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:
- Integrate accounting research,
education and practice for students, practitioners and educators by
bringing professionally oriented faculty more fully into education
programs.
- Promote accessibility of doctoral
education by allowing for flexible content and structure in doctoral
programs and developing multiple pathways for degrees. The current
path to an accounting Ph.D. includes lengthy, full-time residential
programs and research training that is for the most part confined to
quantitative rather than qualitative methods. More flexible programs
-- that might be part-time, focus on applied research and emphasize
training in teaching methods and curriculum development -- would
appeal to graduate students with professional experience and
candidates with families, according to the report.
- Increase recognition and support for
high-quality teaching and connect faculty review, promotion and
tenure processes with teaching quality so that teaching is respected
as a critical component in achieving each institution's mission.
According to the report, accounting programs must balance
recognition for work and accomplishments -- fed by increasing
competition among institutions and programs -- along with
recognition for teaching excellence.
- Develop curriculum models, engaging
learning resources and mechanisms to easily share them, as well as
enhancing faculty development opportunities to sustain a robust
curriculum that addresses a new generation of students who are more
at home with technology and less patient with traditional teaching
methods.
- Improve the ability to attract
high-potential, diverse entrants into the profession.
- Create mechanisms for collecting,
analyzing and disseminating information about the market needs by
establishing a national committee on information needs, projecting
future supply and demand for accounting professionals and faculty,
and enhancing the benefits of a high school accounting education.
- Establish an implementation process to
address these and future recommendations by creating structures and
mechanisms to support a continuous, sustainable change process.
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:
- Accelerated revenue recognition in
software and service sales. This is the classic multiple
deliverables accounting issue. See
The Beauty of Internet Company Accounting.
- Recording discounts (losses) on hardware
sales as marketing expenses rather than cost of sales. Autonomy
bought hardware and sold it at discounts to customers as part of
software transactions. By recording the discounts as marketing expenses
rather than as a cost of sales, Autonomy inflated gross profit. Net
income (loss) was NOT affected by this practice.
- Accelerated revenue recognition by
recording revenue from sales via agents when those agents had not yet
agreed to an onward sale. This particular issue is complicated by
the vagaries of IFRS and its flexibility vis-a-vis US GAAP.
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 troubles. However, 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:
- Reconsideration of defining
and incorporating the terms going concern and substantial
doubt into U.S. GAAP
- The time horizon over which
management would evaluate the entity’s ability to meet its obligations
- The type of information that
management should consider in evaluating the entity’s ability to meet
its obligations
- The effect of subsequent
events on management’s evaluation of the entity’s ability to meet its
obligations
- 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
- Center on Budget and Policy Priorities (Robert Greenstein),
A Bonanza for Scrooge, But a Lump of Coal for Tiny Tim
- Center on Budget and Policy Priorities (James Horney),
Program Cuts Far Exceed Revenue Increases Under Latest Obama Offer
- Center on Budget and Policy Priorities (Chye-Ching Huang),
Two Things You Probably Don't Know About "Plan B"
- Center on Budget and Policy Priorities (Chuck Marr),
Plan B's Harshness Belies GOP Rhetoric on Poverty and Opportunity
- Citizens for Tax Justice,
Comparing Speaker Boehner’s “Plan B” Tax Proposal and President Obama’s
Latest Proposal
- Don't Mess With Taxes (Kay Bell),
Boehner's Plan B, Hated by Everyone
- Forbes (Janet Novack),
A Closer Look at Boehner's Plan B: Tax Hikes for Parents and Workers
- Forbes (Robert Wood),
Plan B: Who Wants To Be A Millionaire?
- Tax Foundation (Stephen J. Entin & William McBride),
The Impact of Speaker Boehner's Millionaire Tax
- Tax Vox Blog (Howard Gleckman),
Should Working Class Families Pay Higher Tax so High Income People Can Pay
Less?
"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 Product, the 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:
- Bob Kerrey (The New School), $3,047,703
- Shirley Ann Jackson (Rensselaer Polytechnic Institute), $2,340,441
- David Pollick (Birmingham-Southern College), $2,312,098
- Mark Wrighton (Washington University), $2,268,837
- Nicholas Zeppos (Vanderbilt University), $2,228,349
- Steven Sample (USC), $1,963,710
- Lee Bollinger (Columbia University), $1,932,931
- Richard Levin Yale University $1,616,066
- Robert Zimmer (University of Chicago) $1,597,918
- 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
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
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 Reuters, a
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 Deloitte –
for 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’s 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 at Forbes.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:
- Does the relationship create a mutual or
conflicting interest between the accountant and the audit client?
- Does the relationship place the accountant
in
the position of auditing his or her own work?
- Does the relationship result in the
accountant acting as management or an employee of the audit client?
- Does the relationship place the accountant
in a position of being an advocate for the 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:
- The world’s Muslim population is growing
at about twice the rate of the non-Muslim population, the
Pew Research Center estimates, driving the
growth of the Islamic banking industry.
- Banks in the Middle East are flush with
cash because of high oil prices. Islamic banks, particularly those
that were not hard hit by the financial crises in the US and Europe,
are looking for opportunities to park their cash. Worldwide, Islamic
assets held by banks account for an estimated $1.1 trillion,
according to Ernst & Young’s
Islamic banking report. Their share of all
commercial bank assets varies from country to country. In the Middle
East and North Africa, Islamic assets constitute an average 14% of
banks’ assets.
- Muslim countries have increased government
spending to stimulate, develop and sustain economic activity since
the beginning of the Arab Spring.
- Investors worldwide are seeking safer
investments following global financial crises. Sukuk are unsecured,
asset-based loans. Unlike asset-backed loans, which use buildings,
land or patents as collateral, sukuk must be based at least 51% on
an asset that generates rent, such as a building. The sukuk issuer
can make amortised payments or a bullet payment at the end to pay
off the sukuk. While the majority of the payments must come from the
rent, a smaller portion can come from profits that a business
generated.
“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.
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:
- J. Kenneth Alderman of Birmingham, Ala.
- Jack R. Blair of Germantown, Tenn.
- Albert C. Johnson of Hoover, Ala.
- James Stillman R. McFadden of Germantown
- Allen B. Morgan Jr. of Memphis
- W. Randall Pittman of Birmingham
- Mary S. Stone of Birmingham
- Archie W. Willis III of Memphis
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
2012-270Washington, 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 2011, New
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
"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:
- Curricula be refreshed to sufficiently prepare
students for careers once they graduate. That includes cutting
time-to-degree to less than five years, closing gaps in students'
ability to communicate complex topics to both technical and nontechnical
audiences, teaching students to work more collaboratively across
disciplines, and requiring students to learn new science and technology
outside of their academic training. Departments also need to be more
transparent about the kinds of career opportunities available to their
Ph.D. students.
- The current system of financial support for
graduate students be overhauled. While student debt was not discussed at
length because most students in the field receive research grants and
fellowships, the speakers said that the support system now in place
rests too heavily on individual research grants and involves serious
conflicts between the education of graduate students and the needs of
grant-supported research. The committee recommended that federal and
state agencies, private foundations, and universities take steps to
"decouple" more student-support funds from specific research projects so
that students will have better balance between their teaching
responsibilities and their research as they seek to finish their degrees
in less than five years.
- Departments review the size and mix of
students in their programs. While the speakers said it was important to
welcome international students, programs need to place a high priority
on building "the domestic fraction of their graduate enrollments,"
especially students from underrepresented minority groups.
- Academic chemical laboratories adopt best
safety practices to protect students and other workers. Noting the heavy
publicity that
laboratory accidents and findings of safety
violations have drawn, speakers said that faculty need to lead by
example and create a "culture of safety" in campus labs. They also
called for uniform lab-safety standards across campuses.
- The American Chemical Society collect and
publish data on Ph.D. and postdoctoral student outcomes, organized by
department, on time-to-degree, types of job placements, salaries, and
overall student satisfaction with the graduate experience and employment
outcome.
- Institutions, departments, and faculty mentors
take greater responsibility for ensuring that postdoctoral students are
integrated into the fabric of the faculty and receive better mentoring
to support their professional development.
"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:
- Integrate accounting research, education
and practice for students, practitioners and educators by bringing
professionally oriented faculty more fully into education programs.
- Promote accessibility of doctoral
education by allowing for flexible content and structure in doctoral
programs and developing multiple pathways for degrees. The current path
to an accounting Ph.D. includes lengthy, full-time residential programs
and research training that is for the most part confined to quantitative
rather than qualitative methods. More flexible programs -- that might be
part-time, focus on applied research and emphasize training in teaching
methods and curriculum development -- would appeal to graduate students
with professional experience and candidates with families, according to
the report.
- Increase recognition and support for
high-quality teaching and connect faculty review, promotion and tenure
processes with teaching quality so that teaching is respected as a
critical component in achieving each institution's mission. According to
the report, accounting programs must balance recognition for work and
accomplishments -- fed by increasing competition among institutions and
programs -- along with recognition for teaching excellence.
- Develop curriculum models, engaging learning
resources and mechanisms to easily share them, as well as enhancing
faculty development opportunities to sustain a robust curriculum that
addresses a new generation of students who are more at home with
technology and less patient with traditional teaching methods.
- Improve the ability to attract high-potential,
diverse entrants into the profession.
- Create mechanisms for collecting, analyzing
and disseminating information about the market needs by establishing a
national committee on information needs, projecting future supply and
demand for accounting professionals and faculty, and enhancing the
benefits of a high school accounting educatio
- Establish an implementation process to address
these and future recommendations by creating structures and mechanisms
to support a continuous, sustainable change process.
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
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 consultant. Almost
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 Good.
But, 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:
- I see nothing in the current proposals that
reflect Mr. Schroeder's views from before he became a board member.
- In the case of Mr. Linsmeier, I do know
something about his background, but I haven't looked at his academic
publications; but I can't imagine that the expected loss model looks
anything like the views he would have come to independently as an
academic. I am also compelled to point out that Mr. Linsmeier
changed his vote only a short while before his re-appointment to the
Board was announced.
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:
- Revised introduction reflecting the current
status, likely next steps, and what companies should be doing now
(see page 2);
- Updated convergence timeline, including
current proposed timing of exposure drafts, deliberations, comment
periods, and final standards
(see page 7);
- More current analysis of the differences
between IFRS and US GAAP -- including an assessment of the impact
embodied within the differences
(starting on page 17); and
- Details incorporating authoritative standards
and interpretive guidance issued through July 31, 2011
(throughout).
This continues to be one of PwC's most-read
publications, and we are confident the 2011 edition will further your
understanding of these issues and potential next steps.
For further exploration of the similarities and
differences between IFRS and US GAAP, please also visit our
IFRS Video Learning Center.
To request a hard copy of this publication, please contact your PwC
engagement team or
contact us.
Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly
downplays the importance of these differences. It may well be that IFRS is more
restrictive in some areas and less restrictive in other areas to a fault. This
is one topical area where IFRS becomes much too subjective such that comparisons
of derivatives and hedging activities under IFRS can defeat the main purpose of
"standards." The main purpose of an "accounting standard" is to lead to greater
comparability of inter-company financial statements. Boo on IFRS in this topical
area, especially when it comes to testing hedge effectiveness!
One key quotation is on Page 165
IFRS does not specifically discuss the methodology
of applying a critical-terms match in the level of detail included within
U.S. GAAP.
Then it goes yatta, yatta, yatta.
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
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:
- Starting in 2005, Deutsche did some credit
trades where they bought protection from some Canadian pension funds and
sold protection to hedge funds, etc.
- The bought and sold protection were not
identical, with various technical bits of non-overlap that you can read
about at your leisure down below.1
- A credit crisis occurred, changing the risks
involved in those non-overlapping bits from silly, abstract, purely
theoretical risks into significantly more alarming and
more-likely-to-occur but still purely theoretical risks.2
- Deutsche’s people sort of ran around dopily
trying to figure out what to do about it. Here’s a condensed version of
the running around they did about the main risk, the “gap option” that
DB was short in its leveraged super senior trades:
[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.
- They got through things just fine
since after all they’d basically bought protection against world-ending
correlated defaults in investment-grade companies and those defaults
didn’t happen:
“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
- No harm, no foul, but still a little scary, so
after things settled down they did what they could to beef up their risk
management for the next crisis, including hiring Eric Ben-Artzi, a math
Ph.D. who’d worked at Goldman, in 2010.
- Among his other talents, Ben-Artzi had at
Goldman used models for some of these risks that were (1) more justified
by the
theoretical literature and (2) more
conservative.
- Then he went around being a dick about how
they’d handled their risks ages ago – “For several months, Mr Ben-Artzi
quizzed colleagues at Deutsche on how it modelled the gap option.”
- In 2006-2008 mind you. That is, for several
months in 2010, this guy was quizzing people about the quality
of their work during the financial crisis several years ago, when he
wasn’t there.
- You’d have fired him too.
- They did.
- He went to the SEC, as did two other former DB
employees, alleging that the various kerfuffling on the Deutsche
correlation desk amounted to accounting fraud.
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.
- The experiences of those frazzled
executives in charge of reducing risks in the credit derivatives
market are starting to resemble Alice’s adventures in Wonderland.
Alice shrank after drinking a potion, but was then too small to
reach the key to open the door. The cake she ate did make her grow,
but far too much. It was not until she found a mushroom that allowed
her to both grow and shrink that she was able to adjust to the right
size, and enter the beautiful garden. It took an awfully long time,
with quite a number of unpleasant experiences, to get there.
Aline van Duyn, "The adventure never ends in the derivatives
Wonderland," Financial Times, September 11, 2008 ---
Click Here
"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
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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
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:
-
Comparing the business tax systems of economies on a like-for-like basis
-
Benchmarking tax systems within economic and geographical groupings,
providing an opportunity to learn from peer-group economies
-
Identifying good practices and potential reforms through in-depth
comparative analysis
- Generating
robust data on tax systems around the world, including how they have
changed, and so helping to inform the development of good tax policy
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 ---
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For an elaboration on the reasons you should join a ListServ (usually
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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,
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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
|
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November 30, 2012
Bob
Jensen's New Bookmarks November 1-30, 2012
Bob Jensen at
Trinity University
For
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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
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.
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.
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.
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.
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.
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 ---
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
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?
- The historic halo reputations and media rankings of the universities
themselves are more important to applicants than teaching quality.
- Applicants assume that top-ranked schools have the best teachers without
really investigating such things as class size and faculty research
distractions before it's too late. And there are assorted outstanding
teachers in the top-ranked business schools.
- Classroom learning is only one component of what applicants want from a
university. Possibly even more important are the business and alumni
connections that are outstanding in the top-ranked business schools,
especially when seeking a first job or changing jobs.
- The top ranked business schools are sometimes noted for being hard work
accompanied by relatively easy grading. For example, we hear horror stories
about all the writing required each week by the Harvard Business School. But
we don't hear many complaints about the final course grades.
- Hand holding and close student-teacher relationships probably are more
important to students 18-years of age still seeking what to do with their
lives than top business school applicants averaging 27-years of age who
already have 4-5 years of college education plus experience on the mean
streets before they apply to Chicago’s
Booth School of Business,
Harvard Business School, and
Wharton.
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
- It came as no surprise that many (most?) members of the U.S. House of
Representatives and the U.S. Senate that writes the laws of the land made it
illegal for to trade in financial and real estate market by profiting
personally on insider information not yet available, including pending
legislation that they will decide, wrote themselves out of the law making
it legal for them to personally profit from trading on insider information.
What came as a surprise is how leaders at the very top of Congress make
millions trading on inside information with impunity and well as immunity.
- The Congressional leader that comes off the worst in this Sixty
Minutes "Insider" segment is former House Speaker and current Minority
leader
Nancy Pelosi.
When confronted with specific facts on how she and her husband made some of
their insider trading millions she fired back at reporter Steve Kroft with
an evil glint saying what is tantamount to: "How dare you question me
about insider trades that are perfectly legal for members of Congress. Who
are you to question my ethics about exploiting our insider trading
privileges. Back off Steve or else!" Her manner can be extremely scary.
Other Democratic Party members of Congress come off almost as bad in terms
of insider trading for personal gain.
- Current Speaker of the House,
John
Boehner, is more subtle. He denies making any of his personal portfolio
investment decisions and denies communicating with the person he hires to
make such decision. However, that trust investor mysteriously makes money
for Rep. Boehner using insider information obtained mysteriously. Other
Republican members of Congress some off even worse in terms of insider
trading.
- Members of Congress on powerful committees regularly make insider
profits on legislation currently being written into the law that is still
being held secret from the public. One of my heroes, former Senator
Judd Gregg,
is no longer my hero.
- Everybody knows that influence peddling in Congress by lobbyists, many
of them being former members of Congress, is a dirty business of showering
gifts on current members of Congress. What is made clear, however, is that
these lobbyists are personally getting something in return from friendly
members of Congress who pass along insider information to lobbyists. The
lobbyists, in turn, peddle this insider information back to the private
sector, such as hedge fund managers, for a commission. Moral of story:
Voters do not stop insider trading by a member of Congress by voting him
or her out of office if they become peddlers of insider information
obtained, as lobbyists, from their old friends still in the Congress.
- Five out of 435 members of the House of Representatives are seeking to
sponsor a bill to make it illegal for representatives and senators to profit
from trading on inside information. The Sixty Minutes show demonstrates how
Nancy Pelosi, John Boehner, and other House leaders have buried that effort
so deep in the bowels of the legislative process that there's no chance in
hell of stopping insider trading by members of Congress. Insider trading is
a privilege that attracts unethical people to run for Congress.
Watch the "Insider" Video Now While
It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody
"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, 2012COSO 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, 2012Managing 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?
- Illinois
- Rhode Island
- Connecticut
- Kentucky
- Louisiana
- Oklahoma
- West Virginia
- New Hampshire (Sigh)
- Alaska
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 ---
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
- Syracuse University (68%),
- Purdue University (67%),
- Hofstra University (59%),
- Babson College (59%), and
- 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
- CFOs are focused on business analytics and
business applications more than on technology
- New applications in financial governance rank
high on improving compliance and efficiency
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:
- Reconciliation and faster closing of
the books
- Collaboration in Microsoft Word
- Change Management and version
comparison
- XBRL Taxonomy setup, XBRL Validation
and XBRL Tagging in Microsoft Word
- “No more pencils down”
- A streamlined process from Closing to
Filing with the SEC
- Integrated process with SecureX Filings
for easy filing and printing of the final documents
Contact us today for a demo.
Email
info@cirrusbi.com, or
register
for a demo you can watch at your desk.
Read the
Trending
News – or – 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:
- The auditor’s qualifications and
performance.
- The quality and candor of the
auditor’s communications with the audit committee and the company.
- The auditor’s independence,
objectivity, and professional skepticism.
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.” See “The
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
the “auditor
shopping” game. 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) 2012-02
1
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 350
3
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.
- The science and technology (STEM) opportunities for graduates (bachelor,
masters, and Ph.D. graduates) are heavily skewed among the sub-disciplines.
Whereas chemistry, physics, mathematics, and geology graduates struggle to
advance their careers with good jobs following graduation, IT and most of
the engineering graduates face better prospects. Emory University dropped
its geology program, and Texas universities dropped some of their physics
programs. For better job opportunities many science and engineering
graduates enter MBA programs and/or doctoral programs. Opportunities in law
declined.
- Science and engineering Ph.D. graduates finding opportunities in
industry do not find the same opportunities in academe. Universities that
have tenure track openings in science and engineering are usually flooded
with highly qualified applicants. And affirmative action comes into play
where qualified women and minorities are favored to fill those science and
engineering tenure track openings. There are shortages of women and minority
candidates in engineering and computer science in industry and in academe.
- Job opportunities are geographically skewed for science and technology
graduates. For example, the son of one of our best friends up here in the
White Mountains is graduating in IT this year from a regional college in
northern New Hampshire. If he had instead been an accounting graduate there
would be opportunities to work for a regional accounting firm, business
firm, and even regional government agencies. After he gains experience say
in tax accounting, there might also be opportunities to start his own
accounting firm northern New Hampshire. But there are virtually no decent IT
opportunities regionally, just as there are virtually no regional
opportunities for most any type of engineering, science, or mathematics
graduate. IT and engineering job opportunities exist but vary
geographically. In most instances graduates must move to large cities
offering varying career opportunities. The woman and mother of the IT
graduate mentioned above has two degrees in entomology. But to live in
Littleton, New Hampshire her business is into landscaping, house painting,
and wallpapering. To find a career in entomology she would have to move far
from Littleton, NH.
- In the 1950s, an accounting and engineering graduate with a C average
generally faced some good job opportunities following graduation. With grade
inflation in colleges and universities over the ensuing decades, a C average
graduate in almost any discipline faces dismal job opportunities in 2012.
For example, those accounting graduates having a 3.5 or higher grade
averages have the world at their feet in the 21st Century in North America.
But those with 2.3 grade averages might have to move back home to live with
their parents and/or accept a job that does not even require a college
education. The same thing has happens to 2.3 g.p.a. science and engineering
graduates.
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:
- Bill Copeland, vice chairman, U.S. Life
Sciences & Health Care leader and U.S. Health Plans leader, Deloitte LLP
- Michael Raynor, director, Deloitte Consulting
LLP, and a New York Times best-selling author
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
|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, COMMERCIAL
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:
- The organization aligns with the mission and
vision of the Institute for Transformational Learning;
- The system protects the intellectual property
of faculty and the university;
- Faculty can modify and contribute to the
course development;
- The system has access to the platform's
foundation code.
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
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.
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:
- “Some deception is accepted as part of
marketplace behavior. Caveat emptor is still a practical ‘default’
position.…the duty to favor the firm becomes almost automatic.”
- “Juries are mystified by the complexities of
financial transactions.”
- The hurdle of the reasonable doubt standard is
too high as “jurors are generally likely to find ‘reasonable doubt’”
which masquerades for their ignorance.
- “Financial wrong-doing at the highest levels
often has the protection of corporate attorneys representing the alleged
wrong-doers.” Ironically, these fees are paid by the shareholders who
have been injured by the fraud.
- “The FBI’s resources are limited, and the
Department of Justice can only prosecute the files that the FBI
prepares; in addition, agents are promoted within the ranks based on
successful convictions…” The number of employees at the FBI and the SEC
is simply too small to confront these demons.
- “There is the appearance that major civil
lawsuits and government-sponsored settlements create sufficient
accountability, but individuals are not held accountable as criminal
laws would, and the firms themselves often pay just a portion of the
monies they ‘earned’ as a result of deceptive practices.”
- “Neither political party has the nerve to
alienate the major banks as potential funders of their political
campaigns.”
- “Financial fraud detection requires a whole
different type of training. Creating these types of specialized agents
takes significant time and money.”
- “It is possible that new criminal statutes
need to be crafted that will meet the due process and vagueness concerns
of” recent court cases.
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.
"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?
- Students (The Economist)
- Deans (U.S. News)
- Recruiters of Graduates (the WSJ)
- Alumni (Business Week) ---
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 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 |
Insead |
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 School |
EMBA |
186,324 |
138 |
|
14 |
18 |
Iese Business School |
GEMBA |
215,027 |
58 |
|
15 |
10 |
London Business School |
EMBA |
180,070 |
68 |
|
16 |
10 |
Duke University: Fuqua |
Duke MBA - Global
Executive |
250,913 |
43 |
|
17 |
14 |
CUHK Business School |
EMBA |
309,340 |
45 |
|
18 |
16 |
Kellogg / WHU Beisheim |
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 Europe |
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 School |
EMBA |
140,590 |
75 |
|
32 |
24 |
City University: Cass |
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: Saïd |
EMBA |
182,709 |
56 |
|
39 |
38 |
UCLA: Anderson |
EMBA |
195,783 |
46 |
|
40 |
- |
ESMT - European School of Management and Technology |
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 Bocconi |
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 Management |
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
Survey: MBA Admission Officials Uncertain About Revised GMAT
Striking the Perfect Tone in MBA Essays
Which MBA Schools Are Worth the Investment?
Fewer 2012 MBA Applications May Mean More Competition in 2013
5 Benefits of a Dual JD/MBA
Convince MBA Admissions Officials You’ve Done Your Research
5 Reasons Not to Get a Dual JD/MBA
5 Things to Weigh Before Applying to B-School
2013 Best Colleges Preview: Top 10 Business Programs
Strategize and Manage the MBA Recommendation Process
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
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 from “bean
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 titled “The
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:
- The world’s Muslim population is growing at
about twice the rate of the non-Muslim population, the
Pew Research Center estimates, driving the
growth of the Islamic banking industry.
- Banks in the Middle East are flush with cash
because of high oil prices. Islamic banks, particularly those that were
not hard hit by the financial crises in the US and Europe, are looking
for opportunities to park their cash. Worldwide, Islamic assets held by
banks account for an estimated $1.1 trillion, according to Ernst &
Young’s
Islamic banking report. Their share of all
commercial bank assets varies from country to country. In the Middle
East and North Africa, Islamic assets constitute an average 14% of
banks’ assets.
- Muslim countries have increased government
spending to stimulate, develop and sustain economic activity since the
beginning of the Arab Spring.
- Investors worldwide are seeking safer
investments following global financial crises. Sukuk are unsecured,
asset-based loans. Unlike asset-backed loans, which use buildings, land
or patents as collateral, sukuk must be based at least 51% on an asset
that generates rent, such as a building. The sukuk issuer can make
amortised payments or a bullet payment at the end to pay off the sukuk.
While the majority of the payments must come from the rent, a smaller
portion can come from profits that a business generated.
“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
- Only four
networks failed to grow revenue, a complete turnaround in fortunes
from last year
- Deloitte
takes the mantle as the world’s largest professional services
network for the first time in history
- Deloitte
reports $9 million more global revenue than PwC, the slenderest
margin
- Consulting
growth alone (12%), including major acquisitions in the US (Bearing
Point) and UK (Driver’s Jonas) help propel Deloitte to top spot
- PwC is
still the largest global audit firm and has the largest tax
business. The steady growth in these core businesses in comparison
to Deloitte places the network in a good position for 2011
Service
lines
- Fee
pressure still widespread in the developed economies although it is
easing
- Audit the
hardest hit by fee pressure although audit revenue from most
networks increased. PwC is the top audit firm followed by Deloitte
- Tax was
the strongest performer, buoyed by a strong demand in transfer
pricing work and international tax advice. PwC leads tax followed by
E&Y
-
Advisory/consulting was a mixed bag with some networks growing
particularly well and others losing out. There is healthy demand for
risk management, internal audit and due diligence services
-
Sustainability services continues to grow and the mid-tier are
starting to become more involved
One of the
selectively booming non-audit businesses has been workouts or bankruptcy
advisory. PwC’s
huge long-term engagement with the Lehman bankruptcy in the UK is a
prime example. Some of PwC’s financial services audit clients
JPMorgan Chase and Bank of America also grew
because of acquisitions during the crisis. Combined with their audit of
Goldman Sachs and involvement in
Treasury TARP activities, non-audit revenues are
growing for PwC. But revenues and profitability are distributed unevenly by
geography and service line in all the firms. Although Deloitte overtook PwC
as the largest global firm in revenue this past year, those rankings are not
only based on the firms own un-audited, self-reported figures, but show a
definite emphasis on consulting and advisory services as a growth engine
versus audit.
Continued in article
"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 |
|
|
Related Media
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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.
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?
- Illinois
- Rhode Island
- Connecticut
- Kentucky
- Louisiana
- Oklahoma
- West Virginia
- New Hampshire (Sigh)
- Alaska
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
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
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Fraud Updates ---
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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
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Bob
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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
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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 ---
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