because it lets bankers "manage earnings"—that is, to raise or lower results from quarter to quarter to look better in investors' eyes. This is a weak argument, because the ALLL reflects a banking reality, and the allowance itself is completely transparent.

No one is misled when sufficient disclosures exist. The size of the bank's reserve cushion will be on the balance sheet, and it would need to be recognized as reasonable by auditors, supervisors and tax authorities. Importantly, from a financial policy point of view, reserves will tend to be countercyclical, likely to discourage aggressive lending into "bubbles" but helping to absorb losses in times of trouble.

Capital is vital to the safety and soundness of banks. It is the ultimate and necessary protection against insolvency and failure. However, permitting a more flexible allowance for loan-loss reserve, an approach that gives banks and prudential regulators the right to exercise reasonable discretion to build a more flexible cushion in case of loss, is a must. Accounting rules need to change to permit this to happen.

Mr. Ludwig, the CEO of Promontory Financial Group, was Comptroller of the Currency from 1993 to 1998. Mr. Volcker, former chairman of the Federal Reserve System, is professor emeritus of international economic policy at Princeton University.

 

"FASB Will Propose New Credit Impairment Model," by Anne Rosivach, AccountingWeb, October 16, 2012 ---
http://www.accountingweb.com/article/fasb-will-propose-new-credit-impairment-model/220047?source=aa

How to measure and disclose evidence that a loan or bond is not performing continues to be an issue in the ongoing deliberations of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). The two boards have been working on a single, converged Accounting for Financial Instruments standard for years.
 
FASB announced recently that it will separately issue an exposure draft, possibly by the end of 2012, of a new model for disclosing credit impairment. The draft of the new approach, which FASB calls the "Current Expected Credit Loss Model" (CECL Model), may be viewed in FASB Technical Plan and Project Updates. The CECL Model applies a single measurement approach for credit impairment. 
 
FASB developed the CECL Model in response to feedback from US stakeholders on the "three-bucket" credit impairment approach, previously agreed upon by the FASB and the IASB. US constituents found the three-bucket approach hard to understand and suggested it might be difficult to audit. 
 
The IASB continues to propose the three-bucket approach. 
 
FASB board members agreed that the CECL Model would apply in all cases where expected credit losses are based on an expected shortfall in the cash flows that are specified in a contract, and where the expected credit loss is discounted using the interest rate in effect after the modification. This would include troubled debt restructurings. The board has provided additional guidance.
 
The Technical Plan explains the CECL Model as follows:
 
"At each reporting date, an entity reflects a credit impairment allowance for its current estimate of the expected credit losses on financial assets held. The estimate of expected credit losses is neither a 'worst case' scenario nor a 'best case' scenario, but rather reflects management's current estimate of the contractual cash flows that the entity does not expect to collect. . . . 
 
"Under the CECL Model, the credit deterioration (or improvement) reflected in the income statement will include changes in the estimate of expected credit losses resulting from, but not limited to, changes in the credit risk of assets held by the entity, changes in historical loss experience for assets like those held at the reporting date, changes in conditions since the previous reporting date, and changes in reasonable and supportable forecasts about the future. As a result, the balance sheet reflects the current estimate of expected credit losses at the reporting date and the income statement reflects the effects of credit deterioration (or improvement) that has taken place during the period."
 
The FASB has tentatively decided to require disclosure of the inputs and specific assumptions an entity factors into its calculations of expected credit loss and a description of the reasonable and supportable forecasts about the future that affected their estimate. The entity may be asked to disclose how the information is developed and utilized in measuring expected credit losses.
 
In July, when the FASB decided to pursue a separate course from the IASB and develop a simpler Model, the FASB explained the three-bucket approach as follows: 
 
"Previously, the Boards had agreed on a so-called 'expected loss' approach that would track the deterioration of the credit risk of loans and other financial assets in three 'buckets' of severity. Under this Model, organizations would assign to 'Bucket 1' financial assets that have not yet demonstrated deterioration in credit quality. 'Bucket 2' and 'Bucket 3' would be assigned financial assets that have demonstrated significant deterioration since their acquisition."
 
FASB states in its Technical Plan that the key difference between the CECL Model and the previous three-bucket model is that "under the CECL Model, the basic estimation objective is consistent from period to period, so there is no need to describe a 'transfer notion' that determines the measurement objective in each period."

 

 

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

Bob Jensen's threads on Cookie Jar Accounting ---
http://www.trinity.edu/rjensen/theory01.htm#CookieJar


Teaching Case from The Wall Street Journal Accounting Weekly Review on November 16, 2012

New Benchmarks Crop Up in Companies' Financial Reports
by: Emily Chasan
Nov 13, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Theory, Advanced Financial Accounting, Financial Accounting Standards Board, Financial Analysis, Financial Reporting, GAAP, Generally accepted accounting principles, SEC, Securities and Exchange Commission

SUMMARY: "Companies are increasingly augmenting their financial reports with nontraditional performance benchmarks that aren't defined by U.S. accounting standards, forcing securities regulators to step up efforts to ensure that investors don't get...misleading information....The Financial Accounting Standards Board...has been looking at whether the greater use of alternative financial measures reflects shortcomings in current accounting standards."

CLASSROOM APPLICATION: The article may be used in any higher level financial reporting or MBA class.

QUESTIONS: 
1. (Introductory) What types of nonstandard measures are companies including in their filings with the SEC or discussing in "roadshows" prior to initial public offerings?

2. (Advanced) From the point of view of the companies presenting these metrics, what is their purpose?

3. (Introductory) What are the SEC's concerns with these metrics?

4. (Introductory) List the examples of problem metrics in SEC filings that are given in the article.

5. (Introductory) Who besides the SEC has concerns with these metrics?

6. (Advanced) What is the FASB's role with regards to these new metrics? State what must be done currently with these metrics and how the FASB is looking to advance its work in this area.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"New Benchmarks Crop Up in Companies' Financial Reports," by Emily Chason, The Wall Street Journal, November 13, 2012 ---
http://professional.wsj.com/article/SB10001424127887324073504578114953782230548.html?mg=reno64-wsj

Companies are increasingly augmenting their financial reports with nontraditional performance benchmarks that aren't defined by U.S. accounting standards, forcing securities regulators to step up efforts to ensure that investors don't get suspect or misleading information.

The companies that tout these newfangled indicators, such as "paid membership rates," number of "active users" or "cumulative customers," say these figures are essential to understanding their operations. But regulators and investors want to make certain these newer measurements are directly related to company performance.

"We're working really hard to make sure we understand industry practices and the resulting disclosures," Shelley Parratt, deputy director of disclosure operations at the Securities and Exchange Commission's Division of Corporation Finance, said last week at a New York conference.Ms. Parratt told the Practising Law Institute gathering that the agency's goal is to "make sure disclosures are balanced and clearly linked to a company's results."

A major concern is how companies present the new indicators. The SEC asked real-estate company Prologis Inc. PLD +2.02% and retailer Home Depot Inc. HD +1.91% in May to remove certain income tables from their filings because the nonstandard metrics were featured too prominently, exaggerating their importance.

After receiving the SEC's letters, Home Depot and Prologis both agreed to change the way they displayed the information.

The agency also is paying closer attention to the benchmarks provided by companies pursuing initial public offerings, as they try to highlight what they consider to be the unique aspects of their businesses. Some 47% of the biggest 45 venture-backed firms that went public in the U.S. this year have provided operating metrics other than traditional accounting figures, up from 26% a year earlier, according to a study by law firm Wilson Sonsini Goodrich & Rosati

The venture-backed firms also have increased their use of nonstandard measures such as earnings before interest, taxes, depreciation and amortization, or Ebitda, and "free cash flow," with 58% disclosing financial benchmarks that aren't part of generally accepted accounting principles, up from 50% in 2011.

Analysts and investors say the measures can be helpful. But because they are nonstandard, the figures may not allow investors to make comparisons between companies or from year to year.

"There is value to them, but the question is how good are they, how much weight do you give them and how do they change over time?" said Sandra Peters, head of financial reporting policy for the CFA Institute, a trade group for financial analysts.

U.S. accounting rules allow companies to use the newer measures as long as they aren't found to be misleading. But they are required to disclose how they stack up to the most directly comparable GAAP number.

Alternative metrics fell out of favor in the aftermath of the dot-com bust more than a decade ago, when unprofitable Internet companies emphasized metrics like "eyeballs," and "mindshare." But the current resurgence is partially the SEC's doing.

The agency noticed companies were discussing nonstandard indicators with analysts and investors at roadshows and conferences, but not fully including them in the financial statements they filed with the SEC. In 2010, the regulator asked companies to include those measures in filings as well.

"Because companies use them and they've shown them to their venture-backed investors, they feel like the public investors are also looking at these measures and want them," said Richard Blake, a partner in Wilson Sonsini's Palo Alto, Calif., office.

Some remain suspicious of the alternative metrics because they aren't subject to rigorous accounting rules and aren't audited. The nonstandard benchmarks are something companies "really need to explain," said Stephen Brown, senior director of corporate governance at pension-fund manager TIAA-CREF.

Last year, the daily-deal site Groupon Inc. GRPN +4.03% removed a controversial measure known as "adjusted consolidated segment operating income" from its IPO filing, under pressure from the SEC. The measure stripped out all marketing expenses, which are one of Groupon's biggest costs. But the company went public using measurements like "cumulative customers," even after the SEC questioned how it was calculating that statistic. Groupon eventually dropped it and now focuses on slightly more traditional operating metrics such as "active customers."

Groupon declined to comment.

The SEC staff still is reminding companies in speeches not to use nonstandard measures that inappropriately excluded normal cash operating expenses. In September, the regulator asked Internet phone company Vonage Holdings Corp. VG -0.90% to revise a measure called "pre-marketing operating income."

Vonage had used the yardstick since it went public in 2006 to show investors the profitability of its existing client base without the marketing costs associated with recruiting new customers, but it said it told the SEC in September that it would drop the metric from future filings.

Continued in article

 

Financial Accounting Standards Advisory Board ---
http://en.wikipedia.org/wiki/FASAB

FASAB ISSUES THREE-YEAR PLAN News ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151837

FASAB UPDATES ITS MISSION STATEMENT ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=152088

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

 


Really?
Business Schools With the Best Teachers Are Not Necessarily the Highest Ranked Domestic or International Business Schools

What hurts the top-ranked business schools in terms of teaching reputations?
Hint: Think class size
 

But don't even mention the unthinkable:  Research stress does not always allow top-ranked business school teachers to perform at their best in classrooms.
 

And don't even think the other unthinkable:  Having teachers who hate capitalism and business does not really help, especially outside the U.S.


"B-Schools With Five-Star Teachers," by Louis Lavelle, Bloomberg Business Week, November 12, 2012 ---
http://www.businessweek.com/articles/2012-11-12/b-schools-with-five-star-teachers#r=hpt-ls 

What qualities make for a great teacher? Like beauty, that’s very much in the eye of the beholder. But in business school, students almost universally praise certain attributes: a compelling classroom presence, an encyclopedic knowledge of the subject, easy availability after class, and a research record second to none.

As part of Bloomberg Businessweek’s 2012 Best B-Schools ranking, scheduled for publication on Nov. 15, we asked recent MBA graduates to judge the quality of their business school’s faculty. When the ranking is published, we’ll award letter grades, from A+ to C, to each of the ranked schools based on how well each program fared in this area. The letter grades are based on an actual numerical ranking, which we used to create the ranking below.

Perhaps the most surprising thing about this list is that it doesn’t include any of the schools typically considered the best of the best—including Chicago’s Booth School of Business, Harvard Business School, and Wharton, which took the top three spots in our 2010 ranking. In fact, the highest-ranked school on the “best” list is Virginia’s Darden School of Business, which ranked 11th in 2010 and came in at No. 3 for teaching. It’s possible that Booth, Harvard, and Wharton were the victims of high expectations. Their reputations for excellence may be impossible to live up to. Very large classes probably don’t help, either. All three have somewhat crowded classrooms, with Harvard tipping the scales at an average of 90 students in core courses.

The “worst” list is dominated by international schools, including two top 10 programs, No. 4 ESADE in Barcelona and No. 9 York’s Schulich School of Business in Toronto. There does not appear to be a universal explanation for this.

See the article itself for a ranking of business schools with the best teachers.
http://www.businessweek.com/articles/2012-11-12/b-schools-with-five-star-teachers#r=hpt-ls

Jensen Question
If Indiana and Maryland universities have the best business school teachers, why do highest GMAT applicants still prefer
Chicago’s Booth School of Business, Harvard Business School, and Wharton if they can swing the prices of these top ranked business schools?

Bob Jensen's threads on the media rankings of business schools and accounting programs ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

 


In addition to errors in spelling his name, Hoogervorst sees uphill battle on lease accounting ---
http://blogs.wsj.com/cfo/2012/11/07/iasb-head-cites-uphill-battle-on-lease-accounting/?mod=wsjpro_hps_cforeport

Speech --- http://www.ifrs.org/Alerts/Conference/Documents/HH-LSE-November-2012.pdf

Accountancy Age --- Click Here
http://www.accountancyage.com/aa/news/2223057/hoogervorst-predicts-uphill-battle-on-lease-accounting?WT.rss_f=&WT.rss_a=Hoogervorst+predicts+%E2%80%9Cuphill+battle%E2%80%9D+on+lease+accounting+

Jensen Comment
In addition to intense business lobbying, I don't look for academic success of better lease accounting until creative ideas come forth on how to deal with renewal and cancellation clauses in operating leases (my term).

Leases: A Scheme for Hiding Debt (Lease) ---
http://www.trinity.edu/rjensen/Theory02.htm#Leases


I'll bet you never heard of some of these top Medical MBA specialty programs (based on a small sample study)
"Johnson & Johnson's Go-To Business Schools," Posted by: Louis Lavelle, Bloomberg Business Week, November 8, 2012 ---
http://www.businessweek.com/articles/2012-11-08/johnson-and-johnsons-go-to-business-schools ,

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

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


References for Comparisons of IFRS versus U.S. GAAP

From Ernst & Young in November 2012
US GAAP versus IFRS: The basics 
While convergence was a high priority for the FASB and the IASB in 2012, differences continue to exist between US GAAP and IFRS. In this guide, we provide an overview by accounting area of where the standards are similar, where differences are commonly found in practice, and how and when certain differences are expected to disappear
http://www.ey.com/Publication/vwLUAssetsAL/IFRSBasics_BB2435_November2012/$FILE/IFRSBasics_BB2435_November2012.pdf

Jensen Comment
This is only a 54-page document. I still prefer the somewhat older but much longer PwC document.

Older links to such comparisons:

 

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.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.


IFRS 9 Carve Out for Hedge Accounting Increasingly Likely in Europe, IAS Plus (Deloitte), November 13, 2012 ---
http://www.iasplus.com/en/news/2012/november/ifrs-fachausschuss-des-drsc-analysiert-und-kommentiert-den-iasb-arbeitsentwurf-zur-sicherungsbilanzierung

The IFRS committee of the Accounting Standards Committee of Germany (ASCG) has analysed the IASB Review Draft 'Hedge Accounting' published in September 2012. The analysis was conducted in co-operation with the ASCG’s Financial Instruments Working Group. It revealed several issues that need further clarification or amendment. One of the findings suggests that the EU carve-out is likely to be imposed on IFRS 9 as well. The results of the analysis have been submitted to the IASB.

Note that IFRS 9 requirements were delayed until 2015.

Bob Jensen's threads on accounting standard settings controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Bob Jensen's free hedge accounting tutorials ---
http://www.trinity.edu/rjensen/caseans/000index.htm


From the CFO Journal on November 19, 2012

Ex-bosses reap big consulting fees. Former executives often land lucrative consulting gigs at their old companies, writes the Journal’s Joann S. Lublin. Boards dole them out to smooth transitions and stop ex-bosses from joining rivals or poaching staff. But Brandon Rees, head of the AFL-CIO’s Office of Investment, says consulting agreements often are a hidden substitute for severance pay.” And they don’t always work out for executives. A CBS finance chief, Fredric G. Reynolds, assisted his longtime employer for a while after he left, but there wasn’t that much to do and he “couldn’t justify” continuing, so he asked CBS to halt payments. Reynolds says boards should be more skeptical of consulting agreements. “It’s a way to get people to move on … But it doesn’t wind up being very productive.”

"Lucrative Consulting Fees Reach Bigger Set," by Hoann S. Lublin, The Wall Street Journal, November 19, 2012 ---
http://professional.wsj.com/article/SB10001424127887324073504578115163336933032.html?mod=ITP_marketplace_0&mg=reno64-wsj

When Samuel J. Palmisano retires next month, he'll enjoy a generous goodbye present: The former International Business Machines Corp. IBM +1.82% chief will earn $20,000 for any day he spends four hours advising his longtime employer.

That means hypothetically he could pocket $400,000 a year for 20 half-days of work—twice what his predecessor, Louis V. Gerstner Jr., makes per day under a similar consulting arrangement. Mr. Palmisano's contract is open-ended and doesn't specify the number of days he will work. Mr. Gerstner's 10-year consulting contract expires in March.

Many former executives enjoy lucrative consulting gigs at their old companies. Boards dole out these agreements to guarantee smooth leadership transitions and prevent former bosses from joining a rival, poaching staffers or filing suit against the company.

Companies have paid key former executives as consultants since at least the 1970s, and the practice gained acceptance because boards wanted continued access to those ex-officials' knowledge, according to several executive-pay attorneys.

In some cases, the deals are so generous that they go beyond the grave—such as the consulting accord for Phillip "Rick" Powell, who stepped down as CEO of First Cash Financial Services Inc. FCFS +5.17% in 2005.

Under Mr. Powell's consulting contract, the operator of pawn shops and check-cashing stores was required to pay $3.5 million in consulting fees if Mr. Powell had died during 2011, the company's latest proxy said. (The 62-year-old Mr. Powell, who has been fighting U.S. charges of illegal insider trading since last year, remains alive and well.)

The controversial perquisite bothers some activist investors, especially because these deals are sometimes made when a company is nudging an executive out the door.

"Consulting agreements often are a hidden substitute for severance pay," says Brandon Rees, head of the AFL-CIO's Office of Investment. "Their questionable value will influence how shareholders vote on executive pay in the 2013 proxy season."

Consulting arrangements have fallen in popularity among CEOs over the past decade, but are gaining traction for other departing C-suite leaders, according to analyses for The Wall Street Journal.

In the five years ended Aug. 1, 16 former leaders of the nation's 1,000 biggest concerns took home at least $500,000 in consulting fees, concludes Equilar Inc., a pay-research firm. That compares with 28 retired chiefs making that much between 1996 and 2001, a previous WSJ study found.

Yet "there's a general upward trend" since 2007 in the number of consulting contracts for other senior executives, such as finance chiefs or general counsel, reports Theo Francis, an independent compensation researcher. He reviewed nearly 300 such agreements for the Journal.

Just a tiny fraction require a minimum workload—7 of 174 recently disclosed executive consulting agreements, according to a separate study by Mr. Francis. (Mr. Francis is a former Journal reporter who left the paper in 2008.)

Kimberly-Clark Corp. KMB +1.14% guarantees Jan B.C. Spencer $50,000 per quarter through mid-2014 for consulting services—and a maximum of 200 hours a year, according to a regulatory filing. The senior vice president retired in June at age 57 after more than three decades with the company, and says he chose to limit his hours because he didn't want an "onerous" obligation.

He estimates he spent nearly 50 hours counseling former colleagues this summer, such as helping a European team with planning.

Smooth transitions are a big part of the plan. Advice from a predecessor proved useful during James D. Wehr's initial months as chief executive of insurer Phoenix Cos. PNX +3.92% Dona D. Young, his predecessor, received $300,000 for six months of consulting after she retired in 2009.

"Dona helped me transition into my new role and expand my relationships inside and outside the company,'' Mr. Wehr recalled. Thomas Johnson, Phoenix's board chairman, said Mrs. Young was especially useful in the initial months, and coached Mr. Wehr about promoting a rising star whom she had been grooming while CEO. Mrs. Young declined to comment.

It doesn't always work out, though. In early 2008, Acxiom Corp. ACXM +1.27% promised to pay departing Chief Executive Charles Morgan $500,000 annually for up to three years of consulting. Mr. Morgan agreed to help his successor, John Meyer, strengthen the company's customer ties and advise on technology strategy, according to his consulting accord. But less than two months later, management stopped using Mr. Morgan's services. An Acxiom spokeswoman declines to say why. Per his accord, Mr. Morgan still collected $1.5 million. He didn't return calls seeking comment.

At Boeing Co., BA +1.65% Scott Carson retired in January 2010 after running its commercial airplanes unit. He earned about $1.5 million for advising Boeing no more than 75 hours a month. The two-year contract expired last March.

Mr. Carson's replacement, Jim Albaugh, "had relatively limited experience with our commercial customers," and so the former executive "provided continuity," a company spokesman says.

Mr. Carson says he attended aircraft-delivery events and accompanied colleagues to complete sales, including one in Ethiopia. But he never consulted the maximum amount per month, the retired executive says. And "in the last six months, it was nothing"—even though he received his full fee.

The transition "ended up being a bit shorter than we estimated," the Boeing spokesman explains.

Mr. Carson now chairs the board of regents for Washington State University, among other things.

A CBS Corp. CBS +2.65% finance chief who won a post-retirement consulting gig took an unusual approach after he no longer felt needed. Fredric G. Reynolds was due $100,000 a month for three months after leaving the media concern in August 2009, followed by $60,000 a month through August 2010.

Mr. Reynolds says he assisted his longtime employer with U.K. outdoor billboard deals, among other things. By early 2010, however, he stopped being busy for CBS, he recalls. "I couldn't justify doing this [consulting] through August," he says.

CBS accepted Mr. Reynolds's request, halting payments in late February, a spokesman says.

Former executives rarely cut short their consulting gigs, however.

Mr. Reynolds says boards should be more skeptical of such arrangements. "It's a way to get people to move on," he notes. "But it doesn't wind up being very productive."

Continued in article

Bonuses for What?
The only guy to make almost a $100 Million dollars at GE is the CEO who destroyed shareholder value by nearly 50% in slightly less than a decade

"GE has been an investor disaster under Jeff Immelt," MarketWatch, March 8, 2010 ---
http://www.marketwatch.com/story/ge-has-been-an-investor-disaster-under-jeff-immelt-2010-03-08

When things go well, chief executives of major companies rack up hundreds of millions of dollars, even billions, on their stock allotments and options.

It's always justified on the grounds that they've created lots of shareholder value. But what happens when things go badly?

For one example, take a look at General Electric Co. /quotes/comstock/13*!ge/quotes/nls/ge (GE 16.27, +0.04, +0.22%) , one of America's biggest and most important companies. It just revealed its latest annual glimpse inside the executive swag bag.

By any measure of shareholder value, GE has been a disaster under Jeffrey Immelt. Investors haven't made a nickel since he took the helm as chairman and chief executive nine years ago. In fact, they've lost tens of billions of dollars.

The stock, which was $40 and change when Immelt took over, has collapsed to around $16. Even if you include dividends, investors are still down about 40%. In real post-inflation terms, stockholders have lost about half their money.

So it may come as a shock to discover that during that same period, the 54-year old chief executive has racked up around $90 million in salary, cash and pension benefits.

GE is quick to point out that Immelt skipped his $5.8 million cash bonus in 2009 for the second year in a row, because business did so badly. And so he did.

Yet this apparent sacrifice has to viewed in context. Immelt still took home a "base salary" of $3.3 million and a total compensation of $9.9 million.

His compensation in the previous two years was $14.3 million and $9.3 million. That included everything from salary to stock awards, pension benefits and other perks.

Too often, the media just look at each year's pay in isolation. I decided to go back and take the longer view.

Since succeeding Jack Welch in 2001, Immelt has been paid a total of $28.2 million in salary and another $28.6 million in cash bonuses, for total payments of $56.8 million. That's over nine years, and in addition to all his stock- and option-grant entitlements.

It doesn't end there. Along with all his cash payments, Immelt also has accumulated a remarkable pension fund worth $32 million. That would be enough to provide, say, a 60-year-old retiree with a lifetime income of $192,000 a month.

Yes, Jeff Immelt has been at the company for 27 years, and some of this pension was accumulated in his early years rising up the ladder. But this isn't just his regular company pension. Nearly all of this is in the high-hat plan that's only available to senior GE executives.

Immelt's personal use of company jets -- I repeat, his personal use for vacations, weekend getaways and so on -- cost GE stockholders another $201,335 last year. (It's something shareholders can think about when they stand in line to take off their shoes at JFK -- if they're not lining up at the Port Authority for a bus.)

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


Teaching Case on Poison Pills from The Wall Street Journal Accounting Weekly Review on November 16, 2012

The Big Number
by: Maxwell Murphy
Nov 13, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Advanced Financial Accounting, Taxes

SUMMARY: The article reports on a review by Factset SharkRepellent indicating that companies have initiated or amended more poison pill plans than they did over the entire previous decade. Companies say they set up these plans to preserve tax loss carryforwards generated by losses experienced due to the financial crisis.

CLASSROOM APPLICATION: The article may be used in a tax class or a financial accounting class covering stockholders' equity (shareholder rights) and/or deferred taxes. NOTE: INSTRUCTORS MAY OR MAY NOT WANT TO DELETE THE FOLLOWING STATEMENT BEFORE DISTRIBUTING TO STUDENTS. Poison pill plans trigger significant dilution in order to make takeovers prohibitively expensive. Triggers include an outside investor obtaining a certain threshold level of ownership interest indicating a possible takeover.

QUESTIONS: 
1. (Advanced) What are tax loss carryforwards?

2. (Introductory) Using the descriptions in the article, summarize your understanding of poison pill plans.

3. (Introductory) How can poison pill plans affect companies' abilities to utilize tax-loss carryforwards? In your answer, comment on the need for a business purpose of a business combination to benefit from tax loss carryforwards.

4. (Advanced) "If U.S. corporate-tax rates are cut, companies would be forced to write down the carrying value on their tax assets..." Why?

5. (Advanced) Refer again to write-downs of tax assets. Does the write down "make them less valuable" or is it the other way around? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"The Big Number," by Maxwell Murphy, The Wall Street Journal, November 12, 2012 --- 
http://professional.wsj.com/article/SB20001424127887323894704578113050810902628.html?mg=reno64-wsj 

115

Number of 'poison pills' companies have adopted or amended since 2008 to protect tax-loss carry forwards

Over the past four years, companies have turned to shareholder rights plans, also known as poison pills, to protect tax-loss carry forwards generated by the losses they piled up during the financial crisis. Carry forwards allow companies to offset taxes on future profits.

Since 2008, according to FactSet SharkRepellent, 115 U.S. companies have adopted or amended their rights plans to protect these net-operating-loss carry forwards, as they are formally known. Just 26 poison pills were used for this purpose in the preceding decade.

This year through Nov. 5, companies have adopted or amended 11 rights plans specifically to protect these assets, compared with 24 last year and a peak of 45 in 2009 during the depths of the crisis.

These carry forwards are typically usable over several years or longer, depending upon profitability and other factors, but companies can lose them if regulators decide there has been a change in control of the company. Poison pills, more commonly used as a takeover defense, cause massive share dilution if an investor acquires a certain percentage stake in the company, making the company prohibitively expense to buy. All of the carry-forward-related poison pills FactSet found set their trigger at 5% or below.

If U.S. corporate-tax rates are cut, companies would be forced to write down the carrying value on their tax assets, which would make them less valuable. But poison pills aren't difficult to adopt, and carry forwards will still be worth protecting for most firms, meaning they won't be less likely to use such plans, said Robert Willens, a tax expert with Robert Willens LLC.

 

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


Question
What recent WSJ article reminds us of Hillary Clinton's great luck in cattle futures trading when her husband was Governor of Arkansas?

Background Reading
Hillary Rodham cattle futures controversy ($1,000 down yields $100,000 rake in) --- http://en.wikipedia.org/wiki/Hillary_Rodham_cattle_futures_controversy

"Executives' Good Luck in Trading Own Stock," by Susan Pulliam and Rob Barry, The Wall Street Journal, Noember 27, 2012 ---
http://professional.wsj.com/article/SB10000872396390444100404577641463717344178.html?mod=djemCFO_h

A timely share sale by two insiders at retailer Body Central Corp. BODY -1.44% this spring spared them a nearly $1.4 million drop in the value of their holdings in the chain.

Founder Jerrold Rosenbaum and chief merchandising officer Beth Angelo, his daughter, sold a combined $2.9 million of Body Central stock on May 1, May 2 and May 3. Later on May 3, after the market close, the company cut its 2012 earnings estimate. The next trading day, the stock plunged 48.5%.

A Body Central official said both executives' trades were part of preordained trading plans. The official said that Ms. Angelo set up a new plan for her father in March, a time when she wasn't aware of the trend that led to the lower estimate. The company wouldn't make either one available for an interview. Mr. Rosenbaum, who the company said is ailing, resigned from the board in May.

Corporate executives long have bought and sold shares of their own companies, and outside investors have long tracked such trades, in the belief that insiders have a particularly good feel for how companies are faring.

Executives can trade for entirely legitimate reasons, such as to raise money to meet a tax bill or simply to diversify. But of course they must avoid trading on nonpublic information, and that can lead to sticky situations, since executives do possess just such information much of the time.

Regulatory efforts to find a way around this conundrum and allow executives to trade, a Wall Street Journal analysis suggests, are so flawed they have left a confusing landscape that can both raise suspicions about trades that are innocent, and provide cover for others that are less so.

The Journal examined regulatory records on thousands of instances since 2004 when corporate executives made trades in their own company's stock during the five trading days before the company released material, potentially market-moving news.

Among 20,237 executives who traded their own company's stock during the week before their companies made news, 1,418 executives recorded average stock gains of 10% (or avoided 10% losses) within a week after their trades. This was close to double the 786 who saw the stock they traded move against them that much. Most executives have a mix of trades, some that look good in retrospect and others that do not.

The Journal also compared the trading of corporate executives who buy and sell their own companies' stock irregularly, dipping in and out, against executives who follow a consistent yearly pattern in their trading. It found that the former were much likelier to record quick gains.

Looking at executives' trading in the week before their companies made news, the Journal found that one of every 33 who dipped in and out posted average returns of more than 20% (or avoided 20% downturns) in the following week. By contrast, only one in 117 executives who traded in an annual pattern did that well.

"We've found a lot of evidence that these insiders do statistically much better than we'd expect," said Lauren Cohen, an associate professor of business administration at Harvard University who co-wrote a study published this year about the performance of insiders who time their trades. "The perch that they have—they not only have proximity to this private information, but they can actually affect the outcomes."

A Securities and Exchange Commission rule requires executives to report trades in their own company's stock within 48 hours. But getting a bead on trading by corporate executives has become more complicated, not less, in recent years, thanks to a proliferation of trading plans that provide for periodic buying or selling.

The arrangements, known as 10b5-1 plans, spell out certain times of the year, or certain target prices, when corporate executives intend to buy or sell shares of their own company. Executives who use such plans can trade even while they possess material nonpublic information about the company. And in the event they face suspicions of improper trading, having followed such a pre-established plan is a strong defense.

But the system has numerous shortcomings. Companies and executives don't have to file these trading plans with any federal agency. That means the plans aren't readily available for regulators, investors or anyone else to examine.

Moreover, once executives file such trading plans, they remain free to cancel or change them—and don't have to disclose that they have done so.

Finally, even when executives have such a preset plan, they are free to trade their companies' stock at other times, outside of it.

"Sometimes a 10b5-1 plan is legitimate and other times it's not, but there is no way of knowing because there is no disclosure of anything to investors," said a hedge-fund manager, David Berman of Berman Capital Management.

The SEC, asked for comment on the plans' limitations, cited the requirement for insiders to report trades within two days and added: "If the Commission were to consider requiring insiders to make disclosure ahead of trades, there would need to be careful consideration of the costs and benefits."

Continued in article

But the worst inside traders are in the U.S. House and Senate:

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

Watch the "Insider" Video Now While It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody

"They have legislated themselves as untouchable as a political class . . . "
"The Wonk (Professor) Who Slays Washington," by Peter J. Boyer, Newsweek Magazine, November 21, 2011, pp. 32-37 ---
http://www.thedailybeast.com/newsweek/2011/11/13/peter-schweizer-s-new-book-blasts-congressional-corruption.html

Jensen Comment
The recent legislation preventing our elected officials is a sham since it does not preclude family members from inside trading.


"Harvard Doctor Turns Felon After Lure of Insider Trading," by Bryan Gruley & David Voreacos, Bloomberg News, November 27, 2012 ---
http://www.bloomberg.com/news/2012-11-27/harvard-doctor-turns-felon-after-lure-of-insider-trading.html

From the age of six, Joseph F. “Chip” Skowron III aspired to be a doctor. At Yale, he earned both a medical degree and a doctorate in molecular and cellular biology, then qualified for Harvard’s elite, five-year residency program. Three years in, Skowron quit medicine for Wall Street. He and two partners started a group of health-care investment funds under the auspices of FrontPoint Partners LLC (MS), a hot new property in the exploding world of hedge funds.

Skowron was soon making millions of dollars a year. He built a gabled, 10,000-square-foot home on three acres in the nation’s hedge-fund capital, Greenwich, Connecticut. He assembled a small fleet of pricey cars, including a 2006 Aston Martin Vanquish and a 2009 Alfa Romeo Spider 8C. He also spent vacation time engaged in Third World humanitarian causes.

Today, Skowron, 43, is serving a five-year term for insider trading at the federal prison at Minersville, Pennsylvania. At FrontPoint, Skowron lied to his bosses and law enforcement authorities, cost more than 35 people their jobs and stooped to slipping envelopes of cash to an accomplice. FrontPoint is gone. Morgan Stanley, which once owned FrontPoint, is seeking more than $65 million from Skowron, whose net worth a year ago was $22 million. Until he’s a free man, his wife of 16 years will have to care for their four children and Rocky, their golden retriever, on her own.

Never Satisfied
“I always detected that he was reaching for something to gratify him,” said his half-sister, Cindi Kinney, in an interview. “It was always something else, whether it was going to medical school or learning the financial industry. He was always setting goals and reaching them -- and never being satisfied.”

Skowron himself told the judge who sentenced him in November 2011: “I was not aware of the changes that were happening in me that blurred the lines between right and wrong. They came very slowly, over many years.”

Continued in article

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


The day Arthur Andersen loses the public's trust is the day we are out of business.  
Steve Samek, Country Managing Partner, United States, on Andersen's Independence and Ethical Standards CD-Rom, 1999

If a man's poor and not a bad fellow, he's considered worthless; if he is rich and a very bad fellow, he's considered a good client.
Titus Maccius Plautus, 255 BC to 185 BC

"Consulting By Auditors: NYU Stern Ross Roundtable Explores Post-Enron Reemergence," by Francine McKenna, Forbes, November 27, 2012 ---
http://www.forbes.com/sites/francinemckenna/2012/11/27/consulting-by-auditors-nyu-stern-ross-roundtable-explores-post-enron-reemergence/

Experts from the finance sector, industry, regulatory agencies, government, legal and accounting professions, and academia got together last night at NYU Stern School of Business for a Ross Roundtable to discuss the reemergence of consulting practices in the major audit firms. I’m honored to have been asked to join the panel with Bob Herz (a former FASB Chairman and current audit committee and PCAOB SAG member), former Fed Chairman Paul Volcker, professors from Stern, and Christopher Davies of Wilmer Hale who pinch hit for PwC’s Brendan Dougher who canceled at the last minute. Davies represents PwC and Ernst & Young in auditor liability matters.

Yes, the firms sent the lawyer instead!

Here’s the text of my remarks with links. Bob Herz interrupted me in the first few seconds of my remarks to object to my characterization of the independent foreclosure reviews by PwC as a problem. I convinced him to allow me to continue. I suggest he, and Christopher Davies who also said he didn’t get it, read some of my American Banker columns on the subject – consumer advocates, the GAO and congressional members have – or this compilation of all the writing I’ve done on the subject.

If they don’t get it then, they never will.

The remarks also include some new information about HP’s allegations against Autonomy. All four of the largest global audit firms are involved in the scandal one way or the other by virtue of their roles as auditors or consultants or both.

If they don’t get your money going in, they’ll surely get it going out.

I’ve worked on the consulting side of two Big Four firms during my career: at KPMG, at KPMG’s spinoff BearingPoint (as a Managing Director and practice leader in Latin America) and at PwC in internal audit of the firm itself.

The last time the audit business was flat, a commodity, and under pricing pressure from clients was when I started working for KPMG Consulting in 1993 after ten years in industry. This was before KPMG Consulting split from KPMG the audit firm and became BearingPoint and just as auditors as consultants became an issue, well before Enron brought it to a head.

I am now watching the second coming of consulting for the Big Four auditors.

Consulting never left Deloitte, only grew bigger while the other three large firms went back to being semi-pure audit firms because they were worried about trouble with regulators. Their concerns were misplaced.

Lane Green writes in a piece called Shape shifters” in the Economist in September:

 “In fiscal 2012 Deloitte increased its revenues from consulting by 13.5% and from financial advisory by 15%—compared with just 6.1% for audit and 3.9% for tax and legal services Barry Salzberg, Deloitte’s boss, says he expects consulting to continue to grow by double digits, whereas the audit market is mature.

If the two businesses continue to grow at the 2012 rate, the firm would do more consulting than auditing by 2017.”

I could make points about auditors and how consulting compromises their independence, professional skepticism and eventually their professionalism using any of the Big Four firms. There are enough cases for each. But Brendan is sitting here on this panel (Doughan did not show up), so, to be polite, I will try to make my points today without picking on PwC too much.

These comments focus on the business model of the Big Four firms and the auditors’ primary public duty to shareholders, via the franchise granted by the public via SEC and exchange regulations that require “certified” audits for all public listings.

Continued in article

"Big four auditors face breakup to restore trust," by Huw Jones, Reuters, November 30, 2011 ---
http://in.reuters.com/article/2011/11/30/eu-auditors-idINDEE7AT0CQ20111130

The world's top four audit firms will have to split up and rename themselves under a far-reaching draft European Union law to crack down on conflicts of interest and shortcomings highlighted by the financial crisis.

"Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary," Internal Market Commissioner Michel Barnier said on Wednesday.

Large auditors said the plans won't improve audit quality, while smaller rivals accused Barnier of a climbdown.

Policymakers have questioned why auditors gave a clean bill of health to many banks which shortly afterwards needed rescuing by taxpayers as the financial crisis began unfolding.

Barnier said recent apparent audit failures at AngloIrish and Lehman Brothers banks, BAE Systems and Olympus "would strongly suggest that audit is not working as it should".

More robust supervision is needed and "more diversity in what is an overly concentrated market, especially at the top end", he said.

Just four audit firms -- Ernst & Young ERNY.UL, Deloitte DLTE.UL, KPMG KPMG.UL, and PwC PWC.UL -- check the books of 85 percent of blue-chip companies in most EU states, a situation the Commission said was "in essence an oligopoly".

UK data shows the Big Four profit margins are 50 percent higher than the next four audit firms, the commission said.

Under Barnier's plan, the four top firms will have to separate audit activities from non-audit activities, such as tax and other advisory services -- "to avoid all risks of conflict of interest".

REBRANDING

There would have to be legal separation of audit and non-audit services if over a third of revenues from auditing is from large listed companies and the network's total annual audit revenues are more than 1.5 billion euros in the EU.

Claire Bury, one of Barnier's top officials, said these conditions, if approved by EU states and the European Parliament, would alter all the Big Four's business models and even one or two of the next tier down in some member states.

Continued in article

Bob Jensen threads on audit firm professionalism and independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm

 


"Ratings agencies Crisis in ratings land? The greater-fool defence takes a blow," The Economist, November 10, 2012 ---
http://www.economist.com/news/finance-and-economics/21565983-greater-fool-defence-takes-blow-crisis-ratings-land

PROTESTING that only fools would rely on your product to make investment decisions may seem a dangerous argument to make. Yet it is one that has served credit-ratings agencies well over the years, allowing them to sell ratings to debt issuers while abjuring legal responsibility for the quality of their work. A ruling by an Australian court this week, however, has raised questions for the industry about its immunity from prosecution.

The ruling in the Federal Court of Australia on November 5th held Standard & Poor’s (S&P) jointly liable with ABN AMRO, a bank, for the losses suffered by local councils that had invested in credit derivatives that were designed to pay a high rate of interest yet were also meant to be very safe. The derivatives in question were “constant proportion debt obligations” (CPDOs). These instruments make even the most ardent fans of complex financial engineering blush: they are designed to add leverage when they take losses in order to make up the shortfall. S&P’s models, which the court said blindly adopted inputs provided by ABN AMRO, gave the notes a AAA rating, judging they had about as much chance of going bust as the American government. In this section

Asia’s great moderation Desperately seeking yield The OECD's forecasts Charged atmosphere Where others fear to tread »Crisis in ratings land? Keep digging The X factor Old-fashioned but in favour Strength in numbers

S&P denies that its ratings were inappropriate, and plans to appeal. But evidence before the court suggests a world of harried analysts being outsmarted by spivvy bankers. It also indicated a disturbing lack of curiosity by S&P analysts and a desire to cover up for the firm’s failings even when they fretted about a “crisis in CPDO land” and worried that some buyers of these products were “in no hurry to stay in front of the truck”. Instead of warning investors that it had made mistakes, the court found that the firm continued to provide glowing opinions on new CPDOs coming out of the ABN AMRO factory.

There is nothing in the ruling to suggest the shoddy behaviour that took place in this instance was widespread across the firm. It would be a mistake to attribute all ratings that subsequently turn out to be wrong to negligence. Making predictions is hard, as Yogi Berra, a famously quotable baseball player, noted, especially when they are about the future.

But the Australian case does challenge a central part of the defence proffered by S&P and other ratings agencies (Moody’s and Fitch are the other two big ones) in some 40 ongoing cases worldwide alleging negligence. They argue that ratings are merely opinions and protected by constitutional safeguards on free speech, and that only imprudent investors would take decisions solely based on them.

This defence has already worked in a number of high-profile cases in America. Investment analysts and lawyers reckon that there is no sign that courts elsewhere are likely to follow the Australian ruling; it may not even survive the appeal. But the reasoning in the Australian case is persuasive. The judge argued that agencies could not wash their hands of all responsibility if investors took their ratings at face value and then lost money. “The issuer of the product is willing to pay for the rating not because it may be used by participants and others interested in financial markets for a whole range of purposes but because the rating will be highly material to the decision of potential investors to invest or not,” the judge wrote.

The tendency of investors to rely on ratings is reinforced by the privileged access that agencies have to information about issuers. The agencies’ defence that theirs is just an opinion wears thin when, having looked under the hood and kicked the tyres, they then tell investors to make up their own mind from a distance. It would help if regulators forced issuers of bonds and other rated securities to provide more public information. That would allow investors to do more of their own due diligence and enable more competition between agencies to provide the best analysis to investors rather than the best service to issuers.

Bob Jensen's threads on the unprofessionalism and frauds of credit ratings agencies ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze


COSO:  Committee on Sponsoring Organizations of the Treadway Commission in 2012 ---
http://www.coso.org/

October 26, 2012

New ERM Thought Paper Details Latest Thinking on Risk Assessment

Recognizing the evolving nature of enterprise risk management (ERM) in recent years, COSO has released a new thought paper authored by representatives from Deloitte titled Risk Assessment in Practice. The paper provides the latest thinking on risk assessment approaches and techniques that have emerged as the most useful and sustainable for decision-making.  It represents another in a series of papers published by COSO aimed at helping organizations move up the maturity curve in their ongoing development of a robust ERM program.


Read the COSO thought paper, Assessment in Practice.
Read the full press release.

September 18, 2012

COSO Releases for Comment Internal Control Over External Financial Reporting

COSO has released for public comment an exposure draft of its Internal Control over External Financial Reporting (ICEFR): Compendium of Approaches and Examples. This Compendium, part of COSO’s overall project to update its Internal Control–Integrated Framework (Framework), has been developed to assist users when applying the Framework to external financial reporting objectives. COSO is also making available an updated version of the Framework, revised to give effect to comments received in the earlier public exposure, as well as proposed Illustrative Tools to assist in assessing effectiveness. COSO welcomes comments on all three of these documents.

 

Read the Press Release
View Exposure Draft and Provide Comments
Read FAQ
Download PowerPoint Presentation

June 20, 2012

Managing Risks of Cloud Computing the Focus of COSO’s Latest Thought Leadership

In response to the growing number of organizations utilizing cloud computing as a viable alternative for meeting their technology needs, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has published a new thought paper titled Enterprise Risk Management for Cloud Computing. The thought paper provides guidance on following the principles of the COSO Enterprise Risk Management (ERM) – Integrated Framework to assess and mitigate the risks arising from cloud computing.

Download the thought paper
Read the full press release.

April 30 , 2012

COSO Expects to Issue the Updated Internal Control-Integrated Framework and Related Supporting Documents During the First Quarter of 2013.
 

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has announced that the updated Internal Control–Integrated Framework (ICIF or Framework) is expected to be released during the first quarter of 2013. The final Framework is expected to enable organizations to adapt to increasing complexity and pace of change; to mitigate risks to the achievement of objectives; and to provide reliable information to support sound decision making.

View press release.

April 2 , 2012

COSO Develops Draft Update to Internal Control - Integrated Framework. Public Comment Period Now Closed.


 

In December, COSO released – for public comment – a draft update to the 1992 Internal Control – Integrated Framework (Framework) intended to help organizations improve performance with greater agility, confidence and clarity. The public comment period ended on March 31, and the final updated Framework is slated to be released in early 2013.

View the Initial ICFR Draft Update
View the Public Comments
Read Frequently Asked Questions
Download PowerPoint Presentation
Read Initial Press Release Published December 19, 2011

Visit the exposure draft Website for more information: www.ic.coso.org
 

March 1 , 2012
 

COSO Releases Thought Paper on Enhancing Board Oversight by Avoiding and Challenging Traps and Biases in Professional Judgement

 

COSO has released Enhancing Board Oversight: Avoiding Judgment Traps and Biases, a thought-paper detailing a five-step judgment process that board members and others can use to overcome common pitfalls and mitigate the effects of judgment bias. The judgment process is based on KPMG’s Professional Judgment Framework, which enables individuals to identify where and when the quality of judgments tends to be threatened by predictable, systematic judgment traps and biases.

View thought paper.
View press release.

January 20, 2012
 

Enterprise Risk Management - Understanding and Communicating Risk Appetite


 

Organizations encounter risk every day as they pursue their objectives. Risk appetite — the amount of risk organizations are willing to accept in pursuit of their objectives — is an integral part of an effective ERM system. This thought paper aims to help organizations develop, better articulate, and implement “risk appetite.” It provides examples of statements of risk appetite and emphasizes the notion that risk appetite should be clearly defined, communicated by management, embraced by the board, and continually monitored and updated.

View Thought Paper
Read Press Release

Risk Analysis in Accounting Theory ---
http://www.trinity.edu/rjensen/Theory01.htm

Ratios for Return, Valuation, and Risk Analysis ---
http://www.trinity.edu/rjensen/roi.htm

Free Tutorials on Accounting for Derivative Financial Instruments and Hedging Activities ---
http://www.trinity.edu/rjensen/caseans/000index.htm


Squeezy the Pension Python to the rescue in Illinois?
"Illinois the 'Unfixable' Squeezy the Pension Python to the rescue. Or not," The Wall Street Journal, November 22, 2012 ---
http://professional.wsj.com/article/SB10001424127887324556304578123052059258768.html?mg=reno64-wsj#mod=djemEditorialPage_t

Illinois's pension system is heading for a meltdown and may now be beyond help. That's the forecast from a Chicago business group, which told its members last week that the state's pension crisis "has grown so severe" that it is now "unfixable."

The Commercial Club of Chicago wrote that because the November elections did not bring in lawmakers willing to push real reform, the state's roughly $200 billion debt now threatens education, health care and basic public services. The problem is worsening so fast that the usual menu of reforms won't be enough to keep public pensions from sucking taxpayers and whole cities into its yawning maw.

If you think Illinois lawmakers aren't taking the problems seriously enough, just ask Pat Quinn. On Sunday, the Illinois Governor kicked off a "grass-roots" effort to rally the state around pension reform. The Governor hasn't come up with a plan, but don't despair: He introduced the state's new animated mascot, "Squeezy, the Pension Python," and encouraged voters to talk about the problem over Thanksgiving.

Here's some food for thought. The state estimates its unfunded pension liabilities at around $95 billion. But that rosy scenario is based on the assumption that pension investments earn some 8% a year. In fiscal 2012, the Teachers Retirement System had a 0.76% return, the State Employees Retirement System 0.05%, and the General Assembly Retirement System a negative 0.14%.

In July, Moody's MCO +0.09% proposed revising how pension funds calculate their discount rates, with the target for fiscal 2012 at a more realistic 4.1%. Under those assumptions, the gap is even wider than Illinois acknowledges. Meanwhile, the state's annual pension liabilities for 2013 are $5.9 billion, up from $1.6 billion a decade ago.

This isn't news to Illinois politicians, who continue to ignore the coming financial calamity even as the state's bond rating has fallen to the worst in the nation. State lawmakers may hope they can delay the train wreck with modest reforms and the kind of tax hikes Governor Jerry Brown recently foisted on California. Mr. Quinn has said getting a progressive income tax in the state is "one of my goals before I stop breathing."

As if he hasn't done enough harm already, but Mr. Quinn's first goal should be waking up Democratic lawmakers to confront their union buddies. "While a number of pension reforms have been proposed in the General Assembly, these are half-measures at best," the Civic Club continues. "Whether they involve token reductions in cost-of-living adjustments, locking in billions of dollars of unfunded retiree health care obligations or other scenarios, these 'reforms' are either insufficient or stand to make our state's fiscal situation even worse."

Although it is "no longer possible to preserve all state pension benefits as currently structured," the Civic Club adds, there are options that would help. The state should immediately end automatic cost-of-living increases, put a cap on how high a salary can be used to calculate a pension and raise the retirement age to 67.

The Civic Club tiptoes around it, but any real plan for the future will also have to include structural changes, including replacing the defined-benefit plans with the kind of defined-contribution plans that are typical in the private economy. More likely is that the politicians keep abdicating and then hit up President Obama for a federal bailout.

Jensen Comment
Sadly Illinois cannot erase its pension obligations by inflationary printing ("Quantitative Easing") of its own currency  like the United States and Zimbabwe are now doing to meet financial obligations --- unless Illinois withdraws from the dollar zone which is unlikely in the near future. Perhaps Illinois will make future pension promises in Squeezy Pension Python Illinois currency spendable only within Illinois.

President Obama's political career was launched in Illinois. Before he leaves office in 2016 he will probably make the ouchie better --- at least for Illinois.

 

"The looming shortfall in public pension costs," by Robert Novy-Marx and Josh Rauh, The Washington Post, October 10, 2012 --- Click Here
http://www.washingtonpost.com/opinions/the-looming-shortfall-in-public-pension-costs/2012/10/19/5b394cdc-0ced-11e2-bd1a-b868e65d57eb_story.html?utm_source=Stanford+Business+Re%3AThink&utm_campaign=1451d355ee-RTIssue2&utm_medium=email

How much will the underfunded pension benefits of government employees cost taxpayers? The answer is usually given in trillions of dollars, and the implications of such figures are difficult for most people to comprehend. These calculations also generally reflect only legacy liabilities — what would be owed if pensions were frozen today. Yet with each passing day, the problem grows as states fail to set aside sufficient funds to cover the benefits public employees are earning.

In a recent paper, we bring the problem closer to home. We studied how much additional money would have to be devoted annually to state and local pension systems to achieve full funding in 30 years, a standard period over which governments target fully funded pensions. Or, to put a finer point on it, we researched: How much will your taxes have to increase?

Robert Novy-Marx is an assistant professor of finance at the University of Rochester’s Simon Graduate School of Business. Joshua Rauh is a professor of finance at the Stanford Graduate School of Business and a senior fellow at the Hoover Institution.

Question
What do the following states sadly share in common?

Hint
You know it must be really bad if California did not make the list.

"Nine States with Sinking Pensions," 247 Wall Street, October 18, 2012 --- Click Here
http://247wallst.com/2012/10/18/nine-states-with-sinking-pensions/?utm_source=247WallStDailyNewsletter&utm_medium=email&utm_content=OCT182012A&utm_campaign=DailyNewsletter

Several years after from the financial crisis of 2008, state pension funds continue to languish. According to data released this week by Milliman, Inc. and by the Pew Center on the States, there was a $859 billion gap between the obligations of the country’s 100 largest public pension plans and the funding of these pensions. Most of these are state funds, and state legislatures have attempted to respond to this growing crisis by making numerous reforms to try to combat this growing deficit.

In 2010, only Wisconsin’s pension funds were fully funded. Nine states, meanwhile, were 60% funded or less — this would mean that at least 40% of the amount the state owes current and future retirees is not in the state’s coffers. In Illinois, just 45% of the state’s pension liabilities were funded. In some of these states, the gap between the outstanding liability and the amount funded was in the tens of billions of dollars. California alone had $113 billion in unfunded liability. Based on Pew’s report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with sinking pensions.

Each year, actuaries determine how much a state should contribute to its pensions to keep them funded. Many states, for various reasons, did not pay the full recommended contributions for 2010, while others have been paying the recommended amount for years. In an interview with 24/7 Wall St., Milliman Inc. principal and consulting actuary Becky Sielman explained that despite states making the recommended payments, many large individual public retirement funds are still underfunded.

Of the nine states with pensions that are underfunded by 40% or more, three paid more than 90% of the recommended contributions, and two, Rhode Island and New Hampshire, paid the full amount. Despite this, pension contributions were still generally higher in states that were better funded. Of the 16 states that were at least 80% funded — a level experts consider to be fiscally responsible — 11 contributed at least 97% of the recommended amount.

In an interview with 24/7 Wall St., Pew Center on the States senior researcher David Draine explained why, despite paying the full amount, several states continued to be severely underfunded. He pointed out that meeting contributions was important. He added that states that made full contributions in 2010 were 84% funded on average, compared to those that did not, which were only 72% funded.

To explain why several states that are making full contributions are still underfunded, Draine said much of it has to do with investment losses. “The 2000s have been a terrible period for pension investments that have fallen short of their expectations … that’s a big part of the growth in the funding gap.”

Unfunded liability can also grow due to overly optimistic assumptions about investment growth, pension payments that become deferred, and an increase in benefits or an increase in the number of beneficiaries without a corresponding increase in contributions, Draine explained.

Based on the Pew Center for the States report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with public pensions that were 60% or less funded as of 2010. From the report, we considered the total outstanding liability, the total amount funded, and the proportion of the recommended contribution each state made in 2010. We also reviewed the level of funding for the 100 largest pension funds in each state, provided by Milliman’s Public Pension Fund Study, which covered a period from June 30, 2009, to January 1, 2011.

Continued in article

Bob Jensen's threads on underfunded pensions and bad accounting rules ---
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

 

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

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


Most GMAT critical reasoning questions contain hidden assumptions, and learning how to recognize them is key

"GMAT Tip: Loaded Questions," Bloomberg Business Week, October 24, 2012 ---
http://www.businessweek.com/articles/2012-10-24/gmat-tip-loaded-questions

The GMAT Tip of the Week is a weekly column that includes advice on taking the Graduate Management Admission Test, which is required for admission to most business schools. Every week an instructor from a top test-prep company will share suggestions for improving your GMAT score. This week’s tip comes from Andrew Mitchell, director of prebusiness programs and GMAT instructor at Kaplan Test Prep.

As the U.S. presidential election continues, the world around us teems with “arguments.” Arguments conveyed through TV ads, debates, stump speeches, and newspaper editorials attempt to persuade us to subscribe to a particular world view, vote for a certain candidate, even donate money to a specific campaign. That’s what all arguments are: attempts to convince. In real life, arguments make this attempt using a variety of tactics, some more honorable than others. While some arguments are based on solid evidence and reasoning, others rely on appeals to emotion or distorted facts.

Fortunately for GMAT test takers, the arguments found in questions that appear in the test’s Critical Reasoning section follow a specific pattern. Keep these things in mind as you evaluate GMAT arguments:

• All GMAT arguments contain evidence, which is used to support a conclusion.

• On the GMAT, all evidence is accepted as true. No exceptions, no “fact checkers.”

• All GMAT arguments are designed to contain a key point of vulnerability: a gap between the evidence and the conclusion, which must be bridged by an assumption.

• An assumption is defined as “something the author doesn’t state but that must be true in order for the argument to hold.”

Finding the assumption is the key to Critical Reasoning success. Questions can ask you to identify the central assumption, point out a flaw in the argument (by showing why the assumption is unreasonable), or recognize potential facts that would strengthen or weaken the argument (by supporting or undermining the assumption, respectively).

Practice identifying assumptions as you listen to the candidates’ arguments. Consider this one: “My administration would create more jobs, since my policies will cut taxes on corporate profits.”

Continued in article

Jensen Comment
Note that the GMAT was among the first certification examinations to have computers grade essay questions ---
http://www.trinity.edu/rjensen/Assess.htm#ComputerBasedAssessment

Sociology professor designs SAGrader software for grading student essays
Student essays always seem to be riddled with the same sorts of flaws. So sociology professor Ed Brent decided to hand the work off to a computer. Students in Brent's Introduction to Sociology course at the University of Missouri-Columbia now submit drafts through the SAGrader software he designed. It counts the number of points he wanted his students to include and analyzes how well concepts are explained. And within seconds, students have a score. It used to be the students who looked for shortcuts, shopping for papers online or pilfering parts of an assignment with a simple Google search. Now, teachers and professors are realizing that they, too, can tap technology for a facet of academia long reserved for a teacher alone with a red pen. Software now scores everything from routine assignments in high school English classes to an essay on the GMAT, the standardized test for business school admission. (The essay section just added to the Scholastic Aptitude Test for the college-bound is graded by humans). Though Brent and his two teaching assistants still handle final papers and grades students are encouraged to use SAGrader for a better shot at an "A."
"Computers Now Grading Students' Writing," ABC News, May 8, 2005 ---
http://abcnews.go.com/Technology/wireStory?id=737451
Jensen Comment:  Aside from some of the obvious advantages such as grammar checking, students should have a more difficult time protesting that the grading is subjective and unfair in terms of the teacher's alleged favored versus less-favored students.  Actually computers have been used for some time in grading essays, including the GMAT graduate admission test --- http://www.yaledailynews.com/article.asp?AID=723

References to computer grading of essays --- http://coeweb.fiu.edu/webassessment/references.htm

You can read about PEG at http://snipurl.com/PEGgrade

Bob Jensen's threads on the CPA and CMA examinations are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

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


According to Hoyle:  Advice to Teachers
JOE'S TOP TWELVE LIST
http://joehoyle-teaching.blogspot.com/2012/11/joes-top-ten-list.html


Free PSAT Practice Exams ---
http://www.testpreppractice.net/PSAT/Default.aspx

"SAT Prep on the Web: : A) a Game; B) Online Chat; C) All of the Above," by Katherine Boehret, The Wall Street Journal, November 3, 2010 ---
http://online.wsj.com/article/SB10001424052748704462704575590383273883818.html

This Saturday, high-school students around the country will sit for hours of silent testing that will determine some portion of their future: That's right, it's SAT time. For both parents and kids, the preparation for taking the standardized test is stressful and expensive, often involving hours of studying and several hundreds of dollars spent on classes, workbooks and tutors. And many kids will take these tests more than once.

So this week I tried a Web-based form of test prep called Grockit that aims to make studying for the SAT, ACT, GMAT, GRE or LSAT less expensive and more enjoyable. Grockit.com offers lessons, group study and solo practice, and does a nice job of feeling fun and educational, which isn't an easy combination to pull off.

A free portion of the site includes group study with a variety of questions and a limited number of solo test questions, which are customized to each student's study needs. The $100 Premium subscription includes full access to the online platform with unlimited solo practice questions and personalized performance analytics that track a student's progress. A new offering called Grockit TV (grockit.com/tv) offers free eight-week courses if students watch them streaming live twice a week. Otherwise, a course can be downloaded for $100 during the course or $150 afterward. Instructors hailing from the Princeton Review and Kaplan, among other places, teach test preparation for the GMAT business-school admissions test and SAT.

For the sake of testing, I focused on the SAT and plunged back into the depths of reading, writing and (gulp) math to get a sense of what students see and do on Grockit.com. In a short period of time, I found myself wanting to go back to the site to get better at certain sections or to earn more Experience Points, which result in badges and unlock new levels of study, both of which can be optionally posted to outside networks like Facebook or Twitter. By default, everyone can see one another's points, which invites healthy competition; these can also be hidden if you'd rather keep them private.

I tested both the free version of Grockit.com, which includes an SAT writing diagnostic test, and the extra offerings of a $100 Premium account, including diagnostic tests for writing, reading and math to evaluate my strengths and weaknesses in taking the SAT. The free version had too many messages that constantly notified me of what I could do with a paid account and prompted me to upgrade.

Along with completing practice questions with strangers and instructors, I got a friend of mine to also use Grockit.com so we could compete together in Grockit's Speed Challenge Games. These are included in the free portion and they reward the fastest person who answers a question correctly—but also display incorrect guesses, thus narrowing the possible answers for those who don't answer first. It was more fun for me to play against someone I knew, but I can imagine kids preferring the anonymity of competing with strangers when they don't answer questions correctly.

In an introductory video, Grockit founder and chief product officer Farb Nivi describes the site by saying, "It's like having a complete multimedia textbook and workbook online, at your fingertips." But for kids (and from my experience, adults), the computer isn't an easy place to concentrate. On any given PC, especially one used by a teenager, instant-message indicators are chiming, Facebook updates and Twitter tweets are waiting to be checked, music is playing in the background and emails are flowing into inboxes. Plus, the Grockit site is just a tab away from other websites and distractions. And the site has no way of working in a distraction-free mode, like how the new Microsoft Office for Mac offers Full Screen View, which quiets any alerts or pop-up distractions.

It also isn't necessarily comfortable for students to read extensive text (like in reading questions for the SAT) on a vertical computer screen. The site will run on the iPad, which can be held on a lap for more comfortable reading, but many students don't own one of these.

Part of the way Grockit is made more fun is by purposely incorporating social networking into the experience. As people work on questions, they can instant message with one another in a right-side panel about tips for answering questions or simply for commiserating about studying. These IMs don't make indicator sounds, so they aren't too intrusive, but they can't be fully closed. I saw several chats among teens about nothing in particular, as well as some test-taking tips from instructors and other students.

Grockit encourages users to "be nice" in chats because all conversations are logged; people can also flag one another for offensive remarks. Chats are also archived on your page so you can reread them for tips and study hints. If you find someone's tip helpful or if you simply like a person, you can award him or her with Grockit Points, which show up beside a name and profile photo. Users' ages or last names aren't displayed.

Grockit offers one-on-one tutoring for a fee of $50 an hour, and I tried one session for math. My instructor and I used Skype to audio chat throughout the session and he took advantage of a whiteboard in Grockit, where he could write out the steps in an algebra problem to demonstrate how to solve for X.

Around 40 instructors are employed for Grockit, but anyone can run a practice session, even other students. I signed up for a scheduled practice session at 8 p.m. that I assumed was run by an instructor, and later found out it was run by a student. Grockit instructors can also pop into sessions at any given time to help students, and one did during my session. Grockit works on a system of transparency so users can evaluate all teachers. My tutor had five-star rating and did a great job reminding me of algebra rules.

If you're looking for an inexpensive and more enjoyable way to study for big tests, Grockit is a viable and easily accessible option. But its proximity to the rest of the Web could prove much more distracting than the old SAT workbook.

—See a video with Katherine Boehret on Web-based test-prep software at WSJ.com/PersonalTech.
Email her at mossbergsolution@wsj.com


Techmeme Technology News Site from Carnegie Mellon University --- http://www.techmeme.com/
Thank you Rick Lillie for pointing to this site on the AAA Commons

The site is more extensive in terms of computing news than is MIT's Technology Review, but TR is carries more science news. Also TR sends me email summaries.

Bob Jensen's threads on blogs ---
http://www.trinity.edu/rjensen/ListservRoles.htm


The Latest from the AECM's Denny Beresford:  Are interim fair value adjustments “accounting fictions” HTM investments?
"Money market fund investments are often held to maturity and any discount or premium in the purchase price is realized by the fund."

"Ex-FASB Chair: Accounting Rules Support Money Funds’ Stable Value," by Emily Chason, CFO Journal, November 1, 2012
http://blogs.wsj.com/cfo/2012/11/01/ex-fasb-chair-accounting-rules-support-money-funds-stable-value/?mod=wsjpro_hps_cforeport

While U.S. regulators are debating forcing money market funds to let their share values float, former Financial Accounting Standards Board Chairman Dennis Beresford defended the use of accounting standards that allow money funds to maintain their stable $1-per-share value.

In a paper released Thursday by the U.S. Chamber of Commerce’s Center for Capital Markets, Beresford said the amortized cost accounting used for money market funds is not a gimmick that gives a false sense of security for the funds, but rather an efficient way to minimize differences between the carrying value and fair value of their investments.

"Amortized Cost Accounting is “Fair” for Money Market Funds," U.S. Chamber of Commerce Center for Capital Markets Competitiveness, Fall 2012
http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/Money-Market-Funds_FINAL.layout.pdf

Summary

Recent events have caused the U.S. Securities and Exchange Commission (SEC) to rethink the long-standing use of amortized cost by money market mutual funds in valuing their investments in securities. This practice supports the use of the stable net asset value (a “buck” a share) in trading shares in such funds. Some critics have challenged this accounting practice, arguing that it somehow misleads investors by obfuscating changes in value or implicitly guaranteeing a stable share price.

This paper shows that the use of amortized cost by money market mutual funds is supported by more than 30 years of regulatory and accounting standard-setting consideration. In addition, its use has been significantly constrained through recent SEC actions that further ensure its appropriate use. Accounting standard setters have accepted this treatment as being in compliance with generally accepted accounting principles (GAAP). Finally, available data indicate that amortized cost does not differ materially from market value for investments industry wide. In short, amortized cost is “fair” for money market funds.

Background

Money market mutual funds have been in the news a great deal recently as the SEC first scheduled and then postponed a much-anticipated late August vote to consider further tightening regulations on the industry.1 Earlier, Chairman Mary Schapiro had testified to Congress about her intention to strengthen the SEC regulation of such funds, in light of issues arising during the financial crisis of 2008 when one prominent fund “broke the buck,” resulting in modest losses to its investors. Sponsors of some other funds have sometimes provided financial support to maintain stable net asset values. And certain funds recently experienced heavy redemptions due to the downgrade of the U.S. Treasury’s credit rating and the European banking crisis.

Money market funds historically have priced their shares at $1, a practice that facilitates their widespread use by corporate treasurers, municipalities, individuals, and many others who seek the convenience of low-risk, highly liquid investments. This $1 per share pricing convention also conforms to the funds’ accounting for their investments in short-term debt securities using amortized cost. This method means that, in the absence of an event jeopardizing the fund’s repayment expectation with respect to any investment, the value at which these funds carry their investments is the amount paid (cost) for the investments, which may include a discount or premium to the face amount of the security. Any discount or premium is recorded (amortized) as an adjustment of yield over the life of the security, such that amortized cost equals the principal value at maturity.

Some commentators have criticized the use of this amortized cost methodology and argued for its elimination. In a telling example of the passionate but inaccurate attention being devoted to this issue, an editorial in the June 10, 2012, Wall Street Journal described this longstanding financial practice in a heavily regulated industry as an “accounting fiction” and an “accounting gimmick.”

. . .

Reasoning for Use of Amortized Cost

The FASB has been considering various aspects of the accounting for financial instruments for approximately 25 years. During that time it has issued standards on topics such as accounting for marketable securities, accounting for derivative instruments and hedging, impairment, disclosure, and others. Also, the FASB has issued standards or endorsed standards issued by the AICPA of a specialized nature applying to certain industry groups such as investment companies, insurance companies, broker/dealers, and banks. Further, the FASB is presently involved in a major project that has encompassed approximately the past 10 years, whereby it is endeavoring to conform its standards on financial instruments to the related standards issued by the International Accounting Standards Board. Aspects of that project have stalled recently, and the two boards have reached different conclusions on certain key issues. Other aspects of that project are moving forward.

Over this 25-year period, probably the most controversial aspect of the financial instruments project has been to what extent those instruments should be carried at market or fair value in financial statements rather than historical cost. On several occasions the FASB has indicated a strong preference for fair value as a general objective. But there has been a great deal of opposition from many quarters, and the FASB has tended to determine the appropriate measurement attribute for particular instruments (fair value, amortized cost, etc.) in different projects based on the facts and circumstances in each case.

. . . (very long passages from this 21-page article are not quoted here)

Conclusion

Accounting for investment securities by money market mutual funds appropriately remains based on amortized cost. The amortized cost method of accounting is supported by the very short-term duration, high quality, and hold-to-maturity nature of most of the investments held. The SEC’s 2010 rule changes have considerably strengthened the conditions under which these policies are being applied. As a result of the 2010 SEC rule changes, funds now report the market value of each investment in a monthly schedule submitted to the SEC that is then made publicly available after 60 days. That provides additional information for investors. And the FASB’s current thinking articulates this accounting treatment as GAAP.

 

Jensen Comment
My main objection to booking fair values of HTM investments is that the interim adjustments for fair values that will never be realized destroys the income statement. Of course, the FASB and IASB have systematically destroyed the concept of net earnings in many other standards to a point where these standard setters can no longer even define net earnings.

Research Studies from the Chamber's Center for Capital Markets ---
http://www.centerforcapitalmarkets.com/resources/publications/

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


IFRS Definition of an "Investment Entity" --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=GBAD-8ZNK2V&SecNavCode=MSRA-84YH44&ContentType=Content&j=23865&e=rjensen@trinity.edu&l=6373_HTML&u=1036220&mid=7002454&jb=0
I don't think this definition is suited to an investment entity that generally carries long-term bond investments and debt to maturity --- where interim fair value adjustments apart from inflation adjustments are more fiction than fact. Here I would prefer that fair values be reported in supplementary statements.

"Amortized Cost Accounting is “Fair” for Money Market Funds," by Dennis Beresford, U.S. Chamber of Commerce Center for Capital Markets Competitiveness, Fall 2012
http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/Money-Market-Funds_FINAL.layout.pdf

What I'm really looking forward to is the new IFRS definition of net earnings for manufacturing company, especially a multinational company. Now that will be a challenge in the forthcoming Concepts Statements of the IASB. It's especially important since net earnings in some form, such as e.p.s. or P/E ratios, is the single most popular index that investors and security analysts track. Can the IASB give us an operating definition that makes sense?


Is that word "Looser" or "Loser?"
"Some Firms Shun Looser IPO Rules," by Jessica Holzer, The Wall Street Journal, November 14, 2012 ---
http://professional.wsj.com/article/SB10001424127887324595904578117322881014396.html?mod=ITP_moneyandinvesting_0&mg=reno64-wsj

When Trulia Inc. TRLA -0.19% went public in September, it could have taken advantage of looser rules aimed at easing a small company's path to an initial public offering.

But the real-estate website operator used only one provision from the new Jumpstart Our Business Startups Act: the ability to submit its offering documents confidentially to the Securities and Exchange Commission.

"We really wanted to project to investors that we are a mature company," said Scott Darling, the company's general counsel.

The JOBS Act, enacted in April and hailed by some Washington policy makers as a tool to spur job growth, offers less stringent requirements for firms going public with less than $1 billion in annual revenue, called "emerging-growth companies."

Some companies are taking advantage of the looser rules, for example, gauging select investors' interest in a stock offering early in the process, filing offering documents confidentially to the SEC, and giving fewer details in those documents about executive-pay plans.

But they are shunning the law's relaxed financial reporting and accounting standards because they believe there is a stigma attached to them. Some company executives said they don't want to risk turning off investors by including less comprehensive disclosures than other public companies even though doing so could save time and money. Companies that qualify for relief under the JOBS Act may adhere to loosened reporting standards for up to five years following an IPO.

Some 85% of emerging-growth companies that went public since April said they would not delay the adoption of any new or revised accounting standards, according to a review by The Wall Street Journal of 55 prospectuses, passing up one of the law's accounting breaks. The election is irrevocable. Most companies also are providing three years of financial statements rather than the two years the law allows for such companies, the Journal review showed.

"Investors will look more unfavorably and will give a lower valuation to companies that don't provide investors with the full transparency and investor protection that other companies provide," said Andrew Shapiro, president of hedge-fund firm Lawndale Capital Management LLC. A small-company investor, he spoke against the JOBS Act when it was moving through Congress.

Mr. Shapiro has argued that the law would have the perverse effect of hurting job growth because it would cause investors to place a lower value on companies that cut back on disclosures. That would, in turn, raise their cost of capital, he said.

Smith Electric Vehicles Corp., a manufacturer of electric trucks in Kansas City, Mo., canceled its initial public offering in September after prospective investors told management they would place a lower value on the company's stock if it went public before it was profitable.

"Even if legally the JOBS Act gives you the right not to disclose certain things, your investors are going to demand it anyway," said Bryan Hansel, CEO of Smith Electric. "The market, as we experienced it, is still going to be very demanding."

Investor advocates and SEC Chairman Mary Schapiro have criticized the law for setting the definition of emerging-growth company so broadly that all but the largest companies would benefit from the less stringent standards. In a letter to senators before the bill's passage, Ms. Schapiro said that setting the revenue threshold below $1 billion would "pose less risk to investors."

Rep. Stephen Fincher (R., Tenn.), who helped write the JOBS Act, said he expects more companies to take advantage of the law "when they realize the lower cost and that it takes less time to go public." But he said the looser rules "may not be a good fit for every company."

Thanks to the law, Vienna, Va.-based software company Eloqua Inc. ELOQ +1.00% met with a large mutual-fund company to gauge interest in its stock about a month before its August IPO. The JOBS Act allows smaller companies to engage in such discussions with select investors before the SEC gives companies its approval to market an offering.

The meeting helped executives hone their pitch to investors ahead of the company's "roadshow" to market its shares, Eloqua Chief Executive Joseph Payne said. But the company won't take advantage of another provision allowing it to put off hiring a public accounting firm to audit its internal controls, though Eloqua estimates the audit could cost up to $400,000 each year. "We might look like a little-boy company when we worked really hard to be a big-boy company," he said.

Continued in article

Jensen Comment
It's a little like the real estate market in San Antonio. Many upper income home buyers will only consider buying homes in gated neighborhoods that have armed-guard check points and ID requirements for cars entering the "compounds." Demand for and prices of expensive homes in non-gated neighborhoods shrank considerably in recent decades due to increasing risks of home burglaries and even home invasions.

It's also a little like media college rankings that have an "Unranked" category for colleges and universities that either refuse to supply all requested data for ranking or have been found to submit phony data (some outstanding schools like Claremont Mckenna Collegeand George Washington University are guilty of submitting phony data to get higher ranks).
'U.S. News' Moves George Washington U. to 'Unranked' Category," Inside Higher Ed, November 15, 2012 ---
http://www.insidehighered.com/quicktakes/2012/11/15/us-news-moves-george-washington-u-unranked-category 
Presumably some college applicants are more dubious about colleges and universities that are in the "Unranked" category.

In a way this is consistent with free market theory contention that SEC requiring CPA audits is not necessary since the securities markets will punish those firms that elect not to have CPA audits by having less demand for firms not having audited financial statements. But before the crash of 1929 fraud and abuse of unregulated securities markets became rampant. In fact the securities markets probably would not have survived due to reluctance of investors to return to unregulated markets. After the SEC was created in the 1930s, one of the first requirements of the SEC was that listed companies have annual CPA audits.

Now in 2012 when IPOs were given looser rules of disclosure by regulators, companies will not necessarily hide more from investors. “Even if legally the JOBS Act gives you the right not to disclose certain things, your investors are going to demand it anyway,” Bryan Hansel, CEO of Smith Electric told the author of the above article. For investors it's a little like not considering home purchases in non-gated neighborhoods.


Quantitative Easing = Printing Money for the Money Supply --- http://en.wikipedia.org/wiki/Quantitative_easing

"Is Ben Bernanke Unleashing Inflation?" by Peter Coy, Bloomberg Business Week, November 21, 2012 ---
http://www.businessweek.com/articles/2012-11-21/is-ben-bernanke-the-new-wizard-of-oz

. . .

“This is a trap,” Goodfriend warned. If the Fed waits to tighten monetary policy until inflation becomes a concern, it will be too late, he said: High inflation will become embedded in the economy and it will take years of punitively high rates to stamp it out.

Continued in article

 

Many of us agree with Keynesians Paul Krugman and Alan Blinder that there are some benefits to massive government spending at the start of a severe economic crash. But the trouble with most Keynesians these days is that they don't know when to stop. There's now a perpetual excuse that the economy is just too fragile to stop printing money to pay government's bills. Confiscating the wealth of the 1% won't make a dent in the weak economy. And hence the money presses just keep rolling and rolling until one morning you wake up and guess what? You're in Zimbabwe that is now printing million dollar bills, two of which it takes to by one chicken egg.

In the media, Peter Schiff is the best-known financial analyst who publically predicted the economic collapse of 2008 long before it happened, including his predictions of the bursting of the real estate bubble. He did not, however, make as many millions on his predictions as several others who quietly gambled on the crash. Some of those heavily leveraged winnings, however, might've been due more to luck than the deep analysis of Peter Schiff ---
http://en.wikipedia.org/wiki/Peter_Schiff

I might note that "Quantitative Easing" QE1-QE3 in the U.S. is short hand for when the Fed cranks up printing presses for money so the U.S. Government can pay its bills without having to either tax or borrow. Sounds like a good idea since these have been trillions of dollars that do not add to the trillion-dollar deficit or National Debt or rile taxpayers ---
http://en.wikipedia.org/wiki/Quantitative_easing

I might also note that I personally think the government is now lying about inflation since with a wave of the magic wand it took fuel, food, and other consumer items out of the calculation of inflation. The current calculation of inflation is also distorted by the crash in the housing market that does not reflect the rising costs of materials going into new and rebuilt homes. For your students, when you want to illustrate how to lie with statistics show them how inflation is calculated by the government.

"When Infinite Inflation Isn't Enough," by Peter Schiff, Townhall, November 9, 2012 ---
http://finance.townhall.com/columnists/peterschiff/2012/11/08/when_infinite_inflation_isnt_enough

If no one seems to care that the Titanic is filling with water, why not drill another hole in it? That seems to be the M.O. of the Bernanke Federal Reserve. After the announcement of QE3 (also dubbed "QE Infinity") created yet another round of media chatter about a recovery, the Fed's Open Market Committee has decided to push infinity a little bit further. The latest move involves the rolling over of long-term Treasuries purchased as part of Operation Twist, thereby more than doubling QE3 to a monthly influx of $85 billion in phony money starting in December. I call it "QE3 Plus" - now with more inflation!

Inflation By Any Other Name

In case you've lost track of all the different ways the Fed has connived to distort the economy, here's a refresher on Operation Twist: the Fed sells Treasury notes with maturity dates of three years or less, and uses the cash to buy long-term Treasury bonds. This "twisting" of its portfolio is supposed to bring down long-term interest rates to make the US economy appear stronger and inflation appear lower than is actually the case.

The Fed claims operation twist is inflation-neutral as the size of its balance sheet remains constant. However, the process continues to send false signals to market participants, who can now borrow more cheaply to fund long-term projects for which there is no legitimate support. I said it last year when Operation Twist was announced, and I'll continue to say it: low interests rates are part of the problem, not the solution.

Interventions Are Never Neutral

Just as the Fed used its interest-rate-fixing power to make dot-coms and then housing appear to be viable long-term investments, they are now using QE3 Plus to conceal the fiscal cliff facing the US government in the near future.

As the Fed extends the average maturity of its portfolio, it is locking in the inflation created in the wake of the '08 credit crisis. Back then, we were promised that the Fed would unwind this new cash infusion when the time was right. Longer maturities lower the quality and liquidity of the Fed's balance sheet, making the promised "soft landing" that much harder to achieve.

The Fed cannot keep printing indefinitely without consumer prices going wild. In many ways, this has already begun. Take a look at the gas pump or the cost of a hamburger. If the Fed ever hopes to control these prices, the day will inevitably come when the Fed needs to sell its portfolio of long-term bonds. While short-term paper can be easily sold or even allowed to mature even in tough economic conditions, long-term bonds will have to be sold at a steep discount, which will have devastating effects across the yield curve.
 
It won't be an even trade of slightly lower interest rates now for slightly higher rates in the future. Meanwhile, in the intervening time, the government and private sectors will have made a bunch of additional wasteful spending. When are Bernanke & Co. going to decide is the right time to prove that the United States is fundamentally insolvent? Clearly this plan lays down an even stronger incentive to continue suppressing interest rates until a mega-crisis forces their hands. 

Also, when interest rates rise - the increase made even sharper by the Fed's selling - the Fed will incur huge losses on its portfolio, which, thanks to a new federal law, will become a direct obligation of the US Treasury, i.e. you, the taxpayer! 

Of course, the Fed refuses to accept this reality. Even though a painful correction is necessary, nobody in power wants it to happen while they're in the driver's seat. So Bernanke will stick with his well-rehearsed lines: the money will flow until there is "substantial improvement" in unemployment.

Does Bernanke Even Believe It?

Even Bernanke must have a hunch that there isn't going to be any "substantial improvement" in the near term. I suggested before QE3 was announced that a new round of stimulus might be Bernanke's way of securing his job, but recent speculation is that he may step down when his current term as Fed Chairman expires. Perhaps he is cleverer than I thought. He'll be leaving a brick on the accelerator of an economy careening towards a fiscal cliff, and bailing before it goes over the edge. Whoever takes his place will have to pick up the pieces and accept the blame for the crisis that Bernanke and his predecessor inflamed.

Don't Gamble Your Savings on Politics

For investors looking to find a safe haven for their money, QE3 Plus is a strong signal that the price of gold and silver are a long way from their peaks. Gold hit an eleven-month high at the beginning of October after the announcement of QE3, but the response to the Fed's latest meeting was lackluster. When the Fed officially announces its commitment to QE3 Plus in December, I wouldn't be surprised to see a much bigger rally. For that matter, many are keeping an eye on the election outcome before making a move on precious metals.

Continued in article

Jensen Comment
Many of us agree with Keynesians Paul Krugman and Alan Blinder that there are some benefits to massive government spending at the start of a severe economic crash. But the trouble with most Keynesians these days is that they don't know when to stop. There's now a perpetual excuse that the economy is just too fragile to stop printing money to pay government's bills. Confiscating the wealth of the 1% won't make a dent in the weak economy. And hence the money presses just keep rolling and rolling until one morning you wake up and guess what? You're in Zimbabwe that is now printing million dollar bills, two of which it takes to by one chicken egg


Teaching Case from The Wall Street Journal Accounting Weekly Review for November 6, 2012

MF Global Problems Started Years Ago
by: Aaron Lucchetti and Julie Steinberg
Oct 29, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Cash Management, Ethics, Sarbanes-Oxley Act

SUMMARY: "It is supposed to be...easy...for brokerage firms to answer, even in the middle of a crisis[, questions about the amount of cash available to the firm]. U.S. rules set tight controls on the accounting, oversight and movement of money that belongs to customers or firms themselves." It was not easy to answer such questions at MF Global during its collapse. Statements in the related article imply that unreliable information may have led former assistant treasurer at MF Global, Edith O'Brien, to authorize cash transfers which ultimately led to more than $1billion missing from brokerage customer accounts. Leaders' knowledge about system weaknesses also would result in personal liability for lost funds on the part of Chief Executive Jon Corzine and financial officer Henri J. Steenkamp under the requirements of Sarbanes-Oxley.

CLASSROOM APPLICATION: The article may be used in an accounting systems or ethics class.

QUESTIONS: 
1. (Introductory) What is MF Global? According to the article, what major action by the firm caused the company to fall into bankruptcy?

2. (Introductory) What difficult question was MF Global accountant Matthew Hughey unable to answer during the company's financial crisis and collapse in October 2011?

3. (Advanced) According to the related article, how did the company try to survive the financial collapse as cash shortfalls and overdrafts occurred? What was the result of these actions?

4. (Advanced) Consider the situation facing Ms. Edie O'Brien according to the article's description of events in October 2011. How difficult do you think were the ethical issues she faced as she responded to her corporate superiors at that time?

5. (Advanced) Return to the main article. What is the importance of the description in the article about difficulties in managing records of cash availability and risk management? Relate these descriptions to statements by Jon S. Corzine and Henri J. Steenkamp "...that they believed internal controls at the company were sound when they signed securities filings in 2011."
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
A Year Later, All Eyes Still on 'Edie'
by Aaron Lucchetti, Julie Steinberg, and Mike Spector
Oct 30, 2012
Online Exclusive

"MF Global Problems Started Years Ago," by Aaron Lucchetti and Julie Steinberg, The Wall Street Journal, October 29, 2012 ---
http://professional.wsj.com/article/SB10001424052970204789304578084763280408172.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

As MF Global Holdings Ltd. MFGLQ -3.03% teetered last October, an accountant in its Chicago office got an urgent question from regulators: How much cash did the firm have left?

It is supposed to be an easy question for brokerage firms to answer, even in the middle of a crisis. U.S. rules set tight controls on the accounting, oversight and movement of money that belongs to customers or firms themselves.

"This will require a significant effort," the MF Global accountant, Matthew Hughey, wrote in an email to seven colleagues at 4:24 a.m. on Oct. 27, 2011. A copy of the email was reviewed by The Wall Street Journal.

The reason Mr. Hughey couldn't answer the question for regulators: Employees at MF Global couldn't keep track of exactly how much money it had at any given moment, even before the company began to wobble, according to Mr. Hughey's email. Officials had been trying to fix the problem for months.

As regulators and lawmakers plow ahead with investigations that began when MF Global tumbled into bankruptcy a year ago this week, yawning gaps in the New York company's procedures for moving and keeping track of money are getting new attention.

A private lawsuit expected to be updated early next month is expected to highlight such issues and how they are tied to the more than $1 billion that went missing from customer accounts as MF Global failed last October, according to people involved in the suit.

A House financial services committee report, which will be released in the next few weeks, is expected to scrutinize how regulators handled MF Global. It is unclear how much focus will be given to the deficiencies in internal computer systems and procedures at the firm.

The Commodity Futures Trading Commission and the Securities and Exchange Commission also are probing the company's inner workings. No decision has been made on whether to file civil charges against former MF Global executives or employees.

There are no signs that prosecutors are planning to bring criminal charges related to the firm's demise.

Jon S. Corzine and Henri J. Steenkamp, MF Global's chief executive and finance chief, respectively, have told lawmakers that they believed internal controls at the company were sound when they signed securities filings in 2011. Their signatures were required under the Sarbanes-Oxley corporate-governance law.

Mr. Corzine, a former Goldman Sachs Group Inc. GS -5.24% chairman, strongly backed the 2002 law while he was a Democratic U.S. senator from New Jersey. He has repeatedly denied any wrongdoing related to MF Global. A spokesman for Mr. Corzine declined to comment Sunday. Mr. Steenkamp's lawyer and Mr. Hughey couldn't be reached for comment. A lawyer for Mr. Hughey declined to comment.

A bankruptcy trustee said in a June report that MF Global's trouble keeping up-to-the-minute track of customer money partly reflected a loose organizational structure. For example, midlevel employees had wide leeway when handling requests from elsewhere in the company to move hundreds of millions of dollars at a time.

Internal documents reviewed by the Journal show that the problems were chronic and deeper than previously disclosed.

An April 2011 spreadsheet called "Outgoing Wire Approved Individuals" lists nearly three dozen back-office employees with authority to move money, sometimes with no limit on the size of the transfer as long as a higher-ranking official approved.

Two people working on the case said the number was unusually large for a brokerage firm of MF Global's size.

The spreadsheet also shows that MF Global set no "dollar threshold" on how much employees could move from accounts used to invest the firm's own money and certain customer funds. In contrast, only two employees were allowed to move more than $500,000 at a time out of an account used to pay commissions owed by MF Global. It isn't clear if the same procedures were in place when MF Global collapsed.

Some people close to the investigation or who worked at MF Global said the firm failed to shore up internal systems that officials knew were weak. One explanation offered by these people is that MF Global had to prioritize what needed to be fixed first, since it had limited resources and was still overhauling systems in response to a 2008 rogue-trading loss.

When the firm was spun off from Man Group EMG.LN -1.03% PLC in 2007, MF Global had only "skeletal resources" in risk management, technology and other back-office functions, according to a former employee involved in later efforts to modernize its systems.

That push sometimes was choked by bureaucracy. In one example in Hong Kong, when company officials were trying to update software, they had to write up a proposal and get at least 14 sign-offs from superiors, said the former employee.

Continued in article

Bob Jensen's threads on MF Global ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search on the phrase "MF Global"


Signs that some PwC audits are getting worse rather than better
2011 Inspection of PricewaterhouseCoopers LLP, PCAOB, September 27, 2012 ---
http://pcaobus.org/Inspections/Reports/Documents/2012_PricewaterhouseCoopers_LLP-USA.pdf
Thank you Caleb Newquist for the heads up

"FDIC to Sue PwC, Crowe Horwath for Malpractice," by Michael Foster, Big Four Blog, November 5, 2012 ---
http://www.big4.com/crowe-horwath/fdic-to-sue-pwc-crowe-horwath-for-malpractice/

Last week, the FDIC sued PwC and Crowe Horwath in federal court for malpractice and breach of contract relating to its dealings with Colonial Bank of Montgomery, Alabama. According to the FDIC’s legal counsel, PwC failed to detect fraud committed at Taylor Bean, a mortgage bank, which left Colonial Bank’s balance sheet incomplete.

According to the FDIC, Taylor Bean “was carrying out an increasingly brazen and costly fraud against Colonial,” yet the Big4 firm and the bank’s internal auditor, Crowe Horwath, failed to detect the fraud. “PwC and Crowe never realized that many hundreds of millions of dollars of bank assets did not exist, had been sold to others, or were worthless,” the FDIC’s counsel wrote in its complaint.

According to the FDIC, two employees at Colonial allowed Taylor Bean to divert money from the bank without collateral, allowing the mortgage lender to steal nearly $1 billion from Colonial bank in 2008 and 2009.

PwC and Crowe Horwath are being accused of failing to protect their client and uncover the illegal activity. “The fraud perpetrated was against Colonial, harmed Colonial, was to the detriment of Colonial and resulted in Colonial lending [Taylor Bean] many hundreds of millions of dollars that were secured by worthless or non-existent loans,” according to the complaint.

Crowe Horwath has denied the claims in a statement, while PwC, through its legal counsel Elizabeth Tanis, has said that the fraud was “so well-concealed that neither the FDIC nor the OCC discovered it, even when they performed targeted exams of the mortgage warehouse lending division, where the fraud occurred.”

Bob Jensen's threads about PwC ---
http://www.trinity.edu/rjensen/Fraud001.htm

 

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

PricewaterhouseCoopers Added As Defendant in MF Global Customer Lawsuit
by: Aaron Lucchetti and Michael Rapoport
Nov 06, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Assurance Services, Audit Quality, Auditing, Auditing Services, Internal Controls

SUMMARY: "Lawyers representing customers of MF Global Holdings Ltd. added accounting firm PricewaterhouseCoopers LLP to a civil lawsuit against former executives of the failed securities firm, saying PwC failed to adequately audit MF Global's internal controls....PwC said it 'will defend this lawsuit vigorously,' and that its review of MF Global's internal controls was 'in accordance with professional standards.' The audit evidence confirmed that MF Global maintained customer assets in accordance with regulators' requirements as of the date of PwC's audit, the firm said...."

CLASSROOM APPLICATION: The article may be used in auditing classes to discuss business risk versus audit risk, engagements to audit financial reports versus reports on internal controls, litigation risks in attestation engagements, and internal control weaknesses.

QUESTIONS: 
1. (Introductory) Refer to the related article. What is MF Global? What internal control issues are associated with its bankruptcy?

2. (Introductory) Why has PriceWaterhouseCoopers (PwC) been included as a defendant in a lawsuit "against former executives of the failed securities firm" MF Global Holdings Ltd?

3. (Introductory) What is the specific claim against the work done by PwC and the resulting reports issued by the firm?

4. (Advanced) Define the terms business risk and audit risk.

5. (Advanced) Is there any evidence, as described in this article, that might have led PwC to increase its assessment of the business risk associated with its client MF Global? Would such an assessment impact the firm's assessment of audit risk and, therefore, audit procedures applied in the engagement? Explain.

6. (Advanced) Is it conceivable that PwC could conclude that MFGlobal's internal controls were adequate even after having been "copied on several MF Global internal-audit reports that indicated there were deficiencies in the firms' internal controls"? Explain your answer.

7. (Advanced) Is there a difference in responsibility associated with PwC's audit of MF Global's financial statements as compared to its report on MF Global's internal controls? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
MF Global Problems Started Years Ago
by Aaron Lucchetti and Julie Steinberg
Oct 29, 2012
Page: C1

 

"PricewaterhouseCoopers Added As Defendant in MF Global Customer Lawsuit," by Aaron Lucchetti and Michael Rapoport, The Wall Street Journal, November 6, 2012 ---
http://professional.wsj.com/article/SB10001424052970203846804578100663911321342.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Lawyers representing customers of MF Global Holdings Ltd. MFGLQ -5.56% added accounting firm PricewaterhouseCoopers LLP to a civil lawsuit against former executives of the failed securities firm, saying PwC failed to adequately audit MF Global's internal controls.

The amended suit, filed in Manhattan federal court Monday, reiterated accusations that Jon S. Corzine, MF Global's former chief executive, and other officials at the firm breached their fiduciary duty to MF Global customers and violated the Commodity Exchange Act. The suit also added a player with deep pockets to the mix as customers continue to try to recover an estimated $1.6 billion that went missing from their accounts when MF Global filed for bankruptcy Oct. 31, 2011.

PwC said it "will defend this lawsuit vigorously," and that its review of MF Global's internal controls was "in accordance with professional standards." The audit evidence confirmed that MF Global maintained customer assets in accordance with regulators' requirements as of the date of PwC's audit, the firm said, and both congressional testimony and a report from the bankruptcy trustee overseeing MF Global "support this conclusion."

Mr. Corzine is expected to contest the claims.

The suit, which seeks class-action status, detailed many of the same findings as a bankruptcy trustee, James Giddens, in a June report. The trustee has assigned his claims against former MF Global officers to plaintiffs' law firms to reduce the legal costs of recovering money.

The latest move comes as civil regulatory investigations continue. A criminal probe hasn't resulted in any charges.

About 36,000 customers of MF Global's U.S. brokerage have filed claims with Mr. Giddens's office. Many have received about 80 cents on the dollar of cash owed to them, while customers who invested on foreign exchanges have received only about five cents on the dollar, due to disputes about how the money should be treated under U.K. bankruptcy law.

"I'm optimistic we'll recover all the customer money and hopefully a good chunk of money for the general estate," said Andrew Entwistle, managing partner at Entwistle & Cappucci, one of the two firms leading the representation of MF Global's commodities customers.

The complaint alleges that PwC, as MF Global's auditor, said the firm's internal controls for safeguarding customer assets were adequate when in fact they weren't and that PwC should have known they weren't.

The complaint alleges PwC breached a fiduciary duty to MF Global and its customers and was negligent in its work at the firm. "If they had made sure the internal controls were adequate, there never would have been an invasion of customer funds," said Merrill Davidoff, a managing principal at Berger & Montague, which also is representing the commodities customers.

In 2010 and 2011, according to the complaint, PwC was copied on several MF Global internal-audit reports that indicated there were deficiencies in the firm's internal controls.

In 2010, according to an internal review by MF Global cited in the complaint, there were five instances in which the firm drew on customer funds to such a degree that it was "funded by clients."

That isn't necessarily against federal commodities rules, but it exposed the firms' clients to risks.

Continued in article

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

Bob Jensen's threads on MF Global ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search on the phrase "MF Global"


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

Price Tag Rising in Laundering Case
by: Margot Patrick
Nov 06, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Contingent Liabilities

SUMMARY: HSBC Holdings PLC of London has made provisions totaling $1.5 billion, and warns the total could reach much higher, after previously acknowledging "...some of the findings of a July report published by the U.S. Senate that alleged some of the bank's global operations were used by money launderers and potentially financed terrorism....HSBC's earnings bring to a close a dismal week of reporting from U.K. banks, dominated by charges and fines on activities in the boom years before the financial crisis."

CLASSROOM APPLICATION: HSBC reports under IFRS. The article may be used to highlight the differences between U.S. GAAP and IFRS in accounting for contingent liabilities, including terminology and the requirement to accrue the most likely amount of the liability when a range of possible outcomes exist (as opposed to the acknowledgement in U.S. GAAP that companies may report the minimum amount in a range of estimates).

QUESTIONS: 
1. (Advanced) What are provisions? What is the comparable term for these items in U.S. GAAP?

2. (Introductory) What admitted wrongdoing and current negotiations have led to U.K. bank HSBC recorded estimated liabilities totaling $1.5 billion?

3. (Introductory) Refer to the related article. What was the "good news in HSBC's third-quarter results"? Why must "one-time items" be excluded to find this good news?

4. (Advanced) Again, refer to the related article. What are the implications of these fines for wrongdoing on HSBC's business?

5. (Advanced) What is the difference between the $800 million provision which "overshadowed" the third-quarter results and the $1.5 billion total liability which might yet be exceeded once negotiations between the U.K. bank and the U.S. authorities are complete?

6. (Advanced) Access the HSBC disclosure of its interim report on which this article is based, available at http://www.hsbc.com/1/PA_esf-ca-app-content/content/assets/investor_relations/121105_interim_management_statement.pdf Refer to page 9. What factors were considered by HSBC in developing its accrual for these fines?

7. (Advanced) What is the implication of the amount of $1.5 billion given that HSBC has disclosed that the amounts owed could grow much higher? In offering your answer, cite a reference to authoritative requirements under IFRS, the basis on which HSBC reports.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
HSBC Haunted by Imperfect Past
by Simon Nixon
Nov 06, 2012
Page: C10

"Price Tag Rising in Laundering Case," by Margot Patrick, The Wall Street Journal, November 6, 2012 --- Click Here
http://professional.wsj.com/article/SB10001424052970204349404578100220595694086.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

LONDON—HSBC Holdings HSBA.LN -1.14% PLC on Monday said its provisional bill to settle money-laundering charges has climbed to $1.5 billion and could end up being far higher, as U.S. authorities continue to consider bringing criminal and civil charges against the bank.

HSBC had previously acknowledged some of the findings of a July report published by the U.S. Senate that alleged some of the bank's global operations were used by money launderers and potentially financed terrorism.

On Monday, the bank said it had added $800 million to the $700 million it provisioned in the summer for possible fines, but again warned they could end up being "significantly higher" than that total.

Chief Executive Stuart Gulliver said no settlement has been reached and that the timetable remains unclear. "We are actively engaged in discussions with U.S. authorities to try to reach a resolution, but there is not yet an agreement," he said. He added that the money-laundering allegations have "undoubtedly caused considerable reputational damage to HSBC." Now Reporting

Track the performances of 150 companies as they report and compare their results with analysts' estimates. Sort by date and industry. [image]

The new charges were disclosed as the bank reported a sharp fall in third-quarter net profit, to $2.5 billion from $5.22 billion a year earlier. But both figures are distorted by fluctuating valuations on HSBC's debt. Adjusted pretax profit—a closely watched figure that strips out those accounting items and is seen as a more accurate indicator of the bank's performance—more than doubled to $5.04 billion, from $2.24 billion. Analysts had been expecting adjusted pretax profit of about $5.45 billion. Underlying revenue rose 20%, to $16.13 billion, meeting analyst expectations and helped by a stronger quarter for investment banking. More

The Source: HSBC Cleans Up

The bank is aiming to shave billions of dollars from its cost base by slimming down its global retail banking empire and cutting jobs. Mr. Gulliver said the bank is ahead of schedule on these plans, though its cost-efficiency ratio of 63.7% in the quarter remains well above a target of 52% or lower by the end of next year.

Finance Director Iain Mackay said a stricter global regime around regulation and compliance is adding roughly $200 million to $300 million to HSBC's annual costs.

HSBC's earnings bring to a close a dismal week of reporting from U.K. banks, dominated by charges and fines on activities in the boom years before the financial crisis. In addition to their efforts to rebuild trust with customers and shareholders, the banks are also having to make major business and cultural changes to adapt to a tougher regulatory environment.

HSBC on Monday added more than $350 million to its ongoing bill for payment protection insurance, bringing its payment protection insurance provisions this year to $1.36 billion.

Continued in article

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


"Why a Low Carbon Price Can Be Good News for the Climate," by Eric Pooley, Harvard Business Review Blog, November 21, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/11/why_a_low_carbon_price_is_good.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Coal is Still King

 


What critics don't realize that one of the selling points of carrots is that they allegedly improve vision in a movie theater.

One carrot gets you a 'free" theater ticket in Spain.

Anybody want a carrot? In Spain, carrots are being sold in place of theater tickets as a way to avoid a 21 percent tax on the tickets. Many Spaniards say the "Carrot Rebellion" is a creative response to the country's unpopular austerity measures, but some simply call it tax evasion.
WGBH Television News, November 12, 2012 ---
http://www.wgbh.org/News/Articles/2012/11/12/To_Get_Around_Tax_Hike_Spanish_Theater_Sells_Carrots_Not_Tickets.cfm


Going Concern's Admittedly Unscientific 2012 Survey of Starting Salaries for New Accounting Graduates ---
http://goingconcern.com/post/recruiting-season-public-accounting-salaries-starting-class-2013

Jensen Comment
Keep in mind that cost of living varies.
When I was still teaching it was somewhat easier to get a Big Four starting job in San Francisco relative to San Antonio. In San Francisco the salary would hardly pay for a one-room apartment without partnering to share the rent. Starting salaries are often not fully adjusted for higher cost-of-living cities.

Also I will mention my oft-repeated advice to college graduates. The amount of starting salary should be a low priority relative to prospective employer training, exposure to clients who are often the way career tracks head after a year or two with a CPA firm, opportunities in areas of interest such as tax or IT, and opportunities for international transfer (e.g., to Asia), and expected travel requirements (tough for expecting parents), and opportunity for work at home (great for expecting parents).

CPA firms do not offer high enough salaries for entry-level auditing and tax to attract graduates from prestigious MBA programs. These firms do not hire many such MBA graduates and when they do hire these graduates at higher salaries it is generally for consulting rather than auditing and tax. CPA firms generally want consultants who have considerable on-the-job training and special skills such as IT and language skills.

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


International Accounting Standards Board --- http://www.ifrs.org/Pages/default.aspx
Also see http://en.wikipedia.org/wiki/International_Accounting_Standards_Board

History of the International Accounting Standards Board (IASB) ---  http://www.iasb.org/About+Us/About+the+Foundation/History.htm
A more complete commentary on the history of the IASC and IASB by current IASB member Paul Pacter ---
http://www.trinity.edu/rjensen/acct5341/speakers/pacter.htm#001

From IAS Plus (Deloitte) on November 2, 2012 ---

10 years of IFRS: Reflections and expectations

The 'Australian Accounting Review' has recently published a special edition that marks the 10th anniversary of the International Accounting Standards Board (IASB) with research papers exploring the impact of IFRS on standard setting, financial reporting practice and accounting education from the perspectives of standard setters, practitioners and academics. Among the articles are contributions by Warren McGregor, IASB Board member for ten years, Kevin Stevenson, AASB Chairman, and Paul Pacter, IASB Board member and former IAS Plus webmaster.

The special edition of the Australian Accounting Review, a leading practitioner-focused journal, appears in two parts: in the September and December 2012 issues.

Australian Accounting Review --- http://onlinelibrary.wiley.com/journal/10.1111/%28ISSN%291835-2561

Jensen Comment
At the 2011 AAA Annual Meetings, Steve Zeff made an outstanding historical presentation entitled"
"The Evolution of the IASC into the IASB, and the Challenges It Faces"
For AAA members with access to the AAA Commons, a video of the entire presentation is available at
http://commons.aaahq.org/posts/e4ea41e4f4

September 8, 2012 Comment by K. Ramesh

For purpose of full disclosure, Steve is my colleague! The speech was simply phenomenal. It was much more than a chronology of easily searchable events, but a thoughtful integration of various facts and circumstances that resulted in today’s IASB. I am so lucky to be able to walk a few doors down the hallway to get answers to any questions that I have on the history of financial reporting regulation.

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


Balanced Score Card --- http://en.wikipedia.org/wiki/Balanced_scorecard

"Balanced Scorecard must adapt to remain relevant," by Arvind Hickman, CGMA Magazine, November 6, 2012 ---
http://www.cgma.org/Magazine/News/Pages/20126794.aspx

The management system of the future will need to adapt to a world that demands greater transparency, corporate responsibility, better risk management and changing patterns of human capital management, according to David Norton, co-founder of the most popular performance management system, the Balanced Scorecard.

The Balanced Scorecard is claimed to be used by 70% of companies across the world. The key to its longevity and popularity, says Norton, has been its ability to adapt and provide solutions to changes in the broader economy.

“The management system cannot lead change, it adapts to these broader macroeconomic things,” he says.

“The question about [whether] the Balanced Scorecard is obsolete – the answer is ‘yes’. Every day it becomes partially more obsolete, as do the management systems in general that you are using.”

Norton was speaking at the CGMA event “Kaplan and Norton: A contemporary performance” at the University of Edinburgh on Monday. The event was one of several events happening this week featuring Norton and his collaborator, professor Robert Kaplan, marking the 20th anniversary of the Balanced Scorecard.

In a thought-provoking address, Norton laid out the five major challenges performance management systems must overcome to remain relevant in the next 10 to 20 years.

1. Managing human capital will become a greater issue. Norton says this is due to what he describes as the “stratification of knowledge work”, which could involve organisations carrying out certain functions in countries where they can derive the most value.

“What kind of knowledge work is best done here versus there? In the US we have a certain level of unemployment even though we have hundreds of thousands of jobs unfilled. Why? Because we don’t have trained workers to step in those jobs, they haven’t readapted in the face of the new economy.

“That’s going to be a big deal and is probably the ultimate challenge for people who measure. How do I measure whether or not my human capital is adequate?”

Norton believes part of the answer can be found in the "cause and effect" logic that underpins the Balanced Scorecard approach. Cause and effect describes how delivering performance on a perspective, such as financial success, can only be achieved by delivering on another perspective, such as customer satisfaction.

“A new mathematics is required here,” he adds. “In the old world, I would measure something like employee turnover and I would look at it in isolation. But what we’ve learned through strategy mapping in the Balanced Scorecard is that performance comes from cause and effect relationships.

"For example, if I want to increase revenue, I have to increase customer confidence and participation. To do that I have to find a critical process and improve it, and to do that I have to train people and give them technology. It's a clear set of "cause and effect" relationships that you find when you learn what a company's strategy is."

2. The networked economy describes the growing interdependence companies have with internal and external suppliers.

“Management systems of the last generation were designed with idea of the legal boundaries of an organisation as being the domain for which strategy and measurement was related,” Norton says. “With outsourcing, you find the legal boundaries start to become meaningless. If your IT department reports to you, it’s inside the legal boundaries. But if it is outsourced, it reports to you in a different way.”

This also applies to a growing number of joint ventures as organisations need to manage what the priority of the joint venture is and whether it leans towards a specific partner or adopts a strategy that is different from that of the parent organisations.

3. Transparency: A growing trend is the need for non-profit and governmental organisations to become transparent. Several governments have committed their governance systems to the Balanced Scorecard, such as the governments of the United Arab Emirates, the Philippines and Botswana.

Each country and city has its own priorities, such as the creation of new businesses or to position itself as a leader in an industry sector.

Norton says the challenge is to ensure performance management systems adapt to evolving strategies.

4. A new role for corporations: Norton points out that the role of corporations in society is changing to recognise their impact on the environment and society, and management systems of the future must be designed with this in mind.

“It’s not enough anymore to make money,” he says. “If you broaden the responsibility of an executive, think about the implications of that on the measurement system, instead of narrowly focusing on one dimension as a success indicator.”

5. Risk: The management system of the future must take into consideration that organisations are becoming increasingly risk averse.

“Half of any strategy is what do I do if I succeed, and the other half is what do I do if I fail. I think almost all of our attention in the past decade has gone on the upside. Now, through a combination of randomness and forces, we are seeing problems in the financial system, rogue traders, hurricanes, problems in quality control of health-care organisations – disasters all around us. That’s created an awareness that more time has to be spent on dealing with risk and particularly strategic risk.”

On reflection: In outlining challenges for the future, Norton explains that in the past 20 years the Balanced Scorecard has had to negotiate several hurdles, including the shift from a products-based economy to a knowledge-based economy, exponential improvements in the speed of processes and systems, the decentralisation of the workforce and integration of governance systems across an enterprise.

Continued in article

Also Bob Kaplan Speaks
At another event in the anniversary series, Balanced Scorecard co-founder Robert Kaplan explained how poor cost measurement is plaguing the U.S. health care system and what can be done to fix it. CGMA Magazine (11/6)

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


Healthcare Video and Cases From PwC
Why mobile technology may well define the future of healthcare... for everyone. ---
http://www.youtube.com/watch?feature=player_embedded&v=qkm_7XUDqIY

PwC mHealth (read that Mobile Health) Master Site --- http://www.pwc.com/gx/en/healthcare/mhealth/index.jhtml?WT.ac=vt-mhealth#&panel1-1

Mobile is accelerating trends in healthcare

Three major trends already happening in healthcare lend themselves to the revolution in mobile technology:

Ageing population

Ageing populations and chronic illness are driving regulatory reform. Public sector healthcare is seeking better access and quality, and it's looking to the private sector for innovation and efficiency. mHealth improves access and quality, and offers dramatic innovation and cost reduction.

Foundations already in place

The foundations of industrialisation of healthcare are already in place — electronic medical records, remote monitoring and communications. ‘Care anywhere’ is already emerging. The platform for mHealth is set.

Personalisation

Healthcare, like other industries, is getting personal. mHealth can offer personal toolkits for predictive, participatory and preventative care.

Bob Jensen's threads on health care ---
http://www.trinity.edu/rjensen/Health.htm


Are CPAs eligible to receive rewards under the new IRS Whistle Blower Program?
http://www.accountingweb.com/article/tax-court-cpa-whistling-wind/220185?source=tax


Question for Your Students
Why will a cut in the corporate tax rate hurt rather than help many corporations?

"Tax Twist: At Some Firms, Cutting Corporate Rates May Cost Billions," by Michael Rapoport, The Wall Street Journal, November 8, 2012 ---
http://professional.wsj.com/article/SB10001424052970204789304578086942601404324.html?mod=dist_smartbrief&mg=reno64-wsj

What Uncle Sam has given to the earnings of companies like Citigroup Inc., C -0.35% American International Group Inc. AIG -0.73% and Ford Motor Co., F 0.00% he soon might take away.

President Barack Obama has said, most recently during last month's presidential debates, that the 35% U.S. corporate tax rate should be cut. That would mean lower tax bills for many companies. But it also could prompt large write-downs by Citigroup, AIG, Ford and other companies that hold piles of "deferred tax assets," or DTAs.

After posting big losses, these companies have tax credits and deductions they can use to defray future tax bills, thus providing a boost to earnings.

But a tax-rate reduction means some of those credits and deductions, counted as assets on the balance sheet, would be worth less, since lower tax bills would mean fewer opportunities to use them before they expire. That would force the companies to write down their value, resulting in charges against earnings.

Citigroup, for instance, acknowledged during its recent third-quarter earnings conference call that a cut in the tax rate could lead to a DTA-related charge of $4 billion to $5 billion against earnings. Lockheed Martin Corp. LMT +0.26% said in its latest quarterly report that a write-down of its DTAs was possible.

Any write-down also would reduce a company's "tangible book value," the sum it could realize by selling its assets in a fire sale. That could further weigh on banks' stock prices. Most large banks already trade at a discount to tangible book value because of investor concerns about their growth prospects and wariness of reported asset values.

"Investors are focused on tangible book value," said Mike Mayo, a CLSA Securities banking analyst who criticized Citigroup's accounting and asked about the possibility of a write-down on Citigroup's recent earnings call.

Companies other than Citigroup haven't disclosed the size of possible write-downs from a tax cut. "I think this is going to be pretty much a surprise" to investors, said Robert Willens, a tax and accounting expert.

Some companies have enormous piles of these assets. Citigroup has $53.3 billion, the most of any U.S. company. Ford has $12.9 billion.

But those numbers would be reduced under Mr. Obama's proposal to cut the corporate rate to 28% with an added break for manufacturers. The proposal would require congressional action.

Continued in article


Spinning Debt Into Earnings With the Wave of a Fair Value Accounting Wand
"Euro banks' £169bn in accounting alchemy," by: Lindsey White, Financial Times Advisor, January 19, 2009 --- Click Here

European banks conjured more than £169bn of debt into profit on their balance sheets in the third quarter of 2008, a leaked report shows.

Money Managementhas gained exclusive access to a report from JP Morgan, surveying 43 western European banks.

It shows an exact breakdown of which banks increased their asset values simply by reclassifying their holdings.

Germany is Europe's largest economy, and was the first European nation to announce that it was in recession in 2008. Based on an exchange rate of 1 Euro to £0.89, its two largest banks, Deutsche Bank and Commerzbank, reclassified £22.2bn and £39bn respectively.

At the same exchange rate, several major UK banks also made the switch. RBS reclassified £27.1bn of assets, HBOS reclassified £13.7bn, HSBC reclassified £7.6bn and Lloyds TSB changed £3.2bn. A number of Nordic and Italian banks also switched debts to become profits.

Banks are allowed to rearrange these staggering debts thanks to an October 2008 amendment to an International Accounting Standards law, IAS 39. Speaking to MM, IAS board member Philippe Danjou said that the amendment was passed in "record time".

The board received special permission to bypass traditional due process, ushering through the amendment in a matter of days, in order to allow banks to apply the changes to their third quarter reports.

However, it is unclear how much choice the board actually had in the matter.

IASB chairman Sir David Tweedie was outspoken in his opposition to the change, publicly admitting that he nearly resigned as a result of pressure from European politicians to change the rules.

Danjou also admitted that he had mixed views on the change, telling MM, "This is not the best way to proceed. We had to do it. It's a one off event. I'd prefer to go back to normal due process."

While he was reluctant to point fingers at specific politicians, Danjou admitted that Europe's "largest economies" were the most insistent on passing the change.

As at December 2008, no major French, Portuguese, Spanish, Swiss or Irish banks had used the amendment.

BNP Paribas, Credit Agricole, Danske Bank, Natixis and Societe Generale were expected to reclassify their assets in the fourth quarter of 2008.

The amendment was passed to shore up bank balance sheets and restore confidence in the midst of the current credit crunch. But it remains to be seen whether reclassifying major debts is an effective tactic.

"Because the market situation was unique, events from the outside world forced us to react quickly," said Danjou. "We do not wish to do it too often. It's risky, and things can get missed."

Jensen Comment
European banks thus circumvented earnings hits for anticipated billions in loan losses by a number of ploys, including arguments regarding transitory price movements, "dynamic provisioning" cookie jar accounting, and spinning debt into assets with fair value adjustments "accounting alchemy."


"The Case for Blending the Liberal Arts with Professional Training," by William H. Weitzer, The Chronicle of Higher Education, October 30, 2012 ---
http://www.insidehighered.com/blogs/higher-ed-mash/case-blending-liberal-arts-professional-training

I have a narrative to tell. It will sound familiar to those of you who know the history of American higher education and who are concerned about the challenges we face today and in the near future. In the first three entries of this blog, I will establish my premise that blending the liberal arts with professional training is one of the key strategic directions in which many institutions of higher education should go. To get to this point, I need to begin with some of the current challenges that we face…

Much has been written about what is wrong with higher education. The litany is familiar to all. We have lost our world-wide advantage. Students are not learning. Faculty are not teaching. We have accommodated student demand in a way that has watered down the education we provide. Our costs have increased at a rate far beyond the inflation rate. Institutions spend too much money on dormitories and fitness centers. Students are leaving with far too much debt. The increased economic “value” of higher education is not being realized by our graduates. We have abandoned true education and are providing training for the professions.

While each of these critiques has some validity, it is also true that American higher education continues to be valued and revered. Perhaps the more accurate assessment is that American higher education has earned its reputation, but serious challenges lie ahead.

As if the problems confronting traditional higher education were not enough, the economic downturn in the first decade of the century presents a significant new challenge. Criticism about the price of higher education was already on the rise. With the economic crisis that began in 2008, students are even more unsure of their ability to pay for college, are worried about the debt that they and their families are accruing, and are questioning the value of a college degree.

It appears that the “value proposition” in the minds of prospective students and their families has shifted. There was a time when families believed in the value of a college degree and would save and sacrifice to have their students earn a degree at the “best” college. With more constrained resources, consumers of higher education are understandably concerned about price. Many are no longer looking for the “best” college for their students, but instead looking for the “best bargain” for marketable skills. While no one can be certain about where higher education is headed, it is not likely that student choices will return to the “value proposition” that existed prior to 2008.

* * * * * * * * * * *

How can higher education adapt? Often, the critics of higher education fail to offer sufficient corrective measures or new solutions. I offer a more positive approach: to identify the components of an institution’s liberal arts and professional training programs and to take the strategic actions necessary to “mash up” the liberal arts and professional training. My basic premise is that rather than presenting students with a choice between the liberal arts and professional training, students would benefit greatly from a blend of the two approaches.

A liberal arts degree might prepare graduates for life, but there is too little focus on the first job out of college. A professional education may do a good job preparing graduates for their first job, but that training is not likely to give the flexibility to prepare them for their second and third jobs. A program that combines these two approaches prepares graduates for the first job, their second job, and beyond. Students (and the parents of traditional age students) who are concerned about beginning their careers (and paying off their loans) should find this combination to be an attractive option. Employers should also prefer students who arrive as career-ready and prepared for life, in other words, with important professional skills but who are also prepared to advance in and contribute more to their businesses, institutions and communities.

* * * * * * * * * * *

My research and observations are not meant to promote one type of institution over another. Rather, I have been identifying and examining “markers” that help strengthen efforts by institutions to blend the liberal arts and professional training, for example, interdisciplinary first-year seminars, service-learning courses, electronic portfolios, community service, and capstone courses. I have also visited institutions that demonstrate “best practices” around the confluence of the liberal arts and professional education and I will be sharing my experiences in future blog entries.

If one visualizes a continuum of institutions from “pure” liberal arts at one end and concentrated professional training at the other, a graph of these “markers” and “best practices” would approximate a “normal curve.” To put it simply, the extreme tails of this continuum will have fewer opportunities to blend the liberal arts and professional training. The greatest confluence of these two approaches will occur at colleges and universities whose missions are about blending the liberal arts and professional training. I contend that based on student and employer demands today and in the future, all types of institutions will need to continually examine how their missions and programs support students both in obtaining their first jobs and preparing them for life.

Continued in article

Jensen Comment
I'm a strong believer that the difference between training and education concerns the breadth and depth of humanities and science in a professional curriculum such as engineering, computer science, accounting, finance, marketing, management, nursing, etc. I'm also became disheartened when virtually all North American universities followed Harvard's trend of replacing a relatively fixed general education core with a smorgasbord of hundreds of courses such that it's no longer clear what a "core" really means in general education. Sometimes I think the Harvard's smorgasbord is intended to protect faculty turf more than provide a genuine education core.

I don’t have any answers to the liberal-core curriculum dilemma. At Trinity we once had a Quest program where all first year students took the same overview course on history, religion, philosophy, etc. That did not meet evolutionary success and gave way to categories of courses in things like “Western Civilization” and a number of other categories for qualified general education courses. That is pretty much the system still in place, but it has become more and more like a Harvard smorgasbord.

The trouble with smorgasbord humanities is that there’s literally no consistency between graduates in terms of what they learned about humanities. Another problem is the turf wars that go on between humanities departments. If you don’t have any majors (e.g., Southern Mississippi has something like three economics majors) then departments fight for survival by attracting general education course enrollments. The Economics Department at Southern Mississippi is currently on the chopping block. Really!

A two-year MBA program works quite well for students who do not take business courses in the first two years. But an MBA program does not work well for non-accounting students wanting to become CPAs due to the many undergraduate pre-requisites for students to enter masters of accounting programs. Similarly, engineering graduate programs do not work well for students who did not major in engineering as undergraduates.

As a rule professional schools of accounting, business, engineering, and nursing rely upon the general education core plus an allowance of upper division electives (possibly even minors) for the humanities and science education components of a curriculum.

A noteworthy Accounting Education Change Commission funded experiment took place at North Texas State University where students could choose either traditional accounting courses or non-traditional accounting courses team-taught by humanities and accounting instructors. My informal feed back is that students overwhelmingly preferred traditional accounting courses. The moral of the story may be that when it comes to the professional courses in the curriculum, students want the courses to be entirely devoted to professional content. Similarly, when it comes to humanities and science courses those same students might prefer more narrow focus on humanities and science (this was not part of the NTSU experiment) ---
http://aaahq.org/AECC/changegrant/cover.htm


Is there too much democracy on the IASB?
"IASB proposes new 12-member advisory body," by Huw Jones, Reuters, November 1, 2012 ---
http://www.reuters.com/article/2012/11/01/accounting-iasb-idUSL5E8M1EMC20121101

The world's top accounting rulesetter unveiled plans on Thursday aimed at buttressing its authority and independence in the face of calls from European groups for a greater say in how new standards are shaped.

The International Accounting Standards Board (IASB) writes rules used in over 100 countries, giving it clout that critics say calls for much greater accountability.

Accounting standards setting has become politically charged since the financial crisis, as policymakers realise the reach that rules can have - such as making banks recognise losses earlier in future, before taxpayer bailouts are needed.

The IASB proposed on Thursday an Accounting Standards Advisory Forum comprising 12 members from across the world.

The board currently relies on informal, bilateral contacts with scores of national accounting bodies for input into writing new rules but this has become unwieldy.

"The answer is to establish a multilateral forum where representatives of the standard-setting community can come together with the IASB," said IASB Chairman Hans Hoogervorst.

But what appears to be a modest piece of housekeeping has already stirred political tensions, not least in Europe, the region that gave IASB rules global momentum and now feels it should have strong representation.

Hoogervorst proposes giving Europe three seats, the same as for the Americas and for Asia-Oceania. It would meet for just a day and a half, four times a year in London and, crucially, be chaired by the IASB.

Members would have to sign up to promoting a single set of global standards - code for no lobbying for national carve-outs - and respect the IASB's independence.

The IASB plan is in effect an opening gambit as national standard setters have already filed a counter proposal to the IASB that proposes a board with up to 20 seats and far greater parity between the IASB and national standard setters.

"Our proposal is more comprehensive, precise, focused on the objective of partnership at all stages, not just a forum controlled by IASB staff," said Jerome Haas, president of the French accounting standards board ANC.

"We will have to work to find the right balance and organisation based on the two proposals," Haas told Reuters.

The counter proposal envisages rulemaking as more of a bottom up process based on evidence and need, rather than being imposed by the IASB after some local consultation.

The IASB has also been locked in joint talks with the accounting standards board from the United States, which still uses its own rules, for a decade to align each others' rules.

But in a blow to the IASB, the United States has deferred a decision on whether to switch to IASB rules.

Continued in article

Jensen Comment
Will this become something like the all-powerful 15-member Security Council of the United Nations?
http://en.wikipedia.org/wiki/Security_Council

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


The Forthcoming Going Concern Standard
Review by PwC on November 8, 2012 --- Click Here
Years after adding the project to its agenda, the FASB took a significant step forward at its November meeting toward developing a new going concern standard. With the stated objectives of bringing increased discipline, structure, and consistency to existing disclosure practices, the FASB decided to require management to formally perform going concern assessments and provide related footnote disclosures.
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=MSRA-8ZUHCC&SecNavCode=MSRA-84YH44&ContentType=Content&j=25629&e=rjensen@trinity.edu&l=6604_HTML&u=1118516&mid=7002454&jb=0

Jensen Comment

At the same time is was disconcerting that clients no longer have to answer questions about going concern status ---
"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

What is never made clear is that clients are not even allowed to follow FASB or IFRS standards if there is a significant probability of not being a going concern. It seems to me that clients are implicitly stating that they are going concerns if they report under FASB or IFRS standards.

Hence, we had thousands of banks in 2008 who followed FASB standards and were given clean opinions by their CPA auditors and then failed in a matter of months. Where were the auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

"Keeping Mum About the 'B Word':  Almost a Third of Companies that Filed for Chapter 11 Bankruptcy Didn't Disclose Plans in Advance," by Mike Spector, The Wall Street Journal, November 8, 2012 ---
http://professional.wsj.com/article/SB10001424127887324073504578105121863526076.html?mg=reno64-wsj

More than two dozen companies in the past five years didn't disclose Chapter 11 bankruptcy preparations to investors, according to a Wall Street Journal analysis of regulatory filings.

The companies, including Eastman Kodak Co. EKDKQ 0.00% and American Airlines parent AMR Corp., AAMRQ +0.27% refrained from warning investors about potentially seeking Chapter 11 protection from creditors despite facing dire financial straits or, in some cases, hiring restructuring advisers to make the preparations.

Some of the firms only disclosed later, in court documents, that they had laid the groundwork for the filings in advance.

The law is murky in this area: Federal securities laws and regulations don't require disclosures of bankruptcy preparations in most circumstances, even though such information could be deemed "material" to investors, according to securities-law specialists.

Disclosing bankruptcy preparations is dicey for companies because the mere mention of the "B word" or doubts about survival can spook investors, suppliers and employees. For a financial firm, such chatter can prompt a run on the bank that leads to implosion.

The upshot can be a company filing for bankruptcy before it is fully prepared—or being forced to seek Chapter 11 protection when it could have been avoided.

"It's not a simple issue. What's clear is we ought to rethink where we've gone in terms of disclosure standards and see if we can do better," said Harvey Goldschmid, a professor at Columbia University's law school and a former commissioner at the Securities and Exchange Commission.

The Financial Accounting Standards Board is working on proposing a rule that would require executives under certain circumstances to be responsible for disclosing issues related to a company's ability to continue as a going concern.

Under current rules, auditors determine whether companies must make that sort of disclosure. The "going concern" disclosure is separate from other general bankruptcy-preparation notifications a company could choose to make.

The Journal examined 90 of the largest companies with publicly traded stocks or bonds that filed for bankruptcy protection between 2007 and April 1, 2012, reviewing all disclosures the firms made during the 12 months preceding a Chapter 11 filing.

Sixty-one companies opted to disclose bankruptcy preparations, noting that they may need to seek court protection or warned investors of "substantial doubt" about their "ability to continue as a going concern," according to the Journal's analysis, performed with Valeo Partners, a Washington-based consulting firm.

Twenty-nine companies—or almost one third—didn't make specific disclosures. Some companies, such as financial firms Lehman Brothers Holdings Inc. and MF Global Holdings Ltd. MFGLQ +2.78% collapsed quickly, making such disclosure near-impossible. Others made preparations but didn't alert investors.

In some instances, court documents show advisers were hired and preparations made before a filing even though there were no disclosures at the time.

The seriousness of a bankruptcy filing suggests that hiring advisers and preparing for the possibility amounts to material information, according to some securities-law specialists. The Supreme Court has defined material information as essentially anything an investor would consider important when deciding to trade.

Even so, current legal precedents and securities laws don't require companies to tell the world everything about what they are doing to address troubled times, experts say.

"Fully informed securities markets aren't the only goal in this world," said Adam Pritchard, a University of Michigan law professor and former SEC attorney. "If disclosure is destroying businesses, well, how is that good for anyone?"

On Sept. 30, 2011, reports swirled that Kodak had hired restructuring lawyers and was weighing filing for Chapter 11 protection. In response, Kodak said in a statement it "is committed to meeting all of its obligations and has no intention of filing for bankruptcy."

Continued in article

 


"FASB amends and clarifies scope of balance sheet offsetting disclosures," PwC, November 1, 2012 --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=GBAD-8ZMNYF&SecNavCode=MSRA-84YH44&ContentType=Content&j=23784&e=rjensen@trinity.edu&l=6495_HTML&u=1034799&mid=7002454&jb=0


"Which B-School Has the Most Global Student Body?" by Louis Lavelle, Bloomberg Business Week, October 24, 2012 ---
http://www.businessweek.com/articles/2012-10-24/which-b-school-has-the-most-global-student-body

There’s growing recognition that today’s MBA graduates, whatever path they take after commencement, will need a knowledge of global business practices and cultures to operate effectively. And there are few better ways to develop those skills than in a classroom surrounded by students who are nothing like you—from the languages they speak to their religious beliefs.

So it should come as no surprise that when judging MBA programs, one of the factors many applicants examine is the student body mix, paying particular attention to the percentage of students who hail from foreign shores. In that spirit, Bloomberg Businessweek has assembled a list of the schools with the most, and least, international student bodies among more than 100 participating in Bloomberg Businessweek’s 2012 ranking of the top full-time MBA programs, scheduled for release on Nov. 15.

For an apples-to-apples comparison, we limited this ranking to U.S. schools, where the share of students from abroad averaged 35.4 percent, a far cry from the 74.8 percent among international programs. But for the record: The non-U.S. programs with the most international students were IMD in Lausanne, Switzerland, and the Hong Kong University of Science & Technology, where 98 percent of MBA students are from somewhere else. The Rotterdam School of Management at Erasmus University, at 97 percent, wasn’t far behind.

And the least “international” international program? That would be the Ivey School of Business at the University of Western Ontario, where only 31 percent of the student body comes from outside Canada. The China-Europe International Business School, with a student body that’s 42 percent international, came in second, with two Canadian programs, HEC Montreal and the Queen’s School of Business, tied for third at 45 percent.

See table in article for the most international U.S. MBA Programs topped by

  1. Syracuse University (68%),
  2. Purdue University (67%),
  3. Hofstra University (59%),
  4. Babson College (59%), and
  5. Thunderbird (55%).

Convergence Blues
"Rulesetter warns global accounting drive may go into reverse," by Huw Jones, Reuters, October 23, 2012 ---
http://www.reuters.com/article/2012/10/23/g20-accounting-idUSL5E8LN78V20121023

Oct 23 (Reuters) - A decade-long drive backed by world leaders to align accounting rules could go into reverse if the United States balks at adopting global standards, a top rule-setter said.

The G20 group of top economies called in 2009 at the height of the financial crisis for a single set of global accounting rules to improve transparency for investors.

But differences between the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) pushed the initial 2011 target back to 2013. And in its latest communiques, the G20 has dropped all mention of a date and only states the need for common rules.

The two sides have been holding meetings for a decade to try to align their rules, but have become bogged down in disagreements, in particular over how to force banks to recognise losses earlier on bad loans.

This was a key G20 demand to stop banks leaving it too late and in extreme cases needing taxpayer bailouts.

"There is a risk that, in the absence of a U.S. decision on adoption, a decade of convergence may be followed by a new period of divergence," said the IASB staff report released on Tuesday in response to a July U.S. announcement.

The report responds point by point to issues raised by the U.S. authorities, which said in July that full adoption of the IASB's rules known as IFRSs had little support and they would stick to requiring generally accepted accounting principles or GAAP.

"While acknowledging the challenges, the analysis ... shows that there are no insurmountable obstacles for adoption of IFRSs by the United States," IASB Trustees Chairman Michel Prada said.

The United States is well placed to achieve a successful transition to IFRSs and complete the objective repeatedly confirmed by the G20 leaders, Prada added.

The IASB report said it was important to consider whether the existing level of alignment can be maintained as both boards plan future workloads.

IASB Chairman Hans Hoogervorst has expressed frustration at how convergence has slowed and wants to move beyond the seemingly permanent joint meetings with the Americans.

Countries such as Japan, Singapore and India are watching to see what the United States decides before fully adopting IFRSs themselves. Over 100 countries use IFRS and many believe it's now time for some of their issues to be debated.

The IASB report seeks to ease U.S. concerns about loss of regulatory sovereignty, saying enforcement would remain the sole responsibility of the Securities and Exchange Commission.

Continued in article

Continued in artilce

Jensen Comment
Loss or regulatory sovereignty is not the burning issue. We always knew that the SEC (and to some extent the AICPA) would enforce the standards in the United States. The burning issue is loss of sovereignty over the writing of the accounting rules that would have to be enforced. It's like turning U.S. lawmaking over to the United Nations.

Another burning issue repeatedly raised by former AAA President and Yale Professor Shyam Sunder is that creating a monopoly in accounting standard setting has more downside risk and upside risk.

The argument that global financial statements will be more comparable is a leaky bucket since there may not be a whole lot of comparability in the way clients and their auditors inconsistently apply "principles-based IFRS standards."

Bob Jensen's threads on the advantages and limitations of convergence are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting


Gartner: CFOs Continue to Focus on XBRL – Implement Disclosure Management Solution ---
http://www.cirrusbi.com/portfolio-view/gartner-may-2012-cfos-continue-to-focus-on-xbrl-implement-disclosure-mangement-solution/

Financial Executives International (FEI) conducted a survey in May 2012 together with Gartner unraveling the top priorities for the CFO’s office. Part of the study showed that XBRL and Disclosure Management is becoming an important focus for the CFO:

Although XBRL is currently a significant requirement, enterprises should consider solutions that can be used for many other reporting requirements, including board books and internal management reporting, and should take a broader view, rather than just focus on tactical XBRL approaches.

FEI Study – Key findings:

The FEI study main point is that time has come for the CFO to start optimizing Disclosure Management Solutions and supporting processes to save time and money. These processes are currently very manual and mostly outsourced with Financial Printers. (Merrill, RR Donnelly). These printers still has a role in the XBRL processes, but should not be part of the creation of the documents in any way. The data is way to sensitive.

Survey Insights

CFO buying behavior is shifting:

When asked what the organization’s approach was to address XBRL reporting requirements, 41% plan on implementing a disclosure management solution. This is an increase of 36% from 2011.

Cirrus Filings offer a complete suite of Disclosure Management Solutions that includes:
 

Contact us today for a demo. Email info@cirrusbi.com, or register for a demo you can watch at your desk.
 

Read the Trending Newsor – download the complete study.

 

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


"Auditors reject EU spending 18th year in a row," by Valentina Pop, EU Observer, 2012 ---
http://euobserver.com/institutional/118108

The EU's top auditing body has for the 18th year in a row said there are too many errors in how EU money is spent, particularly in subsidies going to farmers and fishermen.

"A farmer was granted a special premium for 150 sheep. On inspection the European Court of Auditors found that the beneficiary did not have any sheep," the annual report on EU spending released on Tuesday (6 November) said in a typical case.

The auditors also found an alleged fruit processing factory built with EU aid to the tune of €0.2 million which turned out to be a private residence in northern Italy.

Based on such on-the-spot tests, the auditors concluded that spent EU money in 2011 has an overall error rate of 3.9 percent, which is above the threshold needed for a clean bill of health to be recommended by the court.

A spokeswoman for the European Commission on Tuesday said the error rate does not mean the money is lost, because when fraud or irregularities are detected, the EU claims the money back from the member state.

Still, the report is welcome ammunition for spending hawks among member states who want to contribute less to the next EU budget, as negotiations are enter the final week ahead of a special summit on this topic.

"We all need confidence in how EU money spent. Today's EU Court of Auditors report undermines credibility of EU's financial management," the British representation to the EU wrote on its Twitter page.

The auditors' report is not binding on the European Parliament, the EU institution which signs off the EU's accounts year by year.

Still, political groups reacted according to national and ideological lines.

The British-dominated Conservatives and Reformists group said it made "risible" the EU commission's call for a five-percent rise in the next seven-year budget.

A dedicated commissioner for budgetary control was needed, British Conservative MEP Martin Callanan said - for instance by splitting the current portfolio which pools several tasks - once Croatia joins next year and has the right to put forward an extra commissioner.

The Socialist Group in the European Parliament took a milder stance, even though it noted it is the 18th year in a row the auditors find too many errors.

"We need to make sure that EU money is spent more effectively. But we won't achieve this goal by cutting spending. We need better controls," German Social-Democrat MEP Jens Geier said in a press statement.

"Theft of EU funds greater than reported," By Nikolaaj Nielsen, EU Observer, 2012 ---
http://euobserver.com/justice/117618

EU funds fraud is considerably higher than the €600 million reported by member states in 2010.

“The extent of the illicit activities that lead to losses in the EU budget is really shocking […] we assume that the real figure is considerably higher,” EU justice commissioner Viviane Reding told euro deputies in the civil liberty committee on Thursday (20 September).

Last year’s EU budget amounted to €125.5 billion but a large amount is allegedly stolen primarily in the areas of EU agricultural and regional development programmes. Member states manage 80 percent of the EU budget with national authorities in charge of how it is spent and who and how to prosecute suspected fraudsters.

But patchy judicial systems and low recovery rates prompted the commission to table an anti-fraud directive in July that would provide for an EU response to the problem. Those who commit the crime, she noted, often simply go to member states where prosecution is extremely low or non-existent.

Reding told deputies that the EU needs a “federal law” to ensure the money is better spent and deter criminals from seeking refuge in certain member states.

“If we have a federal budget with money coming from EU-27 member states then we also need a federal law to protect this budget,” she said.

The commissioner wants an automatic minimum six-month sentence and up to 5-years for the most serious offences. Fines would top €100,000 for stealing EU funds and €30,000 for money laundering. Member states would also have to extend time limitations on investigations that in some cases “are too short” and allow suspects to slip away.

A European public prosecutor, a position that the Lisbon Treaty allows to be created, would coordinate national prosecutors in tracking down and jailing suspects. The position has yet to be created and his or her role would be limited to coordinating member states primarily in anti-fraud cases.

But Reding supported the view of eventually expanding the powers of the future prosecutor even if it entails re-writing the treaty.

“I am favourable to have a treaty change but we need a step-by-step approach and do solely what the treaty allows us to do,” said Reding.

Some MEPs voiced their reservations over the plans.

British Liberal MEP Sarah Ludford said the automatic minimum sentence “undermines the freedom of national justice systems.”

She called for judicial discretion and warned that a required minimum sentence could force a judge to impose a six-month sentence even in the most minor of offences.

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


A study reveals that many Twitter followers might in fact not be human

From the Scout Report on November 16, 2012

Beware the tweeting crowds
http://www.economist.com/blogs/schumpeter/2012/11/social-media-followers

How fake are your Twitter followers?
http://www.standard.co.uk/lifestyle/london-life/how-fake-are-your-twitter-followers-8211517.html

Analysis of Twitter followers of leading international companies
http://www.camisanicalzolari.com/MCC-Twitter-ENG.pdf

Status People Fake Follower Check
http://fakers.statuspeople.com/

Twitter Guide Book
http://mashable.com/guidebook/twitter/

The Beginner's Guide to Social Media
http://mashable.com/2012/06/12/social-media-beginners-guide/

Bob Jensen's threads on social networking ---
http://www.trinity.edu/rjensen/ListservRoles.htm

 





The Rain

It was a busy
Morning, about 8:30, when an elderly

Gentleman in his 80's arrived to have
Stitches removed from his thumb.

He said he was in a hurry as he had an
Appointment at 9:00 am.

I took his vital
Signs and had him take a seat,

Knowing it would be over an hour

Before someone
Would to able to see him.

I saw him looking at his watch and

Decided, since I
Was not busy with another patient,

I would evaluate his wound.

On exam, it was
Well healed, so I talked to one of the

Doctors, got the needed supplies to
Remove his sutures and redress his wound.

While taking care of
His wound, I asked him if he

Had another doctor's appointment

This morning, as
He was in such a hurry.

The gentleman told me no, that he

Needed to go to
The nursing home to eat breakfast

With his wife. I enquired as to her
Health.

He told me that
 she had been there
For a while and that she

Was a victim of Alzheimer's Disease.

As we
Talked, I asked if she would be

Upset if he was a bit late.

He
Replied that she no longer knew

Who he was, that she had not

Recognized him in
Five years now


I was surprised, and asked him,

'And you still go every
Morning, even though she

Doesn't know who you are?'

He smiled as he
Patted my hand and said,

'She doesn't
Know me, but I still know who she is.'

I had to hold back
Tears as he left, I had goose bumps

On my arm, and thought,

'That is
The kind of love I want in my life.'

True love is
Neither physical, nor romantic.

True love is an
Acceptance of all that is,

Has been, will be, and will not
Be.

With all the jokes
And fun that are in e-mails,

Sometimes there is one that comes

Along that has an
Important message..

This one I thought I could share with you.

The
Happiest people don't necessarily

Have the best of everything;

They just make 
The best of everything they have.

I hope you share this with someone you
Care about. I just did.
 

 

 




 

Humor November 30, 2012

Humor Pictures and Cartoons

Set 01 --- http://www.trinity.edu/rjensen/tidbits/Humor/2011/Set01/Humor2011Set01.htm

Set 02 --- www.trinity.edu/rjensen/tidbits/Humor/2011/Set02/Set02.htm

Set 03 --- http://www.trinity.edu/rjensen/Tidbits/Humor/2012/Set03/HumorSet03.htm

 

Having sex with your biographer is more fun than having sex with your autobiographer.
David Petraus (not really)

Don's Send Your Husband Shopping --- http://www.youtube.com/watch_popup?v=-YFRUSTiFUs#t=65

We Made It --- http://www.youtube.com/watch?v=zyAGE8Y7ojc&feature=youtu.be

"The Big New Yorker Book of Dogs," by Maria Popova, Brain Pickings, November 7, 2012 ---
http://www.brainpickings.org/index.php/2012/11/07/the-big-new-yorker-book-of-dogs/

Question
Do you ignore those safety briefings between when you leave the gate and before the airliner's wheels leave the ground?
Answer
Maybe, but not on Air New Zealand.
I don't know how the airline managed to get this sampling of new U.S. members of Congress to cooperate for this video.

Russell Brand and Tracey Ullman Sing the Wonders of “Asstrology” in Eric Idle’s What About Dick? ---
http://www.openculture.com/2012/11/russell_brand_and_tracey_ullman_sing_the_wonders_of_asstrology_in_eric_idles_iwhat_about_dicki.html

 





 

Humor Between November 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor113012

Humor Between October 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor103112

Humor Between September 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor093012

Humor Between August 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor083112

Humor Between July 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor073112

Humor Between June 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor063012

Humor Between May 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor053112  

Humor Between April 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor043012

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 November 30, 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

 

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/

 

 

October 31, 2012

Bob Jensen's New Bookmarks October 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 
 

2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view these videos.
Bob Jensen is an obscure speaker following Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc

Links to IFRS Resources (including IFRS Cases) for Educators ---
http://www.iasplus.com/en/binary/resource/0808aaaifrsresources.pdf
Prepared by Paul Pacter: ppacter@iasb.org

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

American Accounting Association  Past Presidents are listed at
http://www.cs.trinity.edu/~rjensen/temp/PastPresidentsAAA.htm 

"2012 tax software survey:  Which products and features yielded frustration or bliss?" by Paul Bonner, Journal of Accountancy, September 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Sep/20125667.htm

Center for Financial Services Innovation --- http://cfsinnovation.com/

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

A Recent Essay
"How Non-Scientific Granulation Can Improve Scientific Accountics"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf
By Bob Jensen
This essay takes off from the following quotation:

A recent accountics science study suggests that audit firm scandal with respect to someone else's audit may be a reason for changing auditors.
"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J. Skinner and Suraj Srinivasan, The Accounting Review, September 2012, Vol. 87, No. 5, pp. 1737-1765.

Our conclusions are subject to two caveats. First, we find that clients switched away from ChuoAoyama in large numbers in Spring 2006, just after Japanese regulators announced the two-month suspension and PwC formed Aarata. While we interpret these events as being a clear and undeniable signal of audit-quality problems at ChuoAoyama, we cannot know for sure what drove these switches (emphasis added). It is possible that the suspension caused firms to switch auditors for reasons unrelated to audit quality. Second, our analysis presumes that audit quality is important to Japanese companies. While we believe this to be the case, especially over the past two decades as Japanese capital markets have evolved to be more like their Western counterparts, it is possible that audit quality is, in general, less important in Japan (emphasis added) .

 

 




 

 Financial Salary Guides for 21 Nations --- http://www.roberthalf.com/SalaryGuide
According to Robert Half career services times are very good for accountants with experience to either get promotions or upgraded new jobs.


Congratulations Bill --- You've worked hard for this since the jungles of Viet Nam!
WILLIAM F. MESSIER, JR. RECEIVES AICPA EDUCATION AWARD ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=152163


"Microsoft Introduces Office 365 for Higher Ed," by George Williams, Chronicle of Higher Education, October 23, 2012 ---
http://chronicle.com/blogs/profhacker/office-365-for-higher-ed/43588?cid=wc&utm_source=wc&utm_medium=en

Here at ProfHacker, we’ve written several posts over the years about cloud computing and collaboration. Most of our focus has been on GoogleDocs and collaborative authorship (see my “GoogleDocs and Collaboration in the Classroom,” for example).

Not to be outdone by the cloud services offered by Google and others, Microsoft has been working on offerings like Office Live (which I wrote about in 2010) and Office 365 (which the New York Times covered in 2011). These services are designed to let users access and edit cloud-based documents, spreadsheets, and presentations from any device with a connection to the Internet and to collaborate on these files simultaneously with other users. And as Microsoft attempts to stay competitive with its mobile devices, introduces a new operating system (or two), and starts selling a new tablet device, cloud-based tools are going to be more and more important.

Last week, Microsoft announced Office 365 University, a cloud-based service to be made available to students, faculty, and staff at colleges and universities. The company says that the service is scheduled to become “[a]vailable in the first quarter of 2013,” and will be free for higher ed users who have purchased Office University 2010 or Office University for Mac 2011. (However, later in that same announcement a price of $1.67 per month is specified, which is still pretty good, but not as good as free).

Continued in article

The Chronicle’s 2012 Digital Campus Microsite ---
http://chronicle.com/section/The-Digital-Campus/519/?cid=dl_dcmtxt_h4

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

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

 


Think of a dubious tactic of doubling tuition and then giving all student prospects 50% scholarships to attract more applicants

"Net-Price Calculators Get the Kayak Treatment," by Beckie Supiano, Chronicle of Higher Education, October 9, 2012 ---
http://chronicle.com/blogs/headcount/net-price-calculators-get-the-kayak-treatment/32238?cid=wc&utm_source=wc&utm_medium=en

Remember when net-price calculators were going to be the next U.S. News & World Report rankings? That’s the comparison that staff members at Maguire Associates, a consulting firm, made a couple of years ago in a paper explaining what the calculators could mean for admissions.

But the calculators, which allow students to estimate what they would pay at a particular college after grants and scholarships, don’t seem to have gained much traction yet. While colleges have been required to post the calculators on their Web sites for nearly a year now, early evidence shows that only about a third of prospective students have tried one out.

The Maguire Associates paper predicted that online aggregators would spring up to allow students to compare their net prices at different colleges, much as Kayak.com lets travelers compare air fares. The prediction has come true: A new Web site, College Abacus, lets students do just that.

Whether this new comparison tool will encourage more prospective students to use the calculators, though, remains to be seen.

Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm


Nobel Laureate Harry Markowitz --- http://en.wikipedia.org/wiki/Harry_Markowitz

Video (apart from an introduction to Professor Markowitz that is entirely too long)
Markowitz' views on Modern Portfolio Theory in his own words ---
http://financeprofessorblog.blogspot.com/2011/02/markowitz-views-on-modern-portfolio.html

 

"Diversifcation: good but not as good as you probably think," by Jim Mahar, FinanceProfessor.com, October 23, 2012 ---
http://financeprofessorblog.blogspot.com/2012/10/diversifcation-good-but-not-as-god-as.html

For years (at least since 2001) this idea has been a mainstay in my classes.  The benefits of diversification have been overstated.  Why?  The correlations that are used to diversify and get the so called optimal portfolio change and the change is NOT in a random format: the correlations go up in bad times.


The Physics of Finance: Why diversification doesn't work:
 

"Harry Markowitz introduced the idea of diversification into investing back in the 1950s (at least he formalized the idea, which was probably around long before). Using information on the mathematical correlations between the returns of the different stocks in a portfolio, you can choose a weighted portfolio to minimize the overall portfolio of volatility for any expected return. This is maybe the most basic of all results in mathematical finance.

But it doesn't work; it suffers from the same problem as the balanced man in the canoe. This is clear from any number of studies over the past decade which show that the correlations between stocks change when markets move up or down."


Click through, this will almost assuredly be a test question for SIMM!

 


Quebec --- http://en.wikipedia.org/wiki/Quebec

"Quebec firms most heavily taxed in Canada and U.S.: study," Financial Post (from the Canadian Press), October 23, 2012 ---
http://business.financialpost.com/2012/10/17/quebec-firms-most-heavily-taxed-in-canada-and-u-s-study/

Quebec companies are by far the most heavily taxed in Canada and the United States, even after accounting for generous financial assistance from the province, according to a new University of Montreal business school study.

The HEC Centre for Productivity and Prosperity’s 2012 report said Wednesday that Quebec companies paid 26% more in taxes than the Canadian average and face almost double the tax burden of U.S. companies.

Taxes represented 5.1% of the gross output of Quebec businesses, compared with 4.1% for Canada and 2.9% for the United States, according to a Statistics Canada survey of 2008 data.

Ontario was the second least competitive province in terms of taxes at 4% of gross output, followed by Alberta (3.9), B.C. (3.8), Nova Scotia (3.7), Manitoba (3.7), Newfoundland and Labrador (3.4), P.E.I. (3.1), Saskatchewan (3.0), and New Brunswick (2.6).

Continued in article

Jensen Comment
Quebec is not the best test case for high taxes, because it has offsetting attractions to locate a business in Quebec, including an abundant work force  and abundant hydro power and an abundant land mass with lots of timber and other natural resources. Quebec is one of the best exporting Canadian provinces, especially if you factor out oil exporting in Western Canada.


From The Wall Street Journal Accounting Weekly Review on October 26, 2012

Debt Fuels a Dividend Boom
by: Tyan Dezember and Matt Wirz
Oct 19, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Bonds, Debt, Dividends

SUMMARY: Leonard Green & Partners LP, Bain Capital LLC and Carlyle Group LP are among the private-equity firms that are adding debt to the companies they own in order to fund dividend payouts to themselves. This controversial practice "rose to popularity before the financial crisis" and this year has resurged to $65 billion. "Critics say the dividends, which are disclosed in offering documents, saddle a company with debt, potentially burdening its operations, while reducing owners' investment exposure." The deals are known as "dividend recapitalizations" and are only possible because some investors are looking for higher yields in this low interest rate environment in the U.S.

CLASSROOM APPLICATION: The article may be used in covering dividends or debt issuance in a financial accounting class.

QUESTIONS: 
1. (Introductory) What types of companies are adding debt to their balance sheets in order to fund dividend payments to shareholders? Who are the shareholder recipients of these dividends?

2. (Advanced) What are the effects on a company's balance sheet from undertaking such a transaction?

3. (Advanced) What financial statement ratio is used to support the argument that "companies doing [these debt issuances to fund dividends]...are in better financial shape than those that sold such deals in the 2000s"? What comparison is made with this ratio in order to support this argument?

4. (Introductory) As described in the article, what are the risks of taking on such transactions?

5. (Advanced) One company's chief executive is quoted as saying that he is "pleased to have generated this early return for shareholders." Why do you think he feels this way?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Debt Fuels a Dividend Boom," by: Tyan Dezember and Matt Wirz, The Wall Street Journal, October 19, 2012 ---
http://professional.wsj.com/article/SB10000872396390444592704578064672995070116.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Private-equity firms are adding debt to the companies they own in order to fund payouts to themselves, a controversial practice now reaching a record pace.

Leonard Green & Partners LP, Bain Capital LLC and Carlyle Group LP CG -0.39% are among the firms using the tactic, which rose in popularity before the financial crisis.

In these deals, known as "dividend recapitalizations," private-equity-owned companies raise cash by issuing debt. The proceeds are distributed in the form of dividends to buyout groups.

The resurgence has been helped by investors' appetite for high-yielding debt at a time of historically low interest rates.

Debt issued to fund private-equity dividends has topped $54 billion this year, after a flurry of deals earlier this month, according to Standard & Poor's Capital IQ LCD data service. That is already higher than the record $40.5 billion reached in all of 2010, when credit markets reopened after the crisis.

For private-equity investors, the deals produce payouts amid a slow market for initial public offerings and acquisitions. "It's hard to be anything but happy" about the dividend boom, said Erik Hirsch, chief investment officer for Hamilton Lane, a Philadelphia firm that manages more than $163 billion in private-equity investments.

Likewise, many debt investors are happy to collect yields as high as 10%.

Critics say the dividends, which are disclosed in offering documents, saddle a company with debt, potentially burdening its operations, while reducing a private-equity firm's investment exposure.

Also some of these deals involve a risky type of debt known as "payment in kind toggle"—or PIK-toggle—bonds that give companies the choice to defer interest payments to investors. Instead, they could opt to add more debt to the balance sheet. The default rate for companies that sold PIK-toggle bonds was 13% from 2006 to 2010, twice the default rate for comparably rated companies that didn't use the bonds, according to a study by Moody's Investors Service.

Six companies have sold PIK-toggle bonds to pay private-equity dividends in September and October, double the number sold in the previous 14 months.

"The market is simply letting its guard down at the expense of getting some incremental yield," said Sandy Rufenacht, chief investment officer of $1.3 billion high-yield asset manager Three Peaks Capital. He said he is selling bonds he owns in companies that issue new PIK-toggle bonds.

Despite concerns, the PIK-toggle deals are generally finding a welcome reception among investors, because the securities can yield more than standard junk bonds, which traded at record-low rates in September.

One attraction for dividend recapitalizations broadly is that some companies doing them these days are in better financial shape than those that sold such deals in the 2000s. Debt of companies that sold bonds to pay dividends this year averaged 4.21 times earnings, compared with 5.36 times at the height of the last credit bubble in 2007, according to Standard & Poor's.

Another driver of the trend, some say, is private-equity investors' desire to reap dividends before the potential increase in taxes on the proceeds next year.

Last week, drug developer Pharmaceutical Product Development LLC, which is owned by Carlyle and Hellman & Friedman, sold $525 million of PIK-toggle bonds, with the proceeds going toward a roughly $600-million dividend for the private-equity firms. To pay the full dividend, the company is also contributing about a third of the cash on its balance sheet.

The private-equity firms bought the company in December for $3.9 billion. Nearly half of the purchase was funded by cash and the rest by debt on the company's balance sheet.

Within days of the dividend recapitalization, Jessica Gladstone, a senior analyst with Moody's, lowered the company's credit rating by one notch to single-B and graded the new bonds triple-C, the lowest junk rating. Such deals are "very reminiscent of the bubble era," she said.

A Carlyle spokesman said the private-equity firms put more cash into the buyout than they would have normally because credit markets then were more stressed. With markets improved, he said, the firms are adjusting the debt load to a level more typical in leveraged buyouts. Also, he said, the company can handle the debt.

In response to demand for the bonds, priced at 9.875%, the company boosted the size of its offering by 5%.

Continued in article

Bob Jensen's threads on dividends ---
http://www.trinity.edu/rjensen/roi.htm#Dividends


October 26, 2012 message from Ernst & Young

Third Quarter Standard Setter Update now available

Our Third Quarter 2012 Standard Setter Update - Financial reporting and accounting developments
publication highlights significant developments in financial accounting and reporting between 1 July 2012 and 30 September 2012 and summarizes certain proposals presently under consideration by the Financial Accounting Standards Board, the Emerging Issues Task Force, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Auditing Standards Board and the Governmental Accounting Standards Board.
 
Dodd-Frank's Title VII - OTC derivatives reform

Our
Dodd-Frank's Title VII - OTC derivatives reform publication explains the potential effects of the new regulation on nonfinancial companies that use over-the-counter (OTC) derivatives. It complements our brochure, The road to reform - Helping commercial end users of OTC derivatives comply with Dodd-Frank's Title VII. Both pieces were produced by our Financial Accounting Advisory Services (FAAS) group and are intended to offer practical insights on what nonfinancial companies need to do to comply with the requirements, which take effect as early as the beginning of 2013.

|Jensen Comment
OTC derivatives are custom derivatives that are too unique to be traded in exchange markets for futures and options contracts. However, the underlyings in most instances are the same as market exchange underlyings such as CME commodity prices, currency translation rates, LIBOR, and Treasury Rates. OTC derivatives are usually contracts between a party and a counterparty where the contracts are negotiated through a participating bank. Often the bank insures against credit defaults such that the financial risk is entirely focused on changes in the underlyings. OTC derivatives are generally contracted when the standardized market exchange contracts are not quite what parties and counterparties are seeking --- such a a unique-sized cross-currency swap between a U.S. company and a Dutch company where the underlying is LIBOR and currency exchange rates are set (hopefully without fraud) in the same manner that they derived for market-exchanged currency and interest rate hedges.

Rules for cross-currency hedge accounting are contained in FAS 138.

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


Hans Hoogervorst, chairman of the International Accounting Standards Board, says the board's Conceptual Framework project will finish on time. Revising the framework is essential because the IASB is "struggling with so many basic questions in terms of measurements," he said.
"Hoogervorst gets tough over IASB framework deadline," by Richard Crump, Accountancy Age, October 21, 2012 ---
http://www.accountancyage.com/aa/analysis/2218655/hoogervorst-gets-tough-over-framework-deadline 

Jensen Comment
Increasingly Hans has mentioned in speeches that many of the basic questions in measurement are focused on costs versus benefits.

Conceptual Framework Agenda ---
http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Other-Public-Meetings-Observer-Notes/Documents/0702sob04.pdf

Phase A—Objectives and Qualitative Characteristics

6. This phase involves consideration of the objectives of financial reporting and the qualitative characteristics of financial reporting information, which include relevance, faithful representation, comparability (including consistency) and understandability, and trade-offs between qualitative characteristics and how they relate to the concepts of materiality and cost-benefit relationships.

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


"New tool aids in evaluation of external auditors," by Ken Tisiac, Journal of Accountancy, October 15, 2012 ---
http://journalofaccountancy.com/News/20126656.htm

With interactions between audit committees and external auditors a focus of a steady stream of news recently, a new tool has been developed to assist audit committees in annual evaluations of external auditors.

The Center for Audit Quality (CAQ), which is affiliated with the AICPA, is one of seven organizations that helped develop the tool. It is designed to help audit committees make an informed recommendation to boards of directors on whether to retain their auditor.

Public company audit committees are responsible for hiring and monitoring auditors, and the tool provides guidance on how to perform those duties. The guidance also could be used by audit committees at private companies, not-for-profits, and government as well as others who monitor external audit services, including company boards, oversight bodies, and even management.

“In assessing information obtained from management,” the tool says, “the audit committee should be sensitive to the need for the auditor to be objective and skeptical while still maintaining an effective and open relationship.”

The tool will operate in a space that has received significant scrutiny over the past few years. The European Union is debating mandatory audit firm rotation requirements proposed by the European Commission. The PCAOB is exploring the idea of mandatory audit firm rotation for public companies in its project aimed at enhancing auditors’ independence, objectivity, and professional skepticism.

In addition, a PCAOB standard regulating audit committees’ communications with external auditors has been forwarded to the SEC for ratification.

The new evaluation tool states that public focus on how audit committees perform, including how they oversee external auditors, has increased significantly. During a PCAOB hearing in March devoted to enhancing auditors’ independence and objectivity, audit committee chair Cathy Lego said audit committee members are devoted to that oversight.

“The audit committee is there on behalf of the board to oversee the integrity of the financials,” said Lego, who chairs the audit committees of California-based tech companies SanDisk and Lam Research. “We are there to appoint, to compensate, to look over the qualifications, review the independence, and perform an evaluation of the firms. We do that periodically. We may need to add a little more rigor around the timing of that, but we do it.”

The new tool says audit committees should evaluate auditors annually to make an informed recommendation to the company board on whether to retain his or her services. The tool says the evaluation should assess:


Sample questions in the tool highlight important areas for consideration. The guide also encourages audit committee members to evaluate the auditor’s performance throughout the audit process.

“These contemporaneous assessments provide important input into the annual assessment,” the tool states. “Audit committees may wish to consider those contemporaneous observations during a more formal assessment process, perhaps by using a questionnaire or guide that considers all relevant factors year-over-year.”

Last week, the CAQ also issued a practice aid on how external auditors and audit committees should proactively communicate in a timely and forthright way about PCAOB inspections and audit firms’ quality-control matters.

A recent accountics science study suggests that audit firm scandal with respect to someone else's audit may be a reason for changing auditors.
"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J. Skinner and Suraj Srinivasan, The Accounting Review, September 2012, Vol. 87, No. 5, pp. 1737-1765.

We study events surrounding ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's Japanese affiliate and one of Japan's largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama's reputation. We use these events to provide evidence on the importance of auditors' reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama's clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument.

 


"ARROGANCE OR IGNORANCE: WHY THE BIG FOUR DON’T DO BETTER AUDITS," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, October 22, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/787

This year we have been outspoken critics of the Big Four’s auditing “prowess.”  SeeThe Auditor’s Expectations GAP…Not Again!  Excuses, Excuses, Excuses!” and “Who Really Cares About Auditor Rotation?  Not Us! Each of these commentaries implicitly, if not explicitly, called on these firms to make substantive, meaningful changes to their audit models so that they might once again fulfill their oversight responsibilities to the investing public.  Instead, according to David Ingram and Dena Aubin at Reuters, the Big Four continue to channel resources into lobbying efforts presumably to maintain the status quo, rather than reengineering the defective service that they label an “audit,” which they continue to peddle with the tacit approval and blessing of the SEC.

Public Company Accounting Oversight Board (PCAOB) board member Jay Hansen seems to agree that auditors face some significant hurdles.  In a recent speech (“The PCAOB’s Role in Investor Protection) at University of Nebraska, Mr. Hansen stated,

Recent inspection findings tell us that auditors have struggled with auditing fair value measurements, impairment of goodwill, indefinite-lived intangible assets, and other long-lived assets, allowance for loan losses, off-balance-sheet structures, revenue recognition, inventory and income taxes. Our inspection results in 2010 and 2011 showed an increase in inspection findings, particularly in the area of fair value, but also in the auditors’ testing of internal controls.

Basic business strategy demands attention to the customer value proposition, as well as product and/or service differentiation.  The fact that the Big Four continue to ignore the real customer (the investing public), and make no attempt to distinguish their audit product on any dimension (quality would be nice), dooms whatever “strategy” that they think they may have to complete to utter failure.

So what’s prompted our recent rant?  Well, several weeks ago one of our Executive MBA students (i.e., a mature, experienced, and motivated individual) shared with us an interaction that he and his audit committee recently experienced with their Big Four auditor.  This particular student serves as both the corporate secretary and as a member of the board of directors and audit committee for a medium-size financial institution.  At a recent meeting with its independent auditor, the audit committee asked the external auditor what the firm was doing to address concerns expressed by the PCAOB about the quality of audits conducted by their firm.  Here is where it gets interesting.

Instead of addressing the question posed by the audit committee or acknowledging that their firm needed to improve audit quality, the engagement partner chose to blame the CLIENT for the firm’s poor audit quality.  Moreover, the partner suggested that if the client would pay higher fees, then their firm could do more work and improve their audits!

 Does this Big Four audit partner’s argument have any merit?  Yes, but only a little…we have known for quite a while that declining audit fees were becoming a problem.  And of course, companies must also share in the blame to the extent that they play theauditor shoppinggame. But a bigger and more troubling question is “why is the audit firm accepting engagements if the fees are not sufficient to guarantee a quality audit?”  The answer of course is that the Big Four just “can’t say no!” What…walk away from a client over fees?

Continued in article

Jensen Comment
The problem with the above article is that the evidence presented just does not support the authors' wide-sweeping inditement of the Big Four. Whereas journalists can get away with such poorly researched headlines, members of our academy should know better. Firstly, there's no definition of what constitutes a "better audit." Secondly, there's no consideration given to the variance of audit quality within a Big Four firm. And lastly, there's no consideration given to why investors prefer that companies have Big Four audits  --- namely investors want companies to choose audit firms with the deepest pockets.

For example, suppose an enormous multinational client has an unbelievably complicated ERP system. It's doubtful whether any firm other than a Big Four or other very, very large audit firm has the IT experts necessary to even consider auditing that client. The issue of "better job" no longer is a consideration if other audit firms have not invested in the experts and auditing software needed to take on the job.

The same applies to certain types of specialty clients. Very few audit firms have the technical expertise to bid audits of companies having very specialized accounting such as the audit of Fannie Mae and its millions of derivatives contracts and complicated hedge accounting that one time got KPMG fired from the unbelievably complicated Fannie Mae audit. Who other than another Big Four firm could even consider taking over for KPMG on that trillion-dollar Big Fannie?

The PCAOB increasingly is leaving us with anecdotal evidence that the Big Four is not necessarily have quality audits in many instances that is consistent with their claims and hype. But the PCAOB evidence is far too sparse to support the above damnation conclusions of this article by the Grumps.

"New tool aids in evaluation of external auditors," by Ken Tisiac, Journal of Accountancy, October 15, 2012 ---
http://journalofaccountancy.com/News/20126656.htm

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


"THE MISSING COMPONENT," by Joe Hoyle, Teaching Blog, October 11, 2012 ---
http://joehoyle-teaching.blogspot.com/

College education has numerous critics these days. I believe the recent fascination with MOOCs comes – at least in part – from dissatisfaction with the perceived quality of the current educational experience. We promise development of critical thinking skills in our students but often appear to deliver little more than well-rehearsed memorization. The argument then follows that we don’t need small classes and individual attention simply to teach memorization. Massive online courses can achieve that goal with much less cost.

In my spare time, I often ponder how modern college education can become better. For example, is the education that a college student gets today really superior in any way to the norm 40 years ago? Cars get more miles per gallon of gas than they did back then. Computers run thousands of times faster. But, has college education gotten better during that same period? We are certainly able to teach more students but has the average education actually improved in any significant way?

About 20 years ago, I read an article that I remember well to this day. The article argued that society’s best teacher was the drill sergeant in charge of new Marine recruits during their stay in basic training. This officer gets paid a relatively small amount but will work 24 hours per day, 7 days a week, for weeks on end to make sure the new recruits are properly trained. The drill sergeant will push, cajole, and drive each person toward success. At the end of that time, the recruit will be basically a new person – gone are laziness and bad habits. The person is now a well-trained soldier.

Why does the drill sergeant work so hard without much real compensation? According to the article, the sergeant is training each new recruit on how to stay alive during combat and other dangerous situations. For the drill sergeant, the very life of the recruit is on the line. A properly trained soldier stays alive whereas a poorly trained one might not. Failure to teach the young soldier well can possibly lead to an avoidable death. It is the urgency of the education that pushes the drill sergeant to go all out, night and day, to train the recruit. The recruit might actually hate the sergeant but also might owe his life to that teacher.

I was reminded of this article recently. My wife and our daughters occasionally watch a television show called “The Biggest Loser.” I have never seen a complete episode but I will sometimes watch a few minutes as I pass through the room. As you might know, a group of very heavy contestants are chosen. These folks typically weigh between 280 to 500 pounds and their lives are in jeopardy simply because of their extreme heaviness.

Over a period of weeks, these contestants eat less and exercise so much that they often lose hundreds of pounds. They become new people ready to resume more active rolls in society.

My favorite characters on this show are the trainers who work with each of the contestants. I know that one of them is named Jillian. Jillian will get in the contestant’s faces and push them unmercifully to do their exercises. She will beg them; she will yell at them; she will use whatever trick it takes to get them to work harder and harder so that the excess weight is lost. From what I have seen, no one does more than Jillian to get the results she wants. I often wonder what college would be like if we had a few people like Jillian on our faculty.

By the end of the television season, these folks have had their lives completely turned around. They might have weighed 390 pounds at the start of the competition but be down to 180 by the end.

Clearly, they do not like the amount of pushing that Jillian does. The work can be incredibly hard. They are used to being lazy; she wants them to do real work. They have always made excuses; she won’t let them make any excuses. I am always expecting one of the contestants to pick Jillian up one day and throw her out the window. However, at the last week of each show, almost every contestant will hug Jillian and tell her thanks. Thanks for not giving up on them. Thanks for continuing to push them to get better and stronger. Thanks for guiding them to lose so much weight. She is not their best buddy and doesn't want to be but she has helped them to change their lives for the better.

Why does Jillian push these people so hard? Well, like the drill sergeant, there is a real urgency present. Improvement is needed and improvement is needed immediately. These people are so heavy that they will likely die before their time if they don’t make a change right now. Today. Each contestant is hundreds of pounds overweight and could have a heart attack at any moment.

This is what I call “educational urgency.” The teacher imparts an urgency that requires serious work and lots of it and all of it right now. No procrastination. No laziness. No excuses. There is work to be done and it needs to be done now.

How many teachers have you ever had that seemed to indicate that there was any urgency at all in the learning of class material? I have had dozens of teachers and I don't remember ever having any urgency. I meandered forward at my own leisure.

Students are human beings (believe it or not). Ask yourself this question: How much real work will they do without a sense of urgency?

Most teachers want their students to learn and most do become annoyed if the students don’t learn. But, is there ever any real urgency? And, if there is not, why would in teacher expect a college student to do the work or even care about the class?

I believe that one of the reasons college teaching is under attack is that our classes often don’t ring with any urgency at all. If the student learns the material, that is great but, if not, it is really no big deal. In the end, it really doesn’t make much difference. That's an attitude that can lead to general dissatisfaction.

Whether you teach Shakespeare or philosophy or political science or, even, accounting, is there any urgency at all to the learning process? If there is no urgency, why should your students really do anything for you? Of course, there are always a few great students who love the material and do the work because of that interest. Trust me, they are not the problem. It is the other students we need to reach and spur on to better habits and deeper thinking.

Continued in article

Jensen Comment
Is there grade inflation in the Marines by having recruits evaluate their teaching drill sergeants?

Is there a RateMySergeant Website?

Grade Inflation and Dysfunctional Teaching Evaluations (the biggest scandal in higher education) ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation


Are little cheaters a bigger problem than big cheaters in the world?
"The Honest Truth about Dishonesty:  RSA Animate Version," by Dan Ariely, October 20, 2012 ---
http://danariely.com/2012/10/20/the-honest-truth-about-dishonesty-rsa-animate-version/

Jensen Comment
This RSA animation is a very neat way to help students learn ---
http://www.321fastdraw.com/?gclid=CI7pp-vOlLMCFVTNOgodZVkApQ

Bob Jensen's threads on edutainment ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment


From the Scout Report on October 19

ExpenseMagic --- https://expensemagic.com/ 

This helpful site provides interested parties with a way to quickly turn their business receipts into expense reports. Visitors can take a photo of their receipt and once it's sent along, a monthly expense report is generated at your convenience to turn your clutter of receipts into a smart, manageable format. Versions range from a free basic edition to £9.99 a month for premium to £4.99 a month for corporate. There is a free iPhone/iPad app with unlimited receipt storage, but no app options are available for Android or Blackberry at this time.


FotoMix 9 --- http://www.diphso.no/FotoMix.html 

FotoMix 9 provides a nice and free tool for interested parties to crop, resize, rotate, enhance, mix and match their photos to create a range of images without the learning curve of higher-end software. For those unfamiliar with the tools, the site includes a helpful tutorial to get acquainted with the program. This particular version is compatible with Windows XP and newer.


In the wake of recent events, there are more concerns about Facebook's privacy settings

Facebook users raise privacy concerns as company tweaks security settings
http://www.guardian.co.uk/technology/2012/oct/15/facebook-users-privacy-concerns-security?newsfeed=true 

When the Most Personal Secrets Get Outed on Facebook
http://finance.yahoo.com/news/when-the-most-personal-secrets-get-outed-on-facebook.html 

Three years, deleting your photos on Facebook now actually works
http://arstechnica.com/business/2012/08/facebook-finally-changes-photo-deletion-policy-after-3-years-of-reporting/ 

Three Facebook Privacy Loopholes
http://blogs.wsj.com/digits/2012/10/12/three-facebook-privacy-loopholes/ 

Facebook: Data Use Policy
http://www.facebook.com/about/privacy 

The Brief History of Social Media
http://www.uncp.edu/home/acurtis/NewMedia/SocialMedia/SocialMediaHistory.html

 


"A Look at the IASB’s Draft of Hedge Accounting Requirements," Deloitte via the CFO Journal, October 19, 2012 ---
http://deloitte.wsj.com/cfo/2012/10/19/a-look-at-the-iasbs-draft-of-hedge-accounting-requirements/

Jensen Comment
This is the most extensive review I've seen of the proposed IFRS 9 departures from IAS 39 in terms of hedge accounting. It covers such things as when a financial instrument can get get hedge accounting previously restricted to derivative financial instruments. Many of the changes are quite technical. The bottom line is that IFRS 9 will allow much more subjective judgment for hedge accounting. In my opinion, this will make financial statements potentially less comparable between companies and thereby destroys to some extent the argument that having global accounting standards increases the comparability in financial reporting.

FAS 133 (as amended a number of times), IAS 39 (as amended a number of times) and IFRS 9 (still being written) are arguably the most difficult accounting standards to teach and apply in practice. The major problems are the technicalities of the accounting added on top of the complicated technicalities of understanding how derivative financial instruments affect financial risks in the management of such risks in both the public and private sectors (e.g., government pension funds use derivatives to manage risks and possibly even speculate).

Deloitte's review does not go far in helping you understand the forthcoming IFRS 9. It goes a long ways in showing you how you're going to have to spend a lot more time and possibly money to understand IFRS 9 before you will ever be able to teach IFRS 9 to students.

The bad news is that hedge accounting will continue to have the worst coverage of all accounting standards in intermediate accounting textbooks.

The good news is that hedge accounting is probably too complicated to ever become a worrisome hurdle in Chartered Accountancy Examinations, CPA examinations, and other certification examinations. Hedge accounting is something you must learn on your own and on the job. IAS 39 was very similar to FAS 133, FAS 133/138 originally had some great illustrations where I learned most of what I know about hedge accounting. Sadly, the FASB eliminated most of those great illustrations when it moved to the Codification database. Boo on the FASB for this! Some of my Excel tutorials on those illustrations can be found in the listing of files at
http://www.cs.trinity.edu/~rjensen/

Also see
http://www.trinity.edu/rjensen/caseans/000index.htm

Sadly, I probably will not be updating my tutorials for IFRS 9 --- hey I'm supposed to be retired!


"How to qualitatively assess indefinite-lived intangibles for impairment," Ernst & Young, October 18, 2012 --- Click Here
http://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_BB2420_Intangibles_18October2012/$FILE/TechnicalLine_BB2420_Intangibles_18October2012.pdf

What you need to know

• Companies that use the optional qualitative assessment and achieve a positive result can avoid the cost and effort of determining an indefinite-lived intangible asset’s fair value.

• Using the new qualitative assessment will require significant judgment.

• Companies that use the qualitative assessment will have to consider positive and negative evidence that could affect the significant inputs used to determine fair value.

• Companies that have indefinite-lived intangible assets with fair values that recently exceeded their carrying amounts by significant margins are likely to benefit from the qualitative assessment.

• Using the qualitative assessment does not affect the timing or measurement of impairments.

Overview

The Financial Accounting Standards Board (FASB or Board) introduced an optional qualitative assessment for testing indefinite-lived intangible assets for impairment that may allow companies to avoid calculating the assets’ fair value each year.

Accounting Standards Update (ASU) 2012-021 allows companies to use a qualitative assessment similar to the optional assessment introduced last year for testing goodwill for impairment.2 The goal of both standards is to reduce the cost and complexity of performing the annual impairment test.

ASC 3503 requires companies to test indefinite-lived intangible assets for impairment annually, and more frequently if indicators of impairment exist. Before ASU 2012-02, the impairment test required a company to determine the fair value of

Continued in article

Bob Jensen's threads on intangibles and contingencies ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes


"SEC Pursues Higher Corporate Penalty Caps," by Emily Chason, CFO Journal, October 12, 2012 ---
http://blogs.wsj.com/cfo/2012/10/12/sec-pursues-higher-corporate-penalty-caps/?mod=wsjpro_hps_cforeport

U.S. Securities and Exchange Commission Chairman Mary Schapiro is throwing her support behind a bill that would loosen restrictions on the size of penalties the market regulator can obtain from companies.

At the moment, the SEC can only force individuals accused of wrongdoing to pay a penalty of up to $150,000 per violation, while that penalty figure is up to $725,000 if an entity or corporation is accused of wrongdoing.

In a speech in Boston on Thursday, Schapiro said it is not enough.

“In most cases – particularly those involving large financial institutions – the maximum penalty is equal only to the amount of the wrongdoer’s ill-gotten gains,” Schapiro said. “We are not permitted to base our penalties on how much investors have lost.”

She said the SEC would benefit from a “bigger stick” such as the one proposed in a bill this July by Sen. Jack Reed, a Rhode Island Democrat and Sen. Charles Grassley, a Republican from Iowa.

The bill, called “The SEC Penalties Act of 2012” would raise the penalty per-violation to $1 million for individuals and $10 million for institutions. It would also let the SEC charge a penalty of up to three times the size of any ill-gotten gains, or up to the full amount of investors losses.

“Increasingly, the public believes that the SEC should be levying penalties that send an even stronger deterrent message,” Schapiro said.

The SEC has been recovering penalties at a record clip since the financial crisis, ordering more than $2.8 billion in penalties and disgorgements in 2011. Schapiro cited federal judge Frederic Block’s reluctant approval of a settlement between two former Bear Stearns hedge fund managers and the SEC in June as further evidence that penalty caps should rise. Judge Block had said the $1.05 million being paid to the SEC by the two managers was “chump change” compared to the $1.6 billion lost by the funds’ investors.

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


From the Scout Report on October 12, 2012

A report calls on Italy to address widespread government corruption

Italy needs anti-corruption authority: Transparency International
http://www.chicagotribune.com/news/sns-rt-us-italy-corruptionbre8941bb-20121005,0,988805.story 

Italy: open letter to Prime Minister Monti
http://www.transparency.org/news/feature/italy_open_letter_to_prime_minister_monti 

European Commission: Italy --- http://cordis.europa.eu/italy/ 

Italy and the European Union --- http://www.brookings.edu/research/books/2011/italyandtheeuropeanunion 

Reporters Without Borders Press Freedom Index 2011-2012 --- http://en.rsf.org/press-freedom-index-2011-2012,1043.html

Transparency International --- http://www.transparency.org/

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


Let's Party Instead:  Weak Internal Controls at Northern Illinois University
Eight of the individuals were charged with felony theft, including a former senior administrator, Robert Albanese, who had been NIU's associate vice president for finance and facilities before he resigned in July while under investigation for misconduct.
"9 charged in NIU inquiry into selling of scrap," by Jodi S. Cohen, Chicago Tribune, October 17, 2012 ---
http://www.chicagotribune.com/news/education/ct-met-niu-employees-charged-20121017,0,7006727.story

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


Simpson's Paradox and Cross-Validation

"Simpson’s Paradox: A Cautionary Tale in Advanced Analytics," by Steve Berman, Leandro DalleMule, Michael Greene, and John Lucker, Significance:  Statistics Making Sense, October 2012 ---
http://www.significancemagazine.org/details/webexclusive/2671151/Simpsons-Paradox-A-Cautionary-Tale-in-Advanced-Analytics.html

Analytics projects often present us with situations in which common sense tells us one thing, while the numbers seem to tell us something much different. Such situations are often opportunities to learn something new by taking a deeper look at the data. Failure to perform a sufficiently nuanced analysis, however, can lead to misunderstandings and decision traps. To illustrate this danger, we present several instances of Simpson’s Paradox in business and non-business environments. As we demonstrate below, statistical tests and analysis can be confounded by a simple misunderstanding of the data. Often taught in elementary probability classes, Simpson’s Paradox refers to situations in which a trend or relationship that is observed within multiple groups reverses when the groups are combined. Our first example describes how Simpson’s Paradox accounts for a highly surprising observation in a healthcare study. Our second example involves an apparent violation of the law of supply and demand: we describe a situation in which price changes seem to bear no relationship with quantity purchased. This counterintuitive relationship, however, disappears once we break the data into finer time periods. Our final example illustrates how a naive analysis of marginal profit improvements resulting from a price optimization project can potentially mislead senior business management, leading to incorrect conclusions and inappropriate decisions. Mathematically, Simpson’s Paradox is a fairly simple—if counterintuitive—arithmetic phenomenon. Yet its significance for business analytics is quite far-reaching. Simpson’s Paradox vividly illustrates why business analytics must not be viewed as a purely technical subject appropriate for mechanization or automation. Tacit knowledge, domain expertise, common sense, and above all critical thinking, are necessary if analytics projects are to reliably lead to appropriate evidence-based decision making.

The past several years have seen decision making in many areas of business steadily evolve from judgment-driven domains into scientific domains in which the analysis of data and careful consideration of evidence are more prominent than ever before. Additionally, mainstream books, movies, alternative media and newspapers have covered many topics describing how fact and metric driven analysis and subsequent action can exceed results previously achieved through less rigorous methods. This trend has been driven in part by the explosive growth of data availability resulting from Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) applications and the Internet and eCommerce more generally. There are estimates that predict that more data will be created in the next four years than in the history of the planet. For example, Wal-Mart handles over one million customer transactions every hour, feeding databases estimated at more than 2.5 petabytes in size - the equivalent of 167 times the books in the United States Library of Congress.

Additionally, computing power has increased exponentially over the past 30 years and this trend is expected to continue. In 1969, astronauts landed on the moon with a 32-kilobyte memory computer. Today, the average personal computer has more computing power than the entire U.S. space program at that time. Decoding the human genome took 10 years when it was first done in 2003; now the same task can be performed in a week or less. Finally, a large consumer credit card issuer crunched two years of data (73 billion transactions) in 13 minutes, which not long ago took over one month.

This explosion of data availability and the advances in computing power and processing tools and software have paved the way for statistical modeling to be at the front and center of decision making not just in business, but everywhere. Statistics is the means to interpret data and transform vast amounts of raw data into meaningful information.

However, paradoxes and fallacies lurk behind even elementary statistical exercises, with the important implication that exercises in business analytics can produce deceptive results if not performed properly. This point can be neatly illustrated by pointing to instances of Simpson’s Paradox. The phenomenon is named after Edward Simpson, who described it in a technical paper in the 1950s, though the prominent statisticians Karl Pearson and Udney Yule noticed the phenomenon over a century ago. Simpson’s Paradox, which regularly crops up in statistical research, business analytics, and public policy, is a prime example of why statistical analysis is useful as a corrective for the many ways in which humans intuit false patterns in complex datasets.

Simpson’s Paradox is in a sense an arithmetic trick: weighted averages can lead to reversals of meaningful relationships—i.e., a trend or relationship that is observed within each of several groups reverses when the groups are combined. Simpson’s Paradox can arise in any number of marketing and pricing scenarios; we present here case studies describing three such examples. These case studies serve as cautionary tales: there is no comprehensive mechanical way to detect or guard against instances of Simpson’s Paradox leading us astray. To be effective, analytics projects should be informed by both a nuanced understanding of statistical methodology as well as a pragmatic understanding of the business being analyzed.

The first case study, from the medical field, presents a surface indication on the effects of smoking that is at odds with common sense. Only when the data are viewed at a more refined level of analysis does one see the true effects of smoking on mortality. In the second case study, decreasing prices appear to be associated with decreasing sales and increasing prices appear to be associated with increasing sales. On the surface, this makes no sense. A fundamental tenet of economics is that of the demand curve: as the price of a good or service increases, consumers demand less of it. Simpson’s Paradox is responsible for an apparent—though illusory—violation of this fundamental law of economics. Our final case study shows how marginal improvements in profitability in each of the sales channels of a given manufacturer may result in an apparent marginal reduction in the overall profitability the business. This seemingly contradictory conclusion can also lead to serious decision traps if not properly understood.

Case Study 1: Are those warning labels really necessary?

We start with a simple example from the healthcare world. This example both illustrates the phenomenon and serves as a reminder that it can appear in any domain.

The data are taken from a 1996 follow-up study from Appleton, French, and Vanderpump on the effects of smoking. The follow-up catalogued women from the original study, categorizing based on the age groups in the original study, as well as whether the women were smokers or not. The study measured the deaths of smokers and non-smokers during the 20 year period.

Continued in article

What happened to cross-validation in accountics science research?

Over time I've become increasingly critical of the lack of validation in accountics science, and I've focused mainly upon lack of replication by independent researchers and lack of commentaries published in accountics science journals ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Another type of validation that seems to be on the decline in accountics science are the so-called cross-validations. Accountics scientists seem to be content with their statistical inference tests on Z-Scores, F-Tests, and correlation significance testing. Cross-validation seems to be less common, at least I'm having troubles finding examples of cross-validation. Cross-validation entails comparing sample findings with findings in holdout samples.

Cross Validation --- http://en.wikipedia.org/wiki/Cross-validation_%28statistics%29

When reading the following paper using logit regression to to predict audit firm changes, it struck me that this would've been an ideal candidate for the authors to have performed cross-validation using holdout samples.
"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J. Skinner and Suraj Srinivasan, The Accounting Review, September 2012, Vol. 87, No. 5, pp. 1737-1765.

We study events surrounding ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's Japanese affiliate and one of Japan's largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama's reputation. We use these events to provide evidence on the importance of auditors' reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama's clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument.

Jensen Comment
Rather than just use statistical inference tests on logit model Z-statistics, it struck me that in statistics journals the referees might've requested cross-validation tests on holdout samples of firms that changed auditors and firms that did not change auditors.

I do find somewhat more frequent cross-validation studies in finance, particularly in the areas of discriminant analysis in bankruptcy prediction modes.

Instances of cross-validation in accounting research journals seem to have died out in the past 20 years. There are earlier examples of cross-validation in accounting research journals. Several examples are cited below:

"A field study examination of budgetary participation and locus of control," by  Peter Brownell, The Accounting Review, October 1982 ---
http://www.jstor.org/discover/10.2307/247411?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203

"Information choice and utilization in an experiment on default prediction," Abdel-Khalik and KM El-Sheshai - Journal of Accounting Research, 1980 ---
http://www.jstor.org/discover/10.2307/2490581?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203

"Accounting ratios and the prediction of failure: Some behavioral evidence," by Robert Libby, Journal of Accounting Research, Spring 1975 ---
http://www.jstor.org/discover/10.2307/2490653?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203

There are other examples of cross-validation in the 1970s and 1980s, particularly in bankruptcy prediction.

I have trouble finding illustrations of cross-validation in the accounting research literature in more recent years. Has the interest in cross-validating waned along with interest in validating accountics research? Or am I just being careless in my search for illustrations?


"How Virtual Teams Can Outperform Traditional Teams," by Jason Sylva, Harvard Business Review Blog, October 9, 2012 --- Click Here
http://blogs.hbr.org/events/2012/10/how-virtual-teams-can-outperfo.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

People can easily list problems they believe are associated with virtual teams: They haven't met and don't really know other team members; it is hard to monitor the work of others; and dispersions can lead to big inefficiencies and degraded performance.

In this HBR webinar, Keith Ferrazzi, a foremost expert on professional relationship development and author of Never Eat Alone and Who's Got Your Back?, shares a strategy for managing virtual teams that can change how your company operates - and how you manage for years to come.

Continued in article

 

Jensen Comment
This theory should be tested in a variety of ways with respect to case analysis by teams. I've always argued that case learning is best in live classrooms, but I'm beginning to doubt myself on this one. Even Harvard and Darden should experiment with onsite versus online team assignments. One advantage of online team assignments is grading if instructors carefully track team member contributions, possibly by monitoring online performance as silent or active (avatar) trackers.

Bob Jensen's threads on case teaching and research ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases


"Mathematics and What It Means to Be Human, Part 2 Mathematics and What It Means to Be Human, Part 1 2," by Michele Osherow and Michele Osherow and Manil Suri, Chronicle of Higher Education, October 16, 2012 ---
http://chronicle.com/article/MathematicsWhat-It-Means/135114/

In May 2009, Michele Osherow, an English professor at the University of Maryland-Baltimore County and resident dramaturg at the Folger Theatre, in Washington, invited her colleague Manil Suri, a mathematician at the university, to act as mathematics consultant for the Folger's production of Tom Stoppard's Arcadia. The play explores the relationship between past and present through the characters' intellectual pursuits, poetic and mathematical.That led to a series of "show and tell" sessions explaining the mathematics behind the play both to cast members and audiences. In the fall of 2011, the two professors decided to take their collaboration to the classroom and jointly teach a freshman seminar on "Mathematics and What It Means to be Human." Here is the second of a three-part series on how the experiment played out. Part 1 is here.

Michele Osherow: While Manil astounded the students with mathematical impossibilities—the trisection of an angle assignment, Zeno's paradox—I focused on the possibilities that characterized the study of literature. Shakespeare's King Lear made it easy to note the range of readings inspired by a single work. But not every text we gave to the students was as richly complex as Lear.

In fact, convoluted might better describe the poetry we introduced next in the classroom from a collection called the Oulipo Compendium. Oulipo poetry emerged in 1960 when Raymond Queneau and François Le Lionnais gathered a group of writers and mathematicians in France to create literature guided by strict (very strict) and often bizarre constraints. For example, the S+7 (or N+7) constraint requires that every noun in a text be replaced with the seventh noun appearing after it in a dictionary. (You can find more information about Oulipo poetry here.)

I had never heard the word Oulipo (short for Ouvroir de Litterature Potentielle, or Workshop of Potential Literature) and was surprised when Manil handed me the anthology during our course planning. He qualified the suggestion by saying he had "no idea if it was any good." But I was intrigued: Literature produced through a series of strict constraints was an interesting fusion of our two fields. I wasn't sure, though, if the art was to be found in the language or in the template. I worried that to some students it wouldn't matter.

When I began reading the material I told myself it was probably more compelling in French. Mostly, I thought the Oulipo pieces were sometimes clever, but more often bizarre outcomes of linguistic games. There are some impressive names among the Oulipians (including Italo Calvino), however, and we decided to let the class have at it. I saw it as an opportunity to introduce students to postmodernism, and give them a chance to think and write creatively. Though I dreaded that they would love the stuff.

It felt strange calling the selections we examined "poetry." I couldn't pull much meaning from the works, and neither could the students, which lead to a discussion of the ways in which meaning might be determined by a reader's will. Somehow, though, the more time we spent examining Oulipian patterns, the more compelling I found the game. I liked these poets' sense of humor and their intolerance of pretentious artists and academics alike. Plus, I appreciated their name—the word potentielle seemed so compelling, and forgiving. Could we brand our class a seminaire potentiel?

Continued in article

Humanities Versus Business ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#HumanitiesVsBusiness


Zoom.us -- An Amazing Cloud-based, Video-Conferencing Posting the AAA Commons by Rick Lillie

Zoom.us -- An Amazing Cloud-based, Video-Conferencing...
blog entry posted September 1, 2012 by Rick Lillie, last edited Yesterday , tagged research, teaching, technology, technology tools
103 Views, 3 Comments
title:
Zoom.us -- An Amazing Cloud-based, Video-Conferencing Service (It's free!)
intro text:
Recently, I read about Zoom.us a new free, cloud-based, video-conferencing service.  Yesterday, three of us used zoom.us to work on a research project.  We are located throughout the U.S.  We logged into the video conference call and worked for more than an hour.  The audio and video were crystal clear.  We shared desktops to work on documents together.  Wow!  The virtual work session was very productive and enjoyable.

I use Skype to work with colleagues and to offer virtual office hours for my students.  Skype offers a free 1:1 video-conference call with desktop sharing.  To include more than two people in a Skype video call, you need to subscribe to Skype's premium service.  Skype's fee is very reasonable; however, it's difficult to beat "free."

Both Zoom.us and Skype have features that meet specific needs.  Therefore, both services are valuable to the teaching-learning experience.  The quality of the zoom.us video-conference call was exceptional.  Zoom.us versus Skype is not an either/or situation.  Using one service or the other is a judgment call regarding features that best fit the need as hand.

Getting started with zoom.us is quick and easy to do.  Their support page explanations are easy to follow.  The service works with Google and Facebook, iPad, iPhone, Windows and Mac.  When I set up zoom.us, I had to download a small file to my computer that includes the zoom.us interface.  The download was quick.  No problem.

Below is a screenshot from the support page indicating key features of the zoom.us interface screen.  Individual members participating in a video call are shown at the top of the screen.  When a member speaks, the border of the member's screen turns "green."  The speaker's screen displays in the "big screen" section of the interface window.  This process works as the conversation switches among participants.  Wow!  This is amazing and allows each speaker to be the center of attention.

Check out zoom.us.  I think you'll like this new video-conference service.

Best wishes,

Rick Lillie (
CSU San Bernardino)

Bob Jensen's threads on case teaching and research ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases

 


"One Business School Is Itself a Case Study in the Economics of Online Education," by Goldie Blumenstyk, Chronicle of Higher Education, October 1, 2012 ---
http://chronicle.com/article/Case-Study-the-Economics-of/134668/?cid=wb&utm_source=wb&utm_medium=en

Distance education has been very good for the business school at the University of Massachusetts at Amherst. More precisely, the revenue-generating online M.B.A. program has been good for the school.

The 11-year-old online program accounts for just over a quarter of the enrollment at UMass's Isenberg School of Management, yet revenues from the program cover about 40 percent of the school's $25-million annual budget. And that's after UMass Online, the in-house marketing agency, as well as a few other arms of the university have taken their cuts.

The business school's experience helps to illustrate the economics of distance education and the way one college with a marketable offering is using online education to help its bottom line.

With a total of about 4,830 undergraduate and graduate students and a faculty of 105, the Isenberg school spends an average of about $5,175 per student. The online M.B.A. program, with 1,250 students, generates about $10-million in net revenue, or about $8,000 per student. Looking at it one way, that's nearly double the per-student revenue that the school generates from all other sources of income for the rest of its enrollment, which comprises about 3,400 undergraduates, 100 full-time, on-campus M.B.A. students, and 80 doctoral candidates.

Mark A. Fuller, the dean, says the profitability of the online program has little to do with any inherent cost savings from offering courses via technology, but quite a bit to do with the high student demand for M.B.A.'s offered by a brand-name public institution in a format and on a schedule made possible by the technology.

The key, he says, is that it's a new educational product, for which the school commands a premium price. The online M.B.A. costs $750 per credit hour (although the business school gets only 60 percent of that), and students take 39 credits; the price equivalent for the 55-credit face-to-face M.B.A. is $482 per credit hour.

Aside from not having the expense of providing the classroom and keeping it heated or cooled, a college doesn't necessarily save money providing a course online rather than in a classroom. In some cases, other costs associated with an online course, for technology and student support, can equal and even exceed those savings.

But institutions do have ways to make their online classes more profitable. With no physical-space limitations, they can pack more students into the distance-education courses, so each class generates more revenue. Or they can hire part-time faculty members to teach a packaged curriculum for lower pay. They can also go cheap on the learning-management system or support services for distant students.

The Isenberg school has a single faculty for all its courses; the online-class sizes aren't any larger than the other ones; and, with few exceptions, all professors teach a mix of undergraduate and graduate courses, including the online ones. "We try to create the same experience" for all students, Mr. Fuller says. (Most students take the M.B.A. online, but they have the option of taking some of their credits at sites in Massachusetts.)

Mr. Fuller says the price is in line with or less expensive than that charged by other public universities offering online M.B.A.'s.

Under this approach, he says, the entire business school participates in the online program, and the entire school benefits.

The online business model takes into account other costs as well. Ten percent of the gross revenues goes to UMass Online, a systemwide organization that helps market online courses and provides the learning-management system that delivers them. The Amherst campus also takes a few other bites, including a charge for overhead and a payment to the provost's office for other universitywide projects.

In the end, the Isenberg school keeps 60 percent of revenue generated by the program. Still, Mr. Fuller considers it a financial boon for the school. "It opens up new markets, particularly for high-quality students with work experience who are placebound," he says. About 20 percent of the students are doctors or other health professionals, with a good number of lawyers and engineers enrolled as well—"all the people you would expect who can't quit their job" and move to Amherst, says Mr. Fuller.

Continued in article

 

Jensen Comment
There are obvious cost savings of distance education delivery that avoids the needs for land, buildings, classrooms, and dorms (although dorms generally are self-funding). However, not all distance education programs avoid such costs. For example, in the past it was common to pipe live classrooms into dorms and homes. This still entailed having classrooms.

Faculty costs may be greater or lower for distance education relative to onsite education. Very intense distance education programs with small classes and top faculty don't necessarily save on faculty costs ---
http://www.cs.trinity.edu/~rjensen/002cpe/Dunbar2002.htm

The fact of the matter is that distance education really offers a much wider range of alternatives from low cost to very high cost per student. Also tuition charged may vary with distance education. The University of Wisconsin at Milwaukee often teaches the same course online and onsite but charges higher tuition for the online version, thereby treating the online courses as cash cows.

Bob Jensen's threads on distance education cost considerations ---
http://www.trinity.edu/rjensen/distcost.htm


"How to Reduce America's Talent Deficit:  At Microsoft, we have more than 6,000 open jobs in the U.S. Some 3,400 of the positions are for engineers. Schools aren't producing graduates with the skills needed in the marketplace," by Brad Smith (executive vice president and general counsel of Microsoft) , The Wall Street Journal, October 18, 2012 ---
http://professional.wsj.com/article/SB10000872396390443675404578058163640361032.html?mg=reno64-wsj#mod=djemEditorialPage_t

Each month, when the government publishes the national jobs report, Americans pick over small movements in the headline rate of unemployment. In doing so, they largely miss a crucial aspect of the U.S. jobs crisis.

Many American companies are now creating more jobs for which they can't find qualified applicants than jobs for which they can. Thus the economy faces a paradox: Too many Americans can't find jobs, yet too many companies can't fill open positions. There are too few Americans with the necessary science, technology, engineering and math skills to meet companies' demand.

At Microsoft, MSFT -0.32% we have more than 6,000 open jobs in the U.S., a 15% increase from a year ago. Some 3,400 of these positions are for engineers, software developers and researchers (a 34% increase from last year).

Other companies face the same problem. As the national unemployment rate this summer exceeded 8% for the third consecutive year, the rate in computer-related occupations was only 3.4%. Even outside of the technology sector, nearly every firm is in some way a software company given the importance of automation. So America's skills shortage affects businesses in every industry and region.

Unfortunately the problem is likely to get even worse. According to the U.S. Bureau of Labor Statistics, the U.S. this year will create some 120,000 new jobs requiring at least a bachelor's degree in computer science. But all of our colleges and universities put together will produce only 40,000 new bachelor's degrees in computer science. The BLS forecasts that this demand for new jobs will persist every year this decade. And when one adds the high multiplier effect of engineering jobs—each one filled typically leads to five additional jobs in the economy, according to Berkeley economist Enrico Moretti—it is clear that this problem touches all of us.

If we don't increase the number of Americans with necessary skills, jobs will increasingly migrate abroad, creating even bigger challenges for our long-term competitiveness and economic growth. This is a personal crisis for young people facing an increasing opportunity divide.

America has more than 30,000 public high schools and 12,000 private ones, yet last year only 2,100 of these schools offered the advanced placement course in computer science. Four decades after Bill Gates and Steve Jobs were teenagers, we still live in a country where you have to be one of the fortunate few to take computer science in high school.

Last month Microsoft laid out a proposal for how to begin addressing the problem. It couples long-term improvements in American education with short-term, skills-focused immigration reform. Done right, immigration reforms can even help fund education improvements, ensuring that more Americans gain the skills they need.

We need a national "Race to the Future" akin to the Obama administration's Race to the Top grant program (which Mitt Romney praises). It would provide new funding and incentives for states to:

• Strengthen science, technology, engineering and math education in grade school by recruiting and training teachers and implementing the Common Core State Standards and the Next Generation Science Standards.

• Broaden access to computer science in high schools.

• Help colleges and universities raise their graduation rates.

• Expand colleges' capacity to produce more degrees in science, technology, engineering and math, with a particular focus on computer science.

On the immigration front, Congress should create a new, supplemental category with 20,000 annual visas for people with science and technology skills that are in short supply. Lawmakers should also take advantage of existing, unused green cards by allocating 20,000 for workers with these vital skills.

It would be fair and feasible to make these supplemental steps more expensive, for example by charging $10,000 for the new high-skill visas and $15,000 for the new green cards. (Large companies pay about $2,300 for each such H-1B petition today.) This would raise $5 billion over the next decade that the federal government could provide to states committed to smart reforms for cultivating important job skills.

Microsoft is convinced that these initiatives could earn bipartisan support, but lawmakers need to summon the will to act. We can't expect to build the economy of the future with only the jobs and ideas of the past.

Jensen Comment
In spite of the tone of the above article there are a number of things to keep in mind.

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


'Why Women Earn Less Than Men a Year Out of School," by Elizabeth Dwoskin, Bloomberg Business Week, October 25, 2012 ---
http://www.businessweek.com/articles/2012-10-25/why-women-earn-less-than-men-a-year-out-of-school 

Consider this scenario: A man and a woman graduate from the same university in 2009. They both major in computer science. They are 22 years old at graduation, single, and have no prior work experience. One year later, both are working full time as computer technicians in cities not too far from where they went to school.

According to a new report (PDF) by the American Association of University Women, the man would be earning a salary of $51,300. The woman’s pay would be $39,600—about 77 percent of what her male counterpart earns.

The AAUW report compared the earnings of men and women just one year out of college across various sectors of the economy. The report controlled for different factors that tend to impact pay, including hours, job type, employment sector, and college major. The report—which uses the class of 2009 as its sample cohort—found that on average, women working full time earned 82 percent of what their male peers earned. The average for all women, at all experience levels, is 77 percent, a number that has barely budged in a decade.

A good portion of the pay differential one year out of school can be explained by choice of major. Eighty-one percent of education majors are female, as are 88 percent of health-care majors. In computer science, information technology, and engineering, more than 80 percent of majors are male. Teachers and physical therapists, on average, tend to earn less than engineers. Women also choose to work in sectors of the economy where there are fewer opportunities to advance into higher-paying jobs. (A teacher might get tenure or become a school principal after working for 20 years. An engineer will move up the pay scale more quickly, and the raises will be bigger over time.)

But as the scenario above shows, even when women and men are in practically identical situations, their earnings start to diverge just one year out of school. That’s true across most sectors of the economy. One year out of college, female teachers earn 89 percent of what male teachers earn. In sales jobs, women earn 77 percent of what male peers earn. Women who major in business earn, on average, just over $38,000 the first year after graduation, while men earn just over $45,000. “About one-third of the gap cannot be explained by any of the factors commonly understood to impact earnings,” write the AAUW researchers, Catherine Hill and Christianne Corbett.

Hill and Corbett consider what could be causing that “unexplained” portion of the gender wage gap. One obvious culprit is discrimination. A less obvious culprit is salary negotiations. Women tend to be worse at negotiating throughout their careers, including their starting pay, Hill says.

Everyone knows that bias exists, but it’s basically impossible to measure—particularly when the bias is unconscious. One way to track it is to look at the number of sex discrimination complaints filed with the federal Equal Employment Opportunity Commission, which have jumped 18 percent over the past decade. There are isolated cases, as when drugmaker Novartis (NVS) was fined $250 million in 2010 for discriminating on pay, promotion, and pregnancy against female sales representatives. The authors cite a recent experiment in which male science faculty members at a research university were asked to pick a starting salary for a laboratory manager position. The scientists, who were provided with the same résumé and qualifications for each applicant, offered a higher starting salary to the male candidate.

Most women who are victims of wage discrimination are probably not even aware of it. Asking about your colleagues’ salaries is frowned upon in the workplace. Those who suspect discrimination may not want to risk it: Many corporate human-resources policies prohibit employees from poking around.

Continued in article

Jensen Comment
This article points out interesting things that our first year students should consider when mapping out a career future for themselves. The article raises questions, but it does not provide answers to some of the most systemic problems. For example, why does a kindergarten teacher earn less than an IT woman, computer programming woman, or chemical engineering woman? There are many reasons of course, but one reason might be that the kindergarten teacher gets to stay at home with her family almost 16 weeks every year. No such luck in most other careers for men or women, except for college professor women that are under heavy publish or perish pressures that can ruin those 16 weeks of personal time out of the classroom..

The article asserts that women one year out earn less than their male counterparts in the same disciplines like accounting. This to me is very disturbing. When we look for reasons, perhaps some of the major causes are still those things sociologists study more in depth. For example, women often get married or become significant others in the first year following graduation. It is extremely common for men and women to get their first jobs or change jobs in that first year. And those new jobs often entail relocating to other cities and towns. I didn't look up the studies on this, but I think it is still more common for the woman give up her job to follow career opportunities of her significant other, although it may be becoming less as women are facing more and better opportunities than they did in the 1950s. Then there is still a fact that we cannot ignore. Many women either drop out of the labor force or go into the part-time labor force when they be come a parent more than men in the same situations. The problem may be exacerbated if the male parent is earning more than the female parent in the full-time labor force. For example, suppose the husband is a chemical engineer and his wife teaches kindergarten.

It's also a chance to stress with students how to lie with statistics. For example, just because women earn less than their male counterparts in the same types of careers on average does not mean that they cannot overcome this difference in their own situations. Women can individually decide that they do not automatically sacrifice their jobs to follow a significant other/spouse. Women can elect to work overtime as much or more than their male counterparts. Women can elect not to become a mother or to insist that fathers share more of the burden of parenting.

I know it's is heresy to criticize the STEM movement. There's a concerted effort at the moment to get women more into science careers. But first-year women should carefully consider the career opportunities they will face upon graduation in various STEM disciplines. What opportunities will four-year graduates face in such disciplines as chemistry, physics, and geology? It often becomes necessary to pursue doctoral studies in science, medicine, law, business, or whatever where the jobs are more plentiful, and graduate studies can be very expensive in terms of stress, time, and money. Compare this with opportunities that do not require doctoral degrees in engineering, business, accounting, and K-12 education.

All this does not excuse subtle forms of gender or other discrimination that still exist in the U.S. We must look to nations that seem to be doing a better job like Canada or Sweden. Those of you know, however, know that I do not buy into dysfunctional social programs that discourage motivation to work overtime or discourage risk taking and stress by investing savings and working 70 hours a week in entrepreneurial ventures ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

Bob Jensen's threads on the gender gap in higher education ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Harvard


The Sad State of North American Accounting Ph.D. Programs

Accounting at a Tipping Point (Slide Show)
Former AAA President Sue Haka
April 18, 2009
http://commons.aaahq.org/files/20bbec721b/Midwest_region_meeting_slides-04-17-09.pptm

Bob Jensen's threads on the Sad State of North American Ph.D. Programs ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms


Video:  A Risky Scenario: Disruption of Group Health Insurance, by Deloitte, CFO Journal, October 12, 2012 ---
http://deloitte.wsj.com/cfo/2012/10/12/a-risky-scenario-disruption-of-group-health-insurance/?icontype=video

The Patient Protection and Affordable Care Act creates, among many other things, a new marketplace for individuals and small businesses to purchase health insurance, and for the first time, the federal government will provide subsidies to individuals to make it affordable. These and other issues are discussed in Deloitte Insights and in a paper, Power to the People? How health care reform could result in the disruption of the group health insurance industry.

The individual market starts January 1, 2014, and while no one really knows exactly what the size is going to be, it is certainly going to be much larger than it is today, which is about 14 million people. Depending on how many people decide to sign up for the new insurance products and the subsidies from the federal government, as well as how many employers might decide to drop coverage and promote their employees to go to the exchange, there could be anywhere between 25 million and 60 million people inside these individual market exchanges.

Watch Deloitte Insights to learn how the growth of the new individual market could disrupt the existing health insurance industry. Deloitte Insights speakers are:

Related Resources

 

Bob Jensen's threads on health insurance controversies ---
http://www.trinity.edu/rjensen/Health.htm


Professors For and Against Audit Firm Rotation

A few surprises of professors coming out in favor of audit firm rotation
"PCAOB Hears Evidence Favoring Auditor Rotation," by Tammy Whitehouse, Compliance Week, October 18, 2012 ---
http://www.complianceweek.com/pcaob-hears-evidence-favoring-auditor-rotation/article/264288/

Audit research experts have presented the Public Company Accounting Oversight Board with evidence they say demonstrates auditor rotation leads to better audit quality.

During its Houston roundtable to discuss whether mandatory rotation would improve audit quality, Scott Whisenant, an associate professor of accounting at the University of Kansas, reviewed a variety of academic studies for the board that suggest rotation would produce benefits the board is seeking. He noted much of the protest around mandatory rotation has focused on costs, but few studies have focused on possible benefits because rotation is practiced in only a handful of countries.

The results of a 2000 study suggest, he said, that long-term auditor client relationships significantly increase the likelihood of an unqualified opinion, which raises questions about audit quality. The exception, however, is the last year of the relationship, when the likelihood of an unqualified opinion drops. “In this final year, the auditors finally drop the hammer down on clients,” Whisenant said, knowing they are about to surrender the job to a successor firm that will no doubt review their work.

Whisenant said his own more recent research with another coauthor suggests that in countries where rotation is practiced there's evidence of less earnings management, less managing to meet earnings targets, and more timely recognition of losses. The study concludes the quality of audit markets improves after the enactment of rotation, he says, and evidence suggests that concerns about any disruption or difficulty of transition to a new audit firm are more than offset by benefits. “Depending on the statistics we investigated, the benefit to audit quality of adopting rotation rules appears to be larger by a factor of at least two, and in some cases more, than the cost of audit quality erosion at the forced rotation of audit engagements,” he said.

Stephen Zeff, accounting professor at Rice University, told the PCAOB auditors have become more commercial and less professional over the past several decades, driven there by an education process that preaches memorization of standards more than critical thinking and an allowance for auditors to develop business relationships with their clients. Karen Nelson, another accounting professor from Rice, said her review of academic research suggests auditors working under the present model are more likely to issue a report biased toward management than under practically any other arrangement  that would involve mandates on rotation or retention.

PCAOB Chairman James Doty praised the “extraordinary array of views” presented by the academics. “This is where we we wanted to get to with the concept release,” he said, where the board could begin to digest empirical evidence that would suggest what regulatory regime is most likely to produce objective, professional, skeptical audits. The webcast archive of the Houston roundtable will be available on the PCAOB website.

 

Jensen Comment
A few of my AECM friends have repeatedly argued for audit firm rotation, including Tom Selling and David Albrecht. Now it turns out that some other professors mentioned above are coming out of the woodwork in favor of such rotation as well.

It would seem that the PCAOB wants audit firm rotation so badly that, in spite of the overwhelmingly negative comments received in various invitations to comment, the Board just keeps coming back for more support in favor of rotation..

I'm on record as being against it for various important reasons. One is cost since there are so many costs of gearing up for a first-time audit, especially a large multinational client with offices and factories spread about the world. I can't imagine the cost of gearing up for a first time audit of GM, GE, Exxon-Mobil, etc. Second, the new costs will be added to pressures on audit firms by the PCAOB to conduct more costly audits, including much more detailed testing ---
http://pcaobus.org/Inspections/Reports/Pages/default.aspx

It's naive to assume that clients will remain passive and simply cough up the millions or tens of millions of dollars added in rotation-based fees billed by their auditors. Instead, get ready for intense lobbying in Washington DC to overturn any PCOAB audit firm rotation mandate and more intense lobbying to overturn SarBox legislation that created the PCAOB in the first place. I think that attention given to the audit firm rotation issue may merely be a pretense by the PCAOB in an effort to scare audit firms and raise added concerns about audit independence. Does the PCAOB really want to go toe-to-toe with Corporate America as well as companies headquartered around the world who listed on the NYSE?

Equally important in my mind is what rotation will do to the quality and skills of auditors on the job. First there is the inevitable relocation that will come from shifting from a huge client headquartered in one city to another big client headquartered thousands of miles away. Even with medium-sized clients in smaller cities there will be inevitable stresses of having to uproot families and move. For example, after giving up an audit of USAA in San Antonio hundreds of auditors may have to move to Dallas, Houston, NYC, Washington DC or who knows where.

I'm not alone. A raft of other highly respected professors claim the following ---
http://pcaobus.org/Rules/Rulemaking/Docket037/041_Karim_Jamal.pdf

We understand and affirm the importance of auditor independence, objectivity and scepticism for the proper functioning of the U.S. capital market and are supportive of the PCAOB’s desire to enhance the actual and perceived independence of auditors. However, academic research on the topic suggests that adopting a system of audit firm rotation will not help the U.S. economy achieve these worthy goals. Instead, such a change may impair auditor independence, weaken audit expertise and undermine corporate governance.

We organize our response below in terms of impact on objectivity (especially opinion shopping), and development of expertise. We note that many of the views expressed in our letter are influenced by a detailed research study conducted by Fiolleau et al. (2010) on how companies currently choose auditors. A copy of this study is publicly available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535074. Of course, any such study is limited in its generalizability. In particular, Fiolleau et al. (2010) examines cases where audit committee’s have voluntarily chosen to seek competing bids from auditors. However, we think the studies’ observations are suggestive of what is likely to happen on an economy-wide basis if PCAOB were to mandate periodic rotation of audit firms. Some of our other comments are based on other research evidence, which we cite.

Selection and appointment of auditors by their clients is a major source of concerns about real and perceived independence and objectivity of the auditors. Since the PCAOB seems to be unwilling to deal with this root cause of the independence problem at this time, other reforms are being sought. No audit can be perfect, and the quality of audit is determined not only by independence but also by many other factors—such as the quality of accounting standards, accounting education, auditor expertise, audit committees, corporate governance, auditor discipline, liability, and a host of other institutional features of the audit environment. The focus of PCAOB should be to provide the best audit quality, and not to fixate on any subset of such determinants of audit quality. Our reading of existing research leads us to conclude that, in spite of its superficial appeal, audit firm rotation is a bad policy choice on all relevant dimensions. We explain our reasons below.

Rotation and Auditor Objectivity
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The most appealing and common sense intuition underlying auditor rotation is that it promotes objectivity by refreshing the personnel (or firm) who are not tied down by judgments, compromises, and personal relationships of the past. A new auditor brings a fresh set of eyes, and has the opportunity to raise issues that have been overlooked or settled in the past. Research experiments show that new auditors are better able to identify issues, alter their judgments, and bring issues up for discussion when they are not personally committed to prior decisions (see article by Tan on p. 113-35 in Spring 1995 issue of Journal of Accounting Research).

Our first observation on this rationale for firm rotation is that familiarity arises between individuals (e.g., the audit partner and the CFO) not firms, so most of the benefit from taking a “fresh look” can be obtained more simply by rotating the partner and or other senior personnel on the audit team (e.g., audit manager). Since the policy of partner rotation is already in place, audit firm rotation is unlikely to add any significant marginal benefit, especially when the considerable costs of firm rotation are taken into account. The GAO’s (2003) study on mandatory audit firm rotation estimated increased initial audit costs of more than 20% (some studies in Europe suggest 40%) and this did not include costs incurred by the audit committee and management to conduct the tendering process.

Our second observation from the research study by Fiolleau et al. (2010) is that although the auditors are supposedly appointed by the audit committee of the client company, management plays a significant role in the process, and may even dominate it for all practical purposes. This means that a mandate for audit firm rotation will force the incumbent and potential auditors into a “beauty contest” every few years. The market power of the audit firms is so much weaker than the power of their clients that, at the time of bidding for engagement, the former compete among themselves to convince the management / audit committee of their potential clients of their commitment, service, and responsiveness. Each hiring exercise becomes an opportunity for opinion shopping by clients, lowballing of audit fees and demonstrations of loyalty and relationship-building by the auditors. Many of the auditor behaviours that the rotation proposal is intended to discourage get exacerbated when the audit firm enters into a beauty contest (bidding war) to get an audit engagement.

A third observation from the Fiolleau et al., (2010) study is that, with only four large international firms, the audit market is highly concentrated. Most large clients already receive one service or another from every one of the four firms. If one of these accounting firms audits the client, the other three often provide it a host of advisory services in tax, valuations etc. This perpetual engagement and pre-existing relationships of most large companies with all four audit firms implies that there is only limited opportunity for mandatory rotation to bring about a “fresh look.”A large corporation would have to deliberately avoid business engagement with one Big 4 firm, to have at least one firm who would meet current independence rules and have the expertise needed to conduct the audit. The PCAOB proposal is likely to yield little by way of benefits and incur the additional harm associated with increased frequency of “beauty contests.”

Rotation and Auditor Expertise
There is compelling evidence that audit firm rotation will impair auditor expertise. PCAOB’s concept paper indicates awareness that the auditor is most vulnerable to missing fraud in a new engagement (see also St Pierre and Anderson on p 242-63 in Vol 59(2), 1984 issue of The Accounting Review). A variety of studies (e.g., Myers et al., on p 779-799 in Vol 78, July 2003 issue of The Accounting Review) show that the quality of accounting numbers improves with increases in auditor tenure. The most compelling force disciplining accounting accruals is auditor industry expertise (see Craswell et al., on p 297-322 in December 1995 issue of Journal of Accounting and Economics). While academic evidence is seldom conclusive, the weight of evidence suggests that a policy of mandatory auditor rotation undermines expertise formation and will impair audit quality. The thrust of Generally Accepted Accounting Principles (GAAP) is increasingly oriented to having management communicate to investors how they operate the business. Auditors’ understanding of the substance of client business would be undermined if they are rotated out every few years. The Fiolleau et al (2010) study reveals that even the four largest audit firm’s lack depth of expertise in serving large corporate clients across all industries outside the main business centres such as New York, Toronto, London, and Tokyo. For clients with headquarters located in smaller cities, finding industry specialists in the local offices can be a significant challenge.

Improving Audit Quality
Audit quality is not just an attribute of the auditor alone. The nature of Generally Accepted Accounting Principles (GAAP) is also a major determinant of audit quality. Over the recent decades, the Financial Accounting Standards Board (FASB) has set standards that de-emphasize verifiability in favour of the mark-to-market valuation, no matter how illiquid the market may be. It has also adopted a practice of writing detailed standards in its attempt to close loopholes but ends up creating new ones. Exploitation of the Repo 105 rules by financial service firms during the recent crisis is a good example. This type of standards place auditors in a very difficult position vis-à-vis corporate management. The shift in GAAP towards the so-called “fair value accounting” is a major factor undermining audit quality.

Importance of Audit Resignation as a Signal
When financial press reports that company X audited by firm Y for the past twenty years has changed its auditor, investors get a valuable and informative warning signal that draws close scrutiny by the investment and regulatory communities. PCAOB’s mandatory rotation proposal will eliminate this signal by making auditor changes a matter of routine, deserving little attention or scrutiny, and thus undermine the quality of audit.

Transfer of Audit Resources from Verification to Marketing
The PCAOB proposal, by eliminating all long-term client-auditor relationships, will induce audit firms to devote even greater resources to marketing themselves to potential clients. These resources can only come from cutting back on the substantive work of verification during the course of their audits or by raising audit fees. Individuals in the audit firm will find their presentation and marketing skills becoming more valuable relative to their technical accounting and auditing skills.

Confusion and Unintended Consequences from Too Many Initiatives
Auditors now face a very complex economic and social environment. There are economic incentives to be responsive to management but these have to be balanced with incentives emanating from audit committees, concurring review partners, national office reviews, litigation, GAAP and industry practice, and PCAOB reviews. In some countries two audit firms jointly conduct an audit making it difficult for any single audit firm to have consistency in its audits across countries as complex co-ordination is required across audit firms. Fraud cases like Parmalat are thought to have avoided detection due to lack of continuity of the auditor and presence of multiple audit firms. Adding more agents and incentives into this mix serves to create a very complex incentive structure, interpersonal friction and potential for unintended consequences as accountability and authority get distributed across a variety of agents. This increases moral hazard and the potential for confusion. Adding one more firm rotation requirement on top is not just a free good that improves the system. Too much complexity makes the audit process more vulnerable to systemic failure.

Conclusion
Audit firm rotation is a bad policy prescription especially in an environment where auditors are appointed by board audit committees who often are significantly influenced by management. The potential benefits of rotation will be exceeded by the harm associated with the “beauty contest” that takes place to appoint a new auditor. Rotation actually impairs audit quality by promoting more frequent opinion shopping and lowballing. Rotation also impairs audit expertise, eliminates a valuable signal of auditor change, and shifts even more resources from substantive audit work to marketing of audit services.

Most of the benefits of rotation can be realized by rotating the engagement partners. Because of limited depth of expertise, we suggest rotating engagement partners every ten years. Given the limited independence of most audit committees from the management, PCAOB’s goal of improving audit quality through firm rotation is beyond its reach. Pressing the FASB/IASB to pay greater attention to verifiability of financial reports would be a more effective avenue to improve audit quality.

Signed,

Tracey C. Ball, FCA ICD.D
Executive Vice President & CFO Canadian Western Bank Group (TSX:CWB)

Rozina Kassam,CA
CFO, C
OMMERCIAL SOLUTIONS INC. (TSX:CSA)

Jonathan Glover, PhD
Professor of Accounting, Carnegie Mellon University

Karim Jamal, FCA, PhD
Chartered Accountants Distinguished Chair Professor, University of Alberta

Ken Kouri FCA
Retired Partner Kouri Berezan Heinrichs, CA

D. Brad Paterson, CMA
CFO, Wave Front Technology Solutions (TSX (V): WEE)

Suresh Radhakrishnan, PhD
Professor of Accounting, University of Texas at Dallas

Shyam Sunder, PhD
James L. Frank Professor of Accounting, Economics and Finance, Yale University

 

The very best prospects for becoming accounting majors may be turned off by the gypsy-living prospects of becoming career CPA auditors. The very best seniors and managers and even partners on a particular audit may take up other job offers rather than uproot spouses and children to relocate as Sundowners ---
http://en.wikipedia.org/wiki/The_Sundowners

There are many, many more very responsible concerns raised in the overwhelmingly negative responses received by the PCAOB --
http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx

In particular read Response 35 (James L. Fuehrmeyer, Jr.) and Response 29 (Dennis R. Beresford) at
http://pcaobus.org/Rules/Rulemaking/Pages/Docket037Comments.aspx


Stephen Zeff, accounting professor at Rice University, told the PCAOB auditors have become more commercial and less professional over the past several decades, driven there by an education process that preaches memorization of standards more than critical thinking and an allowance for auditors to develop business relationships with their clients.
Tammy Whitehouse, Compliance Week, October 18, 2012 ---
http://www.complianceweek.com/pcaob-hears-evidence-favoring-auditor-rotation/article/264288/

"Bad Grades Are Rising for Auditors," by Floyd Norris, The New York Times, August 23, 2012 ---
http://www.nytimes.com/2012/08/24/business/bad-grades-rising-at-audit-firms.html?pagewanted=all&_r=0

Are audits getting worse? Or are the inspectors getting pickier?

Those would seem to be two possible explanations of a trend that looks very bad.

This week the Public Company Accounting Oversight Board reported that in recent months it had reviewed audits of 23 brokerage firms. Not a single one of them was deemed acceptable.

The names of the firms doing the audits were not disclosed, and many of them were very small firms, as opposed to the major firms that audit most public companies.

But the trends at the big firms are not promising either. They are subject to annual reviews by the board, but until 2009 those inspections did not disclose the proportion of audits reviewed that were deemed to be defective. Among the Big Four — Deloitte & Touche, PricewaterhouseCoopers, KPMG and Ernst & Young — the board found something wrong in nearly one in six audits it reviewed that year. A year later, the proportion had doubled to one in three. The 2011 inspections have yet to be released, so we don’t know if things got better or worse.

This is not strictly a Big Four problem. The next four firms, all much smaller but auditing a substantial number of public companies, scored a little worse.

Some of the reaction to the report on brokerage audits was harsh.

“If any other businesses, such as manufacturing or software companies, had such high failure rates in their products, they would go out of business,” said Lynn E. Turner, a former partner in Coopers & Lybrand, a predecessor of PricewaterhouseCoopers, and a former chief accountant for the Securities and Exchange Commission. He then referred to the Yugo, a car from the former Yugoslavia that gained a reputation for very poor quality, and that soon vanished from showrooms.

In fact, the comparison to car manufacturers helps to show why it is so hard for the market to sort out whether audits are done well. The quality of a car will become clear after it is driven for a while, and consumers will notice.

But if an auditor does no work at all and just signs on the dotted line before pocketing the fee, that fact may never become public. If the company’s books were actually pristine, so that a good audit would have uncovered no problems, nothing is likely to surface to demonstrate how bad the audit was, unless someone inspects the work that was done.

Given that reality, it seems amazing that the auditing industry was able to escape any real oversight until 2002, when the Sarbanes-Oxley Act established the accounting oversight board. Until then, the only reviews of auditing were “peer reviews,” administered by the American Institute of Certified Public Accountants, in which one firm checked up on another. Few problems were ever found.

The board began work in 2003, and fairly quickly found problems. In the first year of reviews, it noticed that one company had overstated its current assets, making it look better. It then checked other companies and found that the error was widespread, involving customers of each of the Big Four. A round of restatements followed.

The 2010 reports — the most recent available and the ones with the high level of deficient audits — concerned audits of 2009 financial statements. Inspectors focused on financial companies, and zeroed in on the willingness of auditors to accept valuations of complex securities without determining whether the valuation methods used were reasonable.

That year, 2009, was also the year that politicians put heavy pressure on the Financial Accounting Standards Board, which sets accounting rules, to relax rules on marking securities to market value. At a public hearing in March, Robert H. Herz, then the chairman of the standards board, was excoriated by members of the House of Representatives capital markets subcommittee for issuing rules that made the banks look worse than they deserved to look. FASB (pronounced FASS-bee) soon relaxed the rules, and auditors were expected to assure compliance with those newly eased rules.

Some accountants privately speculate that some of the lapses found by oversight board auditors could have been influenced by the pressure not to make banks, already in trouble, look worse than was necessary.

In its inspections of the audits of 23 brokerage firms, many of the auditing lapses found by the board dealt with the failure of the auditing firms to do enough work, at least in the inspector’s view, to justify a conclusion that the numbers were correct. In 15 of the 23 audits cited in this week’s report, “firms did not perform sufficient procedures to test the occurrence, accuracy and completeness of revenue.” In six of the nine audits where the auditor had to deal with how much securities were worth, “firms did not perform sufficient procedures to test the valuation.”

That is different from saying that the auditor reached the wrong conclusion.

In the 2010 inspection of PricewaterhouseCoopers, auditors were found to have missed significant errors in how one company accounted for derivative securities it owned. The board inspectors cited no other errors in financial statements, but in 27 of the PWC audits — out of 71 reviewed — the auditors failed to perform work that the board thought should have been done.

Those 71 audits were not chosen at random.

“Our approach is risk-based on two different bases,” Jay Hanson, the only board member with extensive experience in auditing public companies, said in an interview. He said the board sought out the riskiest clients at each firm, and then paid attention to what it knew about different offices of the firm. It might even choose to look at work done by a specific partner whose previous work had been deemed subpar.

“We are going into areas where we think there could be problems,” he said. Presumably a review of audits chosen randomly would find fewer problems.

The Big Four firm that has gotten the most negative reviews is Deloitte & Touche. Under the law, the accounting board does not disclose negative conclusions regarding a firm’s quality control systems unless the firm fails to address those problems within a year. Last fall, Deloitte became the only major firm that has had such a review released.

This summer, Deloitte gained another unfortunate distinction. The system of peer reviews still functions, with reviewers looking at audits of private companies that are not subject to review by the oversight board. Deloitte’s review, by Ernst & Young, concluded that the firm had not done enough work on some audits, and said that after the reviewers pointed out problems, Deloitte did more work and a client company had to restate its financial statements.

Deloitte received a grade of “pass with deficiency.” That had never before happened to a major firm.

Deloitte declined to discuss that review with me, but provided a statement saying, “Deloitte is proud of the significant investments and hard work we have put into raising the bar on audit quality and we are confident those efforts are having a positive impact. Audit quality has been and continues to be our No. 1 priority.”

It is hard to imagine any firm saying otherwise, which makes such assertions less than fully persuasive.

Continued in article


“We inherited a set of expectations that, at the moment, are actually dooming us to failure,” said Debora Spar, president of Barnard College, in a wide-ranging, lively talk on modern feminism.

"Feminism without perfection:  Reviewing gains at kickoff for 50th year of women at HBS," Harvard edu, October 15, 2012 ---
http://news.harvard.edu/gazette/story/2012/10/feminism-without-perfection/

Jensen Hope
Please don't shoot the messenger.


"Forbes Magazine: Lying With Numbers," by Francine McKenna, re:TheAuditors, October 18, 2012 ---
http://retheauditors.com/2012/10/18/forbes-magazine-lying-with-numbers/

I have a new feature article for Forbes magazine, “Lying With Numbers”, on newsstands October 22.

The article is also posted on my blog at Forbes.com today.

The SEC is busy chasing Ponzi schemers and foreign bribers. But bogus accounting remains a bigger danger to the markets. Is another Enron brewing?
http://www.forbes.com/sites/francinemckenna/2012/10/18/is-the-secs-ponzi-crusade-enabling-companies-to-cook-the-books-enron-style/

Enron. Qwest. Adelphia.

Sunbeam. WorldCom. HealthSouth. A decade ago investors knew what those companies had in common: top executives who cooked the books. After their phony accounting was exposed, most went to jail–and hundreds of billions of dollars of shareholder wealth evaporated.

The Securities & Exchange Commission remains quite busy. In fiscal 2011 the agency brought a record 735 enforcement actions. But those looking to see the next Jeff Skilling or Richard Scrushy frog-marched in front of television cameras will be sorely disappointed. Only 89 of those actions targeted fraudulent or misleading accounting and disclosures by public companies, the fewest, by far, in a decade.

So what happened? Call it the Bernie Madoff effect. Embarrassed that it missed the Ponzi King’s $65 billion scheme, the SEC reorganized its enforcement division, eliminating an accounting-fraud task force and adding new units to pursue crooked investment advisors and asset managers, market manipulations and violations of the Foreign Corrupt Practices Act. Since then Pfizer, Oracle, Aon, Johnson & Johnson and Tyson Foods have all paid fines to settle foreign-payoff charges.

That’s all fine and good. But remember this: Foreign-payola charges (absent alleged accounting abuses) have minimal effect on a company’s stock. Accounting fraud risks massive market disruption. Groupon, Zynga and Green Mountain Coffee Roasters are all down at least 75% in the past year, amid doubts about their accounting and prospects. And those examples don’t even carry allegations of illegality.

Is a stretched SEC neglecting accounting fraud? In a statement to FORBES, SEC Enforcement Director Robert Khuzami argued that the task force was no longer needed because accounting expertise exists throughout the agency, and the number and severity of earnings restatements (a flag for possible accounting fraud) has declined dramatically since the mid-2000s. He added: “In a world of limited resources, we must prioritize our efforts. … The reorganization helped to focus us on where the fraud is and not where the fraud isn’t, while allowing us to remain fully capable of addressing cases of accounting and disclosure fraud.”

Accounting experts agree that the Sarbanes-Oxley Act of 2002, Congress’ response to Enron, has reduced abuses. But they worry the SEC is risking those gains. “The SEC enforcement of Sarbanes-Oxley has been minimal,” says Jack Ciesielski, a CPA who sells accounting alerts to stock analysts. “Sarbanes-Oxley may have bought us some peace for our time, but without vigilance through long-term enforcement, it can’t last.”

Anyway, it’s not like all numbers games have ceased. Public company CFOs, responding to a survey last year by Duke and Emory business profs, estimated that 18% of companies manipulate their earnings, by an average of 10%, in any given year–to influence stock prices, hit earnings benchmarks and secure executive bonuses. Most of this finagling goes undetected.

Sarbox aimed to limit accounting shenanigans by requiring companies to set up internal accounting controls and CEOs and CFOs to personally “certify” financial statements, risking civil and even criminal penalties if they knowingly signed off on bogus numbers.

In addition, public auditors were required to flag any “material weaknesses” in a company’s internal controls, presumably providing an early warning to companies, investors and the SEC.

How’s that working? A study by two University of Connecticut accounting professors found auditors have waved the weakness flag in advance of a small and declining share of earnings restatements–just 25% in 2008 and 14% in 2009, the last year studied. There was no auditor warning before Lehman Brothers’ 2008 collapse, even though a bankruptcy examiner later concluded it used improper accounting gimmicks to dress up its balance sheet. And no warning before Citigroup lowballed its subprime mortgage exposure in 2007. (It paid a $75 million SEC fine.)

Continued in article

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

 


"Cheap Solar Panels Aren't Enough to Make Solar Installers Profitable:  SolarCity's IPO filings show it needs to grow and lower costs," by Kevin Bullis, MIT's Technology Review, October 8, 2012 --- Click Here
http://www.technologyreview.com/view/429533/cheap-solar-panels-arent-enough-to-make-solar/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20121009

Jensen Comment
This article might be useful in cost, managerial, and environmental accounting courses as well as courses in financial analysis of the IPO filings.


Teaching Case from The Wall Street Journal Accounting Weekly Review on October 12, 2012

Caps on Tax Deductions Find Favor in Both Parties
by: John D. McKinnon
Oct 05, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Alternative Minimum Tax, Capital Gains, Income Taxes, Tax Law, Tax Policy, Taxes

SUMMARY: Both the Republican presidential nominee and the incumbent president are considering proposing limits to individual income tax deductions--for different reasons.

CLASSROOM APPLICATION: The article may be used to introduce political reasons for the differences between personal income tax deductions, personal income tax credits, and limits to income tax deductions.

QUESTIONS: 
1. (Advanced) Define the term income tax deduction and differentiate it from a personal income tax credit. Identify some items that qualify as personal income tax deductions and some that qualify as personal income tax credits.

2. (Introductory) Based on the article, explain the reasons why each presidential candidate is considering the idea of limits on personal income tax deductions. What would a candidate do to act on plans developed in this area of taxation?

3. (Advanced) How is establishing a limit on personal income-tax deductions different from eliminating certain tax deductions such as mortgage interest and charitable donations? Based on discussion in the article, how is this limit consistent with Democratic party principles?

4. (Advanced) Access the online interactive graphic entitled "Obama and Romney on the Issues" and click on Taxes on the left-hand column. How has the health care law known as "ObamaCare" included items related to personal taxation?

5. (Advanced) Again, access the "Obama and Romney on the Issues" graphic. What is the Alternative Minimum Tax? Explain what Mr. Romney proposes about the AMT. How is that proposal consistent with Republican perspectives?

6. (Advanced) What is special about the capital gains tax? How is the Romney proposal, as described in the interactive graphic, consistent with Republican principles?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Caps on Tax Deductions Find Favor in Both Parties," by John D. McKinnon, The Wall Street Journal, October 5, 2012 ---
http://professional.wsj.com/article/SB10000872396390443493304578036932069468920.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

The idea of limiting personal income-tax deductions is gaining traction in both parties as a way to raise more federal revenue without raising tax rates or scrapping popular breaks.

Republicans consider this a way to prevent rate cuts they seek from widening the budget deficit, while Democrats see the extra revenue as a means to shrink the deficit or fund programs.

The approach is also appealing because it would make more income subject to taxation—which boosts revenue—while reducing opposition from taxpayers who want to preserve specific deductions, such as those for mortgage interest, charitable giving or local taxes.

But capping deductions would also inevitably stir up opposition among groups worried that doing so would diminish incentives in the current system, and could have widely disparate effects on taxpayers in different regions.

As with any change in the tax code, the impact would depend on the details.

Republican presidential candidate Mitt Romney joined the chorus supporting the idea this week when he floated the prospect of a dollar cap on the total deductions a household could claim on its tax return. He didn't offer a specific proposal, but suggested options ranging from $17,000 to $50,000.

A $17,000 cap could generate $1.5 trillion or more of extra tax revenue over a decade, according to William Gale, a tax economist at the Brookings Institution, a Washington think tank populated largely by Democrats. Mr. Gale was an author of a recent report that questioned whether Mr. Romney could implement his proposed 20% rate cuts without shifting the overall tax burden to the middle class. On Thursday, he termed Mr. Romney's idea for capping deductions as "a step in the right direction."

In Wednesday's debate, Mr. Romney described a cap on deductions as one way to offset the cost of his proposed rate cut so it doesn't worsen the deficit.

President Barack Obama charged again at the event that Mr. Romney hasn't been specific enough about which deductions he would limit. "He's been asked over a hundred times how you would close those deductions and loopholes, and he hasn't been able to identify them," he said.

Since taking office, Mr. Obama has supported his own limit on the value of itemized deductions for higher-income households, defined as couples earning more than $250,000. His plan would reduce the value of all deductions for such households to 28% from the current 35% maximum. For example, a deduction of $1 million currently would be worth $350,000 in tax savings to someone in the 35% top bracket, all things being equal. Under Mr. Obama's proposal, the same taxpayer would save $280,000.

The president's proposal has expanded in scope in his recent budgets to similarly curb other tax breaks, such as exemptions for interest on bonds issued by state and local governments, contributions to retirement plans and employer-provided health care. His latest version would raise about $584 billion over a decade.

Opponents say the move would damp incentives for such worthwhile activities as charitable giving and home buying.

A Romney campaign aide said Mr. Romney would work with Congress "to preserve access to tax preferences for middle-income folks, and charitable [deductions] in particular."

Defenders of Mr. Obama's plan say it builds on a long-standing concern among some tax experts that deductions unfairly give a greater benefit to people who are subject to higher tax rates.

For months, lawmakers of both parties have been exploring ways to limit deductions and other breaks. They haven't made specific public proposals, but the debate is likely to heat up rapidly next year when Congress turns to overhauling the tax system.

Some recent blue-ribbon proposals for an overhaul also have embraced across-the-board limits on tax breaks. The 2010 deficit-reduction commission led by Erskine Bowles and Alan Simpson suggested a plan to eliminate itemized deductions altogether, replacing them with a system of tax credits and other breaks.

Continued in article

Jensen Comment
There are two ways to limit deductions in arriving at adjusted gross income. One that's already in place is to set a minimum threshold percentage of gross income beneath which almost no deductions are allowed. This is already in place both for nearly all AGI deductions plus additional minimum thresholds on selected items like health expenses. Most taxpayers cannot deduct health expenses unless disaster hits. Additionally, deductions that were once in place such as interest on car loans are no longer allowed.

Setting much more serious minimum or maximum thresholds becomes a political football in Washington DC. Lobbies for such groups as charities, real estate firms, and medical providers will fight tooth and nail against both higher minimum and lower maximum thresholds. I question whether our salivating Congress will resist the lobbying handouts.

Rather than percentage thresholds, there could be actual dollar amount thresholds. This is one way of clobbering higher income taxpayers without hurting taxpayers with more modest income amounts. But since higher income taxpayers are the backbone of many charities, churches, and markets for second (vacation) homes, the lobbies will still fight tooth and nail against absolute-amount as well as percentage thresholds.

When it comes to tinkering with tax exempt interest from municipal, school, county, state, and hospital bonds, taxation of this interest on Federal tax returns will force those non-profits to compete with corporations issuing safer bonds. Most of those tax-exempt bonds have much greater financial risk, as evidenced by the credit rating declines in California, Illinois, and elsewhere. This could really clobber the cost of capital for municipal, school, county, state, and hospital non-profit entities. In particular, this is a double taxation in that homeowners and renters will both pay greatly increased property taxes for public financing plus pay tax on any formerly tax-exempt bonds in their savings portfolios. I can't imagine the Federal government forcing this upon towns, schools, counties, states, hospitals, and retirement savings.

The fair thing to do would be to have the Feds pay the added cost of capital for towns, schools, states, and hospitals. But now is not a good time to have the Federal government add trillions to its own deficits.

It's one thing to plead for tax reform. It's quite another to drill down to specifics that have enormous side effects and externalities.


Teaching Case from The Wall Street Journal Weekly Accounting Review on October 19, 2012

Deferral and U.S. Corporate Taxes in a Global Context
by: Frederick C. Van Bennekom and Colin S. Jackson
Oct 17, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Corporate Tax, International Taxation, Tax, Tax Havens, Tax Law, Tax Policy, Taxation

SUMMARY: These two letters to the editor comment on the related letter from Paul Volcker on October 8 in which Mr. Volcker "...suggests we consider the relative U.S. corporate tax rate versus other countries, rather than the U.S. rate in isolation." Both Mr. Volcker's letter and the two from October 17 clearly discuss the tax issues.

CLASSROOM APPLICATION: These letters to the editor are useful to bring an international perspective to taxation and to highlight one point of debate in the current presidential election.

QUESTIONS: 
1. (Introductory) President Obama has proposed returning our corporate tax rate to 35%, the level in the 1990s which was a period of prosperity in the U.S. What is different today about that very same tax rate of 35%?

2. (Introductory) For what tax rate does Mr. Volcker advocate in his October 8 letter to the WSJ's editors?

3. (Introductory) What other tax items does Mr. Volcker advocate changing? What is his reasoning for those changes?

4. (Advanced) What does it mean to "repatriate earnings"? What current circumstances encourage companies not to repatriate foreign earnings?

5. (Advanced) What is a territorial tax levy? What economic effects might come from such a system being implemented in the U.S.?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Paul Volcker's Views on the Taxation of U.S. Companies
by Paul Volcker
Oct 08, 2012
Page: A16

Obama vs. Volcker, Et Al.
by WSJ Opinion Page Editors
Oct 04, 2012
Online Exclusive

 

"Deferral and U.S. Corporate Taxes in a Global Context," by: Frederick C. Van Bennekom and Colin S. Jackson, The Wall Street Journal, October 17, 2012 ---
http://professional.wsj.com/article/SB10000872396390444897304578046910506560992.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

Your editorial "Obama vs. Volcker, Et AI." (Oct. 4) is a needed start to an honest discussion of corporate tax policy.Three items are in play: the taxing of overseas profits earned by U.S. firms, the deferral of that tax and the overall corporate tax rate.

The president says our tax policy subsidizes companies that move jobs overseas. Since he is never clear about this, we have to infer that he's discussing the impact of the tax deferral, claiming that this encourages companies to invest overseas thus leading to outsourcing. The deferral discourages U.S.-based companies from investing its earnings in the U.S.

So should we eliminate the deferral? As the only major country that taxes overseas profits, we put U.S. firms at an immediate and significant cost disadvantage to non-U.S. firms. Moving to a territorial tax system, as the president's Bowles-Simpson commission recommended, would eliminate the issue and give U.S. firms a level playing field.

But the U.S. also has the highest corporate tax rate of any major nation. Since it is levied on profits earned in the U.S. by foreign firms, it also discourages their investment, i.e., outsourcing, in the U.S., which would create jobs in the U.S.

High tax rates are the currency of politicians. The higher the rates, the more they can trade deductions (loopholes) to favored groups for political favors. This is true both for personal and corporate tax rates, and it corrupts market-based rational decision making while corrupting politicians.

Maybe the president will enlighten us about the basis for his claim rather than just throwing out the hype line, so that he and Mr. Romney can have an honest discussion on the issue of corporate taxes.

Frederick C. Van Bennekom
Bolton, Mass.

Paul Volcker (Letters, Oct. 8) suggests we consider the relative U.S. corporate tax rate versus other countries, rather than the U.S. rate in isolation. The disincentive to repatriate foreign profits back to the U.S. only exists when a company is repatriating profits from a country with a lower tax rate than ours.

Everything seemed to be just fine in the 1990s when the corporate tax rate was also 35%, so why lower the rates now? In 1994 the Irish corporate tax rate was 40%, so there was no penalty to repatriate Irish profits back home.

The higher relative U.S. rate has two penalties on investment in the U.S. Earnings here are taxed at a higher rate than earnings in Ireland, and earnings made in Ireland and then repatriated back to the U.S. must pay a 22.5% penalty. Of course, this penalty is rarely paid since those profits are never repatriated. So the U.S. loses out on the investment, the tax revenue and the jobs which have gone to Ireland. This double penalty didn't exist in the 1990s.

Continued in article


Started by Two Economics Professors from George Mason University --- Click Here
Marginal Revolution University Launches, Bringing Free Courses in Economics to the Web --- Click Here
http://www.openculture.com/2012/10/marginal_revolution_university_launches_bringing_free_courses_in_economics_to_the_web.html

A great year for open education got even better with the launch of Marginal Revolution University. Founded by Tyler Cowen and Alex Tabarrok, two econ professors at George Mason University, MRUniversity promises to deliver free, interactive courses in the economics space. And they’re getting started with a course on Development Economics, a subdiscipline that explores why some countries grow rich and others remain poor. In short, issues that have real meaning for everyday people worldwide.

In an announcement on the Marginal Revolution blog last month, Cowen outlined a few of the principles guiding the project:

1. The product is free, and we offer more material in less time.

2. Most of our videos are short, so you can view and listen between tasks, rather than needing to schedule time for them.  The average video is five minutes, twenty-eight seconds long.  When needed, more videos are used to explain complex topics.

3. No talking heads and no long, boring lectures.  We have tried to reconceptualize every aspect of the educational experience to be friendly to the on-line world.

4. It is low bandwidth and mobile-friendly.  No ads.

5. We offer tests and quizzes.

6. We have plans to subtitle the videos in major languages.  Our reach will be global, and in doing so we are building upon the global emphasis of our home institution, George Mason University.

7. We invite users to submit content.

8. It is a flexible learning module.  It is not a “MOOC” per se, although it can be used to create a MOOC, namely a massive, open on-line course.

9. It is designed to grow rapidly and flexibly, absorbing new content in modular fashion — note the beehive structure to our logo.  But we are starting with plenty of material.

10. We are pleased to announce that our first course will begin on October 1.

Bookmark MRUniversity and look out for its curriculum to expand. In the meantime, you can find more courses in the Economics section of our big list of 530 Free Courses Online.

Marginal Revolution University Launches, Bringing Free Courses in Economics to the Web is a post from: Open Culture. You can follow Open Culture on Facebook, Twitter, Google Plus and by Email.

 

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

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


"First University System (University of Texas) Joins edX," by Tanya Roscorla, Center for Digital Education, October 15, 2012 ---
http://www.centerdigitaled.com/news/First-University-System-Joins-edX.html

With this news, the University of Texas System becomes the first university system to throw in its hat with edX, a not-for-profit enterprise started by Harvard and MIT in May 2012. By partnering with edX, the University of Texas' nine campuses and six health institutions will develop massively open online courses (MOOCs). These courses allow anyone around the world to participate, draw large numbers of students and do not charge participants to take the course.

"Our partnership with edX will help us provide that high-quality education, make it more efficient, make it more accessible and make us more affordable," said Gene Powell, Board of Regents chairman.

The university system decided to offer massively open online courses to provide maximum options to students, said system Chancellor Francisco G. Cigarroa. Current students and alumni — as well as anyone else who wants to — will be able to take courses from edX institutions. These institutions include MIT, Harvard, UC Berkeley and the University of Texas System. While they won't get credit for the course, they will get a grade and a certificate of completion from that campus if they finish.

"We wanted to join the world of MOOCs, and we felt that if we joined with edX, we'd leapfrog into a great orbit of excellence," Cigarroa said.

But this isn't something the university system jumped on overnight. Nineteen months ago, the Board of Regents created two task forces to improve the system's excellence, access and affordability of higher education. One of these task forces looked into blended and online learning. As a result of its research, blended and online learning made it into the chancellor's framework, and the Institute for Transformational Learning was created.

"Higher education is at a crossroads," said Steve Mintz, executive director of the Institute for Transformational Learning in the University of Texas System. "But by leveraging new technologies, we can enhance student learning, we can accelerate graduation, and we can hold down the cost of higher ed."

EdX, Coursera and Udacity all provide platforms for these types of courses. But the University of Texas System chose edX for a number of reasons, Cigarroa said:

Existing online course partnerships with other organizations including Academic Partnerships can continue as well. And this will be more of a partner relationship with edX rather than a vendor relationship.

The chancellor stressed that the massively open online courses will be of high quality and will be offered along with existing blended and online learning options the system already has for its students. In fact, some of the massively open online courses can be offered in a blended format on campus. In these classes, students would watch recorded lectures and participate in the forums, but also have in-class discussions and one-on-one time with professors.

Bob Jensen's threads on MOOCs, MITx, and EDX ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI


Steve Keen in Australia --- http://en.wikipedia.org/wiki/Steve_Keen

They're Great!!!
Steve Keen: Behavioral Finance Lectures 2012  --- Click Here
http://www.valueinvestingworld.com/2012/09/steve-keen-behavioral-finance-lectures.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ValueInvestingWorld+%28Value+Investing+World%29&utm_content=Google+Reader

I’ve just uploaded the first 8 lectures in my Behavioral Finance class for 2012. The first few lectures are very similar to last year’s, but the content changes substantially by about lecture 5 when I start to focus more on Schumpeter’s approach to endogenous money ---
http://www.debtdeflation.com/blogs/2012/09/23/behavioral-finance-lectures/

Related book: Debunking Economics

Jensen Comment
These are quite good slide show lectures.

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

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

Bob Jensen's threads on tutorials, lectures, videos and course materials from prestigious universities ---
http://www.debtdeflation.com/blogs/2012/09/23/behavioral-finance-lectures/

Bob Jensen's threads on tutorials, lectures, videos and course materials from prestigious universities ---
http://www.debtdeflation.com/blogs/2012/09/23/behavioral-finance-lectures/

 


NPR Video on Pacioli:  The Accountant Who Changed The World ---
http://www.npr.org/blogs/money/2012/10/04/162296423/the-accountant-who-changed-the-world

Jensen Comment
It's never been clear how much the mathematician Pacioli changed the accounting world since his brand of double entry accounting was here long before he was born and long after he died. He did reduce it to s set of equations, but did this change the world?
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

"A Brief History of Double Entry Book-keeping (10 Episodes) ," BBC Radio ---
http://www.bbc.co.uk/programmes/b00r401p
Thanks to Len Steenkamp for the heads up

Jolyon Jenkins investigates how accountants shaped the modern world. They sit in boardrooms, audit schools, make government policy and pull the plug on failing companies. And most of us have our performance measured. The history of accounting and book-keeping is largely the history of civilisation.

Jolyon asks how this came about and traces the religious roots of some accounting practices.

 


"RESTORING CRIMINAL LIABILITY FOR FINANCIAL FRAUD," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants, October 1, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/779 

The 2008 financial crisis was brought about by bank managers who finagled various transactions, primarily in the mortgage markets or the market for their securitizations, and obfuscated with accounting cover-ups and opaque disclosures.  Our governments have prosecuted very few of the criminals and have meted out fines at a fraction of the amounts that managers fraudulently.  Furthermore, as Jonathan Weil recently pointed out in his article titled “When Will the SEC Finally Go After Auditors?”, our governments have not brought a single action against an auditor for their involvement in the financial crisis.  What has happened to our institutions?  Is justice dead in America?  Does the current administration care, or is it just incompetent?

An interesting paper came our way recently that addresses these topics.  “Restoring Criminal Liability for Financial Fraud in the United States: A Moral and Legal Imperative” written by Catharyn Baird, CEO of EthicsGame; Don Mayer, University of Denver; and Anita Cava, University of Miami.  They presented the paper at the 2012 Academy of Legal Studies in Business conference and won the “Virginia Maurer Best Ethics Paper” award.  One may obtain a copy of the paper by emailing Kathi Quinn at kquinn@ethicsgame.com.

“Too big to fail” has become a mantra for our times, but frankly the phrase does not capture the essence of this story.  Matt Taibbi has referred to the era as “too crooked to fail,” and this seems more apropos.  Even better in our minds is the slogan “too in bed with government to fail.”  That, at least, provides an explanation for the impotence of our so-called watchdogs.  As Baird, Mayer, and Cava suggest, “Government may have gradually become the chief enabler of ‘too big to fail’ as well as ‘too big to jail.’”

This injustice has to end.  “Some high-level criminal prosecutions for fraud are essential to restore balance in the financial system, a balance that would come from a healthy fear of individual indictment rather than fines paid by the firm [i.e., shareholders].”

The authors of this paper explore the deficiency of various assumptions and theories, such as that of self-interest.  They point to Alan Greenspan’s confession that he relied on the self-interests of corporations to protect themselves and their shareholders.  We disagree with this point.  The real errors by Greenspan are his reification of the firm, thinking it can maximize utility, and that maximization of shareholder wealth is an application of the self-interest principle.  The truth is that CEOs and CFOs are maximizing their own utility and they care about shareholder wealth only to the extent that it coincides with their interests.  Greenspan should have known that managers do not maximize the wealth of shareholders.

We do however appreciate the authors’ discussion about ethical “blind spots,” applying a concept of bounded ethicality.  Business decision-making often must be quick, preventing a deeper analysis of ethical issues.  Individuals often put their ethical principles aside, complying with superiors or trying to win promotions or bonuses based on successful business transactions.  And individuals seldom pay attention to the conflicts of interest that frequently intersect their lives.  The authors illustrate these blind spots in their analysis of the crimes at Ameriquest, Countrywide, Lehman Brothers, Goldman Sachs, and Wells Fargo.

Sam Antar, former CFO at Crazy Eddie, would add the blind spots of auditors.  He says that many young accountants tell him about reprimands received from their superiors for actually “auditing”—even when they are just reading questions from a firm checklist.  They are not allowed to demonstrate any skepticism of their “client.”

Baird, Mayer, and Cava mention that too much faith has been put into self-regulation.  They point to reliance on the efficient market hypothesis instead of government oversight, the repeal of the Glass-Steagall Act, and the inertia that impedes the regulation of derivatives.  We would add that in our experience self-regulation always drifts into no regulation.  We need look no further than the accounting and auditing profession for a current example.

The best part of the paper is the analysis of “why current laws [and regulations] are either inadequate or under-enforced.”  Baird, Mayer, and Cava posit nine possible reasons for this state of affairs:

Continued in article

Bob Jensen's threads on how white collar crime pays even if you get caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays


Surprise Victory of Business Over Government
"Canadian "Supreme Court backs Glaxo in transfer-pricing dispute," by Jeff Gray, Globe and Mail, October 18, 2012 ---
http://www.theglobeandmail.com/globe-investor/supreme-court-backs-glaxo-in-transfer-pricing-dispute/article4620345/

The Supreme Court of Canada has sided with GlaxoSmithKline PLC in a lengthy tax fight the drug giant has been waging with the federal government, in a ruling that some say expands the ability of multinationals to use a technique known as “transfer pricing” to shift profits outside of Canada’s borders.

The court, weighing in for the first time on transfer pricing, handed a defeat to the Canada Revenue Agency in its battle with Glaxo over the way multinationals account for the profits they report to Canada’s taxman and those they send to other, often lower-tax, jurisdictions.

Queen’s University law professor Art Cockfield said Thursday’s ruling could embolden companies that use transfer pricing: “They can take a more aggressive stance, and create these sorts of structures that shift profits to countries like tax havens.”

But Prof. Cockfield and other tax law experts also acknowledge that the decision largely reinforces practices already used by multinationals, while beating back a CRA attempt to much more narrowly interpret the rules.

“This does not give taxpayers carte blanche, at all,” said Claire Kennedy, a tax lawyer with Bennett Jones LLP in Toronto. “... It’s not as though it’s creating a huge opening in terms of transfer pricing.”

Multinationals with local subsidiaries that sell their imported products in Canada must set a price, for tax purposes, that the subsidiary pays its parent for those goods. If the multinational wants to move more of its profits out of Canada, it can increase this “transfer price” that it charges its own subsidiary.

But according to tax laws in Canada and other countries, the prices subsidiaries pay must be equal to the “reasonable” cost an arm’s-length business would pay. At the centre of the Glaxo fight was just how this should be defined.

From 1990 to 1993, the Canadian subsidiary of British-based Glaxo Group Ltd. told Ottawa it had paid a Swiss affiliate $1,512 and $1,651 a kilogram for the ingredient ranitidine, which it packaged as the stomach ulcer drug Zantac.

That price was five times the cost paid by generic producers for the same drug. This difference attracted Ottawa’s attention, and it reassessed the company for $51-million in unpaid taxes, starting a complex and lengthy legal battle. Glaxo beat back the reassessment at the Federal Court of Appeal, and the government took it before the Supreme Court in January.

Glaxo argued the price made business sense, since it was dictated by a licensing agreement that gave its Canadian subsidiary access to all of its other drugs and the right to sell brand-name Zantac for a much higher price. The local subsidiary was still making, and declaring, a 60-per-cent profit margin, the company said.

But lawyers for the Canadian government argued that tax laws mean only the comparable generic price should be taken into account.

In a unanimous decision, the Supreme Court disagreed, saying other factors, such as licensing agreements, should be considered when determining a reasonable arm’s- length price. But it declined Glaxo’s request to actually decide whether the price its Canadian subsidiary paid was fair, referring that question back to the Tax Court of Canada.

Continued in article


"Minority Accounting Students Awarded Scholarships," by Deanna C. White, AICPA, October 29, 2012 ---
http://www.accountingweb.com/article/minority-accounting-students-awarded-scholarships/220121?source=education

For today's college students, struggling under the crushing weight of ever-escalating tuition and staggering student loan debt, a scholarship is nothing short of a godsend.
 
But Ronald Dukes, one of the 2012-2013 recipients of the American Institute of Certified Public Accountants (AICPA) Scholarship for Minority Accounting Students, said the significance of the scholarship transcends merely offsetting college costs. It confirms that he has chosen the right career path, drives him to have a positive influence on the profession, and motivates him to serve as a role model for future generations of CPAs.
 
"To me, the value of the AICPA's minority scholarship doesn't lie solely in meeting a student's financial needs, but also in the many intangibles which outshine any other scholarship I've received," said Dukes, who is pursuing his Master of Accountancy at Villanova University in Pennsylvania. "This scholarship has provided me with inspiration and passion to impact a positive change in the accounting profession and to set an example for my peers to follow."
 
Dukes, who is also the recipient of the AICPA's Robert Half International Scholarship, was one of just eighty-four accounting students from across the United States awarded the 2012-2013 AICPA Scholarship for Minority Accounting Students by the AICPA Foundation this October.
 
This year, the program received 286 eligible applications. The recipients, who were selected through a rigorous process designed to ensure students possessed first-rate academic and leadership, included students in both undergraduate and graduate level accounting programs who maintained a minimum 3.3 grade point average. To qualify, all students must plan on pursuing the CPA licensure.
 
A complete list of the 2012-2013 AICPA minority scholarship recipients is available on the AICPA website.
 
States with the most scholarship recipients this year are Texas with ten, Florida with seven, and tied are New York and North Carolina with 6. 
 
Scholarship funding is provided by the AICPA Foundation with contributions from the Accounting Education Foundation of the Texas Society of CPAs, the New Jersey Society of CPAs, and Robert Half International.
 
In total, the AICPA Foundation awarded $254,500 to the scholars. The majority of students received individual awards of $3,000 to fund expenses related to their pursuit of an accounting degree. Thirteen students were selected as recipients of designated, special awards (see sidebar).
 
The application deadline for the 2013-2014 AICPA minority scholarship program is April 1, 2013. 
 
The AICPA Scholarship for Minority Accounting Students program began in 1969 with the aim to increase the ethnic diversity within the CPA profession. Since the program's inception, the AICPA has awarded approximately $14.6 million. 
 
Recently, the AICPA announced the creation of the National Commission on Diversity & Inclusion to serve as the champion of diversity within the accounting profession and increase the retention and advancement of underrepresented minorities to better reflect the clients and communities CPAs serve.
 
To learn more about the AICPA Scholarship for Minority Accounting Students and other scholarship opportunities, visit www.aicpa.org/scholarships.

See one of my heroes is champion of the KPMG Foundation's Bernie Milano
"KPMG Foundation Celebrates 15th Year of Minority Accounting Doctoral Program," SmartPros, August 1, 2009 --- http://accounting.smartpros.com/x67298.xml 

The KPMG Foundation is marking the 15th anniversary of its Minority Accounting Doctoral Scholarship program by announcing today it has awarded a total of $390,000 in scholarships to 39 minority doctoral scholars for the 2009 - 2010 academic year.

Of the awards, eight are to new recipients scheduled to begin their accounting doctoral program this fall, three are to new recipients who have already begun programs, and 28 are renewals of scholarships previously awarded.

Each of the scholarships is valued at $10,000 and renewable annually for a total of five years. The Foundation established the scholarship program in 1994 as part of its ongoing efforts to increase the number of minority students and professors in business schools – and has since awarded $8.7 million to minorities pursuing doctorate degrees.

“We’re proud of the achievements of our program over the last 15 years, and we have seen a healthy increase in the number of minority faculty members at our nation’s business schools, although more work needs to be done,” said Bernard J. Milano, President of the KPMG Foundation and The PhD Project. “That’s why we continue to award new scholarships each year and we remain committed to our mission.”

Together with The PhD Project, a related program whose mission is to increase the diversity of business school faculty, the Minority Accounting Doctoral Scholarship program has helped to more than triple the number of minority business professors in the United States since The PhD Project first began in 1994. Today, there are 985 minority business school professors teaching in the United States. Nearly 400 minority students are currently enrolled in business doctoral programs.

The Minority Accounting Doctoral Scholarship recipients come from a wide variety of cultures and backgrounds. This year’s new recipients are:

Continued in article

Bob Jensen's threads on careers in accounting ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers


I respectfully decline to answer based on my constitutional rights.
Edith O'Brien taking the Fifth

MF Global
"A Year Later, All Eyes Still on 'Edie'
," by Aaron Lucchettl, Julie Steinberg, and Mike Spector, The Wall Street Journal, October 30, 2012 ---
http://professional.wsj.com/article/SB10001424052970204789304578088892963139264.html?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno-wsj

Who broke the law by raiding customer accounts at MF Global Holdings MFGLQ 0.00% Ltd.?

Investigators seem no closer to the answer than they were when the New York brokerage firm filed for bankruptcy exactly a year ago Wednesday, owing thousands of farmers and ranchers, hedge funds and other investors an estimated $1.6 billion. Their money was supposed to be stashed safely at MF Global, but company officials used much of it for margin calls and other obligations.

The last, best hope for a breakthrough in the probe is Edith O'Brien, the former assistant treasurer at MF Global. Working in the company's Chicago office, she was the go-to person for emergency money transfers as MF Global flailed for its life.

"She really kept the place running," says Matthew Gopin, MF Global's former head of internal audit for North America, referring to her everyday duties approving money transfers.

One transfer in particular has drawn outsize attention.

Ms. O'Brien hasn't budged from her refusal to cooperate with investigators unless she is shielded from prosecution, and in March she cited her constitutional right against self-incrimination in refusing to testify before a congressional panel.

Earlier this year, her lawyers told the government what she would testify to in exchange for an immunity deal. Those talks didn't go anywhere, and prosecutors subsequently signaled that she isn't a target of the criminal probe, according to a person involved in the case. She still could face civil charges from regulators.

It isn't clear if Ms. O'Brien knew that the transfers she approved in MF Global's final days violated U.S. rules on the use of customer funds or deepened a deficit in customer accounts. In some cases, Ms. O'Brien has told friends, she relied on calculations prepared by other MF Global employees that turned out to be wrong. In others, employees bungled transactions that she approved.

Friends say she has been worried about becoming the "fall guy" in the probe, especially since former MF Global Chief Executive Jon S. Corzine told lawmakers in December that she assured him the $175 million transfer was proper.

In private conversations, Ms. O'Brien has bristled at and disagreed with Mr. Corzine's comments. "They may have thought they had a chump, but they've got the wrong chump," she told several friends while drinking Chardonnay at a bar in Chicago, according to someone who was there.

One email from Ms. O'Brien reviewed by the Journal shows her informing Mr. Corzine of an MF Global account the money came from, as opposed to providing explicit assurances that the transfer was proper. The email didn't note, however, that the funds originated from a customer account.

Mr. Corzine declined to comment. Bankruptcy lawyers winding down the company have since found money to cover most of the estimated $1.6 billion customers couldn't get.

Continued in article

MF Global Was Another Repo Scandal
"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 subsequently decided that most repos are to be booked as secured borrowings rather than repo sales.

"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/

Bob Jensen's threads on the MF Global scandal ---
http://www.trinity.edu/rjensen/Fraud001.htm

Search on the phrase "MF Global"

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


"The Tax Import of the FASB/IASB Proposal on Lease Accounting," by George Mundstock, SSRN, September 11, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2144935 

In August of 2010, FASB and the IASB jointly proposed completely new financial accounting rules for simple leases. Basically, the proposal would treat all leases as involving both the use of the leased property and a financing of that use. One consequence of this treatment is more accelerated recognition of rent revenue and expense than currently. This article reviews the proposal, considers how, as financial accounting, the proposal would impact U.S. Federal, state, and local tax-related matters, and then explores whether the proposal should be adopted as U.S. income tax law. The proposal would improve U.S. tax law, including providing the foundation for better rules for sourcing the income of multinational businesses. Even if FASB and IASB do not implement their proposal, its approach would provide the basis for valuable tax reform.

Jensen Comment
Reactions to the Dual Model Lease Proposal have been so overwhelmingly negative, it's not yet what will new lease accounting rules will emerge. Personally, I don't think anything will be resolved until standard setters invent a better way for dealing with short-term lease renewal/cancellation options.

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


Tuck School of Business (Dartmouth College) Admission Videos ---
http://www.beatthegmat.com/mba/school/tuck-school-of-business-dartmouth-college
Scroll down for the videos


Top 100 MBA Programs (beauty is in the eye of the beholder)

This is some good news for Chicago and New Hampshire
"2012 Full time MBA ranking," The Economist, 2012 ---
http://www.economist.com/whichmba/full-time-mba-ranking
Alternate link --- http://www.economist.com/whichmba

1 Chicago, University of - Booth School of Business United States
2 Dartmouth College - Tuck School of Business United States
3 Virginia, University of - Darden Graduate School of Business Administration United States
4 Harvard Business School United States
5 Columbia Business School United States
6 California at Berkeley, University of - Haas School of Business United States
7 Massachusetts Institute of Technology – MIT Sloan School of Management United States
8 Stanford Graduate School of Business United States
9 IESE Business School - University of Navarra Spain
10 IMD - International Institute for Management Development Switzerland
11 New York University – Leonard N Stern School of Business United States
12 London Business School United Kingdom
13 Pennsylvania, University of – Wharton School United States
14 HEC School of Management, Paris France
15 Cornell University – Samuel Curtis Johnson Graduate School of Management United States
16 York University – Schulich School of Business Canada
17 Carnegie Mellon University – The Tepper School of Business United States
18 ESADE Business School Spain
19 INSEAD France
20 Northwestern University – Kellogg School of Management United States
21 Emory University – Goizueta Business School United States
22 IE Business School Spain
23 UCLA Anderson School of Management United States
24 Michigan, University of – Stephen M. Ross School of Business United States
25 Bath, University of – School of Management United Kingdom
26 Yale School of Management United States
27 Queensland, University of – Business School Australia
28 Texas at Austin, University of – McCombs School of Business United States
29 Duke University – Fuqua School of Business United States
30 City University – Cass Business School United Kingdom
31 Hult International Business School United States
32 Vanderbilt University – Owen Graduate School of Management United States
33 Ohio State University – Fisher College of Business United States
34 Washington, University of – Foster School of Business United States
35 Georgetown University – Robert Emmett McDonough School of Business United States
36 Mannheim Business School Germany
37 Cranfield School of Management United Kingdom
38 Melbourne Business School – University of Melbourne Australia
39 Rice University – Jesse H Jones Graduate School of Business United States
40 North Carolina at Chapel Hill, University of – Kenan-Flagler Business School United States
41 Hong Kong, University of – Faculty of Business and Economics Hong Kong
42 Henley Business School United Kingdom
43 Southern California, University of – Marshall School of Business United States
44 Indiana University – Kelley School of Business United States
45 Cambridge, University of – Judge Business School United Kingdom
46 Curtin Graduate School of Business Australia
47 Washington University in St Louis – Olin Business School United States
48 Oxford, University of – Saïd Business School United Kingdom
49 Notre Dame, University of – Mendoza College of Business United States
50 Wake Forest University Schools of Business United States
51 Wisconsin School of Business United States
52 EDHEC Business School France
53 Maryland, University of – Robert H Smith School of Business United States
54 Strathclyde, University of – Business School United Kingdom
55 Boston University School of Management United States
56 Indian Institute of Management – Ahmedabad India
57 EMLYON France
58 Minnesota, University of – Carlson School of Management United States
59 Arizona State University – W. P. Carey School of Business United States
60 Warwick Business School United Kingdom
61 Macquarie Graduate School of Management Australia
62 Hong Kong University of Science and Technology – School of Business and Management Hong Kong
63 University College Dublin – Michael Smurfit Graduate School of Business Ireland
64 Rotterdam School of Management, Erasmus University Netherlands
65 Iowa, University of – Henry B Tippie School of Management United States
66 Vlerick Leuven Gent Management School Belgium
67 California at Davis, University of-Graduate School of Management United States
68 Pennsylvania State University – Smeal College of Business United States
69 Grenoble Graduate School of Business France
70 SDA Bocconi School of Management Italy
71 Texas Christian University – Neeley School of Business United States
72 Nanyang Business School – Nanyang Technological University Singapore
73 George Washington University – School of Business United States
74 Durham Business School United Kingdom
75 McGill University – Desautels Faculty of Management Canada
76 Audencia Nantes School of Management France
77 Temple University – Fox School of Business United States
78 Concordia University – John Molson School of Business Canada
79 International University of Japan – Graduate School of International Management  
80 Lancaster University Management School United Kingdom
81 University of St. Gallen Switzerland
82 Southern Methodist University – Cox School of Business United States
83 Yonsei University School of Business Republic of Korea
84 Birmingham, University of – Birmingham Business School United Kingdom
85 China Europe International Business School (CEIBS) China
86 Nottingham University Business School United Kingdom
87 WHU – Otto Beisheim School of Management Germany
88 Aston Business School United Kingdom
89 Rochester, University of – William E Simon Graduate School of Business United States
90 Purdue University – Krannert Graduate School of Management United States
91 British Columbia, University of – Sauder School of Business Canada
92 National University of Singapore – The NUS Business School Singapore
93 HEC Montréal Canada
94 Chinese University of Hong Kong Hong Kong
95 Calgary, University of – Haskayne School of Business Canada
96 Copenhagen Business School Denmark
97 International University of Monaco  
98 University of Georgia – Terry College of Business United States
99 Pittsburgh, University of – Katz Graduate School of Business United States
100 Case Western Reserve University – Weatherhead School of Management United States

You can read the comments to this article at
http://www.economist.com/whichmba/which-mba-top-25#comments

One comment reads that The Economist's rankings are more accurate because The Economist magazine is more "trustworthy" that other media sources that rank MBA programs. This comment seems to overlook the fact that different media sources use different types of people to do the rankings. There are different strokes for different folks even if the ranking outcomes were trustworthy from other sources. Even if the ranking sources are trustworthy, there are huge sources of possible (honest) error.

And the rankings can be quite misleading for prospects who do not do their own in-depth homework relative to their needs and wants. For example, most MBA programs are no longer good sources for preparing students for careers in CPA firms. There are some exceptions, and students wanting accounting careers might be badly mislead by any of the MBA ranking sources below.
Who are the people who do the rankings?

The U.S. News rankings are influenced very heavy by research reputations of business graduate schools. The WSJ rankings are influenced heavily by "best buys" in the sense that the top ranked MBA program may be more of a diamond in the rough where you don't have to pay quite as much to get an outstanding graduate. The Business Week rankings are influenced heavily by the varying quality and effort of alumni initiatives and organizations. It would seem that current students might be the most variable group of evaluators and the most difficult to predict year-to-year. The criterion that probably is very important with students is placement in their most desired career tracks.

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


Top Global Distance Education EMBA Programs
"EMBA ranking 2012," Financial Times, October 2012
http://rankings.ft.com/businessschoolrankings/emba-ranking-2012

 
Rank 2012
3 year average
School name
Programme name
Salary ($)
Salary growth
  1 1 Kellogg / Hong Kong UST Business School Kellogg-HKUST EMBA 465,774 42
  2 2 Columbia / London Business SchoolFeatured business school EMBA-Global Americas and Europe 265,596 89
  3 3 Trium: HEC Paris / LSE / New York University: Stern Trium Global EMBA 307,992 52
  4 - Tsinghua University / Insead Tsinghua-INSEAD EMBA 287,630 57
  5 - UCLA: Anderson / National University of Singapore UCLA-NUS EMBA 250,940 77
  6 5 InseadFeatured business school Insead Global EMBA 212,586 57
  7 12 Ceibs Global EMBA 274,546 74
  8 8 University of Pennsylvania: Wharton Wharton MBA for Executives 229,086 60
  9 14 Washington University: Olin Olin-Fudan EMBA 255,945 60
  10 7 University of Chicago: Booth EMBA 230,855 60
  11 - Sun Yat-sen Business School SYSBS EMBA 280,374 69
  12 - Korea University Business School EMBA 268,324 95
  12 9 IE Business SchoolFeatured business school EMBA 186,324 138
  14 18 Iese Business School GEMBA 215,027 58
  15 10 London Business SchoolFeatured business school EMBA 180,070 68
  16 10 Duke University: Fuqua Duke MBA - Global Executive 250,913 43
  17 14 CUHK Business SchoolFeatured business school EMBA 309,340 45
  18 16 Kellogg / WHU BeisheimFeatured business school Kellogg-WHU EMBA 173,684 69
  19 - Georgetown University / Esade Business School GEMBA 247,110 42
  20 16 IMD IMD EMBA 221,809 60
  21 22 ESCP EuropeFeatured business school European EMBA 153,168 77
  21 23 Arizona State University: Carey Carey / SNAI EMBA 237,672 74
  23 20 Northwestern University: Kellogg Kellogg EMBA 239,134 52
  24 24 OneMBA: CUHK/RSM/UNC/FGV São Paulo/EGADE OneMBA 184,612 54
  24 31 Warwick Business School Warwick EMBA 149,331 98
  26 24 National University of Singapore Business School Asia-Pacific EMBA 236,511 62
  27 - University of Southern California: Marshall USC-SJTU GEMBA 256,758 49
  27 20 Kellogg / York University: Schulich Kellogg-Schulich EMBA 170,828 53
  29 29 University of Toronto: Rotman Rotman One-Year EMBA 150,066 54
  30 23 New York University: Stern NYU Stern EMBA 192,874 48
  31 29 Imperial College Business SchoolFeatured business school EMBA 140,590 75
  32 24 City University: CassFeatured business school EMBA 153,329 71
  32 24 Columbia Business School EMBA 201,004 49
  34 32 University of Michigan: Ross EMBA 216,099 47
  35 - Fudan University School of Management Fudan EMBA 197,476 92
  35 28 Cornell University: Johnson Cornell EMBA 224,129 53
  35 39 Georgetown University: McDonough EMBA 190,462 67
  38 33 University of Oxford: SaïdFeatured business school EMBA 182,709 56
  39 38 UCLA: Anderson EMBA 195,783 46
  40 - ESMT - European School of Management and TechnologyFeatured business school EMBA 144,015 58
  41 35 Rotterdam School of Management, Erasmus University EMBA 138,674 62
  41 35 Essec / Mannheim Essec & Mannheim EMBA 141,500 56
  43 36 University of Western Ontario: Ivey Ivey EMBA 190,702 51
  44 - University of California at Irvine: Merage EMBA 154,612 62
  45 48 Cornell University: Johnson/Queen's School of Business Cornell-Queen's EMBA 163,559 58
  46 - Kozminski University EMBA 152,930 62
  46 42 Rice University: Jones Rice MBA for Executives 173,565 53
  48 64 Euromed Management Euromed MBA Part Time 149,393 82
  49 44 Emory University: Goizueta Weekend EMBA 163,979 61
  50 - Antwerp Management School EMBA 175,930 53
  51 - WU (Vienna University of Economics and Business)/University of Minnesota: Carlson EMBA (Global) 157,396 50
  51 45 University of Maryland: Smith Smith EMBA 176,914 43
  53 - Henley Business School Henley EMBA 148,557 65
  54 - University of Hong Kong / Fudan University School of Management HKU-Fudan IMBA 113,508 96
  54 50 University of Texas at Austin: McCombs Texas EMBA 142,770 44
  56 64 University of St Gallen EMBA HSG 136,325 51
  56 70 Ohio State University: Fisher Fisher EMBA 177,478 40
  58 58 Texas A & M University: Mays Texas A&M EMBA 182,448 51
  59 60 Vanderbilt University: Owen Vanderbilt EMBA 154,223 58
  60 - EMLyon Business School EMBA 110,467 49
  60 - University of Pretoria, Gibs Modular and Part-time MBA 190,596 58
  62 49 University of Pittsburgh: Katz EMBA Worldwide 168,087 33
  63 - University of Illinois at Urbana-Champaign EMBA at Illinois 139,507 46
  63 53 Temple University: Fox Fox EMBA 143,806 47
  63 68 Georgia State University: Robinson EMBA 166,922 59
  66 - Boston University School of Management Boston University EMBA 176,707 37
  66 - SDA BocconiFeatured business school EMBA 142,636 52
  66 49 National Taiwan University College of Management NTU EMBA 204,860 39
  66 69 University of Texas at Dallas: Jindal EMBA 141,130 41
  70 66 Yonsei University School of Business Corporate MBA 149,664 62
  70 71 Rutgers Business School Rutgers EMBA 166,381 42
  70 79 University of Washington: Foster Foster EMBA 157,327 35
  73 - Fordham University Graduate School of Business EMBA 161,547 52
  73 66 Villanova School of Business Villanova EMBA 169,401 46
  75 55 Cranfield School of ManagementFeatured business school EMBA 132,934 53
  76 84 University of Miami School of Business Administration University of Miami EMBA 153,073 39
  77 - Centrum Católica Global MBA 185,161 50
  78 69 Koç University Graduate School of Business EMBA 131,450 54
  79 76 SMU: Cox SMU Cox EMBA 166,155 43
  80 - University of Minnesota: Carlson Carlson EMBA 142,556 36
  80 - University of Rochester: Simon EMBA 132,067 47
  80 76 Tulane University: Freeman EMBA 161,009 46
  83 66 Aalto University Aalto University EMBA 133,563 49
  83 77 Thunderbird School of Global Management EMBA 158,773 34
  85 69 FIA - Fundação Instituto de Administração International EMBA 194,408 23
  86 - Tilburg University, TiasNimbas EMBA 98,560 51
  86 60 Tongji University/ENPC Shanghai International MBA (SIMBA) 131,897 74
  88 - Georgia Institute of Technology: Scheller EMBA 143,494 37
  88 66 University College Dublin: Smurfit EMBA 115,445 53
  90 77 Vlerick Business School EMBA 115,204 54
  91 68 University at Buffalo, The State University of New York EMBA 140,545 51
  92 72 Copenhagen Business School EMBA 119,169 38
  92 82 Queen's School of Business Queen's EMBA 127,542 39
  94 73 Ashridge EMBA 145,731 58
  95 77 University of Georgia: Terry Terry EMBA 146,122 42
  96 - HEC Lausanne EMBA in Management & Corporate Finance 104,096 34
  96 92 Baylor University: Hankamer Baylor University EMBA 126,410 57
  96 97 University of Denver: Daniels Daniels EMBA 163,450 44
  99 73 University of Alberta/University of Calgary: Haskayne Alberta / Haskayne EMBA 130,094 41
  100 - University of Zurich Zurich EMBA 121,552 18
 
 

 

Hi Amy,

I do not know the answer to your specific question about how to submit a US News survey instrument.


The link you provided is a scam promotional for for-profit universities ---
http://www.businessdegreeonline.com/programs/macc-degrees/


A better link is the U.S. News information page about online programs ---
http://www.usnews.com/education/online-education 


US News has been trying to rank online programs for some time but encountered resistance from virtually all for-profit universities that refused to cooperate (probably in fear of a low ranking in terms of cost and quality).


US news did come out with an "Honor Roll" of online programs in general that does not rank the winners nor does it include any of the for-profit alternatives. There is still only an "Honor Roll" instead of overall rankings of the winners ---
http://www.usnews.com/education/online-education


For Business Undergraduate Programs the rankings are at
http://www.usnews.com/education/online-education/mba/faculty-credentials-training-rankings
Note the single line with a drop down box of criteria selections.

Interestingly, US News avoids some of the systemic aggregation problems that I've discussed in other contexts (aggregations of net earnings components and aggregations of roll forward PPE disclosures under IFRS). The result is an "Honor Roll" that ranks the underlying components but does not aggregate across all components ---
http://www.usnews.com/education/online-education/mba/honor-roll-rankings
I was not familiar with Brandman University, but a search of its Website revealed that it is a non-profit private university in the Chapman University system.

Bob Jensen's threads on systemic problems of aggregation ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

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

The US News online graduate school page is at
http://grad-schools.usnews.rankingsandreviews.com/best-graduate-schools
This has a link to business graduate studies.
Note the following links:

More About Business Schools

 

The bottom line is that For-Profit universities are excluded from the U.S. News tables mostly because those For-Profits refuse to supply the requested data needed to be rated among the Non-Profit universities. The huge problem for For-Profit universities is that refusal to be evaluated further hurts graduates of those universities in the job market.

Note that the respected magazine called The Economist from the U.K recently revealed its own rankings of the Top 100 Onsite Programs. The Financial Times recently came out with onsite versus EMBA global rankings.

Top Global Oniste MBA Programs from The Economist
"2012 Full time MBA ranking," The Economist, 2012 ---
http://www.economist.com/whichmba/full-time-mba-ranking
Alternate link --- http://www.economist.com/whichmba

Top Global EMBAEducation EMBA Programs from Financial Times ---
"EMBA ranking 2012," Financial Times, October 2012
http://rankings.ft.com/businessschoolrankings/emba-ranking-2012 
There's no clear distinction between fully-online EMBA programs versus hybrid (partly online) EMBA programs.

I did not find UCONN in the Top 100 in either list (Bummer). Note that there are other leading media rankings of the onsite MBA programs (US News, Business Week, WSJ, Financial Times, etc) ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

 


"The World's Priciest Business Schools," Posted by Louis Lavelle, Bloomberg Business Week, October 18, 2012 ---
http://www.businessweek.com/articles/2012-10-18/the-worlds-priciest-business-schools 

Ranking season is upon us, and in anticipation of the Nov. 15 release of the 2012 Bloomberg Businessweek Best B-School ranking, over the next few weeks we’ll give readers a sneak preview of some of the more compelling information we collected. And what better place to start than with the world’s most expensive business schools?

The cost of an MBA from a top-ranked program has been growing by leaps and bounds over the past decade, and the more than 100 programs participating in this year’s ranking are no exception. Nonresident tuition and fees for all schools averaged $78,982, with two-year programs coming in at $85,306 and more than 20 programs breaking the $100,000 mark. Factor in two years of tuition and fees, two years of books and living expenses, plus two years of forgone salary, and the average opportunity cost comes to $230,676.

Those are just averages, though. At the University of California, Berkeley’s Haas School of Business the total comes to $303,634. That’s something of a bargain compared with New York University’s Stern School of Business, where the total is $317,554.

Continued in article

Bob Jensen's threads on media rankings of colleges and universities ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

 


Teaching Case from The Wall Street Journal Weekly Accounting Review on October 19, 2012

A 'Waste of a Board Seat'?
by: Maxwell Murphy
Oct 16, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Audit Committee, Board of Directors, Sarbanes-Oxley Act

SUMMARY: Due to the push for greater independence of boards of directors from company managements, "just 19 [chief financial officers] CFOs of fortune 500 companies sit on their own boards, down from 37 in 2005....Eleven of those CFOs joined their boards more than a decade ago, before the Sarbanes-Oxley Act of 2002 prompted U.S. stock exchanges to require that the majority of public-company directors be independent...." Further, 'governance advocates back the idea of fewer CFOs serving on their respective company's board...[because it] calls into question the relationship with the audit committee..."

CLASSROOM APPLICATION: The article helps students to see the detailed impact of Sarbanes-Oxley on the structure of boards of directors, particularly with respect to participation by the top finance/accounting executive, the CFO.

QUESTIONS: 
1. (Advanced) What are the responsibilities of a company's chief financial officer (CFO)? Include in your list at least one item required by Sarbanes-Oxley Act of 2002.

2. (Advanced) What are the responsibilities of a company's board of directors? Of the audit committee of a board of directors?

3. (Advanced) What might be the benefit of having a CFO on a company's board of directors? Consider the benefits if that CEO is from the company itself and consider the benefits if that CEO is from another company.

4. (Introductory) Based on the discussion in the article, what factors weigh against having CFOs on the board of directors?

5. (Advanced) Given the difficulties of a CFO obtaining board experience within his or her own company, what are the implications for these executives to obtain positions on other boards? How can a CFO overcome these obstacles?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"A 'Waste of a Board Seat'?" by Maxwell Murphy, The Wall Street Journal, October 16, 2012 ---
http://professional.wsj.com/article/SB10000872396390443624204578058642536086764.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Chief financial officers serving as directors at their own companies are a dying breed, thanks to a push for greater board independence.

Just 19 CFOs of Fortune 500 companies sit on their own boards as of earlier this year, down from 37 in 2005, according to new research by executive-recruiting firm SpencerStuart. And 11 of those CFOs joined their boards more than a decade ago, before the Sarbanes-Oxley Act of 2002 prompted U.S. stock exchanges to require that the majority of public-company directors be independent, with certain exceptions. The last appointment among the group came in late 2009, when Milton Johnson was named a director of hospital operator HCA Holdings Inc. HCA -2.37% Corporate-governance experts don't expect the CFO ranks to grow. Boards are more keen to appoint so-called independent directors—those who don't have a connection to current management.

Independent boards are also seen as less likely to harbor an entrenched management team that, for example, wants to avoid even attractive mergers that would see them lose their jobs.

"Boards are becoming much more independent each year," says Julie Daum, co-head of SpencerStuart's North American board and CEO search practice. Sarbanes-Oxley actually created a demand to recruit outside CFOs to corporate boards to improve board audit and finance committees, but that demand has subsided after an initial surge.

Governance advocates, of course, back the idea of fewer CFOs serving on their respective company's board.

Naming the sitting CFO to the board of directors is "a waste of a board seat," says Paul Hodgson, chief research analyst for governance firm GMI Ratings.

Including a CFO on a corporate board calls into question the relationship with the audit committee that oversees company financials and the CFO's performance, Mr. Hodgson says. A better approach is to simply have the CFO available for questions on an as-needed basis, Mr. Hodgson adds.

The CEOs of virtually all Fortune 500 companies are on the boards of their respective companies, according to SpencerStuart's Ms. Daum.

Recent CFO moves provide further evidence that finance chiefs are less likely to serve on their own boards, at least until they retire.

Last month, Goldman Sachs Group Inc. GS -1.22% said CFO David Viniar would retire at the end of the January and then become a director on the board.

Goldman on Monday appointed Adebayo Ogunlesi to the board as the first of what it expects to be two additional independent director appointments to offset adding Mr. Viniar, who would be considered nonindependent. Goldman declined to comment.

At AOL Inc., AOL -0.25% which isn't part of the Fortune 500, Karen Dykstra had to step down as a board director in September to assume the role of CFO after Artie Minson was promoted to chief operating officer.

AOL Chief Executive Tim Armstrong says the company's board has had a policy of allowing only its CEO to serve as a director ever since its late-2009 spinoff from Time Warner Inc., TWX -2.11% so the matter of keeping Ms. Dykstra on the board was never up for discussion.

But Mr. Armstrong says he feels AOL's board will benefit both from the continued counsel of Ms. Dykstra, and the new independent directors.

"The CFO is an integral part of the board process," and sits in on the majority of director meetings, Mr. Armstrong says.

Richard Galanti has held the top finance post of warehouse retailer Costco Wholesale Corp. COST -1.61% since 1984, and joined its board in 1995. Mr. Galanti says he brings perspective to the board, having been with the company as it grew from four warehouse clubs to more than 600 in the U.S. and overseas.

But he says he understands the push for "good governance and good independence," and thought it would be unlikely that his successor would sit on the board.

A majority of Costco's directors are independent, he adds, and the company believes its governance is both "pro-shareholders" and "pro-Costco."

Among the 19 finance chiefs who sit on their company's board is News Corp NWSA -2.01% . CFO David DeVoe. He has been CFO and on the News Corp. board since 1990. A spokesman for News Corp., which owns Dow Jones and The Wall Street Journal, declined to comment.

Representatives for the other 18 companies either declined to comment or didn't respond to inquiries.

Adam Kovach, a member of SpencerStuart's financial officer practice, says CFO candidates continue to ask about the possibilities of a board seat at companies interested in hiring them, even though such a discussion is "not even an option."

And while there is still a market for CFOs on corporate boards, Mr. Kovach says most companies want a director that has served on a public-company board before, experience that they now have little chance of obtaining at their employer.

Continued in article

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


David M. Walker --- http://en.wikipedia.org/wiki/David_M._Walker_%28U.S._Comptroller_General%29

Career as Comptroller General

Walker served as Comptroller General of the United States and head of the Government Accountability Office (GAO) from 1998 to 2008. Appointed by President Bill Clinton, his tenure as the federal government's chief auditor spanned both Democratic and Republican administrations. While at the GAO, Walker embarked on a Fiscal Wake-up Tour,[1] partnering with the Brookings Institution, the Concord Coalition, and the Heritage Foundation to alert Americans to wasteful government spending.[2] Walker left the GAO to head the Peterson Foundation on March 12, 2008.[3] Labor-management relations became fractious during Walker's nine-year tenure as comptroller general. On September 19, 2007, GAO analysts voted by a margin of two to one (897–445), in a 75% turnout, to establish the first union in GAO's 86-year history.

Peter G. Peterson Foundation

In 2008, Walker was personally recruited by Peter G. Peterson, co-founder of the Blackstone Group, and former Secretary of Commerce under Richard Nixon, to lead his new foundation. The Foundation distributed the documentary film, I.O.U.S.A. which follows Walker and Robert Bixby, director of the Concord Coalition, around the nation, as they engage Americans in town-hall style meetings, along with luminaries such as Warren Buffett, Alan Greenspan, Paul Volcker and Robert Rubin.

Peterson was cited by the New York Times as one of the foremost "philanthropists whose foundations are spending increasing amounts and raising their voices to influence public policy."[5] In philanthropy, Walker has advocated a more action-based approach to the traditional foundation: “I do believe, however, that foundations have been very cautious and somewhat conservative about whether and to what extent they want to get involved in advocacy.”[5] David Walker stepped down as President and CEO of the Peter G. Peterson Foundation on October 15, 2010 to establish his own venture, the Comeback America Initiative

Campaign for fiscal responsibility

Walker has compared the present-day United States to the Roman Empire in its decline, saying the U.S. government is on a "burning platform" of unsustainable policies and practices with fiscal deficits, expensive overcommitments to government provided health care, swelling Medicare and Social Security costs, the enormous expense of a prospective universal health care system, and overseas military commitments threatening a crisis if action is not taken soon]

Walker has also taken the position that there will be no technological change that will mitigate health care and social security problems into 2050 despite ongoing discoveries.

In the national press, Walker has been a vocal critic of profligate spending at the federal level. In Fortune magazine, he recently warned that "from Washington, we'll need leadership rather than laggardship." in another op-ed in the Financial Times, he argued that the credit crunch could portend a far greater fiscal crisis;[11] and on CNN, he said that the United States is "underwater to the tune of $50 trillion" in long-term obligations.

He favorably compares the thrift of Revolutionary-era Americans, who, if excessively in debt, would "merit time in debtors' prison", with modern times, where "we now have something closer to debtors' pardons, and that's not good."

Other responsibilities

Prior to his appointment to the GAO, Walker served as a partner and global managing director of Arthur Andersen LLP and in several government leadership positions, including as a Public Trustee for Social Security and Medicare from 1990 to 1995 and as Assistant Secretary of Labor for Pension and Welfare Benefit Programs during the Reagan administration. Before his time at Arthur Andersen, Walker worked for Source Finance, a personnel agency, and before that was in Human Resources at accounting firm Coopers & Lybrand.

Continued in article

In 2010 David Walker was admitted to the Accounting Hall of Fame --- Click Here
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/david-michael-walker/

"Former comptroller general urges fiscally responsible reforms," by Ken Tysiac, Journal of Accountancy, October 6, 2012 ---
http://journalofaccountancy.com/News/20126578.htm

The giant red digits on the “U.S. Burden Barometer” outside the auditorium where David Walker spoke Friday provided the numbers behind this prominent CPA’s message: The United States urgently needs significant government financial reform.

Counting upward at a feverish pace, the barometer represented an estimate of what Walker, a former U.S. comptroller general, calls the “federal financial sinkhole,” combining explicit liabilities, commitments and contingencies, and obligations to Social Security and Medicare.

Shortly before Walker began his presentation, the number stood at $70,821,389,917,073.

“It’s 70.8 trillion dollars, going up 10 million a minute, a hundred billion a week,” Walker told an audience consisting primarily of CPAs at the University of North Carolina at Chapel Hill. “So the federal financial sinkhole is much bigger than the politicians admit. It’s growing rapidly by them doing nothing, and they’ve become very adept at doing nothing. And something has got to be done.”

Walker, a political independent, headed the U.S. Government Accountability Office from 1998 to 2008. As CEO of the not-for-profit Comeback America Initiative, he is promoting fiscal responsibility and seeking solutions to federal, state, and local fiscal imbalances in the United States.

His tour, which is barnstorming 16 states in 34 days, ends Tuesday and positions Walker as one of the leading sentinels in a growing chorus of concern over the economic direction of the United States at an important time. With a presidential election closing in on its final days, one of the most persistent questions both candidates face is how they will handle the economy, taxes, and the federal deficit.

Educating the public about the deficit and the important, difficult, disciplined action that could bring it under control is Walker’s passion. He warns of the impending “fiscal cliff” the nation faces in January 2013 as the result of the scheduled expiration of various tax provisions, and says a U.S. debt crisis is possible within two years.

He comes armed on his tour with statistics that demonstrate the financial peril that government spending and deficits have brought for the United States. His PowerPoint slides show that:

  • Federal spending as a percentage of GDP has grown from 2% in 1912 to 24% in 2012.
  • Total government debt in the U.S. is estimated to be 137.8% of the economy, when intra-governmental holdings are included, in 2012.
  • Publicly held federal debt as a percentage of GDP is projected to grow to 185% by 2035, according to one scenario in the Congressional Budget Office’s long-term outlook.


“The federal government has grown too big, promised too much, lost control of the budget, waited too long to restructure, and it needs fundamental restructuring,” Walker said during an interview before the event. “Not nip and tuck. Radical reconstructive surgery done in installments over a period of time.”

Walker showed that defense spending in the United States in 2010 exceeded the combined total spent by 15 other nations, including China, Russia, France, the U.K., Japan, Saudi Arabia, India, and Germany. And he showed that U.S. per capita health care costs ($7,960) were more than double the OECD average ($3,361) and far outpaced those of Canada ($4,363) and Germany ($4,218).

He wants to reform budgeting, Social Security, health care, Medicare and Medicaid, defense spending, and the tax code.

He envisions measures that tie debt to GDP targets as needed reforms of federal budget controls. He advocates suspending the pay of members of Congress if they fail to pass a budget. With regard to Social Security, he would raise the taxable wage base cap, gradually raise the retirement eligibility ages, and revise the benefit structure based on income.

Walker would guarantee a basic level of health coverage for all citizens, revise payment practices to be evidence based, and phase out the tax exclusion for employer-provided health insurance, which he says estimates show will cost the federal government a total of more than $650 billion from 2010 to 2014. He would impose an annual budget for Medicare and Medicaid spending, and make Medicare premium subsidies more needs based.

He would reform the military by requiring cost consideration in defense planning, “right-sizing” bases and force structure, and modernizing purchasing and compensation practices. He also would reform individual and corporate federal income taxes, increasing the effective tax paid by the wealthy and decreasing the number of citizens who pay no income tax.

At an event whose sponsors included the AICPA, the North Carolina Association of Certified Public Accountants, and the N.C. Chamber of Commerce, Walker said CPAs have an important role to play in bringing about these changes.

“I believe that CPAs have a disproportionate opportunity and an obligation to be informed and involved here,” Walker said. “They’re good with numbers. They’re respected by the public. And I think that our profession, really, ought to be leaders in this area.”

The AICPA has long been a leading advocate for comprehensive reform that would simplify tax laws without reducing the productive capacity of the economy. In addition, the AICPA works as a proponent of personal financial literacy and fiscal responsibility through efforts such as 360 Degrees of Financial Literacy and What’s at Stake.”

Anthony Pugliese, AICPA senior vice president–Finance, Operations and Member Value, said Walker’s message was on point with the Institute’s initiatives promoting financial literacy and responsibility at the consumer, business, and government levels.

“We hope our members can make a difference. We know they can make a difference with the clients they serve and small business owners around the country and individual consumers,” Pugliese said. “We hope this message is spread, and I think we have a vital role to play in this.”

Walker said that political changes need to be made in order to bring about all these other transformations that would put the United States on a better fiscal path. He encourages development of a strategic framework for the federal government and creation of a government transformation task force. He calls for Congressional redistricting reform, integrated and open primaries, campaign finance reform, and term limits.

Continued in article

Bob Jensen's threads on the pending economic collapse of the United States ---
http://www.trinity.edu/rjensen/Entitlements.htm


"Accounting Option Facilitates Multinational Earnings Manipulation," by Michael Cohn, Accounting Today, October 12, 2012 ---
http://www.accountingtoday.com/news/accounting-option-facilitates-multinational-earnings-manipulation-64298-1.html

An accounting construct known as permanently reinvested earnings is helping U.S.-based multinational corporations keep tens of billions of dollars in profits overseas, according to a new study.

Not only does it greatly reduce earnings repatriation, but it appears to be used extensively to manipulate corporate earnings and thereby mislead investors. A tax director of a Fortune 500 company has compared permanently reinvested earnings to crack cocaine, explaining that "once you start using it, it's hard to stop."

The accounting tool, known as PRE for short, goes one better than IRS rules that each year permit companies to defer paying U.S. taxes on tens of billions of dollars' worth of earnings by their foreign subsidiaries. PRE gives the multinationals the additional option of omitting from their financial statements entirely, except in footnotes, an admission that any taxes at all are owed to Washington on those profits, which they are able to do by declaring their intention to indefinitely reinvest them abroad. PRE have accumulated over time, and by the end of last year they amounted to more than $1.5 trillion, about 42 percent above their level of two years earlier.

While accounting scholars have for some time agreed that the PRE option lowers the repatriation of foreign earnings, it has remained unclear by how much. New research offers an answer.

A study in the current issue of the journal The Accounting Review, published by American Accounting Association, concludes that the PRE option reduces multinational firms' repatriation of foreign affiliates' earnings (through dividends paid to U.S. parent firms) by approximately 20 percent a year. While acknowledging that high U.S corporate tax rates and the ability to defer payment play a major role in keeping earnings abroad, it finds that "repatriation is more sensitive to the repatriation tax rate in the presence of reporting incentives," so much so that "firms with high reporting incentives repatriate, on average, 16.6 to 21.4 percent less per year than firms with low reporting incentives."

"Our study suggests that companies would repatriate about 20 percent more than they currently do if they didn't have this accounting tool that enables them to put a gloss on their financial statements," said Leslie A. Robinson, an accounting professor at Dartmouth College, who conducted the study with professors Linda Krull of the University of Oregon and Jennifer Blouin of the University of Pennsylvania.

Even though U.S. tax law permits multinationals to defer payment of U.S. taxes due on earnings abroad, Robinson explained, mere deferral does not exempt these firms from recording a tax liability on their financial statements. In contrast, declaring profits to be PRE provides this exemption, which has the effect of enhancing firms' bottom lines.

The accounting standard responsible for PRE, known as APB 23, came under attack last month during a one-day Senate hearing, chaired by Carl Levin, D-Mich., which probed offshore corporate profit-shifting (see Senate Probes Offshore Profit Shifting by Microsoft and HP). Indeed, one expert witness called for abolishing APB 23 entirely, describing it as "provid[ing] enormous potential to call up earnings as needed —or postpone them —in a large multinational operation."

Foreign affiliates' permanently invested earnings, he added, can be “sliced as finely as needed to meet earnings estimates with pinpoint precision.”

Levin commented: "On the one hand these companies assert that they intend to indefinitely or permanently invest that money offshore. Yet, they promise on the other hand to bring it home as soon as it is granted a tax holiday. That's not any definition of' 'permanent'' that I understand. While this may seem like an obscure matter, it is a major issue for U.S. multinational corporations."

While the authors of the new Accounting Review paper do not offer specific policy prescriptions, their findings make clear the special appeal PRE have for U.S. parent companies that, in the study's words, "face reporting incentives to consistently report strong earnings numbers." The study’s authors find that public firms are likely to declare a considerably greater proportion of their assets as PRE than private firms do, since "capital-market pressures vary between public and private firms due to differences in the constituents to which the two types of firms report...Public-firm managers typically have a strong focus on reported earnings because of its effect on both firm value and managerial compensation. In contrast, private firms have high levels of insider ownership and encounter...less incentive to focus on reported earnings."

Among public multinationals, the study suggests, PRE are especially favored by firms highly sensitive to the capital markets, including those whose stock prices have above-average responsiveness to company earnings, those with a consistent record of matching or narrowly beating earnings forecasts, and those with relatively few dedicated investors—that is, institutional investors whose focus is on companies' long-term performance.

In addition, the more PRE that firms accumulate over time, the lower their repatriation of current foreign earnings. The study explains that, if companies designate high levels of undistributed foreign earnings as PRE, they may find themselves in a bind in repatriating current earnings, since their financial statements will have to recognize both higher tax expenses and lower earnings than were recorded for previous periods.

The study's findings derive from a sample of 577 U.S.-based multinational corporations, including 479 public companies with 23,669 foreign affiliates and 98 private firms with 1,790 foreign affiliates. The professors combine data from the U.S. Bureau of Economic Analysis with information from other sources to construct measures of tax-reporting incentives over a six-year period. To isolate the effect on repatriation of tax-reporting incentives, as distinguished from incentives to avoid actual tax payments, the professors "identify and measure firm attributes across which reporting incentives vary while holding the cash payment for repatriation taxes constant." The reporting incentives include whether a company is public or private, how sensitive it is to capital markets, and how much PRE it has accumulated.

Continued in article

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


"Corporate Tax Aggressiveness and Firm Risk," by David A. Guenther, Steven R. Matsunaga, and Brian M. Williams, SSRN, September 27, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2153187
Thank you Paul Caron for the heads up.

Prior research has argued that a firm’s investment in aggressive corporate tax avoidance activities, as measured by low cash effective tax rates (Cash ETR) or high reserves for unrecognized tax benefits (UTB), results in higher firm risk. However, it is not clear that activities that reduce taxes or increase the UTB are inherently risky. In this paper we argue that the volatility of Cash ETR is a better proxy for the riskiness of aggressive corporate tax avoidance than the level of Cash ETR or UTB. Consistent with this view we find a positive relation between the standard deviation of annual Cash ETRs and the volatility of stock returns in the following year. In contrast, low Cash ETRs or high UTBs are not associated with future stock return volatility. Our results suggest that the volatility of Cash ETR reflects the riskiness of a firm’s tax positions better than the level of Cash ETR or UTBs.

Continued in article


Increased Investor Risks Caused by the Jumpstart Our Business Startups Act
"The Data Facebook Didn't Want to Share," by Karen Wei, Bloomberg Business Week, October 10, 2012 ---
http://www.businessweek.com/articles/2012-10-10/the-data-facebook-didnt-want-to-share

. . .

Today a great story from our colleagues over at Bloomberg News looks at the recently released documents from Facebook’s IPO and finds that the social network fought to keep key risks hidden. The SEC forced Facebook to avoid double-counting mobile users and to disclose that people who accessed the site largely on mobile devices were making up a growing share of its users. This was problematic for Facebook because it derives less revenue for mobile users than for regular ones. Spokesmen for Facebook and the SEC declined to comment for the Bloomberg story.

The SEC also asked Facebook why it didn’t report how much revenue it generated per user. Facebook’s attorney responded that the company preferred to use aggregate numbers. The SEC went ahead and calculated the figures on its own—which showed that per-user revenue was declining. Facebook ultimately included the statistics in its filings.

The Facebook letters show that while there is a push and pull between the SEC and the company looking to launch an IPO, ultimately the SEC has the final word. As Alan Mendelson, a partner at Latham & Watkins, explained to us in February, a company “might have to cave and put something in the document that you prefer not to.” Put another way, had the SEC’s vetting process not existed, investors wouldn’t have known details about the mobile-revenue concerns before the stock hit the market.

But something big has changed since Facebook started its IPO process. In the spring, Congress passed—and President Obama signed—the Jumpstart Our Business Startups Act, a bill that loosened investor protections with the goal of creating more jobs. The bill reduces disclosure requirements for so-called emerging growth companies that want to go public; under the law an emerging growth company can have as much as $1 billion in annual revenue. The bill also opens the way for buyer-beware offerings through crowdfunding. And it allows companies to raise money from as many as 2,000 investors privately, up from the previous limit of 500. When raising money privately, companies are under far less obligation to divulge information. So once the JOBS Act goes in to effect next year, more deals can avoid the SEC process that forced Facebook to show its cards to investors.


"In brief: FASB and IASB decide on revenue contract modifications and measures of progress," PwC, October 19, 2012 --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=KOCL-8Z8PSR&SecNavCode=MSRA-84YH44&ContentType=Content&j=20419&e=rjensen@trinity.edu&l=6205_HTML&u=835164&mid=7002454&jb=0

The FASB and IASB (the "boards") met on October 18, 2012 to discuss their joint project on revenue recognition. They reached decisions on contract modifications and measures of progress towards satisfying a performance obligation. The boards' decisions are tentative and subject to change. Other key issues still to be redeliberated include collectibility, the constraint on recognizing revenue from variable consideration, licenses, allocation of transaction price, disclosures, and transition. This In brief article provides an overview of the boards discussions and key decisions.

Continued in article

Bob Jensen's threads on revenue accounting issues ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 


International Partnership Undergraduate Programs
"USC Marshall’s ‘Passport to the World’," by Warren Bennis, Business Week, October 15, 2012 ---
http://www.businessweek.com/articles/2012-10-15/usc-marshalls-passport-to-the-world

As I’m writing this on the West Coast at 11 p.m., Oct. 11, three top administrators from the University of Southern California—Provost Elizabeth Garrett; James Ellis, dean of the Marshall School of Business; and his vice dean for academic affairs, John Matsusaka—are in Milan wrapping up an agreement with their counterparts at the Hong Kong University of Science and Technology and Bocconi University. These three universities are collaborating to launch a three-continent degree program that will take students from Los Angeles to Hong Kong to Milan. They’ve formed a partnership to establish the World Bachelor in Business (WBB). Innovative is too bland a word for what I consider an inspiring and unique breakthrough: the reframing of undergraduate business education with far-reaching and profound consequences.

One sign of its significance was the spectacular international coverage. It garnered Page 1, above-the-fold headlines in just about every business newspaper and magazine. For good reason. Imagine this: You are one of 45 students starting their first year of college, 15 each from Bocconi, Hong Kong, and USC, all carefully selected on identical admission criteria. All 45 spend their entire first academic year in Los Angeles at USC, their second year at HKUST Business School, and year three at Bocconi in Milan. The students then get to choose which of the three universities they want to spend their fourth and final year.

What do they get? Well, listen up and you’ll understand the basis for my brazen gusto. Three bachelor’s degrees from three outstanding universities. But as they say in TV commercials, “much, much more!” Garrett frames it this way: “WBB represents a unique approach to undergraduate education that global executives have been demanding for years, an approach that will prepare a new generation of leaders for the opportunities of an increasingly connected world. The program will allow students to explore diverse cultures and challenge them to think and learn from broad and divergent perspectives.” Although all classes will be taught in English, the students will learn two other languages—Italian and Chinese—along the way through the daily interchange with their cohort group of 45 as well as mixing in with the regular business degree students.

Continued in article

Jensen Comment
I'm reminded of accounting professor Sharon Lightner's daring and innovative international partnership venture for a single international accounting course years ago. I've always admired how Sharon pulled this off with determined grit, creative ideas, and no money.---
http://www.trinity.edu/rjensen/255light.htm

But she had an influential friend and mentor named Gerhard Mueller.


"Favorite Professors: Carnegie Mellon's Milton Cofield," by Kate Abbott, Bloomberg Business Week, October 12, 2012 ---
http://www.businessweek.com/articles/2012-10-12/favorite-professors-carnegie-mellons-milton-cofield

Milton Cofield

Tepper School of Business, Carnegie Mellon University

Undergraduate Courses Taught: Global Business, International Management

One of Milton Cofield’s goals in the classroom is to help his students relate the material he’s teaching to the real world. Cofield, the executive director of the undergraduate program at Tepper, says a typical lecture could include the “PowerPoints and lecturing that people hate,” but he mixes up his lessons with the occasional dramatic reading from a Shakespeare play. He uses current events and real-life examples of corporate decision-making in his business classes so that students are “really prepared for the world they want to be a part of,” he says.

Cofield took an unconventional path to the teaching ranks. True, his educational experience pointed to a career in academia, but he calls his work trajectory “nontraditional.” After spending more than a decade as a physical scientist in a research lab, he entered higher education in 1991. “The transition was supposed to be about becoming an academic administrator,” he says, “but then I discovered the best job in university is teaching.” Cofield has taught a variety of subjects, including chemistry, physics, mathematics, and business administration. He joined the Carnegie Mellon faculty in 2001. “I had a very broad range of professional experiences, a very diverse educational background, and I think I understand the issues of management, strategic management, global enterprise, from all of those perspectives,” he says.

Cofield holds a B.S. in chemistry and a Ph.D. in philosophy. He received his MBA from the University of Pennsylvania’s Wharton School in 1989.

Students say:

• “He brings a real-life feel to the classroom and acts more like your friend than a professor. However, he is able to teach the material as well as keep the class as a more informal setting.”

• “It’s very rare that the director of a program takes the time to teach students, but it is exactly what happens at Carnegie Mellon University. It’s obvious that he knew the material he was teaching and had the experience to back it up. All in all, it was an enjoyable class that made you more interested in the material, even if there was a lot of work.”

Cofield on using Shakespeare in the classroom:

I quote from Macbeth, because there’s more drama and the consequences of being are significant and real. There’s more of the sense that not everything is determined by the individual. Business students are people, too. People go to college to learn how to interpret their experiences using new resources, and [Shakespeare] is only one of them.

Editor’s Note: This profile is part of Bloomberg Businessweek’s series on favorite undergraduate business professors. Subjects were chosen based on feedback collected in Bloomberg Businessweek’s annual survey of senior business students. The featured professors were the ones most often mentioned by students as being their favorite. Student quotes come directly from the student survey.


From The Wall Street Journal Accounting Weekly Review on October 12, 2012

Another California City Struggles With Finances
by: Bobby White
Oct 05, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Bankruptcy, Cost Management, Governmental Accounting

SUMMARY: "The small agricultural town of Atwater, Calif., has declared a fiscal emergency, as is seeks to avoid becoming the fourth municipality in the state this year to file for bankruptcy...Atwater is the latest California town to publicly edge down the road toward bankruptcy. Under state law, a local government must declare a 'fiscal emergency' or go through a confidential negotiation process with its creditors before it files a petition under chapter 9 of the U.S. Bankruptcy Code."

CLASSROOM APPLICATION: The article is useful for governmental accounting classes to highlight the particular managerial issues facing cities and towns. While the article focuses on California and specifics of state laws there impact the issues discussed, those specifics also help students to understand the constraints faced by many cities and towns in other locations.

QUESTIONS: 
1. (Introductory) Based on the discussion in the article, what towns in California face financial difficulties? What reasons led to this dire situation?

2. (Advanced) What particular state law makes it difficult for California towns to cope with rapid financial changes?

3. (Introductory) Beyond the factors affecting many California towns, what particular problems have beset the town of Atwater?

4. (Advanced) What strategies did the town of Atwater use to cope with emerging financial problems? How did these strategies actually exacerbate the problems?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Another California City Struggles With Finances," by: Bobby White, The Wall Street Journal, October 5, 2012 ---
http://professional.wsj.com/article/SB10000872396390443493304578036781420348220.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

The small agricultural town of Atwater, Calif., has declared a fiscal emergency, as it seeks to avoid becoming the fourth municipality in the state this year to file for bankruptcy protection.

Located about 100 miles east of San Francisco, Atwater is grappling with a $3 million budget deficit, declining city revenues and cost overruns for a new wastewater treatment plant.

The town on Wednesday declared the emergency, which under state law allows it to restructure union contracts, including imposing salary reductions and benefit cuts without negotiations. "We're working hard to balance the budget and avoid bankruptcy," said Joan Faul, Atwater's mayor.

She said the city of 28,000 people earlier this week laid off 14 employees, or about 16% of its workforce. She said the city was exploring options for increasing revenue, such as raising rates for water services and for garbage collection. The Atwater City Council is scheduled to meet Oct. 22 to discuss whether it should file for bankruptcy.

Atwater is the latest California town to publicly edge down the road toward bankruptcy.Under state law, a local government must declare a "fiscal emergency" or go through a confidential negotiation process with its creditors before it files a petition under Chapter 9 of the U.S. Bankruptcy Code.

Since June, three California cities—Stockton, San Bernardino and Mammoth Lakes—have filed for bankruptcy protection. The city of Vallejo emerged from bankruptcy last year after declaring Chapter 9 in 2008.

The string of fiscal emergencies and bankruptcies highlights the continuing impact of the 2008 recession, which hit many of the cities hard by lowering property-tax revenues. At the same time, many towns are grappling with rising costs related to employees' pensions, health-care costs and union salaries. California cities face particular hurdles in raising taxes, for which they often have to seek voter approval.

Declaring a fiscal emergency doesn't always lead to bankruptcy discussions. The California towns of La Mirada, Fairfield and Culver City are among those that declared fiscal emergencies this year and placed sales tax increases before voters; they didn't end up seeking Chapter 9.

Still, Doug Scott, a managing director with Fitch Ratings Agency, said Atwater remained a bankruptcy candidate because the city has used restricted funds from its water and sewer service to pay other bills, a practice that has now made it difficult for the city to meet debt payments. Last month, Fitch downgraded Atwater's debt to noninvestment grade, citing poor handling of its respective funds. "We're concerned about the direction this city is headed," said Mr. Scott.

Atwater has struggled since 2008 over how to pay for construction cost overruns for a new $90 million wastewater treatment facility. The city issued $85 million in bonds to pay for the construction, which wasn't enough.

As Ms. Faul explained it, officials later used money designated for other services to pay the extra construction costs, but the practice began depleting funds. The 2008 economic downturn further hindered Atwater's ability to pay its bills by hitting property-tax revenues.

Atwater has introduced city staff furloughs and hiring freezes to curb some of the losses. "We're doing everything we can to avoid bankruptcy," Ms. Faul said.

 

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


"Fake Peer Reviews, the Latest Form of Scientific Fraud, Fool Journals," by Josh Fischman, Chronicle of Higher Education, September 30, 2012 ---
http://chronicle.com/article/Fake-Peer-Reviews-the-Latest/134784/

Scientists appear to have figured out a new way to avoid any bad prepublication reviews that dissuade journals from publishing their articles: Write positive reviews themselves, under other people's names.

In incidents involving four scientists—the latest case coming to light two weeks ago—journal editors say authors got to critique their own papers by suggesting reviewers with contact e-mails that actually went to themselves.

The glowing endorsements got the work into Experimental Parasitology, Pharmaceutical Biology, and several other journals. Fake reviews even got a pair of mathematics articles into journals published by Elsevier, the academic publishing giant, which has a system in place intended to thwart such misconduct. The frauds have produced retractions of about 30 papers to date.

"I find it very shocking," said Laura Schmidt, publisher in charge of mathematics journals at Elsevier. "It's very serious, very manipulative, and very deliberate."

This "has taken a lot of people by surprise," wrote Irene Hames, a member of the Committee on Publication Ethics, in an e-mail to The Chronicle. The committee is an international group of science editors that advises journals on ways to handle misconduct. "It should be a wake-up call to any journals that don't have rigorous reviewer selection and screening in place," she wrote.

Blame lies with those journals, she said, that allow authors to nominate their own reviewers and don't check credentials and contacts.

What's worse, said Ivan Oransky, co-publisher of the blog Retraction Watch, which first uncovered this pattern, is that some editors saw red flags but published the papers anyway. Later retractions don't undo the harm created by introducing falsehoods into the scientific literature, he said, noting that some of these papers were published years ago and have been cited by several other researchers.

'Do-It-Yourself' Reviews

Claudiu Supuran, editor in chief of the Journal of Enzyme Inhibition and Medicinal Chemistry, became suspicious that one of his authors was engaged in "do-it-yourself" peer review in 2010. Hyung-In Moon, now an assistant professor at Dong-A University, in Busan, South Korea, had submitted a manuscript along with the names of several potential reviewers. Mr. Supuran, then an associate editor at the journal, duly sent the article out for review and became suspicious when good reviews came back in one or two days. "Reviewers never respond that quickly," he said.

So he sent the manuscript to two scientists whom he picked himself. Their reviews suggested revisions but were also positive, so the article was published.

 

Jensen Comment
This problem probably never arises in accountics science since there are few, if any peer reviews published in the accounting research journals. Academic accounting research is also rarely reviewed in practitioner journals. The closest thing we have to peer reviews are book reviews and published conference proceedings where discussant papers are also published. But those "peer reviews" are not faked and are, as a rule, not very critical of the research in question. I suspect that anonymous referees who write caustic rejections are much more polite and soft in their criticisms if their reviews are not anonymous. At one time, the accounting research conferences at the University of Chicago used to pride themselves in impoliteness (remember Sel Becker and Bob Jensen), but I suspect those conferences are much more polite in the past 40 years.

I'm always a Doubting Thomas when reading book reviews in such places as Amazon. The problem may not be that the authors themselves write fake reviews, but the publishing companies may instigate positive reviews. About the only reviews I really trust on Amazon are the negative reviews, and the reviews on Amazon often contain a subset of negative reviews.

The hope for honest peer reviews of accounting research is in the blogs and listservs like the AECM, but the blogs have to restrain themselves against "political politeness" as well as "political correctness" if they are to maintain academic integrity." Problems lie in that gray zone of where researchers treat criticisms of their work as insults. There are of course bullies and monsters who cross too far into that gray zone of criticism. I seem to have become one of those who has made some criticisms too personal. For this I apologize. I really am going to try to get better when pushing into that gray zone of criticism.
 


"Getting Banks off the Roller Coaster," by Yalman Onaran, Bloomberg Business Week, October 4, 2012 ---
http://www.businessweek.com/articles/2012-10-04/getting-banks-off-the-roller-coaster

Bank executives like to say that their most important job is managing risk. This does not mean they’re good at it. Banks the world over have often failed to monitor hazards properly, blowing up spectacularly every few decades. Regulations drafted in the wake of the global financial crisis were supposed to curb dangerous behavior. Yet the complex new rules repeat a mistake that led to the banks’ troubles in the first place: They assume bank executives and regulators can figure out what is risky.

Now a handful of regulators on both sides of the Atlantic are pushing for a less complicated approach. They argue that the only way to make sure financial institutions don’t fail when their bets go bad is by relying on dead-obvious restrictions on leverage. For every dollar of capital a bank has, it can lend a fixed amount, say $10, regardless of how risky or non-risky it claims that loan to be. That way the bank can take any risk it wants as long as there’s enough shareholder equity to cover the potential losses—so taxpayers aren’t stuck with the tab if it collapses.

Andrew Haldane, executive director of financial stability at the Bank of England, and Thomas Hoenig, a board member of the U.S. Federal Deposit Insurance Corp., are the leading voices in this back-to-basics movement. “There’s scope for significant simplification of the rules,” says Haldane. “An advantage of the leverage ratio is that it doesn’t pick certain assets as winners and others as losers.”

Banks in some 100 countries are bound by the Basel Accords, a set of regulatory standards named after the Swiss city where officials gather to forge those rules. Under Basel, the minimum capital requirement is determined by looking at a bank’s risk profile, which institutions calculate using their own complex formulas. The third installment of the Basel framework, which countries will start phasing in next year, ratchets up the minimum ratio to 8 percent; it does not question whether banks do a decent job of estimating the risk of their own loan portfolios. “The whole Basel approach has failed miserably because it allows the banks to focus on gaming the system,” says Anat Admati, a finance professor at Stanford University. “The simpler you make the capital rule, the harder it becomes to game it. That’s why simple leverage can work better.”

In a paper presented at a gathering of central bankers in August, Haldane showed that the simple leverage ratio would have been a better predictor of failures in the last crisis. He also noted that the models banks use to measure risk involve millions of variables and assumptions, rendering them impossible to monitor for accuracy by regulators. Using its secret in-house formulas, Deutsche Bank (DB) calculates its risk to be 20 percent of assets. JPMorgan Chase (JPM) says about half its balance sheet is risky.

The latest Basel rules do introduce the simple leverage concept for the first time, though as a secondary requirement to the minimum capital ratio. Haldane has said the Basel target of 3 percent of assets is lower than he would like, though he has shied away from offering his own number. Hoenig has proposed 10 percent. Sheila Bair, former chairman of the FDIC, favors 8 percent. Senator Sherrod Brown (D-Ohio) has introduced legislation that would set a 10 percent leverage limit.

If U.S. regulators adopted Hoenig’s proposal as part of their implementation of Basel III, the four largest U.S. banks would have to increase their capital by $300 billion, according to Bloomberg Businessweek calculations. That would mean selling new shares or holding on to profits. Bank of America (BAC) would have to suspend its dividend for 12 years.

Banks have resisted calls for higher capital requirements, saying they would end up curtailing economic growth. Because there isn’t enough investor demand for bank shares, financial firms would have to reduce assets to comply with a higher ratio, bank executives say. That means less lending for companies and consumers. The Institute of International Finance, a lobbying group, estimated in 2010 that new financial regulations would shave 3 percent from global economic output. The International Monetary Fund recently published a study refuting such claims.

Unlike Hoenig, Haldane doesn’t advocate ditching Basel altogether. Bringing simple leverage to the forefront and pushing risk-based calculations to the background would make Basel much more powerful, Haldane argues. Bair agrees, especially if banks aren’t allowed to rely on their own risk models but are given standard risk scores for different asset categories. “Simpler and standard across-the-board risk weighting can help the leverage ratio in restraining banks,” she says.

Yet even standardized measures can fail to spot risk in advance. Before the subprime crisis, mortgage lending was assigned a very low risk factor, while the sovereign bonds of most developed nations were seen as risk-free. If there’s one lesson the world should have learned about banking risk by now, it’s that it’s unpredictable.

The bottom line: Banks are resisting calls for the introduction of simple restrictions on leverage, saying they would restrain lending and dent growth.

 


The Forthcoming CPA Canada Professional Designation
"Two of Canada's accounting groups agree on national organization," by Janet McFarland, Globe and Mail, October 11, 2012 ---
http://www.theglobeandmail.com/report-on-business/two-of-canadas-accounting-groups-agree-on-national-organization/article4606924/

Two of Canada’s largest accounting bodies have reached an agreement to create a national organization to oversee a new CPA Canada accounting designation.

The Canadian Institute of Chartered Accountants (CICA), the national association for CAs in Canada, and CMA Canada, which oversees the CMA designation, have announced they will launch a new combined CPA Canada oversight body as of Jan. 1.

The creation of a national CPA organization is the first step in a proposal to merge CAs and CMAs throughout Canada and create a new Chartered Professional Accountant designation.

Because accounting is provincially regulated, however, accounting bodies in each province must also agree to merge and create the new CPA title before it can be adopted in each jurisdiction.

“This is a journey, and different provinces will get to the end game at different points in time,” said CICA chief executive officer Kevin Dancey.

Mr. Dancey said there are no plans to shut down the CICA or CMA Canada when the new CPA body is formed in January, because both organizations will have to continue to exist until they no longer have member provinces that have not merged.

The merger plans have been unfolding for over a year and have involved different permutations in different provinces.

In seven provinces, CAs and CMAs have agreed to pursue merger talks toward creating a joint CPA organization, and some have already put merger proposals to a vote of members. In Ontario, however, only CAs are interested in joining the CPA body and CMAs are not participating.

Provincial groups for Canada’s third main accounting body – Certified General Accountants (CGAs) – have opted not to participate in merger talks in most provinces, but CGAs in Quebec have already completed a merger with CAs and CMAs and legislation has been passed to combine the three groups in that province.

In Alberta, meanwhile, CAs have not agreed to join the CPA plan, while CMAs and CGAs are in talks to merge their two provincial groups.

The confusion means Canada will have four accounting designations – CPA, CA, CMA and CGA – for the foreseeable future, despite hopes the merger proposal will streamline the country’s accounting regulation. But Mr. Dancey said he remains hopeful that all the provincial groups will over time decide to merge under the CPA banner.

“This is complicated – it is Canada,” he said.

Continued in article


Disaster for Dodd Frank --- Lawyers are Litigating

"Courts taking up opposition to Dodd-Frank," Dina ElBoghdady, The Washington Post, October 5, 2012 --- Click Here
http://www.washingtonpost.com/business/economy/courts-taking-up-opposition-to-dodd-frank/2012/10/05/ebeb1874-0e27-11e2-bb5e-492c0d30bff6_story.html

After failing to scuttle the landmark legislation in Congress, critics of the Dodd-Frank Act overhauling financial regulations are trying to chisel away at it in the courts — with some initial success.

Twice, federal regulators have lost in court trying to defend the rules, which were put in place after the 2008 financial crisis. On Friday, they were back in court again, fighting for yet another regulation they say is linked to Dodd-Frank.

Each time, the challenge came from a lawyer with a prominent legal pedigree: Eugene Scalia, son of Supreme Court Justice Antonin Scalia.

The legal battles raise an urgent question that’s likely to surface again and again about how much deference the courts are willing to grant the agencies that police corporate America.

“After all the lobbying in Congress to tear down Dodd-Frank, there’s now a second stage in the war: the courts,” said Donald Langevoort, a Georgetown Law securities professor. “The judges seem more than willing to say that the rules adopted in the aftermath of the financial crisis simply can’t be enforced because of procedural defects.”

In the case Friday, a federal judge heard a challenge to a rule that requires mutual funds that invest in certain financial instruments to register with the Commodity Futures Trading Commission. Last week, the same court struck down a regulation designed to rein in speculative commodities trading. And about a year ago, an appeals court blocked a rule that would have made it easier for shareholders to oust members of corporate boards.

In each case, Scalia’s team at Gibson, Dunn & Crutcher argued that the regulators failed to justify the rules they crafted or fully consider their economic impact.

“The agencies gave reasons that didn’t add up, contradicted themselves or failed to respond to significant criticisms raised by the public,” Scalia said in an interview. “Any one of those things is going to result in a rule getting thrown out by any court at any time.”

In the case argued Friday, the CFTC said that the financial overhaul bill gave it authority to set the new rules for mutual funds. But the plaintiffs said the rule is unrelated to the Dodd-Frank law, and that the agency is using that law “to change the subject” because the regulation is neither necessary nor justified by economic analysis.

Similar arguments prevailed in the two cases decided by the courts so far.

In the commodities trading decision last week, U.S. District Judge Robert L. Wilkins told the CFTC to justify the need for a regulation that would limit how many contracts a trader can obtain for the future delivery of 28 commodities, including natural gas and oil. The rule also would have applied to certain financial instruments known as swaps, a form of derivative.

The agency said it was acting under a Dodd-Frank mandate designed to reduce excessive speculation in the commodities market so that no one trader could control such a large percentage of the market that it skews prices.

Continued in article

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


Where Fair Value Market Accounting Fails:  Unique Items Not Traded (e.g., bank loans)

In the above module it was stressed how fair value adjustments are troubled for unique assets such as each of 300+ Days Inn hotels where no single hotel is alike due in large part by affects different locations can have on fair value. Fair value adjustments are possible for bonds traded in public markets, but hundreds of millions of bank loans are not traded in public markets. Each borrower is unique, and each purpose of a loan from a bank is unique. Unless the government will buy up selected types of bank loans (e.g., residential mortgages) there are no trading markets for these bank loans. Typically banks hold these investments to maturity (HTM Held-To-Maturity).  Such loans may be adjusted for inflation and interest rate changes, but there are no markets for mark-to-market adjustments.

Much more subjectivity in valuation becomes necessary for "granular factors" that take uniqueness of each loan into consideration. The typical valuation model is discounted cash flow (DCF economic value) adjusted by granular factors. In 1932, Bill Paton (in his Accountants Handbook), Bill Paton outlines thos "appraisal factors" in the following categories:

1.      Length of time the account has run.

2.      Customer's pract6ice with respect to discounts.

3.      General character of dealings with the customer.

4.      Credit ratings and similar data.

5.      Special investigations and reports.

Fair value advocates sometimes mislead students into thinking that there are markets or surrogate markets for everything to be marked to market, but the fact of the matter is that more often than not it is impossible to find reliable market values.

 

Banks must also submit much more granular information, including dozens of details about individual loans.
See article below.

"Stress for Banks, as Tests Loom," by Victoria McGrane and Dan Fitzpatrick, The Wall Street Journal, October 8, 2012 ---
http://professional.wsj.com/article/SB10000872396390444024204578044591482524484.html?mod=WSJ_hp_LEFTWhatsNewsCollection.

U.S. banks and the Federal Reserve are battling over a new round of "stress tests" even before the annual exams get going later this fall.

The clash centers on the math regulators are using to produce the results. Bankers want more detail on how the calculations are made, and the Fed thus far has resisted disclosing more than it has already.

A senior Fed supervision official, Timothy Clark, irked some bankers last month when he said at a private conference they wouldn't get additional information about the methodology, according to people who attended the event in Boston. Wells Fargo WFC -0.78% & Co. Treasurer Paul Ackerman said at the same conference that he still doesn't understand why the Fed's estimates are so different from Wells's. His remarks drew applause from bankers in the audience, said the people who attended.

The annual examinations in their fourth year have become a cornerstone of the revamped regulatory rule book—and a continuing source of tension between the nation's biggest banks and their overseers.

Smaller banks will soon have to grapple with similar requirements. On Tuesday, the three U.S. banking regulators—the Fed, the Comptroller of the Currency and the Federal Deposit Insurance Corp.—plan to complete rules requiring smaller banks with more than $10 billion in assets to also run an internal stress test each year. That would widen the pool of test participants beyond the Fed's current requirement of $50 billion in assets, a group comprised of 30 banks.

The stress tests, which started in 2009 as a way to convince investors that the largest banks could survive the financial crisis, now are an annual rite of passage that determines banks' ability to return cash to shareholders.

The financial crisis taught regulators that they need to be able "to look around the corner more often than in the past," said Sabeth Siddique, a director at consulting firm Deloitte & Touche, who was part of the Fed team that ran the inaugural stress test in 2009.

The Fed asks the big banks to submit reams of data and then publishes each bank's potential loan losses and how much capital each institution would need to absorb them. Banks also submit plans of how they would deploy capital, including any plans to raise dividends or buy back stock.

After several institutions failed last year's tests and had their capital plans denied, executives at many of the big banks began challenging the Fed to explain why there were such large gaps between their numbers and the Fed's, according to people close to the banks.

Fed officials say they have worked hard to help bankers better understand the math, convening the Boston symposium and multiple conference calls. But they don't want to hand over their models to the banks, in part because they don't want the banks to game the numbers, officials say.

It isn't clear if smaller banks will have to start running their tests immediately, as regulators have issued guidance indicating that midsize banks will have at least another year until they have to run the tests.

One new frustration for big banks is that the information requested by the Fed is changing. This year the Fed began requiring banks to submit data on a monthly and quarterly basis, in addition to the annual submission. Banks must also submit much more granular information, including dozens of details about individual loans.

Fed officials say the new data gives them the information they need to build their stress-test models and to see banks' risk-taking over time. Banks say the Fed has asked them for too much, too fast. Some bankers, for instance, have complained the Fed now is demanding they include the physical address of properties backing loans on their books, not just the billing address for the borrower. Not all banks, it turns out, have that information readily available.

Daryl Bible, the chief risk officer at BB&T Corp., BBT -0.77% a Winston-Salem, N.C.-based bank with $179 billion in assets, challenged the Fed's need for all of the data it is collecting, saying in a Sept. 4 comment letter to the regulator that "the reporting requirements appear to have advanced beyond the linkage of risk to capital and an organization's viability," burdening banks without adding any value to the stress test exercise. BB&T declined further comment.

The Fed has backed off some of its original requests after banks protested. For example, the Fed announced Sept. 28 that it wouldn't require chief financial officers to attest to the accuracy of the data submitted after banks and their trade groups argued that the still-evolving process was too fresh and confusing for any CFO to be able to be sure his bank had gotten it right.

Banks needed more time to build up the systems and controls to report data reliably, the Fed said. But the regulator also warned that it may require CFO sign-off in the future.

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


"FASB Will Propose New Credit Impairment Model," by Anne Rosivach, AccountingWeb, October 16, 2012 ---
http://www.accountingweb.com/article/fasb-will-propose-new-credit-impairment-model/220047?source=aa

How to measure and disclose evidence that a loan or bond is not performing continues to be an issue in the ongoing deliberations of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). The two boards have been working on a single, converged Accounting for Financial Instruments standard for years.
 
FASB announced recently that it will separately issue an exposure draft, possibly by the end of 2012, of a new model for disclosing credit impairment. The draft of the new approach, which FASB calls the "Current Expected Credit Loss Model" (CECL Model), may be viewed in FASB Technical Plan and Project Updates. The CECL Model applies a single measurement approach for credit impairment. 
 
FASB developed the CECL Model in response to feedback from US stakeholders on the "three-bucket" credit impairment approach, previously agreed upon by the FASB and the IASB. US constituents found the three-bucket approach hard to understand and suggested it might be difficult to audit. 
 
The IASB continues to propose the three-bucket approach. 
 
FASB board members agreed that the CECL Model would apply in all cases where expected credit losses are based on an expected shortfall in the cash flows that are specified in a contract, and where the expected credit loss is discounted using the interest rate in effect after the modification. This would include troubled debt restructurings. The board has provided additional guidance.
 
The Technical Plan explains the CECL Model as follows:
 
"At each reporting date, an entity reflects a credit impairment allowance for its current estimate of the expected credit losses on financial assets held. The estimate of expected credit losses is neither a 'worst case' scenario nor a 'best case' scenario, but rather reflects management's current estimate of the contractual cash flows that the entity does not expect to collect. . . . 
 
"Under the CECL Model, the credit deterioration (or improvement) reflected in the income statement will include changes in the estimate of expected credit losses resulting from, but not limited to, changes in the credit risk of assets held by the entity, changes in historical loss experience for assets like those held at the reporting date, changes in conditions since the previous reporting date, and changes in reasonable and supportable forecasts about the future. As a result, the balance sheet reflects the current estimate of expected credit losses at the reporting date and the income statement reflects the effects of credit deterioration (or improvement) that has taken place during the period."
 
The FASB has tentatively decided to require disclosure of the inputs and specific assumptions an entity factors into its calculations of expected credit loss and a description of the reasonable and supportable forecasts about the future that affected their estimate. The entity may be asked to disclose how the information is developed and utilized in measuring expected credit losses.
 
In July, when the FASB decided to pursue a separate course from the IASB and develop a simpler Model, the FASB explained the three-bucket approach as follows: 
 
"Previously, the Boards had agreed on a so-called 'expected loss' approach that would track the deterioration of the credit risk of loans and other financial assets in three 'buckets' of severity. Under this Model, organizations would assign to 'Bucket 1' financial assets that have not yet demonstrated deterioration in credit quality. 'Bucket 2' and 'Bucket 3' would be assigned financial assets that have demonstrated significant deterioration since their acquisition."
 
FASB states in its Technical Plan that the key difference between the CECL Model and the previous three-bucket model is that "under the CECL Model, the basic estimation objective is consistent from period to period, so there is no need to describe a 'transfer notion' that determines the measurement objective in each period."

 


Saving Management Accounting in the Academy (by Sue Haka, former AAA President)

I am involved with five university faculty to author a report for the American Accounting Association on reforms for university accounting course curriculums to shift the emphasis of teaching topics from financial to managerial accounting methods. It is a noble effort. What concerns me is how sensitive my co-writers are to the resistance from accounting faculty that this shift would be different from what accounting professors already teach. We will never move finance and accounting professionals from “bean counters to bean growers” if we continue with traditional practices.
See below

"Frustrations of a Mover and Shaker for Managerial Accounting," by Gary Cokins, SmartPros, October 2012 ---
http://accounting.smartpros.com/x74303.xml

Many who just read "managerial accounting" in this blog's title are not bothering to read this. Why? They do not care. They only care about external financial reporting for regulatory agencies, bankers, and investors. This frustrates me because I interpret this as their not caring about managers and employees who need better internal managerial accounting information for insights and foresight to make better decisions compared to what they are currently provided by their CFO's function.



 

Should I laugh or cry?

Allow me to share with you some examples of what frustrates me related to this topic.

In a recent discussion thread in the website of the Institute of Management Accountants (IMA) there was a post that described how to calculate product and standard service-line costs. The writer meticulously listed the steps. In the final instruction they wrote to “allocate” the indirect and shared support expenses one should use broadly-averaged basis like the number of direct labor input hours, headcount, or square feet. I did not know whether I should laugh or cry! Where have they been the last few decades?

This primitive cost allocation method totally violates the costing principle of a cause-and-effect relationship between changes in the amount of workload and the products and services that consume those expenses. Activity-based costing (ABC) resolves this. ABC has been researched and promoted since the 1980s. (I was trained in 1988 by ABC’s lead promoter, Harvard Business School’s Professor Robert S. Kaplan. I subsequently wrote several books on ABC.) After implementing my first ABC system, the company was shocked by how different the product costs and profit margins were compared to their existing “cost peanut butter spreading” method. They were exact in total, but not with the parts. I then thought the practice of ABC would take off like a rocket. It hasn’t, but its acceptance continues with a slow but increasing pace. Too slow for me.

But wait. There is more!

This blog may now appear to be like a television Ginza knives commercial. There is more!

I am involved with five university faculty to author a report for the American Accounting Association on reforms for university accounting course curriculums to shift the emphasis of teaching topics from financial to managerial accounting methods. It is a noble effort. What concerns me is how sensitive my co-writers are to the resistance from accounting faculty that this shift would be different from what accounting professors already teach. We will never move finance and accounting professionals frombean counters to bean growers if we continue with traditional practices.

Another example of my frustration involves adversarial competition for managerial accounting practices. Often driven by self-serving consultants, they advocate managerial accounting methods that only serve their interest. The late Theory of Constraints (TOC) guru Eli Goldratt proclaimed, “Cost accounting is enemy number one of productivity.” He proposed the throughput accounting method, which with investigation only applies under very special conditions of a 24 / 7 / 365 existence of a physical bottleneck like a heat treat oven in a foundry. Some lean accounting advocates slam ABC as being misguided. Both of these methods, if exclusively used, deny strategic analysts understanding of the profit margins of products, services, channels, and customers.

Cutting through the Clutter

I participated on a task force that recently published a report for the IMA titledThe Conceptual Framework for Managerial Accounting.” It is an exposure draft that anyone interested in it can review and comment on. Our task force’s mission was to determine key accounting principles to reflect economic reality that any managerial accounting system should comply with.

Many organization’s existing practices would fail compliance with the report’s framework. With financial accounting, if the CFO gets the numbers wrong, they can go to jail! But when they get the managerial accounting information, they don’t go to jail. Nor should they. But at least CFOs should feel embarrassed and irresponsible that they are performing a disservice to their organization’s workforce who increasingly needs much better management accounting information from which to further apply business analytics.

Continued in article

 

"Saving Management Accounting in the Academy," by Sue Haka (former AAA President), AAA Commons, Last Edited February 10, 2012
http://commons.aaahq.org/posts/98949b972d

Discussion:
Saving Management Accounting in the Academy
Details:
The long run place of management accounting in the academy seems in peril for several reasons. First, there is an ongoing migration of accounting topics to other disciplines. Second, evidence suggests that the diversity in management accounting research seems to be dwindling. Third, the value of our content for MBA programs is not apparent. Finally, our engagement with the management accounting practitioner community is weak.

First-topic migration: I don't know about your experiences, but at my institution I must be ever vigilant about traditional management accounting topics migrating into management, marketing, or supply chain classes. While I am delighted that cost-volume-profit topics are important to my marketing colleagues, unfortunately the students that come to my management accounting class after having been "taught" CVP by my marketing colleagues cannot distinguish between fixed and variable costs! Other topics taught by my colleagues include ABC in supply chain and balanced scorecard in management. Making sure that students are required to take a management accounting class prior to classes where discussions about how ABC is important for supply chain decision making requires constant vigilance. Years ago management accounting virtually gave capital budgeting up to the finance department...is fair value measurement next!

Second-research diversity: I have often been among those who have suggested that general accounting research is not sufficiently diverse (i.e. an overabundance of financial archival focus). I forgot my mother's phrase--when you point at others, three fingers point back at you! Recent reviews of JMAR topical areas suggest a lack of diversity within our discipline. These reviews show an overwhelming focus on performance measurement--in 2008 (2007) 48% (50%) of submitted articles were focused on performance measurement. Only one other category is over 12%. It seems that management accounting research is fairly narrow.

Third-value in the MBA: Management accounting should be a bedrock of MBA programs. However, we have let financial accounting eclipse management accounting. MBA programs have, over the last decade, decreased accounting content and the majority of that reduction has come out of management accounting. Yet most MBAs become managers and management accounting should be highly value added for them.

Finally-practitioner engagement: While our colleagues in auditing and financial accounting have opportunities to serve as fellows at the SEC or FASB or take a semester or year to work at one of the big four firms, management accounting faculty have few established programs allowing us to experience first hand many of the issues that we teach and write about. I believe creating these types of opportunities would help us diversify our research and convince others of the value of management accounting for MBAs and in the practicing communities.

I'm sure you have other issues that imperil the discipline of management accounting. Please add your comments and discussion.

Note the relatively large number of comments to this article

This was Michael van Breda's reply on the AAA Commons:
Posted 04:41 AM EDT by Michael F van Breda
Comment: The fact that only a handful of academics are participating in this conversation speaks, perhaps, for the state of the discipline. Worrying. Worrying not just for us who teach the subject but worrying for a country subject to the whims of 19th century manufacturing accounting. I am told, for instance, that managerial accounting in hospitals is primitive at best. How do we get our healthcare costs under control if we don't know just what those costs are? So, as I see it, this is not an academic issue but one of potentially huge national significance. I wonder, sometimes, whether the rot did not begin to set in when the FASB was established and announced to the dismay of many at the time that its remit was to external stakeholders only. The result has been enormous energy being poured in to financial reporting but very little movement in managerial reporting. Could the creation of an MASB be a solution to the problem ?

 

Also see
Accounting at a Tipping Point (Slide Show)
Former AAA President Sue Haka
April 18, 2009
http://commons.aaahq.org/files/20bbec721b/Midwest_region_meeting_slides-04-17-09.pptm


Sukuk --- http://en.wikipedia.org/wiki/Sukuk

Islamic Bond Excitement in Financial Markets
"Interested in buying sukuk? by Sabine Vollmer, CGMA Magazine, October 5, 2012 ---
http://www.cgma.org/magazine/news/pages/20126503.aspx

Following financial crises in the US and Europe, investors are increasingly attracted to raising funds for investments through Islamic bonds called “sukuk.”

Sukuk are an alternative to conventional bonds that governments and companies sell regularly to raise funds. They comply with sharia law, the moral code of conduct based on the Quran, which prohibits charging interest and trading in debt.

Ernst & Young’s Global Islamic Banking Centre of Excellence projects that global demand for sukuk is likely to triple to $900 billion in 2017. Here are a few reasons for the surge:

“Would the growth be the same if the US and the European market weren’t in crisis? Perhaps yes, but not at the rate you see now,” said Rizwan Kanji, a lawyer who specialises in sukuk transactions in the Dubai office of the law firm King & Spalding. “… The growth of sukuk will continue while the Western markets recover.”

Establishing a global standardised sukuk trading platform that is open to all financial institutions would go a long way toward spurring more supply, according to Ashar Nazim, E&Y’s MENA Islamic finance services leader.

Continued in article

Jensen Comment
CGMA Magazine seems to be getting more and more innovative ---
http://www.cgma.org/magazine/Pages/MagazineHome.aspx

Bob Jensen's threads on Islamic and Social Responsibility Accounting ---
http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting


"The Big Four accounting firms:  Shape shifters (With the audit market maturing, accounting firms become consultancies)"
The Economist Magazine
September 29-October 5, pp. 76-77
http://www.economist.com/node/21563726

IT IS hardly news that the “Big Four” accounting firms get bigger nearly every year. But where they are growing says a lot about how they will look like in a decade, and the prospects worry some regulators and lawmakers. On September 19th Deloitte Touche Tohmatsu was the first to report revenues for its 2012 fiscal year, crowing of 8.6% growth, to $31.3 billion. Ernst & Young, PwC and KPMG will soon report their revenues (as private firms the Big Four choose not to report profits).

For all four, Asia is a bright region. Deloitte’s revenue in Asia grew by 16.3% in dollar terms, faster than anywhere else. This was despite long-running worries about dodgy audits of Chinese companies by Western firms. American and Chinese regulators have been rowing over whether America’s accounting watchdog may inspect Deloitte Shanghai’s work. The two sides recently announced that American regulators could visit and observe, but not perform their own inspections.

Yet more important, at all four firms consulting has been growing much faster than the audit business in recent years. In fiscal 2012 Deloitte increased its revenues from consulting by 13.5% and from financial advisory by 15%—compared with just 6.1% for audit and 3.9% for tax and legal services (see chart). Barry Salzberg, Deloitte’s boss, says he expects consulting to continue to grow by double digits, whereas the audit market is mature. Deloitte is adding consulting staff at twice the rate as employees for audits (at the end of May the firm had 193,000 people on its payroll).

If the two businesses continue to grow at the 2012 rate, the firm would do more consulting than auditing by 2017. Some lawmakers already fret that consulting and tax advisory (when the Big Four are explicitly helping companies make money) can be in conflict with auditing (where the firms should take a wary, outside view of the books, in the service of investors not management). Lynn Turner, a former chief accountant at America’s Securities and Exchange Commission, calls the audit firms a “public utility”, but worries that they do not see themselves that way.

In 2002 the Sarbanes-Oxley act limited what kind of non-audit services an American accounting firm can offer to an audit client. But contrary to what many people believe, it did not forbid all of them. In its last full proxy statement before being bought by JPMorgan, Bear Stearns reported paying Deloitte in 2006 not only $20.8m for audit, but $6.3m for other services. The perception that auditors and clients are hand-in-glove, fair or not, is a reason why shareholders of Bear Stearns sued Deloitte along with the defunct bank. (JPMorgan and Deloitte settled in June. Deloitte paid out $20m, denying any wrongdoing.)

The European Commission in Brussels recently proposed taking a meat-axe to the problem. A draft directive provides for the creation of audit-only firms in the European Union. But the legal-affairs committee of the European Parliament does not like the idea. With the EU’s legislative machinery slow and complex, it is impossible to predict the final outcome.

Asked what would happen if people perceived Deloitte as a consulting firm with an audit business rather than the other way round, Mr Salzberg replies: “we’re not going to take our eye off our professional responsibility with respect to either.” The future of the Big Four’s business model may depend on whether lawmakers in Europe and America are convinced that this is possible.

"Auditors and Consulting: Claims of No Conflict Strain Credibility," by Francine McKenna, re:TheAuditors, February 14, 2011 ---
http://retheauditors.com/2011/02/14/auditors-and-consulting-claims-of-no-conflict-strain-credibility/

Big 4 audit firms are focusing on growth in their global consulting businesses but the conflicts that drove three out of four of the firms to sell them after Enron are a bigger problem than ever before. Deloitte was the only firm that held on to its consulting arm after abuses of the privilege of doing everything for clients resulted in prohibitions in the Sarbanes-Oxley Act of 2002 on the scope of services auditors could provide.

Between 2000 and 2002, in response to the new rules, the IT consulting practices of four of the Big five accounting firms were either sold to public companies or spun off and IPO’d.

- In February 2000, Ernst & Young Consulting was sold to Cap Gemini.

- In February 2001, KPMG Consulting (later BearingPoint, Inc.) was floated with an IPO. (This IPO was delayed and re-priced several times in order to wait until more favorable market conditions after the millennium change, but finally took place and then went nowhere.)

- In July 2001, Accenture (known as Andersen Consulting before its split from Arthur Andersen) also went through an IPO.

- In October 2002, PricewaterhouseCoopers Consulting was sold to IBM. (They failed on their first attempt to sell to HP.)

Only Deloitte Consulting did not, in the end, separate from Deloitte & Touche.

Since the end of 2006, however, the audit firms have been rebuilding their consulting arms. All the largest accounting firms, including Deloitte, are making acquisitions and hiring to expand consulting practices. Fee increases from advising companies on Sarbanes Oxley started slowing down significantly in 2006 and other regulatory changes such as IFRS and XBRL mandates have seen repeated delays. M&A went into a slump that only now looks to be recovering slightly and the financial crisis caused significant contraction in the population of large financial services audit clients.

 

Global highlights via CPA Trendlines and International Accounting Bulletin

The report found that fee pressure is still widespread, but easing, and this has hit the audit sector hardest. However, revenues from audits have actually increased for most networks, with PwC taking the lead and Deloitte following.

Tax was the strongest performer, buoyed by a strong demand in transfer pricing work and international tax advice and PwC led the way in this sector too. The mid-tier are starting to make more noise in the sustainability services market, which continues to grow, but corporate finance, IPO services and transaction support remain flat

Service lines

One of the selectively booming non-audit businesses has been workouts or bankruptcy advisoryPwC’s huge long-term engagement with the Lehman bankruptcy in the UK is a prime example. Some of PwC’s financial services audit clients JPMorgan Chase and Bank of America also grew because of acquisitions during the crisis. Combined with their audit of Goldman Sachs and involvement in Treasury TARP activitiesnon-audit revenues are growing for PwC. But revenues and profitability are distributed unevenly by geography and service line in all the firms. Although Deloitte overtook PwC as the largest global firm in revenue this past year, those rankings are not only based on the firms own un-audited, self-reported figures, but show a definite emphasis on consulting and advisory services as a growth engine versus audit.

Continued in article

"Auditors’ Independence: An Analysis of Montgomery’s Auditing Textbooks in the 20th Century"
by Hossein Nouri and Danielle Lombardi
Accounting Historians Journal
June 2009
http://umiss.lib.olemiss.edu:82/articles/1038280.7113/1.PDF 

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


LIBOR --- http://en.wikipedia.org/wiki/Libor

Interest Rate Swap --- http://en.wikipedia.org/wiki/Interest_Rate_Swap

How to Value and Interest Rate Swap --- http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm

"Rigged Libor Hits States-Localities With $6 Billion: Muni Credit," by Darrell Preston, Bloomberg News, October 9, 2012 ---
http://www.bloomberg.com/news/2012-10-09/rigged-libor-hits-states-localities-with-6-billion-muni-credit.html

The Libor bid-rigging scandal is poised to more than double the losses suffered by U.S. states and localities that bought $500 billion in interest-rate swaps before the financial crisis.

Manipulation of the London interbank offered rate cost issuers in the $3.7 trillion municipal-bond market at least $6 billion, according Peter Shapiro, managing director of Swap Financial Group in South Orange, New Jersey. Shapiro, a muni adviser for more than 20 years, specializes in the contracts.

Any taxpayer losses on derivative deals linked to Libor would add to at least $4 billion in payments that localities have already made to unwind backfiring interest-rate swaps sold by Wall Street banks as hedges to cut borrowing costs, data compiled by Bloomberg show.

“This number shows that banks can’t be trusted in this market,” said Marcus Stanley, policy director for Americans for Financial Reform, a Washington group that has pushed for stronger regulation of lenders. “Municipalities would be the group most likely victimized by the abuse of Libor.”

Issuers from New York to California have entered swap agreements, which are bets on the direction of interest rates. They attempted to lower borrowing costs while guarding against increasing rates by exchanging variable-rate loans for fixed ones. The strategy went awry when the Federal Reserve lowered its benchmark rate almost to zero to counter the 18-month recession that began in December 2007.

$500 Billion

Banks sold as much as $500 billion of swaps to municipalities before the credit crisis, according to a report by Randall Dodd, a researcher on the U.S. Financial Crisis Inquiry Commission. Shapiro based his calculation of losses on his estimate that $200 billion of the derivatives were tied to Libor and that banks suppressed the rate by 0.30 percentage points for three years.

Some U.S. municipal interest-rate swap payments were tied to Libor, the basis for more than $300 trillion in securities and loans worldwide, which is supposed to represent what banks pay each other for short-term loans. While traders have said for years that the benchmark was rigged, the suspicions were confirmed in June when Barclays Plc (BARC), Britain’s second-biggest lender by assets, paid a record 290 million-pound ($468 million) fine for manipulating the rate.

Raised Cost

Three-month dollar Libor, the most commonly used of the rates overseen by the British Bankers’ Association, was at 0.35025 percent yesterday, down from 0.58250 percent at the start of the year.

In the derivatives market, setting Libor too low raised what issuers had to pay to their swap counterparties. That drove up their costs and boosted the price of ending the arrangements.

Libor losses may spawn “a wave of lawsuits,” said Michael Greenberger, who studies derivatives at the University of Maryland’s law school in Baltimore. He said civil complaints, settlements with more banks, and, possibly, criminal indictments lie ahead.

“Libor was a bid-rigged rate,” said Greenberger. “Almost all interest-rate swaps begin with Libor.”

Five-State Probe

Since the Barclays settlement, governments around the U.S. have started their own probes, including attorneys general of at least five states, including Florida and Connecticut. Jaclyn Falkowski, spokeswoman for Connecticut Attorney General George Jepsen, and Jennifer Meale, spokeswoman for Florida Attorney General Pam Bondi, each confirmed the investigations. They declined to comment further.

“I have a board and they want to know what Libor is doing to us,” Brian Mayhew, chief financial officer of the San Francisco Bay area’s Metropolitan Transportation Commission, which finances roads and bridges, said in an interview.

The Libor investigations have implications for states and cities that are still contending with the fiscal legacy of the recession, which left them grappling with falling tax revenue and rising costs. States have had to deal with combined deficits of more than $500 billion since fiscal 2009, according to the Washington-based Center on Budget & Policy Priorities.

Baltimore, Maryland, and the New Britain Firefighters’ Benefit Fund, a pension for workers in the Connecticut city, had already sued more than a dozen banks before the Barclays settlement, alleging Libor was artificially suppressed as part of a conspiracy.

Rates Diverge

Baltimore claimed that Libor’s divergence from its historical correlation to overnight swaps showed manipulation. Since the financial crisis, the spread between three-month Libor and three-month swap rates has increased by 95 percent, data compiled by Bloomberg show.

Hilary Scherrer, a lawyer for the plaintiffs at Washington- based Hausfeld LLP, didn’t return a phone call seeking comment.

North Carolina is among states waiting for findings from federal investigations into the abuse of Libor, Treasurer Janet Cowell said in a Sept. 28 interview on Bloomberg Television.

“We don’t know what the manipulation was at this point,” Cowell said. “It’s a lot of analytics and data collection.”

Because each swap is unique in its pricing and structure, it is possible that not all issuers were harmed by the Libor rigging.

Libor Theory

“There’s a theory that the Libor manipulation lowered the interest rate we got paid on our swaps,” said Mayhew. “But the inverse of that is it also then lowered what we were paying on the variable-rate debt.”

Mayhew said he doesn’t expect a quick resolution.

“This is one of those things that won’t be solved in court, it won’t be solved by lawsuits,” said Mayhew. “This is going to be a global settlement where whoever is guilty of whatever gets in a room, makes a global settlement, and then that’s it.”

In muni trading last week, the yield on 10-year munis rated AAA dropped about 0.07 percentage point to 1.65 percent, data compiled by Bloomberg show. The index touched 1.63 percent on July 27, the lowest since at least January 2009, when data collection began. The U.S. bond market was closed yesterday for the Columbus Day holiday.

Following are pending sales:

Continued in article

Bob Jensen's threads on Derivative Financial Instruments Frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

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


From AccountingEducation.com on October 10, 2012

LAUNCH OF SUSTAINABILITY ACCOUNTING STANDARDS BOARD --- http://www.sasb.org/

Source: SASB
Country: US
Date: 06/10/2012
Contributor: Bob Schneider
Web: http://www.sasb.org
 
*
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* SASB
* Web version of 'SASB'

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"Odd Debt Rule to Lose Bite Adjustments That Whipsaw Bank Earnings Won't Affect Bottom Lines in Future," by Michael Rapoport, The Wall Street Journal, September 30, 2012 ---
http://professional.wsj.com/article/SB10000872396390443389604578024641162432714.html?mod=googlenews_wsj&mg=reno64-wsj

Accounting rule makers are on the verge of rolling back a widely assailed provision that counterintuitively adds to U.S. banks' profits when their debt looks riskier to investors and penalizes them when it looks safer.

The provision—known as the debt or debit value adjustment, or DVA—has come under increasing fire as major banks posted quarterly results whipsawed by big gains one quarter and big losses the next as the market value of their own debt fluctuated.

Major banks and securities firms have posted almost $4 billion in cumulative DVA gains over the past year, but big DVA losses are expected in the third quarter, including an anticipated $1.9 billion at Bank of America Corp., disclosed Friday.

The Financial Accounting Standards Board, which sets U.S. accounting standards, tentatively agreed in June to strip the changes out of net-income calculations, which would prevent the DVA swings from affecting banks' marquee earnings numbers any longer. The board is expected to formally propose the move by the end of the year— none too soon, in the view of some banking observers.

"They cannot get rid of this rule fast enough in my opinion," said Chris Kotowski, an analyst with Oppenheimer & Co. J.P. Morgan Chase. Chief Executive James Dimon last year called the rule "one of the more ridiculous concepts that's ever been invented in accounting."

Any change is unlikely to come before 2014, so it won't help banks during their third-quarter earnings season, which begins Oct. 12 with J.P. Morgan's results.

But ultimately it may help banks' earnings be a little simpler and cleaner—and relieve banks of what has become a quarterly chore of explaining away an item that has distorted their bottom-line performance.

The change "provides more clarity in financial results, and what we have now muddies the waters," said Robert Willens, a tax and accounting expert who heads his own firm, Robert Willens LLC.

The peculiar gains and losses stem from a rule the FASB issued in 2007, allowing banks to value some of their liabilities at "fair value"—market value or the closest approximation—instead of original cost.

Under current rules, banks must record losses when the value rises on some of their debt, and post profits when the debt's value declines.

The rationale is that lower market prices make it cheaper for banks to repurchase their own debt.

The banks choose which debt receives this treatment and often apply it to so-called structured notes, in which the payout to the holder is tied to changes in some other instrument. (Banks report DVA numbers slightly differently, so the numbers aren't always directly comparable.)

That means that improving perceptions of a bank's creditworthiness hurt its earnings, and worsening perceptions of creditworthiness help earnings. That feeds big swings in earnings at banks like Morgan Stanley, which went from a $216 million DVA gain in the fourth quarter of 2011 to a $2 billion loss in the first quarter of 2012 to a $350 million gain in the second quarter.

Sometimes the DVA gains and losses make a big difference in banks' bottom lines. In the first quarter of 2012, for instance, Morgan Stanley had a $78 million loss from continuing operations applicable to the company. Excluding its big DVA loss for the quarter, however, it had income from continuing operations of $1.4 billion.

Under the tentative agreement the FASB reached in June, DVA gains and losses will go into "other comprehensive income," a separately reported form of earnings that includes a variety of items that don't stem from a company's operations, such as foreign-exchange effects and changes in the value of pension assets.

The move is "a definite improvement" on the FASB's part, Mr. Willens said. "I guess they've seen the error of their ways."

The change is expected to be part of a broader proposal revamping the accounting for financial assets and liabilities that the FASB expects to issue by year's end. That proposal is subject to public comment and possible changes before it would be implemented.

The changes will give investors "greater information," said FASB member Russell Golden.

Continued in article

"IASB Addresses 'Counter-intuitive' Effects of Fair Value Measurement of Financial Liabilities," SmartPros, May 10, 2010 ---
http://accounting.smartpros.com/x69432.xml

The International Accounting Standards Board (IASB) today published for public comment its proposed changes to the accounting for financial liabilities.

This proposal follows work already completed on the classification and measurement of financial assets (IFRS 9 Financial Instruments). 
 
The IASB is proposing limited changes to the accounting for liabilities, with changes to the fair value option.  The proposals respond to the view expressed by many investors and others in the extensive consultations that the IASB has undertaken—that volatility in profit or loss resulting from changes in the credit risk of liabilities that an entity chooses to measure at fair value is counter-intuitive and does not provide useful information to investors.
 
When the IASB introduced IFRS 9 many stakeholders around the world advised the IASB that the existing requirements for financial liabilities work well, except for the effects of changes in the credit risk of a financial liability (‘own credit’) that an entity chooses to measure at fair value. 
 
Building on that global consultation on IFRS 9, the IASB sought the views of investors, preparers, audit firms, regulators and others on the ‘own credit’ issue.  The views received were consistent with the earlier consultations—that volatility in profit or loss resulting from changes in ‘own credit’ does not provide useful information except for derivatives and liabilities that are held for trading.
 
The IASB is therefore proposing that all gains and losses resulting from changes in ‘own credit’ for financial liabilities that an entity chooses to measure at fair value should be transferred to ‘other comprehensive income’.  Changes in ‘own credit’ will therefore not affect reported profit or loss.
 
No other changes are proposed for financial liabilities.  Therefore, the proposals will affect only those entities that choose to apply the fair value option to their financial liabilities.  Importantly, those who prefer to bifurcate financial liabilities when relevant may continue to do so.  That is consistent with the widespread view that the existing requirements for financial liabilities work well, other than the ‘own credit’ issue that these proposals cover.  
 
Commenting on the proposals, Sir David Tweedie, Chairman of the IASB, said:
 
Whilst there are theoretical arguments for treating financial assets and liabilities in the same way it is hard to defend the accounting as providing useful information when a company suffering deterioration in credit quality is able to book a corresponding large profit, especially when investors tell us that such information is often excluded from their financial models.
 
An IASB ‘Snapshot’, a high level summary of the proposals, is available to download free of charge from the IASB website at http://go.iasb.org/financial+liabilities.
 
The exposure draft Fair Value Option for Financial Liabilities is open for comment until 16 July 2010.  It can be accessed via the ‘Comment on a proposal’ section on www.iasb.org from today.
 

Jensen Comment
What the IASB has not done is eliminate the enormous inconsistency in fair value accounting for financial assets versus financial liabilities.

This proposed IAS 39 amendment allowing for an option to carry debt at fair value is still in exposure draft form.

The worst part of all this is that students, let’s call them classic sophomores, are willing to jump to conclusions like the following:

1.       Historical cost accounting, even when price-level adjusted, leads to ancient balances of assets and liabilities that are seriously out of date with current market values whether markets are entry or exit value markets.

2.       Therefore, to the extent possible assets and liabilities should be carried at fair values (exit or entry) with changes in fair values reported in current earnings.

What these sophomores do not understand that fair value adjustments create utter fiction for held-to-maturity or other “locked-in” items. Adjusting some assets and liabilities to fair values is utter fiction if there is no option or intent for fair value transactions to transpire before some shock such as contractual maturity or abandonment of a manufacturing operation (that makes factory real estate finally available for sale). The classic example is fixed-rate debt for which there is no embedded option to pay off the debt prematurely or purchase it back in an open market. If the cash flow stream is thus set in stone until maturity, any adjustments to fair value are accounting fictions. Temporal changes in current earnings for fictional accounting value changes are more misleading than helpful.

Creditors might propose deals for early retirement, but they do so when it is not particularly advantageous for the debtor. Conversely, debtors may propose deals for early retirement, but they will do so when it is not particularly advantageous for the creditors. Hence such debt is usually retired early only when either the debtor or the creditor is willing to negotiate a heavy penalty. Without a willingness to incur heavy penalties, changes in earnings for accounting fictions are highly misleading in terms of fictional earnings volatility.


Question
What do the following states sadly share in common?

Hint
You know it must be really bad if California did not make the list.

"Nine States with Sinking Pensions," 247 Wall Street, October 18, 2012 --- Click Here
http://247wallst.com/2012/10/18/nine-states-with-sinking-pensions/?utm_source=247WallStDailyNewsletter&utm_medium=email&utm_content=OCT182012A&utm_campaign=DailyNewsletter

Several years after from the financial crisis of 2008, state pension funds continue to languish. According to data released this week by Milliman, Inc. and by the Pew Center on the States, there was a $859 billion gap between the obligations of the country’s 100 largest public pension plans and the funding of these pensions. Most of these are state funds, and state legislatures have attempted to respond to this growing crisis by making numerous reforms to try to combat this growing deficit.

In 2010, only Wisconsin’s pension funds were fully funded. Nine states, meanwhile, were 60% funded or less — this would mean that at least 40% of the amount the state owes current and future retirees is not in the state’s coffers. In Illinois, just 45% of the state’s pension liabilities were funded. In some of these states, the gap between the outstanding liability and the amount funded was in the tens of billions of dollars. California alone had $113 billion in unfunded liability. Based on Pew’s report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with sinking pensions.

Each year, actuaries determine how much a state should contribute to its pensions to keep them funded. Many states, for various reasons, did not pay the full recommended contributions for 2010, while others have been paying the recommended amount for years. In an interview with 24/7 Wall St., Milliman Inc. principal and consulting actuary Becky Sielman explained that despite states making the recommended payments, many large individual public retirement funds are still underfunded.

Of the nine states with pensions that are underfunded by 40% or more, three paid more than 90% of the recommended contributions, and two, Rhode Island and New Hampshire, paid the full amount. Despite this, pension contributions were still generally higher in states that were better funded. Of the 16 states that were at least 80% funded — a level experts consider to be fiscally responsible — 11 contributed at least 97% of the recommended amount.

In an interview with 24/7 Wall St., Pew Center on the States senior researcher David Draine explained why, despite paying the full amount, several states continued to be severely underfunded. He pointed out that meeting contributions was important. He added that states that made full contributions in 2010 were 84% funded on average, compared to those that did not, which were only 72% funded.

To explain why several states that are making full contributions are still underfunded, Draine said much of it has to do with investment losses. “The 2000s have been a terrible period for pension investments that have fallen short of their expectations … that’s a big part of the growth in the funding gap.”

Unfunded liability can also grow due to overly optimistic assumptions about investment growth, pension payments that become deferred, and an increase in benefits or an increase in the number of beneficiaries without a corresponding increase in contributions, Draine explained.

Based on the Pew Center for the States report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with public pensions that were 60% or less funded as of 2010. From the report, we considered the total outstanding liability, the total amount funded, and the proportion of the recommended contribution each state made in 2010. We also reviewed the level of funding for the 100 largest pension funds in each state, provided by Milliman’s Public Pension Fund Study, which covered a period from June 30, 2009, to January 1, 2011.

Continued in article

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

 


"When Will the SEC Finally Go After the Auditors?" by Jonathan Weil, Bloomberg, September 27, 2012 ---
http://www.bloomberg.com/news/2012-09-27/when-will-the-sec-finally-go-after-the-auditors-.html

Something very unusual happened at the Securities and Exchange Commission this week: The SEC accused three former bank executives of committing fraud by deliberately understating their company's loan losses during the financial crisis. Such accusations have not been made often in recent years.

Unless you happen to live in Nebraska, you probably haven't heard of Lincoln-based TierOne Corp., which had about $3 billion assets when it failed in 2010. Yet it's an important story because of what it shows about the state of securities-law enforcement in the U.S.

On Tuesday the SEC said it had reached settlements with the company's former chief executive officer and chairman, Gilbert Lundstrom, and another former senior executive, who will both pay fines. (Per the usual custom, neither admitted or denied any wrongdoing.) A third former executive is contesting the agency's claims, which include allegations of egregious accounting violations.

Several times in recent years the SEC's enforcement division has seemed to bend over backwards to avoid accusing anyone at a failed financial institution of committing accounting fraud. To name a few: When the SEC filed fraud claims against former executives of Countrywide Financial Corp., IndyMac Bancorp, Freddie Mac and Fannie Mae, it accused them of making false disclosures. But it made sure not to allege that any of the companies' books were wrong; none of them ever admitted to any accounting errors.

At Countrywide, for instance, the SEC accused former CEO Angelo Mozilo of failing to disclose known loan losses. If the SEC's allegations against him were true, then the company's financial reports by definition must have contained misstatements -- except the SEC never alleged so in its complaint against him. He committed disclosure fraud, the SEC said, not accounting fraud.

The main beneficiary of the SEC's approach in such cases has been the Big Four auditing firms, as I wrote in a column last year. They can claim their audits were fine, because there was never any official finding that the numbers were incorrect. That has helped the firms enormously in class-action litigation brought by investors.

TierOne's auditor was KPMG LLP, which also was the auditor for Countrywide. (The other Big Four firms are Ernst & Young LLP, PricewaterhouseCoopers LLP and Deloitte & Touche LLP.) Neither KPMG nor any of its personnel were named as defendants in the SEC's complaint this week. One of the allegations against the former TierOne executives was that they lied to KPMG auditors. Under the Sarbanes-Oxley Act, passed in 2002, lying to an auditor is a punishable offense.

Does this mean KPMG got a pass from the SEC? My guess is yes. An SEC spokesman, John Nester, declined to say. A spokesman for KPMG, Manuel Goncalves, declined to comment.

There is somebody out there, however, who believes KPMG should be held liable for failing to catch TierOne's accounting chicanery. TierOne's Chapter 7 bankruptcy trustee earlier this year sued the accounting firm, accusing it of negligence and breaches of fiduciary duty. KPMG has denied the allegations and asked that the matter be resolved in arbitration proceedings rather than in court. It was TierOne's regulator, the U.S. Office of Thrift Supervision, that caught the bank's accounting manipulations -- not KPMG, which continually blessed TierOne's financial statements and resigned as auditor in 2010 only weeks before the bank failed.

The financial crisis was in large part about financial institutions' cooked books. A big reason that companies such as Lehman Brothers, Fannie Mae and Freddie Mac failed was that investors could tell from the outside looking in that their balance sheets were bogus. Even Hank Paulson, the former Treasury secretary, said as much in his memoir. (The SEC never brought a single enforcement action against a former Lehman executive.)

Continued in article

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


More Woes for PwC
"New York Attorney General Sues JP Morgan And Raises Question Of What The "Auditor" Knew," by Francine McKenna, Forbes, October 2, 2012 ---
http://www.forbes.com/sites/francinemckenna/2012/10/02/new-york-attorney-general-sues-jp-morgan-and-raises-questions-of-what-the-auditor-knew/

Eric Schneiderman,the New York Attorney General, filed suit yesterday against JPMorgan Chase for the sins of Bear Stearns committed prior to the distressed purchase of Bear Stearns by the bank in 2008. Schneiderman plays a dual role here, as New York AG and co-head of the Obama administration Residential Mortgage Backed Securities Working Group. That task force was peeved, according to Alison Frankel for Thomson Reuters’ On The Case blog, that Schneiderman filed the suit Monday, jumping the gun on a joint federal-state press conference scheduled for Tuesday.

The NYAG complaint rests heavily on work done by others, in particular law firm Patterson Belknap Webb & Tyler, journalist Teri Buhl - who has been following this story since 2010 – and documentary filmmaker Nick Verbitsky. Patterson Belknap represents monoline mortgage insurers Ambac, Syncora and Assured Guaranty in their pursuit of Bear Stearns and now JPM.

Unfortunately, the NYAG complaint rests a bit too heavily on Patterson Belknap’s Ambac complaints (first and second amended versions) when discussing the role and responsibilities of global professional services firm PricewaterhouseCoopers.

From the Ambac Second Amended Complaint:

In August 2006, Bear Stearns’ external auditor, PriceWaterhouseCoopers (“PWC”), advised Bear Stearns that its failure to promptly review the loans identified as defaulting or defective was a breach of its obligations to the securitizations.232 PWC advised Bear Stearns to begin the “[i]mmediate processing of the buy-out if there is a clear breach in the PSA agreement to match common industry practices, the expectation of investors and to comply with the provisions in the PSA agreement.”

The New York Attorney General’s complaint repeats an error made by Patterson Belknap in the Ambac complaints and that was proliferated in many media reports when the Ambac suit was filed: PwC is not Bear Stearns external auditor. The error in the paragraph above and another that says “audit firm” PwC advised Bear Stearns in August of 2006 that “its failure to promptly evaluate whether the defaulting loans breached EMC’s representations and warranties to the securitization participants was contrary to “common industry practices, the expectation of investors and . . . the provisions in the [deal documents],””  misrepresents PwC’s role and the importance of its report, misleading the reader. The error wasn’t caught by the New York Attorney General’s office, potentially affecting its litigation strategy and the public’s perception of PwC.

The PwC report prepared for Bear Stearns is entitled, “UPB Break Repurchase Project – August 31, 2006.” Alison Frankel obtained a copy of the first few pages but that’s enough to see that PwC acted as a consultant to Bear Stearns, not its external auditor. This was not an audit report. It is the summary of recommendations to a client by a consultant who was paid for advice that likely wasn’t followed.

Continued in article

Bob Jensen's threads on the woes of PwC ---
http://www.trinity.edu/rjensen/Fraud001.htm


Teaching Case from The Wall Street Journal Accounting Weekly Review on October 5, 2012

Tyco's Breen Looks Back on Putting Out Fires
by: Joann S. Lublin
Oct 03, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Changes and Error Corrections, Accounting Irregularities, Cash Flow, Earnings Forecasts

SUMMARY: The article is prepared in an interview format with Edward Breen, who took the reins at Tyco after Dennis Kozlowski was fired and faced trial for taking $600 million in unauthorized compensation and illicit stock sales. The fraud was perpetrated by making accounting entries to reduce employee-loan accounts of three top employees. The resulting investigation led to restatement of many years' financial statements.

CLASSROOM APPLICATION: The article is useful to see the accounting information useful to a CEO and to cover accounting for corrections of errors.

QUESTIONS: 
1. (Introductory) Mr. Breen took over as CEO of Tyco in July 2002 and "faced a liquidity crisis and an accounting mess." Define liquidity. Refer to the related article and explain why the company faced this crisis.

2. (Advanced) Based on information in the article, how long did it take to resolve the "accounting mess"? What was the result of the company's inquiry? What does that result imply about the nature of the "accounting mess" Mr. Breen faced when he arrived at Tyco?

3. (Advanced) What is free cash flow? Why did Mr. Breen focus on that metric in his first year at Tyco?

4. (Introductory) What did Mr. Breen say about management providing information to Wall Street analysts? Answer the question after considering the tumultuous time that he arrived at Tyco and, later, the healthier times at the company.

5. (Introductory) What opinion does Mr. Breen hold about the current state of U.S. corporations and the U.S. economy? What governmental reform does he hope to see after the presidential election?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Tyco's 'Special Bonus' on Trial
by Mark Maremont
Oct 03, 2003
Page: C1

 

"Tyco's Breen Looks Back on Putting Out Fires," by Joann S. Lublin, The Wall Street Journal, October 3, 2012 ---
http://professional.wsj.com/article/SB10000872396390443862604578032374284688146.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

WEST WINDSOR, N.J.—Edward D. Breen stepped down last week after a decade as chief executive of Tyco TYC -0.42% International Ltd., a period in which he oversaw two breakups.

When he took the job, few expected Mr. Breen or Tyco to last. The former Motorola Inc. MSI +0.77% president took charge of the battered conglomerate in July 2002, succeeding L. Dennis Kozlowski, who lost his job amid imminent charges of sales-tax evasion. (He later was convicted and imprisoned for looting Tyco.)

Mr. Breen faced a liquidity crisis and a huge accounting mess. Though he navigated debt issues, he came under criticism for moving too slowly to clean up the books. In July 2003, Tyco restated results back to 1998.

He initially split Tyco into three companies in 2007, spinning off a medical-products company and an electronics-component maker. The latest breakup, unveiled a year ago, transforms a serial acquirer that bought hundreds of businesses over five decades into a $10-billion seller of security and fire-protection systems.

Mr. Breen, a boyish-looking 56-year-old, remains board chairman and says he hopes to run another company. Tyco's new CEO is George R. Oliver, who joined the Switzerland-based conglomerate in 2006.

In an interview at Tyco's operational headquarters here, Mr. Breen shared survival strategies for new CEOs and discussed the corporate-divorce boom. Edited excerpts:

Edward Breen, former chief executive of Tyco International Ltd., on what it's like to spend ten years in the corner office.

WSJ: With CEO turnover climbing, how can someone taking command of a public company keep the job for 10 years?

Mr. Breen: Stay calm and focused. There are big ups and downs. And don't overcommit to numbers you may hit in your first year.

WSJ: What else spurred your longevity?

Mr. Breen: We were very transparent about what was going on—good or bad. You must be totally aligned with the board.

When I got here, it was like a forest fire. I learned to worry about the few big levers. We told employees, "We are going to save the company, fix the company and then grow the company."

I had to get rid of the board and get a new, highly credible one. We also got rid of almost 300 people on the corporate team.

The third important decision was fixing the debt crisis. We paid down debt to $10 billion from $30 billion.

WSJ: What were some of your top priorities for fixing Tyco between roughly 2004 and 2007?

Mr. Breen: We got rid of excess costs. For every dollar of waste we can get out, we said we are going to reinvest about half in growth initiatives and the other half is going to drop to the bottom line.

We then focused on our leadership-development process. As a result, we created five CEOs out of our team, running retained or spun-off businesses. We also sold over 150 companies. Prior management had done about 800 acquisitions.

WSJ: Looking back, how could you have made your life easier?

Mr. Breen: You always wish you moved faster on some people issues. We hired some that were really good for the "save" part, but not necessarily good for the "grow" part.

WSJ: How can a new CEO avoid obsessing over quarterly results instead of long-term shareholder value?

Mr. Breen: There are pressures to do it that way. But you are not really thinking about the long term if you spend too much time focusing on that next report card. It is not the way to manage.

WSJ: Is that why you dropped earnings forecasts during your first year?

Mr. Breen: We focused on generating free cash flow to pay down $11 billion of debt due in my first year. We didn't have any money in the bank. With a very low stock price, we didn't even have stock currency. Our cash flow in fiscal 2002 was $800 million. The next year was over $5 billion. I resumed making quarterly earnings forecasts in 2003.

WSJ: If long-term shareholder growth is their goal, should public-company CEOs skip earnings forecasts?

Mr. Breen: Whether it was your forecast or not, a miss is a miss. You might as well give guidance and at least make sure it is in the ranges you think are appropriate.

WSJ: Why didn't you change Tyco's name? After all, it was associated with a corporate scandal.

Mr. Breen: We looked at changing it. We surveyed employees and customers and learned Tyco was a very strong name around the globe. You think twice about changing a name when you're the market leader.

WSJ: Are the recent flurry of corporate breakups a good or bad idea?

Mr. Breen: There's a lot of logic to it. You have to have a market-leading company to justify a separation. That's a very attractive stock to investors.

We will continue to see breakups. The complexity of the company has a lot to do with it. You must answer the question: 'Can we do better than the form we are in?' It's not easy for a management team to say, 'I am going to shrink the pie.' I view a breakup as expanding the pie.

WSJ: What about corporate breakups that result from activist investor pressure?

Mr. Breen: If activists find a weakness, they jump. It is not the most elegant way to get it done.

WSJ: How do you see the economy and growing federal deficit affecting U.S. businesses' spending?

Continued in article

Bob Jensen's threads on Tyco are at
http://www.trinity.edu/rjensen/Fraud001.htm
Search for Tyco at the above site.
Unlike many companies that failed after their top executives went to prison, Tyco was and remained financially very sound because of successful acquisitions engineered by the top executives that went to prison for criminal activities along the way, including stealing from the company.

 


Advanced Accounting
Teaching Case from The Wall Street Journal Accounting Weekly Review on October 5, 2012

T-Mobile Redials America
by: Miriam Gottfried
Oct 03, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Antitrust, business combinations, Mergers and Acquisitions

SUMMARY: In 2011, Deutsche Telekom had planned to stop investing in its U.S. cellular operation, T-Mobile USA, and sell the company to AT&T. However, that combination was stopped by the Justice Department for anti-trust reasons. Deutsche Telekom now has announced a plan for T-Mobile USA to merge with MetroPCS.

CLASSROOM APPLICATION: The article is useful to introduce the process of business combinations in advance of teaching the accounting for these transactions. The related article describes the accounting entry made by AT&T to record a charge for the break-up fee associated with its attempted combination with T-Mobile, clearly indicating likely failure of the transaction.

QUESTIONS: 
1. (Introductory) What are the competitive and strategic reasons that form the "...many ways it actually makes sense for T-Mobile's parent, Deutsche Telekom, to bulk up in the U.S. with the deal"?

2. (Advanced) What are the historical reasons to indicate that this deal may face trouble amounting to "continuing to dig when you're in a hole"? Refer to the related article to assist in your answer.

3. (Advanced) What form of business combination and "currency" for the business combination does the author think is likely? What financing reasons lead to this conclusion?

4. (Advanced) What is a "reverse merger"? How would that result in Deutsche Telekom having a U.S. stock listing?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
AT&T's T-Mobile Deal Teeters
by Anton Troianovski, Greg Bensinger and Amy Schatz
Nov 25, 2011
Page: A1

 

"T-Mobile Redials America," by Miriam Gottfried, The Wall Street Journal, October 3, 2012 ---
http://professional.wsj.com/article/SB10000872396390443862604578032873818844376.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

When you are in a hole, you usually stop digging. And yet struggling T-Mobile USA, after failing to sell itself to AT&T, T +0.44% may be about to dig even deeper into the U.S. market: It is in talks to purchase prepaid mobile carrier MetroPCS PCS +3.55% .

In many ways, it actually makes sense for T-Mobile's parent, Deutsche Telekom, DTE.XE +1.49% to bulk up in the U.S. with the deal. It would eliminate a low-cost competitor and give the combined companies 29.5% of the prepaid market, according to Sanford C. Bernstein. Total subscribers would be 42.5 million, against 56 million for Sprint, S -2.16% 111 million for Verizon Wireless VZ +2.07% and 105 million for AT&T, as of the second quarter.

If T-Mobile were to structure the deal as a reverse merger, as some analysts have suggested, it would give the company a U.S. stock listing. That would allow it to finance itself separately and let Deutsche Telekom sell down its exposure over time. MetroPCS's spectrum holdings are geographically complementary with T-Mobile's. And a deal would significantly bolster the latter's presence in the top 100 markets, as well as giving it crucial bandwidth to build a next-generation LTE network.

Given future calls on T-Mobile's cash—from integration expenses, network investment and the possible introduction of the iPhone on its network—any deal is likely to be in stock. MetroPCS shareholders would potentially own about one-quarter of the combined company.

One key opportunity is for T-Mobile to move subscribers off MetroPCS's network, which uses a different technology, and eventually to turn it off. That would both free up spectrum and allow the combined company to save money by merging cell sites, among other things.

But it can be a painful process as evidenced by Sprint's ongoing shutdown of the Nextel network, which it bought in 2005. Running both networks for so long has squeezed Sprint's margins. Sprint expects the transition—which includes the cost of lost subscribers, in addition to other expenses related to shutting down the network—to reduce profit by $800 million in 2012 and by another $100 million in 2013.

T-Mobile will also be able to build a single LTE network, although it will still have to spend billions that it would have saved if the sale to AT&T hadn't been blocked by regulators on competition grounds. The deal probably has little impact on T-Mobile's decision on whether or not to offer the iPhone to better compete against AT&T and Verizon Wireless. But UBS expects it to begin carrying the iPhone next year, meaning hefty subsidy costs, particularly for postpaid subscribers who pick the device.

If the deal goes through, the most obvious loser is Sprint, which was widely seen as the most likely buyer for MetroPCS or T-Mobile. In addition to being a sign that T-Mobile is prepared to invest in its business, at least for now, the deal could make regulators less likely to welcome any Sprint-T-Mobile tie-up in the future.

Continued in article


Teaching case on a accounting entry has AT&T made in relation to its proposed acquisition of T-Mobile USA?

From The Wall Street Journal Weekly Accounting Review on December 2, 2011

AT&T's T-Mobile Deal Teeters
by: Anton Troianovski, Greg Bensinger and Amy Schatz
Nov 25, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Contingent Liabilities

SUMMARY: 'AT&T and Deutsche Telekom insisted they weren't throwing in the towel" on their proposed transaction for AT&T to acquire T-Mobile, Deutsche Telekom's U.S. cellular phone operation. However, AT&T announced it would take a charge in the fourth quarter's financial statements for a $4 billion break-up fee it agreed to in negotiations.

CLASSROOM APPLICATION: Accounting for contingent liabilities and the link to information being signaled to the market is the focus of this review.

QUESTIONS: 
1. (Introductory) What accounting entry has AT&T made in relation to its proposed acquisition of T-Mobile USA? When will this entry impact AT&T's reported results?

2. (Advanced) What accounting standard requires making this entry?

3. (Introductory) Access the filing made by AT&T to the SEC regarding this matter. It is available on the SEC web site at http://www.sec.gov/Archives/edgar/data/732717/000073271711000097/tmobile.htm. Why do you think the company must make this disclosure at this time?

4. (Advanced) How does the accounting for this $4 billion become a signal that the AT&T planned acquisition of T-Mobile "is more likely to fail than to succeed"?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Nuggets from the FCC's Scathing Report on AT&T/T-Mobile
by Anton Troianovski
Nov 30, 2011
Online Exclusive

 

"AT&T's T-Mobile Deal Teeters," by: Anton Troianovski, Greg Bensinger and Amy Schatz, The Wall Street Journal, November 25, 2011 ---
http://online.wsj.com/article/SB10001424052970204452104577057482069627186.html?mod=djem_jiewr_AC_domainid

AT&T Inc. signaled for the first time that its planned $39 billion acquisition of T-Mobile USA is more likely to fail than to succeed, saying Thursday it would set aside $4 billion in this year's final quarter to cover the potential cost of the deal falling apart.

The move came after Federal Communications Commission Chairman Julius Genachowski said this week he would seek a rare, trial-like hearing on the merger, which would add months of arguments and another big hurdle for the controversial deal.

AT&T and T-Mobile parent Deutsche Telekom AG responded Thursday morning by pulling their application for merger approval at the FCC in order to focus on their fight with the Justice Department, which has sued to block the acquisition.

The federal agencies say a deal combining the No. 2 and No. 4 wireless carriers would damage competition and potentially raise prices, with little offsetting benefit. AT&T needs both agencies to sign off to get the merger through.

The moves, disclosed in the early hours of Thanksgiving morning in the U.S. and just ahead of the market's opening in Germany, reflect a changed internal calculus at AT&T about the deal's chances to succeed.

AT&T and Deutsche Telekom insisted they weren't throwing in the towel. Their strategy is to try to strike a settlement with the Justice Department or to beat the agency in a trial that begins Feb. 13, then reapply with the FCC for merger approval.

But it was clear that the odds have lengthened significantly for a deal that would have created the country's largest wireless operator. "There's a degree of giving up," said Bernstein Research analyst Robin Bienenstock. "If you believed you could litigate your way out of it or do something else, you wouldn't take the charge."

The developments could mean many more months of uncertainty for the wireless industry and for consumers, particularly T-Mobile's 33.7 million customers. T-Mobile has lost 850,000 contract customers this year, and it failed to land the most sought-after device, Apple Inc.'s iPhone. If the AT&T deal falls through, analysts and investors expect Deutsche Telekom to try to find another way to exit the U.S. market.

A broken deal would send AT&T back to the drawing board for a strategy to shore up its network and compete with larger rival Verizon Wireless. AT&T has said it needs to buy T-Mobile to gain much-needed rights to the airwaves. It also sees the deal as an expeditious way to shore up its network, which has come under strain from the demands of millions of iPhones and other devices, hurting call quality and prompting customer complaints.

Justice Department officials were taking stock of the developments but expected to continue preparing for trial, a person familiar with the matter said. AT&T's move has increased the certainty felt by many department officials that the company is unlikely to prevail in court, this person said. A Justice Department spokesperson couldn't be reached for comment.

For AT&T Chief Executive Officer Randall Stephenson, the merger with T-Mobile represents the biggest gamble in a four-year tenure that has been devoid of blockbuster deals, which were a hallmark of his predecessor, Ed Whitacre. Mr. Whitacre created today's AT&T over more than a decade of deal-making that pieced together fragments of Ma Bell and rolled up several wireless companies.

Analysts had generally considered AT&T to be too big to pull off any more mergers in the U.S. In order to persuade Deutsche Telekom to go along, AT&T agreed to pay $3 billion in cash, and to turn over valuable spectrum if the merger fell through, an unusually large breakup fee.

For AT&T, the benefits of the deal are potentially huge. T-Mobile, which uses the same network technology as AT&T, seemed to be the answer to network constraints. Heavy overlap meant cost savings could be huge. The deal would vault AT&T ahead of rival Verizon Wireless.

AT&T, which announced the deal on March 20, said buying T-Mobile would allow it to extend its high-speed mobile network into more of rural America, striking a chord in Washington. AT&T lined up supporters among governors, members of Congress and interest groups.

Yet AT&T apparently failed to anticipate antitrust officials' concerns about growing market concentration in the wireless industry, already dominated by Verizon Wireless and AT&T.

On the morning of Aug. 31, Mr. Stephenson touted the deal on CNBC. Later that day, the Justice Department filed suit to block it on antitrust grounds.

Continued in article

Bob Jensen's threads on merger and acquisition accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#Pooling


Teaching Case from The Wall Street Journal Accounting Weekly Review on October 5, 2012

BofA Takes New Crisis-Era Hit
by: Dan Fitzpatrick, Christian Berthelsen and Robin Sidel
Sep 29, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video
 

TOPICS: Contingent Liabilities

SUMMARY: "Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co...." during the financial crisis in 2008. At the time it acquired Merrill Lynch in September 2008, BofA became the biggest U.S. bank; the value of the bank then fell by more than half by the time the acquisition of Merrill Lynch closed 3 months later. These losses were not disclosed by then CEO Ken Lewis and his management team to shareholders before they voted on the merger transaction with Merrill.

CLASSROOM APPLICATION: The article addresses accounting for litigation contingent liabilities. The related video clearly discusses the history of the transactions.

QUESTIONS: 
1. (Introductory) To whom did Bank of America Corp. (BofA) agree to pay $2.43 billion dollars?

2. (Introductory) For what losses did BofA agree to make this payment?

3. (Advanced) How could losses have occurred and a payment of $2.4 billion be required if "Bank of America executives now say Merrill...has become a big profit contributor... [and that] it's clear that Merrill is a significant positive any way you want to look at it..."?

4. (Advanced) What accounting standards provide the requirements to account for costs such as this $2.4 billion payment by BofA?

5. (Advanced) According to the article, BofA has "set aside more than $42 billion in litigation expenses, payouts and reserves...[which] includes $1.6 billion taken in the third quarter [of 2012]...." According to the related video, what period will be affected by $1.6 billion being recorded as an expense related to this $2.43 billion settlement? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
BofA-Merrill: Still A Bottom-Line Success
by David Benoit
Sep 28, 2012
Online Exclusive

"BofA Takes New Crisis-Era Hit," by Dan Fitzpatrick, Christian Berthelsen and Robin Sidel, The Wall Street Journal, September 29, 2012 ---
http://professional.wsj.com/article/SB10000872396390443843904578024110468736042.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co., in the latest financial-crisis aftershock to rattle the banking sector.

The payment is the largest settlement of a shareholder claim by a financial-services firm since the upheaval of 2008 and 2009. It also ranks as the eighth-largest securities class-action settlement, behind payouts like the $7.2 billion settlement with shareholders of Enron Corp. and the $6.1 billion pact with WorldCom Inc. investors, both in 2005.

The deal is a sign that U.S. banks' battle to contain the high cost of the crisis continues to escalate, despite a four-year slog of lawsuits, losses and profit-sapping regulations. Bank of America's total exposure to crisis-era litigation is "seemingly never-ending," said Sterne Agee & Leach Inc. in a note Friday.

Is the era that produced all of this legal exposure "history?" the Sterne Agee & Leach analysts said. "Unlikely."

The settlement ends a three-year fight with a group of five plaintiffs, including the State Teachers Retirement System of Ohio and the Teacher Retirement System of Texas. They accused the bank and its officers of making false or misleading statements about the health of Bank of America and Merrill Lynch and were planning to seek $20 billion if the case went to trial as scheduled on Oct. 22.The size of the pact highlights how hasty acquisitions engineered during the height of the financial crisis by Kenneth Lewis, then the bank's chief executive, are still haunting the company four years later. Decisions to buy mortgage lender Countrywide Financial Corp. and Merrill have forced Bank of America, run since 2010 by Chief Executive Brian Moynihan, to set aside more than $42 billion in litigation expenses, payouts and reserves, according to company figures. The funds are meant to absorb a litany of Merrill-related lawsuits and claims from investors who say Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the crisis.

That total includes $1.6 billion taken in the third quarter to help pay for the Merrill settlement announced Friday and a landmark $8.5 billion agreement reached last year with a group of high-profile mortgage-bond investors.

The company's shares lost more than half their value between when Bank of America announced its late-2008 plan to purchase Merrill Lynch and the date the deal closed 3½ months later, wiping out $70 billion in shareholder value. The shares have fallen further since then, and investors who owned the shares won't be made whole by the settlement.

"We find it simply amazing the sheer magnitude of value destruction over the years," said Sterne Agee in the note issued Friday. And "the bill is surely set to increase" as the research firm expects the bank to reach other legal settlements over the next 12 to 24 months. Bank of America is still engaged in a legal clash with bond insurer MBIA Inc., MBI +3.91% which has alleged that Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the financial crisis.

The move to buy Merrill over one weekend in September 2008 was initially hailed as a rare piece of good news during a week when much of Wall Street appeared to be teetering on the brink. It also vaulted the Charlotte, N.C., lender to the top of the U.S. banking heap, capping a goal pursued over two decades by Mr. Lewis and his predecessor, Hugh McColl.

The Merrill deal, initially valued at $50 billion in Bank of America stock, was the "deal of a lifetime," Mr. Lewis said on the day it was announced.

But the agreement soon became a problem as analysts questioned whether Mr. Lewis paid too much and Merrill's losses spiraled out of control in the weeks before the deal closed. Investor fears stemming from the financial crisis sent shares of Bank of America and other financial companies into free fall, and the deal was worth roughly $19 billion at its completion on Jan. 1, 2009.

Mr. Lewis and his top executives made the decision not to say anything publicly about the mounting problems before shareholders signed off on the merger—a decision that formed the basis of a number of Merrill-related suits, including an action brought by the Securities and Exchange Commission. The bank also didn't disclose that it sought $20 billion in U.S. aid to digest Merrill, or that the deal allowed Merrill to award up to $5.8 billion in performance bonuses. When Bank of America threatened to pull out of the deal because of the losses, then-Treasury Secretary Henry Paulson told Mr. Lewis that current management would be removed if the deal wasn't completed.

The legal scrutiny surrounding the Merrill acquisition contributed to Mr. Lewis's decision to step down at the end of 2009. Mr. Lewis's lawyer declined to comment.

"Any way you slice it, $2.4 billion is a big number," says Kevin LaCroix, a lawyer at RT ProExec, a firm that focuses on management-liability issues.

Bank of America executives now say Merrill, unlike Countrywide, has become a big profit contributor, while the company continues to work to absorb massive losses in its mortgage division. The divisions inherited from Merrill produced $31.9 billion in net income between 2009 and 2011 and $164.4 billion in revenue. Bank of America's total net income over the period was just $5.5 billion, on $326.8 billion in revenue, reflecting in part the hefty losses tied to the Countrywide deal.

"I think it's clear that Merrill is a significant positive any way you want to look at it," said spokesman Jerry Dubrowski.

The settlement doesn't end all Merrill-related headaches. The New York attorney general's office still is pursuing a separate civil fraud suit relating to the Merrill takeover that began under former Attorney General Andrew Cuomo. Defendants in that case include the bank, Mr. Lewis and former Chief Financial Officer Joe Price. A spokesman for New York State Attorney General Eric Schneiderman declined to comment.

It isn't known how much all shareholders will receive as a result of the Merrill settlement announced Friday. The amount shareholders receive will ultimately depend on how long they held the shares and how much they paid. Mr. Lewis, also a shareholder, won't receive a payout because defendants in the suit are excluded from the class that the court certified.

But because the decline in Bank of America stock was so steep—the shares fell from $32 to $14 between Sept. 12, 2008, the day before the Merrill acquisition was announced, and the Jan. 1, 2009, closing—no shareholders can expect to recover their full losses.

Before the settlement was reached, a targeted recovery for at least three million shareholders who were part of the class was $2.52 a share, said a spokesman for Ohio Attorney General Mike DeWine. The State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System, which held between 18 million and 20 million shares, now expect to recover $1.19 per share, or roughly $20 million.

Continued in article

Merrill Lynch had a friend in Hank Paulson, but he was no friend to Bank of America shareholders
The ex-US Treasury Secretary has admitted telling the Bank of America boss he might lose his job if he walked away from a merger from Merrill Lynch. The former US Treasury Secretary says the merger was necessary Hank Paulson warned the bank's chief executive Kenneth Lewis that the Federal Reserve could oust him and the board if the rescue did not proceed. But Mr. Paulson insisted that remarks he made were "appropriate." Bank of America bought Merrill during the height of the financial crisis and suffered severe losses.
"Paulson admits bank merger threat," BBC News, July 15, 2009 ---
http://news.bbc.co.uk/2/hi/business/8152858.stm
 

Jensen Comment
Paulson's claim that his threats were "appropriate" comes as little comfort to Bank of America shareholders who will be losing greatly because of the threats.

Bank of America is now paying a steep (fatal?) price for having purchased the fraudulent Countrywide and Merrill Lynch companies. The poison-laced Countrywide was a lousy investment decision. However, then CEO Kenneth D. Lewis contends that then Treasury Secretary Hank Paulson held a gun to his head and forced BofA to buy the deeply corrupt and poison-laced Merrill Lynch.

 

Breaking the Bank Frontline Video
In Breaking the Bank, FRONTLINE producer Michael Kirk (Inside the Meltdown, Bush’s War) draws on a rare combination of high-profile interviews with key players Ken Lewis and former Merrill Lynch CEO John Thain to reveal the story of two banks at the heart of the financial crisis, the rocky merger, and the government’s new role in taking over — some call it “nationalizing” — the American banking system.
Simoleon Sense, September 18, 2009 --- http://www.simoleonsense.com/video-frontline-breaking-the-bank/
Bob Jensen's threads on the banking bailout --- http://www.trinity.edu/rjensen/2008Bailout.htm

Bob Jensen's threads on the Bailout's deceptions ---
http://www.trinity.edu/rjensen/2008Bailout.htm


From the TaxProf Blog by Paul Caron on October 2, 2012

Raj Chetty Named 2012 MacArthur Fellow

Raj Chetty (Harvard University, Department of Economics) has been named a 2012 MacArthur Fellow:

Raj Chetty is an economist whose rigorous theoretical and empirical studies are informing the design of effective government policy.  His initial work focused on resolving inconsistencies in earlier theories of specific questions in public finance, such as how dividend tax cuts affect corporate behavior and how unemployment insurance affects job-seeking behavior.  More recently, he and colleagues designed novel empirical tests to gauge the impact of sales taxes on demand.  In a study at a large supermarket chain, they demonstrated that, although most customers were well-informed about the retail sales tax rates, consumers purchased less of a product when posted prices indicated the associated sales tax than when the tax was simply added to the product’s base price at checkout.  This observation, suggesting that the way in which a tax is perceived can have as much or more impact on consumer decision making as the tax itself, is an important contribution to the emerging field of behavioral public finance.  Using large administrative databases drawn from tax and social security records in the United States and Europe, Chetty currently is exploring a range of other questions, such as the effect of tax policy on how much people work, the extent to which tax deductions for retirement savings stimulate individual savings, and key aspects of early childhood education.  In a study on teacher quality using these data sets and information gleaned from school district databases, Chetty and colleagues found that, adjusting for other factors, students who by chance were assigned to talented teachers in elementary school had significantly higher incomes as adults and better future life outcomes more generally.  By asking simple, penetrating questions and developing rigorous theoretical and empirical tests, Chetty’s timely, often surprising, findings in applied economics are illuminating key policy issues of our time.

 


Hi Roger,

Although I agree with you regarding how the AAA journals do not have a means of publishing "short research articles quickly," Accounting Horizons (certainly not TAR) for publishing now has a Commentaries section. I don't know if the time between submission and publication of an AH Commentary is faster on average than mainline AH research articles, but my priors are that it is quicker to get AH Commentaries published on a more timely basis.


The disappointing aspect of the published AH Commentaries to date is that they do not directly  focus on controversies of published research articles. Nor are they a vehicle for publishing abstracts of attempted replications of published accounting research. I don't know if this is AH policy or just the lack of replication in accountics science. In real science journals there are generally alternatives for publishing abstracts of replication outcomes and commentaries on published science articles. The AH Commentaries do tend to provide literature reviews on narrow topics.


The American Sociological Association has a journal called Footnotes ---
http://www.asanet.org/journals/footnotes.cfm
 

Article Submissions are limited to 1,100 words and must have journalistic value (e.g., timeliness, significant impact, general interest) rather than be research-oriented or scholarly in nature. Submissions are reviewed by the editorial board for possible publication.

ASA Forum (including letters to the editor) - 400-600-word limit.

Obituaries - 700-word limit.

Announcements - 150-word limit.

All submissions should include a contact name and an email address. ASA reserves the right to edit for style and length all material published.

Deadline for all materials is the first of the month preceding publication (e.g., February 1 for March issue).

Send communications on materials, subscriptions, and advertising to:

American Sociological Association
1430 K Street, NW - Suite 600
Washington, DC 20005-4701

 

The American Accounting Association Journals do not have something comparable to Footnotes or the ASA Forum, although the AAA does have both the AAA Commons and the AECM where non-refereed "publishing" is common for gadflies like Bob Jensen. The Commons is still restricted to AAA members and as such does not get covered by search crawlers like Google. The AECM is unrestricted to AAA Members, but since it requires free subscribing it does not get crawled over by Google, Yahoo, Bing, etc.

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

 


Center for Financial Services Innovation --- http://cfsinnovation.com/

Bob Jensen's threads on personal finance ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers


 

Note that this is a book available for about $15 or less for used copies
FORTUNE The Greatest Business Decisions of All Time: How Apple, Ford, IBM, Zappos, and others made radical choices that changed the course of business --- Click Here
http://www.barnesandnoble.com/w/fortune-the-greatest-business-decisions-of-all-time-fortune-magazine-editors/1113015377?cm_mmc=affiliates-_-linkshare-_-bhxbhyulyvm-_-10%3a1&ean=9781603200592&r=1

Jensen Comment
I also find it interesting out some of the same companies making the "greatest decisions of all time" also make the worst decisions of all time. For example, IBM invented the PC but let it slip away to Microsoft and Apple because IBM considered the PC that it invented to be just a toy.

Apple gave Bill Gates and Paul Allen an opening by refusing to make the Mac operating system an open source for other hardware manufacturers of portable computers. If Apple has made the Mac an open source platform, Bill Gates may have had no alternative other than becoming a used car salesman or a programmer for Apple.

In its earliest years, Ford carried the assembly line mentality to a fault by keeping the product lines too narrow and standardized for the common man, thereby giving rise to General Motors and other manufacturers for innovative and less standardized (sometimes luxury) alternatives like Packards.


"Unintended Consequences of LIFO Repeal:  The Case of the Oil Industry," by  David A. Guenther and Richard C. Sansing, The Accounting Review, Vol. 87, No. 5, September 2012, pp. 1589-1602 (this article is not free) ---
http://aaajournals.org/doi/full/10.2308/accr-50194

Abstract
This study examines the effect on firm value of repealing the last-in, first-out (LIFO) inventory method for tax purposes. Our model extends prior literature by determining quantities and prices in equilibrium, rather than specifying them exogenously. We find that LIFO repeal could increase the future after-tax cash flows of firms that had used LIFO, because the higher tax costs associated with FIFO result in lower equilibrium quantities and higher equilibrium output prices, which increase pretax cash flows. We illustrate our model by examining inventory methods used by firms in the oil industry.

Introduction
We examine the effects of repealing the last-in, first-out (LIFO) inventory method on firm production decisions, output prices, and firm after-tax profits. This is an important topic because repeal of LIFO, either directly or indirectly, as a consequence of adopting International Financial Reporting Standards (IFRS), is being considered by U.S. policymakers. Although our model applies to any industry, we discuss the implications of our model for the oil industry because (1) almost all firms in the industry use LIFO for their U.S. operations, and (2) demand for the oil industry's products is inelastic. Our model implies that LIFO repeal would cause the after-tax profits of firms in the oil industry to increase because (1) the higher marginal cost would reduce production and raise prices, and (2) inelastic demand implies that the higher output price would more than offset the higher tax cost associated with the first-in-first-out (FIFO) inventory method.1

For nearly 20 years, Kang's (1993) “real value” model has influenced accounting research on the link between LIFO and firm value. The real value model implies that the value of the firm in the absence of inflation is the same as the value of the firm in the presence of inflation if the firm uses LIFO. LIFO provides a nominal tax gain, but not a real inflation-adjusted gain. This suggests that LIFO repeal would decrease the value of a firm that used LIFO. A critical assumption underlying the real value model is that neither inflation nor inventory method choice affects firms' production decisions or output prices. In this study, we relax that assumption, deriving equilibrium production decisions and prices instead of specifying them exogenously. We find that, unlike the results from the real value model, inflation and inventory choice can affect production decisions and firm value.

Our approach applies insights from the industrial organization literature regarding the effect of cost increases on production decisions and profits under Cournot competition.2 In particular, an increase in costs, such as income taxes, that affects all firms in an industry induces all firms to reduce output, which, in turn, increases the equilibrium output price. Depending on the slope of an industry's marginal revenue curve, decreasing industry output quantity can either increase or decrease the profits and, hence, the value of the firms in the industry. If the industry marginal revenue curve is downward sloping, a cost increase causes the value of firms to decrease, because the higher selling price is not enough to offset the lost revenue from selling fewer units. In contrast, if the industry marginal revenue curve is upward sloping, a decrease in industry output results in an increase in industry total revenue, and this increase more than offsets the higher cost. Therefore, a cost increase causes the value of all firms in the industry to increase.

Nelson (1957) and Meyer (1967) identify situations in which increases in costs can lead to increased industry profits. The idea of increasing marginal revenue at the industry level may, at first, seem unrealistic. However, as Formby et al. (1982, 303) point out, “the conditions for a positively sloping marginal revenue curve are much less stringent than is generally recognized. Simple transformations of any well-behaved convex demand function can easily result in a demand for which marginal revenue is positively sloping. For this reason, positively sloping marginal revenue functions must be considered whenever convex demand functions are analyzed.” In other words, the only restriction on increasing marginal revenue is that the demand curve must be convex.

An excise tax on inputs, such as the tax on the sale of domestically produced coal, is one example of a cost that affects all firms in an industry. Katz and Rosen (1985) and Seade (1985) show circumstances under which an increase in a tax can increase after-tax industry profits. Our study extends this idea to the effects of a firm's inventory method used for income tax purposes. When costs are increasing due to inflation, the use of FIFO instead of LIFO by all firms in an industry is economically equivalent to an excise tax on inputs imposed on all firms. Therefore, if the industry marginal revenue curve is increasing, all firms in an industry would have greater after-tax cash flows by using FIFO instead of LIFO. However, unlike an excise tax, firms can choose an inventory cost flow assumption (LIFO) that avoids the tax increase. Every firm would prefer for other firms to use FIFO while it chooses LIFO, getting both the tax benefits of LIFO for itself while also benefiting from the reduced quantities and higher prices associated with every other firm choosing FIFO. This can occur, for example, if a non-U.S. firm that is not permitted to use LIFO under home country tax rules competes in the same market with a U.S. firm that is permitted to use LIFO. Therefore, each firm has an incentive to choose LIFO, even in a situation in which every firm would be better off if every firm were to choose FIFO.

One way to have all firms use FIFO when doing so would increase the value of every firm is to no longer allow the use of LIFO for tax purposes in the U.S. This suggests that LIFO repeal would increase firm value if the industry's marginal revenue curve is upward sloping and all firms had adopted LIFO.

Continued in article

LIFO Sucks Teaching Case on LIFO Layers in Years of Rising Prices

"Fight for Your LIFO," by Liam Denning, The Wall Street Journal, December 2, 2010 ---
http://online.wsj.com/article/SB10001424052748704594804575649002258068166.html?mod=djemheard_t

Buried on page 29 of Wednesday's report was a proposal to eliminate last-in-first-out, or LIFO, accounting for inventories. Under LIFO, companies assume that the goods they sell from inventories are the last ones put in. When prices are rising, this means the cost of goods sold is higher, reducing reported profits and, thereby, the taxes paid on them. Therein lies the rationale for LIFO's potential abolition.

The potential impact could be significant. Take Exxon Mobil, Chevron, and ConocoPhillips, the top three U.S. majors. They had an aggregate LIFO reserve of $28.3 billion at the end of 2009. In theory, abolishing LIFO would result in a tax liability of about $10 billion.

Beyond the oil patch, a 2008 survey by the American Institute of Certified Public Accountants found 36% of U.S. firms using LIFO for at least some of their inventories.

Dr. Charles Mulford of Georgia Tech College of Management says that while LIFO accounting is "often blamed as a tax gimmick," it also offers a more accurate picture of profits by aligning costs with revenues.

There is another potential wrinkle. LIFO accounting is suited to periods of inflation. When prices are falling, companies using LIFO actually pay more tax, as their cost of goods sold falls and reported profit rises.

Say LIFO is abolished and, despite Washington's best efforts, deflation takes hold. Under that scenario, the companies that benefited from LIFO accounting during the boom years would actually enjoy a tax shield on future profits from the new accounting method. In this era of unintended consequences, such a policy outcome wouldn't be wholly surprising.

 Jensen Comment
In my opinion any ban of LIFO for tax or financial reporting should be accompanied by inflation adjustments.
 

A Very Practical Application of 'Dollar-Value Lifo
"The IPIC Method Revisited: A Simplified Explanation and Illustration of the Inventory Price Index Computation (IPIC) Method"
by CPA Valuation Specialist William Brighenti [william_brighenti@yahoo.com]
http://www.cpa-connecticut.com/IPIC.html

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


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

Accounting Method Sucks Up Oil
by: Dan Strumpf
Nov 22, 2010
Click here to view the full article on WSJ.com

TOPICS: Inventory Systems
SUMMARY: "The oil market has been waiting months for...a drop in supplies along the nation's main refining corridor. Prices are poised to soar on any indication that rising demand from the recovering economy is bringing a two-year-old oil glut to an end." But drop in inventory among U.S. oil companies merely follows a typical year end pattern. "To avoid a tax charge tied to rising oil prices, refiners and other companies that store crude are scrambling to make sure they end the year with the same inventories they had at the start."
CLASSROOM APPLICATION: The article brings to life the implications of dipping into LIFO inventory layers.
QUESTIONS:
1. (Introductory) What inventory method is used by most companies in the oil industry?

2. (Advanced) What are the federal tax incentives to use LIFO inventory method?

3. (Advanced) What Louisiana state tax requirements also influence oil companies to choose LIFO inventory accounting?

4. (Introductory) Refer to the related article. What factors are leading to a two-week high price for oil as of December 1, 2010?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Oil Climbs to $86.75, a 2-Week High
by Jerry A. DiColo
Dec 01, 2010
Online Exclusive

"Accounting Method Sucks Up Oil," by: Dan Strump, The Wall Street Journal, November 22, 2010 --- fhttp://online.wsj.com/article/SB10001424052748703531504575625013694074190.html?mod=djem_jiewr_AC_domainid

An accounting practice is making the millions of barrels of excess crude that have flooded the oil market disappear—for a few weeks, anyway.

To avoid a tax charge tied to rising oil prices, refiners and other companies that store crude are scrambling to make sure they end the year with the same inventories that they had at the start. Stockpiles on the Gulf Coast plunged nearly 7 million barrels in the week ended Nov. 12, the region's biggest drop in over two years, according to the Energy Information Administration. Another 25 million barrels need to go for this December's inventories to match last year's. But if past years are any indication, inventories are likely to rise just as quickly with the start of the new year.

The oil market has been waiting months for just such a drop in supplies along the nation's main refining corridor. Prices are poised to soar on any indication that rising demand from the recovering economy is bringing a two-year-old oil glut to an end.

But the recent draws aren't that sign, and it's being reflected in the price of oil. Crude prices are off 7.2% since ending at a two-year high on Nov. 11, trading late Friday at $81.51 a barrel. Futures nearly fell below $80 a barrel for the first time in a month on Wednesday—after the government inventory report—as U.S. demand looked weak.

"It's not any huge surge in demand that's causing the drawdown," said a spokesman for a large refiner that is reducing inventories for tax reasons.

Companies usually reduce stocks by importing less oil, then drawing on inventories to refine into fuel. Last week, oil imports hit an 11-month low, the EIA said.

The refiner, like much of the oil industry, uses a form of accounting called "last in, first out," or LIFO, to value their inventories. The practice allows a company to claim each barrel of oil they sell was the most recent one purchased. That creates an incentive to lower end-of-year inventories when prices climb because the more expensive oil is the "first out," allowing the remaining oil to be taxed at a lower rate.

Oil inventories are typically valued each year using prices at the start of the year, said Les Schneider, partner at the Washington, D.C., law firm Ivins, Phillips & Barker and an expert on inventory taxation. If a refiner builds up one million barrels of oil inventories over the course of 2009, it could value that crude at the January 2009 price of roughly $40 a barrel. But if the refiner ends 2010 with 1.5 million barrels in storage, the additional 500,000 barrels would be valued at around $80 a barrel, the January 2010 price.

In addition, oil companies face taxes in Gulf Coast states based on the level of inventory they have in storage, providing another incentive to draw down year-end inventories.

Crude stockpiles fell sharply in November and December in three of the past four years, only to quickly rebound. Inventories are down nearly 3% nationwide in the past two weeks of government data, though they remain well above the historical average.

"Year after year, we see crude inventories in the Gulf Coast region decline in December…and it doesn't mean a darn thing in terms of whether the global oil market is tight or not," said Tim Evans, an oil analyst at Citi Futures Perspective.

The Obama administration has periodically tried to end LIFO accounting, and earlier this month, the co-chairs of a presidential commission charged with finding ways to reduce the deficit proposed doing away with the practice.

Companies that use LIFO, however, have opposed its repeal, saying it protects them against rising prices. The American Petroleum Institute, the main oil-industry lobbying group, has argued that repealing LIFO would result in a "significant upfront tax increase."

Jensen Comment
Moves are now underway to end LIFO for tax purposes and as an accounting alternative. This would make U.S. GAAP much more like IFRS international rules that never have allowed LIFO.

Free Accounting History Book (U.K, Accountants)
Capsule Commentary, by Steve Zeff,

ROBERT H. PARKER, STEPHEN A. ZEFF, and MALCOLM ANDERSON, Major Contributors to the British Accountancy Profession: A Biographical Sourcebook (Edinburgh, Scotland, U.K.: The Institute of Chartered Accountants of Scotland, 2012, ISBN 978-1-904574-85-9, pp. 137).

This is a successor to Robert H. Parker's compilation of obituaries that was published in 1980 by Arno Press. But this edition reproduces obituaries, profiles, and interviews with “major contributors” to the British accounting profession, while the earlier volume was confined to British accountants. This book reports on 37 important figures who died between 1941 and 2010, and the coverage includes professional accountants, academics, accountants in industry, editors of professional and academic journals, librarians, executives in professional institutes, and public servants.

The authors supply a lengthy introduction in which they comment on the roles played by the major contributors as well as on the changing scene in the British accounting profession during the past three decades. In a supplement, they supply references to other sources of biographical information about the individuals treated in the book.

As with other research monographs published by the Institute of Chartered Accountants of Scotland, this volume may be downloaded without charge from the Institute's website (http://icas.org.uk).

MAAW Accounting History database --- http://maaw.info/

History of Accountics Science ---
http://www.trinity.edu/rjensen/Theory01.htm#AccounticsHistory

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

 




Humor October 1-31, 2012

Three German Shepherds Walk into a Bar ---
http://www.youtube.com/watch_popup?v=f309fSTWYo4

"Lone Ranger" Story -Jay Thomas on Dave Letterman ---
http://stg.do/0N3c

Peter Sellers Gives a Quick Demonstration of British Accents ---
http://www.openculture.com/2012/09/peter_sellers_gives_a_quick_demonstration_of_british_accents.html

German Waterbed --- http://www.youtube.com/embed/9wm-Ge8LL7o?rel=0

James Cagney and Bob Hope --- http://videos2view.net/Hope-Cagney.htm

Tech News Collection (history of the Illinois Institute of Technology) ---
http://archives.iit.edu/technews/
Blast From the Past April Fools Issue --- http://archives.iit.edu/technews/volume128/tnvol128no8.pdf#page=2
Search on the word "Fools" for other interesting links

Ohio State Students Sing "Lucille" ---
http://www.sodahead.com/entertainment/osu-students-sing-lucille-obama-this-is-great/question-3232925/

Marx Bros in Lydia the Tatooed Lady ---
http://www.youtube.com/watch?v=n4zRe_wvJw8


Forwarded by Maureen

1.. The sport of choice for the urban poor is BASKETBALL.

2.. The sport of choice for maintenance level employees is BOWLING.

3.. The sport of choice for front-line workers is FOOTBALL.

4.. The sport of choice for supervisors is BASEBALL.

5.. The sport of choice for middle management is TENNIS.

6.. The sport of choice for corporate executives and officers is GOLF.

THE AMAZING CONCLUSION:

The higher you go in the corporate structure, the smaller your balls become.

Therefore, one might conclude, there must be a ton of people in Washington playing marbles.


Forwarded by Paula

Never squat with your spurs on

Will Rogers, who died in a 1935 plane crash, was one of the greatest political sages this country has ever known.

Some of his sayings: 1. Never slap a man who's chewing tobacco.

2. Never kick a cow chip on a hot day.

3. There are two theories to arguing with a woman. Neither works.

4. Never miss a good chance to shut up.

5. Always drink upstream from the herd.

6. If you find yourself in a hole, stop digging.

7. The quickest way to double your money is to fold it and put it back into your pocket.

8. There are three kinds of men: The ones that learn by reading. The few who learn by observation. The rest of them have to pee on the electric fence and find out for themselves.

9. Good judgment comes from experience, and a lot of that comes from bad judgment.

10. If you're riding' ahead of the herd, take a look back every now and then to make sure it's still there.

11. Lettin' the cat outta the bag is a whole lot easier'n puttin' it back.

12. After eating an entire bull, a mountain lion felt so good he started roaring. He kept it up until a hunter came along and shot him. The moral: When you're full of bull, keep your mouth shut.

ABOUT GROWING OLDER...

First ~Eventually you will reach a point when you stop lying about your age and start bragging about it.

Second ~ The older we get, the fewer things seem worth waiting in line for.

Third ~ Some people try to turn back their odometers. Not me; I want people to know 'why' I look this way. I've traveled a long way, and some of the roads weren't paved.

Fourth ~ When you are dissatisfied and would like to go back to youth, think of Algebra.

Fifth ~ You know you are getting old when everything either dries up or leaks.

Sixth ~ I don't know how I got over the hill without getting to the top.

Seventh ~ One of the many things no one tells you about aging is that it's such a nice change from being young.

Eighth ~ One must wait until evening to see how splendid the day has been.

Ninth ~ Being young is beautiful, but being old is comfortable.

Tenth ~ Long ago, when men cursed and beat the ground with sticks, it was called witchcraft. Today it's called golf.

And, finally ~ If you don't learn to laugh at trouble, you won't have anything to laugh at when you're old.


Blonde Joke Forwarded by Paula

Two blonde girls were working for the city public works department.

One would dig a hole and the other would follow behind her and fill the hole in.

They worked up one side of the street, then down the other, then moved onto the next street, working furiously all day without a rest, one girl digging a hole, the other girl filling it in again.

An onlooker was amazed at their hard work, but couldn't understand what they were doing.

So he asked the hole digger, "I'm impressed by the effort you two are putting into your work, but I don't get it-why do you dig a hole, only to have your partner follow behind and fill it up again?"

The hole digger wiped her brow and sighed,"Well, I suppose it probably looks odd because we're normally a three-person team. But today the girl who plants the trees called in sick."

Jensen Comment
Last week on the AECM we had a message claiming most companies do not continue to use ABC costing. Yet it remains a heavy component of our cost and managerial courses as well as their textbooks. Could it be that ABC costing is like the "third girl" above who no longer shows up for work?


Neil Armstrong’s Parents Appear on the Classic American TV Show “I’ve Got a Secret,1962" ---
http://www.openculture.com/2012/10/neil_armstrongs_parents_appear_on_the_classic_american_tv_show_ive_got_a_secret_1962.html
Hint:  This isn't connected to the joke that "we'll have oral sex when the kid next door walks on the moon" ---
http://www.snopes.com/quotes/mrgorsky.asp





 

Humor Between October 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor103112

Humor Between September 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor093012

Humor Between August 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor083112

Humor Between July 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor073112

Humor Between June 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor063012

Humor Between May 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor053112  

Humor Between April 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor043012

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 October 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

 

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/