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/.

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/

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.

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

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:
 

1. Reconsideration of defining and incorporating the terms going concern and substantial doubt into U.S. GAAP
    
2. The time horizon over which management would evaluate the entity’s ability to meet its obligations
    
3. The type of information that management should consider in evaluating the entity’s ability to meet its obligations
    
4. The effect of subsequent events on management’s evaluation of the entity’s ability to meet its obligations
    
5. Whether to provide guidance on the liquidation basis of accounting.

The Board then modified the objective of the project to require an entity to provide earlier disclosures (early warning disclosures) as it became increasingly likely that the entity would be unable to meet its obligations as they become due. This objective replaced the project’s initial objective of incorporating AU 341 into U.S. GAAP because the Board came to believe that users of financial statements would benefit more from ongoing and incremental disclosures about risk than they would if such disclosures were required only when management concluded that there was substantial doubt about the entity’s ability to continue as a going concern. Because of comments from stakeholders that the guidance about when and how an entity should apply the liquidation basis of accounting was unclear, the Board also added a separate objective to provide guidance related to that topic.

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

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

Superseded Tentative Decisions
 

 

Early Warning Disclosures

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

Subsequent Events

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

Time Horizon

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

Next Steps

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

Board/Other Public Meeting Dates

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

The following are links to the minutes for each meeting.

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

Background Information

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

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

Contact Information

Brian North
Project Manager
bnorth@fasb.org

Daghan Or
Practice Fellow
dor@fasb.org

Kathryn Cantlon
Postgraduate Technical Assistant
kscantlon@fasb.org

 

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

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

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

The Competing Obama and Boehner Tax Plans

• 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

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

 

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:

• Movies by Rotten Tomatoes
• Trends, especially focused on marketing and millennials - a good help with understanding some of our students
• Trends in academic libraries, I found especially insightful when we think about the future of intellectual property

Happy New Year to you, and yours!

 

"Six Social-Digital Trends for 2013," by David Armano, Harvard Business Review Blog, December 12, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/12/six_social-digital_trends_for.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Bob Jensen's threads on technology trends are at
http://www.trinity.edu/rjensen/Bookbob4.htm

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

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

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

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

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

Rick Lillie
CSU San Bernardino

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

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

. . .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

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

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

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

Student A

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

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

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

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

Continued in article

Here are the ten highest paid private college presidents:

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

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

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

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

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

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

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

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

An Accounting Review Article is Retracted

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

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

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

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

 

November 15, 2012 reply from Bob Jensen

Hi Richard,

 

Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s?

 

 

Thank you for the heads up on the Hinton and Gold article. This is sad, because Steve Kachelmeier pointed out this article to me last year as an example of where the researchers used real-world experimentation data using subjects from a large CPA firm as opposed to students. Another factor that surprised me was was sample size of  supposedly 2,614 auditors.

 

 

Bob Kaplan wrote the following in
"Accounting Scholarship that Advances Professional Knowledge and Practice," AAA Presidential Scholar Address by Robert S. Kaplan, The Accounting Review, March 2011, pp. 372-373

 

Some scholars in public health schools also intervene in practice by conducting large-scale field experiments on real people in their natural habitats to assess the efficacy of new health and safety practices, such as the use of designated drivers to reduce alcohol-influenced accidents. Few academic accounting scholars, in contrast, conduct field experiments on real professionals working in their actual jobs (Hunton and Gold [2010] is an exception). The large-scale statistical studies and field experiments about health and sickness are invaluable, but, unlike in accounting scholarship, they represent only one component in the research repertoire of faculty employed in professional schools of medicine and health sciences.  

 

 

One thing I note is that the article has not been removed from the TAR database. The article still exists with a large "Retracted" stamp that appears over every page of the article

http://aaajournals.org/doi/pdf/10.2308/accr.2010.85.3.911

 

 

I attached the picture of a sample page.

 

 

Would the Techies on the AECM explain this:
The "Retracted" stamp is transparent in terms of copying any passage or table in the article. In other words, the article can be quoted as easily by copy and paste as text without any interference from the "Retracted Stamp." It cannot, however, be copied as a picture without interference from the "Retracted Stamp." 

 

Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s

 

 

Years ago Les Livingstone was the first person to detect a plagiarized article in TAR (back in the 1960s when we were both doctoral students at Stanford). This was long before digital versions articles could be downloaded. The TAR editor published an apology to the original authors in the next edition of TAR. The article first appeared in Management Science and was plagiarized in total for TAR by a Norwegian (sigh).

 

 

Not much can be done to warn readers about hard copy articles if they are subsequently "retracted." One thing that can be done these days is to have an AAA Website that lists retracted publications in all AAA journals. The Hunton and Gold article may be the only one since the 1960s.

 

Respectfully,
Bob Jensen

 

November 28, 2012 forward from Dan Stone

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

Explanation of Retraction (Hunton & Gold 2010)

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

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

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

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

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

Signed:

James Hunton Anna Gold

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

 

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

Harry Markopolos <notreallyharry@outlook.com>

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

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

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

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

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

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

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

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

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

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

Sincerely,

Harry Markopolos

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

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

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

An Accounting Review Article is Retracted

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

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

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

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

 

November 15, 2012 reply from Bob Jensen

Hi Richard,

 

Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s?

 

 

Thank you for the heads up on the Hinton and Gold article. This is sad, because Steve Kachelmeier pointed out this article to me last year as an example of where the researchers used real-world experimentation data using subjects from a large CPA firm as opposed to students. Another factor that surprised me was was sample size of  supposedly 2,614 auditors.

 

 

Bob Kaplan wrote the following in
"Accounting Scholarship that Advances Professional Knowledge and Practice," AAA Presidential Scholar Address by Robert S. Kaplan, The Accounting Review, March 2011, pp. 372-373

 

Some scholars in public health schools also intervene in practice by conducting large-scale field experiments on real people in their natural habitats to assess the efficacy of new health and safety practices, such as the use of designated drivers to reduce alcohol-influenced accidents. Few academic accounting scholars, in contrast, conduct field experiments on real professionals working in their actual jobs (Hunton and Gold [2010] is an exception). The large-scale statistical studies and field experiments about health and sickness are invaluable, but, unlike in accounting scholarship, they represent only one component in the research repertoire of faculty employed in professional schools of medicine and health sciences.  

 

 

One thing I note is that the article has not been removed from the TAR database. The article still exists with a large "Retracted" stamp that appears over every page of the article

http://aaajournals.org/doi/pdf/10.2308/accr.2010.85.3.911

 

 

I attached the picture of a sample page.

 

 

Would the Techies on the AECM explain this:
The "Retracted" stamp is transparent in terms of copying any passage or table in the article. In other words, the article can be quoted as easily by copy and paste as text without any interference from the "Retracted Stamp." It cannot, however, be copied as a picture without interference from the "Retracted Stamp." 

 

Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s

 

 

Years ago Les Livingstone was the first person to detect a plagiarized article in TAR (back in the 1960s when we were both doctoral students at Stanford). This was long before digital versions articles could be downloaded. The TAR editor published an apology to the original authors in the next edition of TAR. The article first appeared in Management Science and was plagiarized in total for TAR by a Norwegian (sigh).

 

 

Not much can be done to warn readers about hard copy articles if they are subsequently "retracted." One thing that can be done these days is to have an AAA Website that lists retracted publications in all AAA journals. The Hunton and Gold article may be the only one since the 1960s.

 

Respectfully,
Bob Jensen

 

November 28, 2012 forward from Dan Stone

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

Explanation of Retraction (Hunton & Gold 2010)

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

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

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

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

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

Signed:

James Hunton Anna Gold

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

 

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

Harry Markopolos <notreallyharry@outlook.com>

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

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

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

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

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

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

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

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

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

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

Sincerely,

Harry Markopolos

 

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

July 1964 Plagiarized Article in The Accounting Review

Hi Dan,

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

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

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

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

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

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

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

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

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

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

December 11, 2012 reply from Paul Williams

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

A few days ago I reported at Forbes.com on a new business alliance between PwC China and Thompson 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.

 

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.

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

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

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

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

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

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

TOPICS: Pension Accounting

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

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

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

This is a common practice for asset management firms, and it’s just common sense. Do stock brokers broadcast tips to their competitors? Does Warren Buffet tell the world where he’s investing next? Does Disney broadcast which plots of land it is planning to buy for its next theme park? Of course not, and IV takes a similar approach to our investments.

Ah, sure, this is all to throw other companies off the scent of what IV is "investing" in. That makes sense if IV were actually an investment company, rather than a shakedown play. The idea that publicly stating what patents it owns would somehow "broadcast tips" to "competitors" is ridiculous. Who out there is really an IV competitor? No, what IV is almost certainly worried about is that, if the extent of its activities were known, there would be more fodder for real and necessary reform against trolling -- and, more importantly, it's worried about tipping off the companies it's about to go after. It's not about competition -- it's about avoiding a smart company going to court to get a declaratory judgment against IV, which they admit later on in the post:

Moreover, were we to publish the entirety of our holdings we, or any other company for that matter, could find ourselves mired down in a series of tactical declaratory judgments and reexaminations.

Shocking. Perhaps if you didn't go around demanding huge sums of money from companies with a giant stack of vague and overly-broad patents you wouldn't face a series of declaratory judgments and re-exams.

In fact, no one has ever suggested that transparency is needed in the real estate world, yet properties are routinely held in the name of holding companies. When it comes to property ownership, patents shouldn’t be held to a different of set of rules

Well, if property holding companies routinely used their assets to shake down every other real estate owner out there, perhaps there would be calls for the practice to end. Plus, sorry, patents are not "property" like real estate is property. And, in fact, this is the key to IV's entire business model. If patents properly delineated the boundaries of what the patents covered, there wouldn't be much room for trolling. But, instead, IV relies on the fact that patents are broad and vague and "might" apply to all sorts of things.

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

Thankfully, however, the good folks at PlainSite, who try to shine some light on the hidden corners of the legal system, decided to take Intellectual Ventures up on its offer -- and actually went through the data to see what was lurking:

Like all of the USPTO's on-line systems, the assignment database is a technological abomination--sadly ironic for the agency that effectively manages the nation's technology rights. (The USPTO does deserve credit for making raw XML data available through Google, which is where our project began.) It must be noted that Intellectual Ventures would have had a much harder time lurking in the shadows all these years if government information technology systems, such as the USPTO assignment database and different states' corporation databases, were kept up to par. In fact, its business model would likely be impossible, as the courts would be likely to label the company as a vexatious litigant if they only knew how many lawsuits it filed.

In the end, after digging through the database, PlainSite has identified -- and released for all your enjoyment -- the names of what appear to be over 2,000 shell companies, though they admit that some of them may be fully independent. But... many of them apparently had "some obvious overlaps" like sharing "managing corporations, telephone numbers, and other factors." Oops. They're hoping not to "crowdfund" the efforts here, but rather to crowdsource the data. As they note, they're spreading this information, because "we hope that Congress and the courts take notice of one of the largest racketeering schemes ever perpetrated on the nation, with some of its richest billionaires acting more like thugs than visionaires."

Continued in article

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

Message from Denny Beresford on December 11, 2012

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

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

Denny

SEC Release 2012-259

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

FOR IMMEDIATE RELEASE
2012-259

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

---

Additional Materials

• SEC Order

---

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 2012-270 Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a digital financial media company and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors. Additional Materials SEC complaint v. TheStreet SEC complaint v. Ashman SEC complaint v. Alwine and Barnett 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

• SEC Revokes Registration of Toronto-Based Broker and Bans Two Executives from U.S. Securities Industry for Allowing Layering
• SEC Charges Financial Media Company and Executives Involved in Accounting Fraud
• SEC Charges Connecticut-Based Adviser for “Skin in the Game” Misstatements About CDOs
• SEC Charges Germany-Based Allianz SE with FCPA Violations

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

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
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http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118301552.html

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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.

 

"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.

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

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

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

"Can the Estate Tax Solve the Fiscal Cliff?" by Christopher Matthews, Time Magazine, December 11, 2012 ---
http://business.time.com/2012/12/11/can-the-estate-tax-solve-the-fiscal-cliff/ 

Jensen Comment
I've been a long-time advocated of greatly increased estate taxation. But I also see problems if the threshold is set too high to protect family farms. Family farm estates, along with many other estates like farm estates, have frequent problems with liquidity. Estate taxes will exacerbate that problem to a point where the assets of the estate (e.g., the farm land and equipment) must be auctioned off to pay increased estate taxes. The end result will be ever-increasing loss of family farms to big agribusiness conglomerates. Maybe this is inevitable even without increasing estate taxes, but I would hope that along with increases in estate taxation some innovative solutions are found to allow farms to be passed on to family heirs rather than forcing these farms to be victims of ever-increasing ownership of the land by giant and faceless multinational corporations.

Question From Freakonomics:
Must there be a disconnect between introductory microeconomics and the business world?

"Putting Microeconomics to Work," by Steven D. Levitt, Freakonomics, November 27, 2012 ---
http://www.freakonomics.com/2012/11/27/putting-microeconomics-to-work/

I’ve long been puzzled by the almost complete disconnect between real-world businesses and academic economics.  After I graduated from college, I went to work as a management 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.

• Discourage replications by refusing to publish research that is only intended to reproduce the published findings
  This prevents getting P&T credit for mere replication research publication
  http://www.trinity.edu/rjensen/TheoryTAR.htm#Replication
  
  
   
• Discourage commentaries on published research
  This prevents getting P&T credit for mere questioning of published research outcomes
  http://www.trinity.edu/rjensen/TheoryTAR.htm#TARversusAMR
  
   
• Gaming for Tenure as an Accounting Professor ---
  http://www.trinity.edu/rjensen/TheoryTenure.htm
  (with a reply about tenure publication point systems from Linda Kidwell)
  
   
• How 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

 

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

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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.

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.

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.

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

"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

"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

• 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

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/643a6c06-42f0-11e2-aa8f-00144feabdc0.html#ixzz2EkdS3jxh

HSBC and Standard Chartered, the two biggest UK banks by market value, have agreed to pay almost $2.6bn in fines as part of record settlements with US authorities over money laundering allegations.

HSBC announced on Tuesday that it would pay $1.92bn and enter a deferred-prosecution agreement to settle accusations it allowed itself to be used by money launderers in Mexico and terrorist financiers in the Middle East.

More On this story

Business blog Virtue and vice at HSBC and StanChart UK ready to ‘trust’ US over failing banks HSBC sells some Central American units Lex HSBC / StanChart – rap on the knuckles FT’s Year in Finance

On this topic

Fitch downgrades HSBC over expansion push HSBC sells Ping An stake to Thai group HSBC left holding Amadeus stake Lombard Ocado / HSBC and Ping An

IN Banks

Tokyo loses out as foreign banks refocus KBC to sell €1.23bn in shares US and UK unveil failing banks plan US banks in fresh structured finance spree

Stuart Gulliver, HSBC’s chief executive, said: “We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes.

“Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters.”

StanChart agreed on Monday to pay $327m to several authorities in the US to settle allegations it violated US sanctions law and impeded government inquiries. That sum comes on top of the $340m the UK bank agreed to pay in August to New York state’s Department of Financial Services.

Until the HSBC settlement was reached, StanChart’s total $667m was to be the largest combined penalty paid to US authorities by a financial institution for allegedly breaching sanctions policy.

The broad allegations against HSBC were detailed in a July report by the Senate permanent subcommittee on investigations. The bank was alleged to have stripped details from transactions that would have identified Iranian entities, which may have put the bank in breach of US sanctions against that country.

The bank was said to have also moved billions of dollars in cash from its affiliate in Mexico to the US – more than any other Mexican bank – despite concerns raised with HSBC by authorities that such sums could only involve proceeds from illegal narcotics.

Since then, HSBC has increased its reserves to some $1.5bn to cover an agreement with US regulators that would settle the allegations.

As noted in its agreement with US Department of Justice, HSBC said its US subsidiary had increased its spending on anti-money laundering approximately ninefold between 2009 and 2011, and increased its anti-money laundering staffing almost 10-fold since 2010.

HSBC also said it had revamped its Know Your Customer programme, including treating non-US HSBC group affiliates as third parties subject to the same due diligence as all other customers; ended 109 correspondent relationships for risk reasons; clawed back bonuses for a number of senior executives and spent more than $290m on remedial measures.

StanChart was accused in August of defrauding regulators, falsifying records and obstructing government inquiries after New York state’s banking supervisor alleged the bank hid from regulators key details involving transactions with entities in countries including Iran.

After settling with New York – following the regulator’s threat to revoke StanChart’s state banking licence – the bank settled on Monday with the Federal Reserve, Department of Justice, Treasury Department and the Manhattan district attorney.

Lanny Breuer, assistant US attorney-general, said: “The United States expects a minimum standard of behaviour from all financial institutions that enjoy the benefits of the US financial system. Standard Chartered’s conduct was flagrant and unacceptable.”

The bank was accused of stripping identifying information from hundreds of billions of dollars of transactions involving Iran. Benjamin Lawsky, New York state’s banking regulator, had called StanChart a “rogue institution”.

Continued in article

"HSBC auditor talks on career opportunities," by Kathleen Buechel, The Ticker, October 10, 2011 ---
http://www.theticker.org/about/2.8218/hsbc-auditor-talks-on-career-opportunities-1.2650560#.UMc7NfJXfDM

During the month of September, EOC Jobsmart Career Hour hosted Mark Martinelli as he spoke on emerging issues in the finance industry as well as some career opportunities in HSBC. The event was co-sponsored by the Baruch College Accounting Society.

Martinelli is Chief Auditor at HSBC North American Holding Inc., as well as the Chief Auditor at HSBC Bank USA, N.A. He is also a Certified Public Accountant and is a member of the Baruch College Board of Trustees which he was elected to in April 2010.

Getting straight to the pint, Martinelli immediately opened the floor up for student questions instead of spending more time talking about himself. Now and then though he used himself as an example.

He comes to Baruch because it gives students some exposure to opportunity as well as having someone external to give a different perspective on the things that he sees, as well as to give back.

"There is a real advantage of doing a diversity of different things," said Martinelli in his regard to the various finance careers he has held.

Martinelli believes it is extremely important to have a strong grasp of technology. If he had the chance to go back and get his Masters degree he would get the degree in a technology concentration.

There is a common thread in that area, whether someone goes into marketing, managing or another area, stated Martinelli.

Martinelli worked 10 years in public accounting, even though he made a decision early on that he wanted to work in financial services. This is because he enjoyed it and there was a lot of growth in financial services when he left school.

When it comes to public accounting he stated that a person will know a lot of public audit and won't know real accounting until they become a CFO. To be an effective CFO you need to know the product and service, which is how the company grows, not just debits and credits in Martinelli's opinion.

"Have a sight of what jobs you want. You can't wait for people to offer you a job. Ideally you want to know what your skillsets are, what you're strong at, what you're weak at and have a list of jobs you want to do in an organization. The goal is simple, keep yourself as financially marketable as possible," said Martinelli.

In being financial marketable as possible, he stated that if you don't land a job with a Big 4 firm you are not a failure. There are at least 100 firms within a few miles around Baruch that are considered large firms.

Through networking and keeping a short term plan, 18 months to three years, and a long term plan Martinelli himself figured out where he wanted to be in Republic National Bank (now HSBC).

According to Martinelli HSBC has about 300,000 employees, is in eight different countries and has been around for 200 years. Much of HSBC's growth has always been in emerging markets because of HSBC's want to be a global competitor.

Its international marketing employees have come to be known as international managers. The program is a high entry level position where members are trained for two years in different world locations. Martinelli stated these managers are groomed to be future leaders of HSBC.

When gaining a presence in other countries, HSBC will send international managers as well as hire local persons. This is because local people know the local markets.

"You'll be in Greece today as a deputy CEO and you'll decide to make an acquisition in Turkey and pretty much in 48 hours notice you'll fly to Turkey," said Martinelli of the challenges of being an International Manager.

Areas of interest for HSBC worldwide are in these emerging markets such as China, Singapore, Malasiya as well as some other countries. As for the United States growth areas are in commercial space, middle markets and small business lending. HSBC is looking for retail space for premier banking and moving away from credit cards.

Continued in article

HSBC's auditor KPMG had twice reported serious risks regarding Madoff's investment funds, but Picard alleged that the bank chose to ignore its accountant's warnings.
"HSBC sued for $9bn over Madoff fraud:  Banking giant accused of being "wilfully and deliberately" blind to Madoff's Ponzi scheme," New Statesman, December 2010 ---
http://www.newstatesman.com/banking-and-insurance/2010/12/ponzi-scheme-madoff-hsbc-bank

Europe's biggest bank HSBC is being sued for $9bn (£5.7bn) for being "wilfully and deliberately" blind to Bernard Madoff's multibillion-pound Ponzi scheme despite warnings from its own auditor.

Irving Picard, the court-appointed trustee charged with recouping assets for victims of the fraudster, has filed a lawsuit with the US Bankruptcy Court in New York, alleging that HSBC ignored "red flags" that could have brought the scam to light years earlier.

David J Sheehan, the lawyer representing Picard, said the bank "possessed a strong financial incentive to participate in, perpetuate, and stay silent about Madoff's fraudulent scheme."

But HSBC stated it would "defend itself vigorously" against the allegations and said the trustee's claims of wrongdoing were "unfounded". In the lawsuit, Picard has accused the bank of indulging in 24 counts of fraud and misconduct.

HSBC's auditor KPMG had twice reported serious risks regarding Madoff's investment funds, but Picard alleged that the bank chose to ignore its accountant's warnings.

HSBC is the third major bank to be named in the lawsuit over the fraudulent Ponzi scheme that has landed Bernard Madoff in jail for 150 years. Earlier, similar suits had been filed against JPMorgan and Swiss lender UBS for $6.4bn and $2bn respectively.

 

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

Question
What's the difference between insider trading in Congress versus private sector insider trading?

Answer
Private sector insider trading is enforced by both the SEC and the justice divisions of our 50 states. Congressional inside trading is enforced by Congressional inside traders that virtually never convict one another ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

"Insider-Trading Probe Widens U.S. Launches Criminal Investigation Into Stock Sales by Company Executives," by Susan Pulliam, Jean Eaglesham, and Rob Berry, The Wall Street Journal, December 10, 2012 ---
http://professional.wsj.com/article/SB10001424127887323339704578171703191880378.html?mod=djemCFO_h

Federal prosecutors and securities regulators are taking a deeper look into how executives use prearranged trading plans to buy and sell shares of their company stock.

The Manhattan U.S. attorney's office has launched a broad criminal investigation into whether seven corporate executives cited in a recent Wall Street Journal article traded improperly in shares of their own company's stock, according to a person familiar with the matter. These executives lead companies in industries ranging from retailing to energy to data processing.

Meanwhile, the Securities and Exchange Commission is examining trading by VeriFone Systems Inc. PAY +1.33% Chief Executive Officer Douglas Bergeron, according to a person familiar with that probe. VeriFone said Mr. Bergeron, one of those cited in the Journal article, did nothing wrong.

The probes illustrate that authorities have opened a new front in a three-year push to attack possible improper trading on Wall Street and in corporate America.

Until now, prosecutors and regulators were focused mainly on ferreting out traditional insider trading in the financial world, involving outside investors in companies. Some 70 convictions and guilty pleas from traders and others have resulted from such efforts.

Now, authorities, including the Federal Bureau of Investigation, are turning more attention to trading by corporate executives in their own company's shares. The probe follows the Nov. 28 Journal article, which focused on highly beneficial sales by executives that occurred before bad news about their companies hit, sparing them declines in the value of their holdings.

Besides Mr. Bergeron, the Journal reported last week federal prosecutors and the SEC were examining trading of another executive cited in the article, Big Lots Inc. BIG +1.49% CEO Steven Fishman. The company said his trades were "properly made" at a time when allowed.

Unlike many of those the federal authorities now are looking at, Mr. Fishman didn't make his sale using a prearranged corporate-executive trading plan. The plans, known as "10b5-1" plans, permit executives to trade their own company's stock despite possessing important, nonpublic information, by scheduling their trades in advance at particular times or prices.

Having used such a plan can be a strong defense against any suspicion that the trading was improper. But it isn't a complete defense: Executives are vulnerable if they set up a plan at a time when they are in possession of inside information. Executives don't have to disclose the plans or their provisions, and they can change or discontinue them, also without disclosure.

The Manhattan U.S. attorney's office is investigating the circumstances surrounding seven trades cited by the Journal, according to the person familiar with the criminal probe, most made under trading plans. They include:

• May 2012 trades by Body Central BODY -2.68% founder Jerrold Rosenbaum and chief merchandising officer Beth Angelo, his daughter, before the retailer cut its earnings estimate, sending the shares down 48.5% the next day. A Body Central spokeswoman declined to comment on the investigation but previously said both executives' trades were made under a 10b5-1 plan and that Ms. Angelo, who set up a plan for her father in March 2012, wasn't aware of the trend that led to the stock drop.

• November 2008 trades by Ronald Delnevo, former managing director of U.K. operations for Cardtronics Inc., CATM -2.98% before lower earnings that hammered the stock. A company spokesman declined to comment on the investigation but previously said Mr. Delnevo's sales were part of a 10b5-1 plan he amended two months before selling, which is permissible under the company's policies.

• July 2007 trades by Raymond Zinn, CEO of semiconductor maker Micrel Inc., MCRL +0.86% before lower-than-expected earnings, which sent the stock down 22%. Micrel said the sales were made under a 10b5-1 plan, the details of which it didn't disclose.

• March 2006 sales by Jeffrey Lorberbaum, CEO of flooring maker Mohawk Industries Inc., MHK -0.91% just days after he set up a 10b5-1 trading plan and also days before lower-than-expected earnings sent the stock down 5.4%. Mohawk didn't return calls or emails about either the probe or the trades.

• July 2011 trades by Cobalt International Energy CIE -2.36% co-founder Samuel Gillespie during the two weeks before the oil company said it had abandoned an exploratory well. The stock slumped 39% after nine trading days.

A Cobalt spokeswoman didn't return calls about the investigation but earlier said the sales were in accordance with a 10b5-1 plan amended before the sales. She said the change was "in complete compliance with our procedures and had at least a minimum of 30 days before trades occurred." She said the well issue wasn't encountered until Mr. Gillespie had already begun to sell shares.

In the Big Lots matter, the U.S. attorney's office and the SEC are examining the March 2012 trading of Mr. Fishman. He exercised stock options and sold a little over $10 million of Big Lots stock on March 20. On April 23, Big Lots disclosed that first-quarter sales had slowed, beginning in late March. The stock sank 24% on the news. The quarter ended on Apr. 28.

Continued in article

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

Shell pickers will find some of the biggest shells in Bermuda (e.g., Google and Accenture shells)
"Google Revenues Sheltered in No-Tax Bermuda Soar to $10 Billion," by Jesse Drucker, Bloomberg News, December 10, 2012 --- Click Here
http://www.bloomberg.com/news/2012-12-10/google-revenues-sheltered-in-no-tax-bermuda-soar-to-10-billion.html?mod=djemCFO_h

 

Google Inc. (GOOG) avoided about $2 billion in worldwide income taxes in 2011 by shifting $9.8 billion in revenues into a Bermuda shell company, almost double the total from three years before, filings show.

By legally funneling profits from overseas subsidiaries into Bermuda, which doesn’t have a corporate income tax, Google cut its overall tax rate almost in half. The amount moved to Bermuda is equivalent to about 80 percent of Google’s total pretax profit in 2011.

The increase in Google’s revenues routed to Bermuda, disclosed in a Nov. 21 filing by a subsidiary in the Netherlands, could fuel the outrage spreading across Europe and in the U.S. over corporate tax dodging. Governments in France, the U.K., Italy and Australia are probing Google’s tax avoidance as they seek to boost revenue during economic doldrums.

Last week, the European Union’s executive body, the European Commission, advised member states to create blacklists of tax havens and adopt anti-abuse rules. Tax evasion and avoidance, which cost the EU 1 trillion euros ($1.3 trillion) a year, are “scandalous” and “an attack on the fundamental principle of fairness,” Algirdas Semeta, the EC’s commissioner for taxation, said at a press conference in Brussels.

‘Deep Embarrassment’

“The tax strategy of Google and other multinationals is a deep embarrassment to governments around Europe,” said Richard Murphy, an accountant and director of Tax Research LLP in Norfolk, England. “The political awareness now being created in the U.K., and to a lesser degree elsewhere in Europe, is: It’s us or them. People understand that if Google doesn’t pay, somebody else has to pay or services get cut.”

Google said it complies with all tax rules, and its investment in various European countries helps their economies. In the U.K., “we also employ over 2,000 people, help hundreds of thousands of businesses to grow online, and invest millions supporting new tech businesses in East London,” the Mountain View, California-based company said in a statement.

The Internet search giant has avoided billions of dollars in income taxes around the world using a pair of tax shelter strategies known as the Double Irish and Dutch Sandwich, Bloomberg News reported in 2010. The tactics, permitted under tax law in the U.S. and elsewhere, move royalty payments from subsidiaries in Ireland and the Netherlands to a Bermuda unit headquartered in a local law firm.

Last year, Google reported a tax rate of just 3.2 percent on the profit it said was earned overseas, even as most of its foreign sales were in European countries with corporate income tax rates ranging from 26 percent to 34 percent.

Foreign Taxes

At a hearing last month in the U.K., members of Parliament pressed executives from Google, Seattle-based Amazon.com Inc. (AMZN) and Starbucks Corp. (SBUX) to explain why they don’t pay more taxes there.

The U.K., Google’s second-biggest market, was responsible for about 11 percent of its sales, or almost $4.1 billion last year, according to company filings. Google paid 6 million pounds ($9.6 million) in U.K. income taxes.

Matt Brittin, Google’s vice president for Northern and Central Europe, testified that the company pays taxes where it creates “economic value,” primarily the U.S.

Still, Google attributes some profit based on technology created in the U.S. to offshore subsidiaries, lowering its U.S. taxes, according to company filings and people familiar with its tax planning. Google paid $1.5 billion in income taxes worldwide in 2011.

‘Fair Share’

In the wake of the parliamentary hearing, the House of Commons issued a report last week declaring that multinationals “do not pay their fair share” of tax. The committee also criticized the U.K.’s tax collection agency, Her Majesty’s Revenue & Customs, for “not taking sufficiently aggressive action” and called on the agency to “get a grip” on corporate tax avoidance.

A spokesman for HMRC said the agency “ensures that multinationals pay the tax due in accordance with U.K. tax law.”

The French tax authority this year proposed increasing Google’s income taxes by about $1.3 billion. The agency searched Google’s Paris offices in June 2011 and removed computer files as part of an examination first reported by Bloomberg last year. Google is cooperating with French authorities and works with them “to answer all their questions on Google France and our service,” the company said.

Italian Audit

In Italy, the Tax Police began an audit of Google last month and recently searched the company’s Milan offices, as well as the offices of Facebook Inc. (FB), according to a person familiar with the matter. “It’s very common for companies to be audited, and we have been working closely with the Italian authorities for some time,” Google said. “So far we have not had any demands for additional tax in Italy.”

Facebook, based in Menlo Park, California, is cooperating with the Italian tax authority and “we take our obligations under the Italian tax code very seriously,” a company spokeswoman said.

In Australia, the country’s assistant treasurer gave a speech last month outlining Google’s tax avoidance strategies.

The use of offshore shelters to avoid corporate taxes has prompted calls for reform in the U.S. as well. The Treasury Department has repeatedly proposed since 2009, with little success, to make it harder for multinationals to bypass taxes by shifting profit into tax havens.

Transfer Pricing

Multinational companies cut their tax bills using “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens and expenses to higher-tax countries.

In Google’s case, an Irish subsidiary collects revenues from ads sold in countries like the U.K. and France. That Irish unit in turn pays royalties to another Irish subsidiary, whose legal residence for tax purposes is in Bermuda.

The pair of Irish units gives rise to the nickname “Double Irish.” To avoid an Irish withholding tax, Google channeled the payments to Bermuda through a subsidiary in the Netherlands -- thus the “Dutch Sandwich” label. The Netherlands subsidiary has no employees.

Continued in article

Jensen Comment
If a giant hurricane ever wipes out Bermuda, the shell corporations won't lose much from their nearly-empty offices in Burmuda.

PCAOB faults auditor staffing, training for deficiencies
"'Control' Problems Cited," by Michael Rapoport, The Wall Street Journal, December 10, 2012 ---
http://professional.wsj.com/article/SB10001424127887324478304578171280865613110.html?mod=djemCFO_h

A U.S. regulator reported an increase in the percentage of audits of "internal controls" at companies that were flawed because of inadequate work by major accounting firms.

The Public Company Accounting Oversight Board said the eight biggest accounting firms failed in 22% of the audits it reviewed last year to gather enough evidence to support opinions issued by the firms that claimed a company's internal controls were effective.

The percentage was up from 15% of the audits the PCAOB reviewed in 2010. PCAOB officials said the increase shows auditors are at greater risk of letting serious financial errors or even fraud slip through undetected.

"When audit firms do not approach their work appropriately, they are increasing their own risk of not detecting problems," PCAOB member Jeanette Franzel said after the findings were released Monday. The PCAOB regulates and inspects firms that audit public companies, while setting and enforcing standards that govern audits.

The Center for Audit Quality, which represents major accounting firms, said in a statement that the industry "recognizes the need to improve performance in this important area" and has already poured "significant" resources into doing so.

"Internal controls" are safeguards meant to insure that a company's financial statements are accurate. At all but the smallest public companies, auditors are required by U.S. law to evaluate those controls annually for effectiveness.

The PCAOB's conclusion that an accounting firm's review of internal controls was deficient doesn't necessarily mean the controls were inadequate or a company's finances are shaky. The findings are a sign that auditors haven't done the job needed to tell. To fix the problem, accounting firms should consider providing more training and guidance to auditors, the PCAOB said Monday.

PCAOB members said the percentage of audits where they found problems is too high. And when an audit of internal controls isn't done properly, it usually means the corresponding audit of a company's financial statements also is deficient, the PCAOB said.

The results released Monday are based on annual inspections by the PCOAB of big accounting firms to evaluate their audit work and compliance with professional standards.

No firms were singled out for criticism in the report, but the findings were based on inspections of BDO Seidman LLP, Crowe Horwath LLP, Deloitte & Touche LLP, Ernst & Young LLP, Grant Thornton LLP, KPMG LLP, McGladrey LLP and Pricewaterhouse Coopers LLP. The regulator's board said it has found similar problems at other auditing firms.

Continued in article

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

"Citigroup to Cut 11,000 Jobs, Take $1 Billion Charge," by Donal Griffin, Bloomberg News, December 5, 2012 ---
http://www.bloomberg.com/news/2012-12-05/citigroup-to-take-1-billion-charge-cut-11-000-jobs.html

Jensen Comment
And this is even before Sen. Elizabeth Warren takes her new seat on the Banking Committee.

Behavioral Finance: Herding Video --- http://www.youtube.com/watch?v=BXR2PrULyW0
Thank you Jim Mahar for the heads up.

"SEC Says Big Four Audit China-Affiliates Blocked Probe," by Joshua Gallu, Bloomberg News, December 3, 2012 ---
http://www.bloomberg.com/news/2012-12-03/sec-says-big-four-audit-china-affiliates-blocked-probe.html

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

"Who Will Be the Next Hewlett-Packard?" by Jonathan Weil, Bloomberg, November 29, 2012 ---
http://www.bloomberg.com/news/2012-11-29/who-will-be-the-next-hewlett-packard-.html 

During the technology-stock bubble of the 1990s, it would have been a compliment to say a company had the potential to become the next Hewlett-Packard Co. That same line would have a very different meaning now.

Today, if someone called a company the next Hewlett- Packard, this would probably mean it is a prime candidate to book huge losses because of disastrous acquisitions. What might such a company look like? Consider Xerox Corp. (XRX)

At the start of 2007, Xerox had a stock-market value of $16 billion. Since then, the Norwalk, Connecticut-based printer and copier pioneer has paid about $9.1 billion to acquire 41 other companies. It has destroyed more value than it created. At $6.79 a share, Xerox’s market value is $8.6 billion -- equivalent to 71 percent of its common shareholder equity, or book value.

The most glaring sign that large writedowns may be needed at Xerox is a line on its books called goodwill, which is the intangible asset that a company records when it pays a premium in a takeover. Xerox’s balance sheet would have investors believe that its goodwill alone, at $9 billion, is more valuable than what the market says the whole company is worth.

Xerox’s goodwill obviously isn’t worth that in reality. Goodwill exists only on paper and can’t be sold by itself. It’s a plug number, defined under the accounting rules as the difference between the purchase price for an acquisition and the fair value of the acquired company’s net assets. ‘Reference Points’

Asked about the possible need for large writedowns, a Xerox spokeswoman, Karen Arena, noted that the company will conduct its annual goodwill-impairment test this quarter.

“Share price is just one of several reference points we use to validate our assumptions,” she said. “We also look to our operational results, including cash flows, revenue growth and profit margins.”

Most of the goodwill on Xerox’s balance sheet arose from the company’s $6.5 billion acquisition in 2010 of Affiliated Computer Services Inc., a provider of information-technology services. Xerox allocated $5.1 billion of the purchase price in that deal to goodwill. Xerox’s latest balance sheet also showed $2.9 billion of other intangible assets, the bulk of which are customer relationships acquired from Affiliated Computer.

Suspiciously high goodwill was the same indicator I pointed to in an Oct. 4 blog post suggesting that more large writedowns were needed at Hewlett-Packard. (HPQ) The Palo Alto, California-based maker of computers and printers traded for a significant discount to book value at the time, and its goodwill exceeded its market value by $7.5 billion.

Hewlett-Packard last week disclosed an $8.8 billion writedown of goodwill and other intangible assets from its 2011 purchase of the U.K. software maker Autonomy Corp. It said more than $5 billion of the charge was related to financial-reporting improprieties by Autonomy. The disclosure sent Hewlett-Packard’s shares down 12 percent in a day.

Regardless of whether the allegation proves correct, Hewlett-Packard paid way too much for Autonomy, which had a reputation for aggressive accounting long before it was bought. (Just ask the analysts at the financial-research firm CFRA in New York, who wrote 14 reports from 2001 to 2010 raising doubts about Autonomy’s accounting and disclosure practices.)

Hewlett-Packard had allocated $6.9 billion of its $11 billion purchase price for Autonomy to goodwill. The writedowns disclosed last week were only the latest of their kind. Three months earlier, Hewlett-Packard recorded a $9.2 billion writedown largely related to its buyout of Electronic Data Systems Corp. in 2008. Dubious Leaders

A search for other companies with strangely high goodwill values turned up several notable examples. Credit Agricole SA (ACA), the French bank that trades for about a third of its book value, shows goodwill of 16.9 billion euros ($21.9 billion). By comparison, its stock-market value is 14.6 billion euros.

Telecom Italia SpA (TIT), which trades for about 60 percent of its book value, has goodwill of 36.8 billion euros and a market capitalization of only 13.2 billion euros. Fiat SpA (F), the Italian automaker, trades for less than half of book and shows goodwill of 10.4 billion euros -- more than twice its market value. Nasdaq OMX Group Inc. trades for 78 percent of book and shows $5.3 billion of goodwill; its market cap is $4 billion.

Those kinds of numbers -- where the balance sheets are clearly out of whack with market sentiments -- don’t necessarily mean the companies will be required to slash asset values. But they are strong indicators that big writedowns may be needed. The test under the rules ultimately comes down to management’s cash-flow projections, and whether they are strong enough to justify the goodwill on the books. That’s why goodwill writedowns can be an important signal about the future.

Continued in article

Question
What does Joe Hoyle mean by "Be the Stream and Not the Rock?"

Hint
He's not discussing the painful passing of a kidney stone.
The context is how perseverance prevails.

"BE THE STREAM AND NOT THE ROCK," by Joe Hoyle, Teaching Blog, November 26, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/11/be-stream-and-not-rock.html

Deloitte Releases Sixth Edition of “SEC Comment Letters-Including Industry Insights” --- 
http://deloitte.wsj.com/cfo/files/2012/11/SEC_comment_letters_highlighting_risks.pdf 

"Two-thirds of millionaires left Britain to avoid 50% tax rate:  Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50% top rate of tax, figures have disclosed," by Robert Winnett, The Telegraph, November 27, 2012 ---
http://www.telegraph.co.uk/news/politics/9707029/Two-thirds-of-millionaires-left-Britain-to-avoid-50p-tax-rate.html

Jensen Comment
The article doesn't reveal where the 10,000 wealthy taxpayers went, but it certainly wasn't France or Scandinavia. I suspect that many of them moved to Ireland and Switzerland, although they perhaps still have real estate in England. Perhaps some sold residences with leaseback provisions for visiting their old homes. Artists and writers can live tax free in Ireland. And just about anybody can live tax free in Greece since Greece hasn't yet figured out how to enforce tax laws. But Greece might make an exception by hammering down on wealthy immigrants fleeing U.K. taxes. Then again Greece might might prefer that the wealth is re-invested in Greece.

I suspect some of the super wealthy don't much care since they have more than they can spend after taxes. I wonder if taxpayers living on yachts can avoid taxes altogether if those boats are constantly on the move between nations?

Teaching Case from The Wall Street Journal Accounting Weekly Review on November 30, 2012

Obama Sets Steep Tax Targets
by: Janet Hook and Carol E. Lee
Nov 14, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

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