Bob Jensen's Threads on Shared Open Courseware (OCW) from
Around the World: OKI, MIT, Rice, Berkeley, Yale, and
Other Sharing Universities (OKI. MOOCs, SMOCs, etc.)---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Some Things You Might Want to Know About the Wolfram Alpha (WA) Search
Engine: The Good and The Evil
as Applied to Learning Curves (Cumulative Average vs. Incremental Unit)
http://www.trinity.edu/rjensen/theorylearningcurves.htm
Sustainability Accounting Standards Board
The SASB apparently will have some forthcoming accounting standards by the
end of 2013. Does anybody know something useful about this accounting standards
board which got a short publicity module on Page 52 of the September 30, 2013
issue of Time Magazine?
A woman named Jean Rogers is apparently the Founder and Executive Director of
the SASB which has a home page at http://www.sasb.org/
The current Board of Directors is somewhat impressive although lacking in
directors who have contributed to the literature of accounting or its social
media ---
http://www.sasb.org/sasb/board-directors/
The curmudgeon in me makes me skeptical about the accounting expertise needed
to generate "accounting standards."
Until recently, I taught a class in sustainability
accounting, and I can tell you that it is just as fraught with big issues as
is ‘real’ accounting. Indeed, they are many of the same issues. They really
do need standards, but the problem – the same problem faced in the early
days of accounting standards – is that the businesses are very different,
and the stakeholders’ needs diverge enormously.
Elaine Cohen, author of the CSR reporting blog, is
someone I respect in the field. I have met her, and have used her material.
I do enjoy her blog. She would agree that sustainability accounting is very
different to the sort of accounting that we do, but it is important and it
does need some level of standardisation, whether done by ‘real’ accountants
or by others.
Kind regards
Ruth
September 25, 2013 reply from Bob Jensen
Hi Ruth,
In the USA, the SASB has no jurisdiction unless one of the government
agencies like the SEC takes it on like the SEC took on the FASB.
The SASB will be somewhat like the IASC in the earliest days before it
became the IASB. The IASC adopted only non-controversial milk toast
standards when compliance was only voluntary. The major factor that allowed
the IASB to take on more controversial issues was its agreement with IOSCO
that forced it to take on more controversial issues like IAS 39 ---
http://www.trinity.edu/rjensen/acct5341/speakers/pacter.htm
But like the IASC in its earliest days, the SASB is a start.
Respectfully,
Bob Jensen
September 24, 2013 reply from Bob Jensen
Dear Bob,
I
agree that the SASB is a good start in the right direction, as now more than
5000 public companies worldwide are voluntary reporting on their various
five dimensions of sustainability performance, including economic,
governance, social, ethical and environmental (EGSEE). These EGSEE
dimensions of sustainability performance are the main theme of my recent
book, coauthored with Ann Brockett of E&Y and published by John Wiley in
November 2012. This book won the Axiom Gold Award in 2013 in the category of
“Business ethics” (please see attached book flyer).
Many global regulators and standard-setters and other organizations,
including the SASB, GRI and IIRC, are now promoting and suggesting
guidelines for Integrated/Sustainability Reporting and Assurance.
Sustainability performance reporting and assurance can be further promoted
in three ways:
1.
Market forces of the
demand for and interests in Integrated/Sustainability performance, reporting
and assurance by investors and financial markets,
2.
Mandatory sustainability
reporting and assurance by regulators and listing standards of stock
exchanges (Singapore Exchange, SGX, 2011)
3.
A combination of mandatory
and voluntary initiatives.
Best regards,
Zabi
Zabihollah "Zabi"
Rezaee,
PhD, CPA, CMA, CIA, CGFM, CFE,
CSOXP, CGRCP, CGOVP, CGMA, CRMA
Thompson-Hill Chair of Excellence/Professor of Accountancy/PhD coordinator
Fogelman College of Business and Economics
300 Fogelman College Administration Bldg.
The University of Memphis
Memphis, TN 38152-3120
901.678.4652 (phone)zrezaee@memphis.edu
(e-mail)
https://umdrive.memphis.edu/zrezaee/www/
September 24, 2013 reply from Bob Jensen
Thank you Zabi for the update on a world I know longer know much about
since writing a AAA Research Monograph entitled Phantasmagoric Accounting in
the 1970s when there was much hype and little hope for social responsibility
accounting. Monograph 14 (1976) at
http://aaahq.org/market/display.cfm?catID=5
Great analysts tell great stories based on the
results of their analyses. Stories, after all, make results user-friendly,
more conducive to decision-making, and more persuasive.
But that is not the only reason to use stories.
Time and time again in our experience, stories have been more than an
afterthought; they have actually enabled a more rigorous analysis of data in
the first place. Stories allow the analysts to construct a set of
hypotheses and provide a map for investigating the data.
We recently worked with a department store retailer
and a team of analysts looking for creative insights into customer loyalty.
Based on our work with a department store expert, we started out with a
storyline, a narrative hypothesis, according to which a customer experiences
different journeys through the department store over time and rewards the
retailer with a certain level of loyalty.
How will these journeys unfold? Does the customer
start in cosmetics and then move into clothing? Does she go from the
second floor to the first floor to buy a handbag to match a new outfit?
Does she have shopping days where she takes a lunch break in the restaurant
before continuing her shopping? Do less loyal customers make different
journeys from more loyal ones?
In other words, we were interested not just in what
customers were buying, but in the mechanics of how they make their purchases
and how this may make them loyal. After the analysis, the true story of a
customer’s path to loyalty is in fact revealed.
Where do these stories come from? In our
experience, they can come either from the experience of an expert in the
sector or brand, as was the case in the previous example, or from
qualitative research using observation or in-depth interviews.
One consumer revealed that he actually owns two SIM
cards for the same smartphone and told us in what context he changes from
one to the other. Another customer told us about the parental control and
other relevant apps and browsing that she has discovered and collected and
which facilitate her lifestyle as a mother.
What we are seeing here is a multi-usage context
(characterized by two SIM cards) and a “Mobile Mommy” context, each of which
calls for a distinct analysis and possibly different products/services to be
developed subsequently. In other words, we found that the customers’
homemade solutions could be used by brand managers to identify what kind of
data to gather and what kind of analysis to perform.
The analyses will in their turn enrich the initial
stories and lead to deeper insights. What is important here is that the
storyline, told before the analyses, enables an authentic human element to
surface that would be more difficult to extract from the data alone
In order for a story to truly enable analytics, the
story development process needs to be rigorous. We use the framework of
Grounded Theory to ensure that the data and
overarching storyline inform each other and are coherent with each other.
The idea is for the analyst to navigate back and forth between the data and
the developing story to ensure a good balance between the creative narrative
and the analytics that reveal the facts and details of the story.
Medical students can
earn academic credit at the University of
California at San Francisco for
editing content on Wikipedia. Fourth-year medical
students in a new class will be editing articles, adding images, reviewing
edits and adding citations to support unreferenced text. They will focus on
editing 80 frequently used articles that have low levels of quality.
Wikipedia is a widely used reference for health topics, but medical entries
can lack sources and have gaps in content.
“We’re recognizing the impact Wikipedia can have to educate patients and
health care providers across the globe, and want users to receive the most
accurate publicly available, sound medical information,” said Amin Azzam,
association clinical professor and instructor for the new class, in a news
release. The class will also teach students how to communicate with
consumers about health topics.
The class is a collaboration between the UCSF School
of Medicine and the Wiki Project Med Foundation.
Jensen Comment
I don't see why schools of accounting cannot do something like this for student
assignments. However, since accounting is so poorly posted, relative to
economics, finance, and medicine, to Wikipedia accounting students would
probably have to start new modules.
Going-concern assertions are appropriately made by
management, the AICPA’s Financial Reporting Executive Committee (FinREC) and
the Center for Audit Quality (CAQ) said in comment letters supporting a FASB
proposal.
The comment period ended Tuesday for FASB’s
proposed
Accounting Standards Update, Presentation of
Financial Statements (Topic 205),Disclosure of Uncertainties About
an Entity’s Going Concern Presumption.
FinREC and the
CAQ, which is affiliated with the AICPA, both
commended FASB for its work developing a going-concern model that requires
preparers to perform a going-concern assessment and, where required, provide
footnote disclosures about going-concern uncertainties in each reporting
period.
FASB is undertaking the project because U.S. GAAP
does not explicitly define financial statement preparers’ responsibilities
with respect to disclosing conditions that may give rise to substantial
doubt about an entity’s ability to continue as a going concern.
Financial statements currently are prepared under
the presumption that an entity will be able to realize its assets and meet
its obligations in the ordinary course of business. When liquidation is
imminent, the organization starts applying the liquidation basis of
accounting in its financial statements.
Currently, auditors are required under U.S.
auditing standards to assess whether there is substantial doubt about an
entity’s ability to continue as a going concern.
FASB asked stakeholders to evaluate whether
possible bias on the part of management would cause its going-concern
evaluation to be of little use for investors. Both FinREC and the CAQ said
management bias has the potential to affect other aspects of financial
reporting, too, so an exception should not be made with respect to going
concern.
“Management should be making a going-concern
assessment,” Aaron Anderson, CPA, a FinREC member and chairman of its
going-concern task force, said in a telephone interview. “It should not be
just left in the hands of the auditor.”
In addition, FinREC welcomed the clarifications in
the proposal around the definition of “going concern,” clarity surrounding
the time horizon over which an entity should be evaluated, and clarification
about the information used in that evaluation.
Continued in article
Jensen Comment
The sick joke is that in 2008 when thousands of banks in the USA failed
they were all deemed by the CPA auditors to be going concerns ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
A huge problem when an auditor makes a going concern exception about a
client whose troubles are previously unknown to investors is that the
auditor firm's going concern exception may trigger a bankruptcy,
i.e., going concern exceptions by auditors are not neutral in terms of
survival of a client. In practice, it is generally known by investors
that the client is in deep financial trouble before the auditors
actually make going concern exceptions.
After KPMG was paid $456 million in 2006 fines for selling phony tax
shelters, KPMG promised it would never happen again. Yeah Right!
For reasons that will be explained, the Court also
finds that BB&T is liable for tax penalties for its participation in the
STARS transaction. The conduct of those persons from BB&T, Barclays,
KPMG, and the Sidley Austin law firm who were involved in this and other
transactions was nothing short of reprehensible. Perhaps the business
environment at the time was “everyone else is doing it, why don’t we?”
Perhaps some of those who participated simply were following direction from
others. Nevertheless, the professionals involved should have known better
than to follow the STARS path, rife with its conflicts of interest,
questionable pro forma legal and accounting opinions, and a taxpayer with a
seemingly insatiable appetite for tax avoidance. One of Defendant’s experts,
Dr. Michael Cragg, aptly stated that “enormous ingenuity was focused on
reducing U.S. tax revenues.” Cragg, Tr. 4687. After wading through the
intricacies of the STARS transaction, the Court shares Dr. Cragg’s view that
“[t]he human effort, the amount of creativity and overall effort that was
put into this transaction . . . is a waste of human potential.”
Journalism professors are exploring Google Glass
this year to see how it works in their field.
California State University, Chico, is one of the
latest journalism and public relations programs to buy the wearable
technology, which allows users to shoot video, share tweets and show the
latest news, among other things. The developer version of Google Glass costs
around $1,500 and is currently only available to explorers that Google
selected through a contest.
"As I told Google when we entered their contest, we're training students for
jobs that probably don't even exist yet," said Susan Wiesinger, associate
professor and department chair of the university's Journalism and Public
Relations program. "We need them to think creatively. We need to think what
might be ahead. And for them to even see a device that isn't yet on the
market, it makes them engage with it and not ignore it."
Some feel that the journalism field has a history
of ignoring technology until it's too late. For example, few journalists
took desktop Internet seriously, and as a result, classified ads went to
Craigslist instead of online newspapers.
"When has the journalism industry ever benefited
from dismissing or ignoring emerging technology?" asked Robert Hernandez,
assistant professor of professional practice at the USC Annenberg School for
Communication and Journalism. "In other words, I don't know how Glass can be
used for journalism on either creation, or distribution or consumption, but
the only way to find out is to play with it, so I've been experimenting with
it."
Hernandez already plans to bring Google Glass into
a new journalism class with another technology he's been experimenting
with: augmented reality. He also hopes to hire a developer who will create
Glass apps for existing media brands. And this year, he'll work on a pilot
with a few other people that could turn into a Glass app developing course
for news and information.
At Chico State, Google Glass will spark discussions
around privacy issues and technology development in a media literacy class
that Wiesinger teaches. A student from Tehama Group Communications, the
department's public relations firm on campus, will write a first-person
story on how it could be used in the industry and another story about how
the department is using it. On top of that, a digital media start-up class
will allow students to develop apps for the device.
But neither of these professors say that Google
Glass is groundbreaking for journalism at the moment. Right now, it's a
hands-free accessory to a smartphone and still needs to be tied to that
phone to tweet and post pictures.
The technology does allow students to record video
while keeping their hands free for other tasks, such as taking notes. And it
could provide contextual information for buildings that they're looking at,
for example.
Hernandez said that context is king with journalism
and technology. The storytelling has to come first, and the technology comes
second in these journalism programs.
Continued in article
Jensen Comment
I envision that Google Glass could also revolutionize some auditing procedures
and the teaching of auditing.
New gadgets — I mean whole new gadget categories —
don’t come along very often. The iPhone was one recent example. You could
argue that the iPad was another. But if there’s anything at all as different
and bold on the horizon, surely it’s Google Glass.
That, of course, is Google’s prototype of a device
you wear on your face. Google doesn’t like the term “glasses,” because there
aren’t any lenses. (The Glass team, part of Google’s experimental labs, also
doesn’t like terms like “augmented reality” or “wearable computer,” which
both have certain baggage.)
¶Instead, Glass looks like only the headband of a
pair of glasses — the part that hooks on your ears and lies along your
eyebrow line — with a small, transparent block positioned above and to the
right of your right eye. That, of course, is a screen, and the Google Glass
is actually a fairly full-blown computer. Or maybe like a smartphone that
you never have to take out of your pocket.
¶This idea got a lot of people excited when Nick
Bilton of The New York Times broke the story of the glasses in February.
Google first demonstrated it April in a video. In May, at Google’s I/O
conference, Glass got some more play as attendees watched a live video feed
from the Glass as a sky diver leapt from a plane and parachuted onto the
roof of the conference building. But so far, very few non-Googlers have been
allowed to try them on.
¶Last week, I got a chance to put one on. I’m
hosting a PBS series called “Nova ScienceNow” (it premieres Oct. 10), and
one of the episodes is about the future of tech. Of course, projecting
what’s yet to come in consumer tech is nearly impossible, but Google Glass
seemed like a perfect example of a breakthrough on the verge. So last week
the Nova crew and I met with Babak Parviz, head of the Glass project, to
discuss and try out the prototypes.
¶Now, Google emphasized — and so do I — that Google
Glass is still at a very, very early stage. Lots of factors still haven’t
been finalized, including what Glass will do, what the interface will look
like, how it will work, and so on. Google doesn’t want to get the public
excited about some feature that may not materialize in the final version.
(At the moment, Google is planning to offer the prototypes to developers
next year — for $1,500 — in anticipation of selling Glass to the public in,
perhaps, 2014.)
¶When you actually handle these things, you can’t
believe how little they weigh. Less than a pair of sunglasses, in my
estimation. Glass is an absolutely astonishing feat of miniaturization and
integration.
¶Inside the right earpiece — that is, the
horizontal support that goes over your ear — Google has packed memory, a
processor, a camera, speaker and microphone, Bluetooth and Wi-Fi antennas,
accelerometer, gyroscope, compass and a battery. All inside the earpiece.
¶Google has said that eventually, Glass will have a
cellular radio, so it can get online; at this point, it hooks up wirelessly
with your phone for an online connection. And the mind-blowing thing is,
this slim thing is the prototype. It’s only going to get smaller in future
generations. “This is the bulkiest version of Glass we’ll ever make,” Babak
told me.
¶The biggest triumph — and to me, the biggest
surprise — is that the tiny screen is completely invisible when you’re
talking or driving or reading. You just forget about it completely. There’s
nothing at all between your eyes and whatever, or whomever, you’re looking
at.
¶And yet when you do focus on the screen, shifting
your gaze up and to the right, that tiny half-inch display is surprisingly
immersive. It’s as though you’re looking at a big laptop screen or
something.
¶(Even though I usually need reading glasses for
close-up material, this very close-up display seemed to float far enough
away that I didn’t need them. Because, yeah — wearing glasses under Glass
might look weird.)
¶The hardware breakthrough, in other words, is
there. Google is proceeding carefully to make sure it gets the rest of it as
right as possible on the first try.
¶But the potential is already amazing. Mr. Pariz
stressed that Glass is designed for two primary purposes — sharing and
instant access to information — hands-free, without having to pull anything
out of your pocket.
¶You can control the software by swiping a finger
on that right earpiece in different directions; it’s a touchpad. Your swipes
could guide you through simple menus. In various presentations, Google has
proposed icons for things like taking a picture, recording video, making a
phone call, navigating on Google Maps, checking your calendar and so on. A
tap selects the option you want.
¶In recent demonstrations, Google has also shown
that you can use speech recognition to control Glass. You say “O.K., Glass”
to call up the menu.
¶To illustrate how Glass might change the game for
sharing your life with others, I tried a demo in which a photo appeared — a
jungly scene with a wooden footbridge just in front of me. The theme from
“Jurassic Park” played crisply in my right ear. (Cute, real cute.)
SUMMARY: In London, Big Four accounting and auditing firm Deloitte
was fined 14 million pounds ($22 million) for "failing to manage conflicts
of interest in advice it gave to MG Rover Group...." London's Financial
Reporting Council alleged that Deloitte "failed to consider the public
interest in a series of transactions."
CLASSROOM APPLICATION: The article may be discussed in an ethics or
auditing class to discuss conflicts of interests in services provided by
public accounting firms.
QUESTIONS:
1. (Introductory) From the article and/or other outside sources,
describe the work for which Deloitte is accused of "failing to manage
conflicts of interest" and therefore violating the public interest in its
work.
2. (Introductory) What is the public interest? What are conflicts
of interest?
3. (Advanced) Why do accounting firms have a duty to consider the
public interest in the work they do?
4. (Advanced) What self-regulatory mechanisms are used by the
public accounting profession to ensure this obligation is upheld?
Reviewed By: Judy Beckman, University of Rhode Island
Accountancy firm Deloitte was fined £14 million
($22 million) on Monday for failing to manage conflicts of interest in
advice it gave to MG Rover Group and its owners before the British auto
maker entered administration in 2005.
A tribunal handed down the fine after upholding 13
allegations made by regulatory body the Financial Reporting Council against
Deloitte and one of its former partners, Maghsoud Einollahi The FRC's
allegations centered around Deloitte's failure to consider the public
interest in a series of transactions between the auto maker, its owners and
associated companies, and to address the potential conflicts of interest
between the parties.
A Deloitte spokeswoman said the firm is
disappointed with the outcome and disagrees with the tribunal's main
conclusions. It has 28 days to appeal the decision but the spokeswoman
declined to comment on whether it would take action.
The tribunal also issued "a severe reprimand" to
Deloitte, and presented Mr. Einollahi with a £250,000 fine and three-year
ban from working in the profession. A spokesman at Freshfields, the law firm
representing Deloitte and Mr. Einollahi, declined to comment.
The FRC said the tribunal's decision should "send a
strong and clear message to all members of the accountancy profession about
their responsibility to act in the public interest and comply with their
code of ethics."
MG Rover collapsed in 2005, five years after a
group of four businessmen bought the loss-making auto maker for £10.
Deloitte was auditor for MG Rover while also acting as corporate finance
adviser to companies controlled by or affiliated with the businessmen.
The fine came as Deloitte and other auditing firms
face pressure from regulators to sharpen their standards and act with
greater independence in questioning clients' activities.
SUMMARY: This is the third of three articles in the WSJ's Section
on Leadership in Corporate Finance published on Monday, February 27, 2012.
This article is useful to introduce the economic reasoning behind treasury
stock purchases prior to presenting the accounting for these transactions.
CLASSROOM APPLICATION: The article may be used in any financial
accounting class covering treasury stock purchases.
QUESTIONS:
1. (Advanced) What is a stock buyback? What term do we use in
accounting for this transaction?
2. (Advanced) Summarize the accounting for stock buybacks.
3. (Introductory) What reason does Mr. Milano give for his opinion
that "buybacks are...often a bad idea"?
4. (Introductory) What evidence does Mr. Milano give to support his
view?
5. (Advanced) One of the reasons Mr. Tilson acknowledges that
buybacks are often poorly considered by the managements who conduct them is
that they focus on "propping up share price." Mr. Milano notes that stock
buybacks increase earnings per share. How do stock buybacks have these
effects? Do the share price effects stem from increasing earnings per share?
Support your answer.
6. (Advanced) List the other two of Mr. Tilson three examples of
"the wrong reasons" to conduct a stock buyback and explain how buybacks
produce these two effects.
Reviewed By: Judy Beckman, University of Rhode Island
As share buybacks climb toward record, prerecession
levels, the debate over the tactic is heating up.
Companies sitting on piles of cash are under
increasing pressure to return that value to shareholders, but are buybacks
the best way to do that? Or should companies raise dividends, use the money
for acquisitions or invest it in their business instead?
We invited two Wall Street personalities with
strong views on the issue to participate in an email discussion of the
merits and drawbacks of stock buybacks.
Whitney R. Tilson is the founder and managing
partner of T2 Partners LLC, a New York hedge fund, and an outspoken
proponent of share repurchases.
Gregory V. Milano is the co-founder and chief
executive of Fortuna Advisors LLC, a corporate-finance consulting firm based
in New York, who rarely encounters a buyback he considers the best use of a
company's cash.
Here are edited excerpts of their discussion.
Crowding Out
WSJ: Mr. Milano, why you do think buybacks are so
often a bad idea?
MR. MILANO: Though some are successful with share
repurchases, the evidence overwhelmingly shows that heavy buyback companies
usually create less value for shareholders over time.
Many managements have become so infatuated with how
buybacks increase earnings per share that these distributions are crowding
out sound business investments that create more value over time.
In one study, those that reinvested a higher
percentage of their cash generation into capital expenditures, research and
development, cash acquisitions and working capital delivered substantially
higher total shareholder return than those that reinvested less.
The problem with buybacks is considerably
compounded by poor timing: the propensity to buy when the price is high and
not when it's low. A measure called buyback effectiveness compares the
buyback return on investment to total shareholder return, and indicates
whether the company buys low or high relative to the share price trend. From
2008 through mid 2011, nearly two out of three companies in the S&P 500 had
negative buyback effectiveness.
Most academic research shows that share prices
typically increase when buybacks are announced, which benefits short-term
owners. For those interested in long-term value creation, which should be
the focus of managements and boards, the evidence convincingly shows that
buybacks usually do not help.
WSJ: Mr. Tilson, what makes buybacks work for
investors, rather than against them?
MR. TILSON: I agree with Greg that most companies
do not think or act sensibly regarding share repurchases and therefore end
up destroying value.
It never ceases to amaze me—and, when a company we
own does the wrong thing, infuriate me—how few companies think sensibly
about this topic and thus buy back stock for all the wrong reasons: to prop
up the price, signal "confidence," offset options dilution, etc.
But the same could be said of acquisitions, and
does anyone believe that all acquisitions are bad? Share repurchases, like
acquisitions, can create enormous long-term shareholder value if done
properly.
Warren Buffett, in his 1999 letter to Berkshire
Hathaway shareholders, perfectly captures the key elements of a smart share
repurchase program:
"There is only one combination of facts that makes
it advisable for a company to repurchase its shares: First, the company has
available funds—cash plus sensible borrowing capacity—beyond the near-term
needs of the business and, second, finds its stock selling in the market
below its intrinsic value, conservatively calculated."
In other words, once a business has a strong
balance sheet, then it should first take its excess cash/cash flow and
reinvest in its own business—if (and only if) it can generate high rates of
return on such investment.
Then, if it still has cash/cash flow left over, it
should return it to shareholders, who are, after all, the owners of the
business—it's their cash. But this raises the question of whether cash
should be returned via dividends or share repurchases.
That depends on the price of the stock versus its
intrinsic value.
My rule of thumb is that if the stock is trading
within 20% of fair value, then the company should use dividends; if it's
trading at greater than a 20% discount, buybacks. If it's trading at a big
premium to fair value, then the company should issue stock, via compensation
to employees, a secondary offering and/or as an acquisition currency.
Getting It Wrong
MR. MILANO: I agree with the Warren Buffett quote
completely, and Whitney's view on how often managements get it wrong is
really one of my main principles.
As an investment banker at Credit Suisse in 2007 I
visited scores of companies to explain that their share prices were so high
that the expectations they needed to achieve just to justify their price,
let alone grow it, were unrealistic in a world where we experience the ups
and downs of business cycles. I suggested they use convertible-debt
financing to fund their growth.
Continued in article
Question
There are various reasons for buying back common shares (e.g., to have shares
available for employee compensation). How many of you also teach that one
purpose may be to buy back your company's earnings growth?
Teaching Case
From The Wall Street Journal's Accounting Weekly Review on September 20,
2013
TOPICS: Dividends, Earnings Per Share, Financial Analysis
SUMMARY: The article clearly shows the impact of stock repurchases
on EPS growth for large technology firms that have matured: Cisco,
Microsoft, IBM, and Oracle.
CLASSROOM APPLICATION: The article may be used when covering
stockholders' equity in a financial accounting class.
QUESTIONS:
1. (Introductory) What has Microsoft announced about its stock
repurchases?
2. (Introductory) Provide the journal entry to record a stock
repurchase transaction.
3. (Advanced) What did Microsoft also announce at the same time as
the share repurchase announcement? How do both of these actions mean that
Microsoft will "keep kicking cash" to shareholders?
4. (Advanced) Explain the contents of the graphic entitled "Backstory."
Specifically explain how earnings-per-share growth absent the stock buybacks
is calculated.
Reviewed By: Judy Beckman, University of Rhode Island
It's good news for Microsoft MSFT +0.05%
shareholders that the company will keep kicking back cash their way. It will
also help the software giant juice earnings growth, like so many of its big
tech brethren.
Microsoft's new $40 billion share-repurchase plan
doesn't mark a sea change. The company is essentially replacing its last,
almost-exhausted $40 billion buyback plan launched in 2008. Boosting the
dividend 22%, which implies a yield of 3.4%, may have a bigger impact as it
makes shares notably more attractive to income-hungry investors.
But buying back shares at such a rapid clip has led
to a big decline in shares outstanding and, consequently, a sizable increase
in earnings per share. In total, Microsoft has repurchased $110 billion of
its own shares over its past nine fiscal years, says CapitalIQ, reducing its
share count 22%. Thanks to such buybacks, the company's average annual
earnings growth rate of 11% was 46% higher than it would have been holding
the share count constant.
he company is hardly alone. International Business
Machines IBM +0.69% has bought back $100 billion of stock over its past nine
fiscal years, reducing its share count by a third and boosting its average
earnings growth rate 53%, to 16%. Cisco Systems CSCO -1.26% has purchased
$63 billion of stock, reducing its share count 19% and increasing average
earnings growth 40%, to 10%.
Oracle ORCL -0.56% stands out not just for faster
earnings growth but for far less reliance on buybacks. Earnings-per-share
growth has averaged 19% a year the past nine fiscal years, just slightly
higher than the 18% growth rate had its share count been unchanged. That
said, even Oracle has significantly increased its share repurchases the past
two years.
Higher earnings-growth rates are good news for
shareholders. Still, the way tech giants manufacture that growth is a
reminder that they are more about past glory than future promise.
Jensen Comment
JSTOR provides Web access to a deep history of scholarly journals. Many of us
have permissions to download those articles "free" because our universities pay
a subscription price for students, staff, and retired staff. Now JSTOR will
provide an inexpensive subscription price to anybody in the world.
For example, JSTOR is the only service that I know of that provides Web
access to the earliest years of The Accounting Review articles. TAR
commenced publishing in 1926. The AAA only provides access (for a fee) to a
small subset TAR issues published since 1999.
One frustrating aspect of JSTOR is that access to the most recent articles of
a journal is delayed for quite some time. For current issues of all AAA journals
it's best to go directly to the AAA archives.
SEC: You should know how Inline XBRL (IXBRL) differs from plain old
XBRL
"New XBRL Version May Answer SEC's Prayers: With companies' lackluster use
of XBRL and the SEC taking heat about its own low usage, a new Inline version
could make it easier for filers as well as regulators. CFO.com, September
20, 2013 ---
http://www3.cfo.com/article/2013/9/gaap-ifrs_xbrl-inline-xbrl-financial-reporting-darrell-issa
Corporations have expressed their disdain for
tagging financial data through eXtensible Business Reporting Language (XBRL)
and the Securities and Exchange Commission itself has been criticized for
not using it enough internally. But a new version of XBRL could make the
data-formatting language more popular.
Inline XBRL (iXBRL), which offers easier formatting
than XBRL and can be viewed on Internet browsers instead of software, is
being touted as an answer to much of the discord that has surfaced since
CFOs and their staffs were required to use the language following an SEC
mandate in 2009. The new Inline version eliminates the need to create
separate XBRL and HTML attachments when filing their financial documents --
which bogs down current filers -- and allows filers to embed the XBRL tags
in the financial documents.
The SEC, for its part, is considering Inline XBRL
and working closely with its staff to evaluate a possible implementation,
Virginia Meany, assistant director of the Office of Risk Assessment and
Interactive Data in the SEC’s Division of Economic and Risk Analysis, told
CFO. “We believe that the use of Inline XBRL creates a good
opportunity to improve both efficiency and quality,” she says.
That would eliminate the “double jeopardy” that Rob
Blake, product director at Trintech, a provider of software solutions, and
one who assisted with the early creation of XBRL, says comes about when
having to use both XBRL and HTML when filing financial statements.
As Meany notes, Inline XBRL, which is already being
used in the United Kingdom for corporate- reporting purposes, has “potential
benefits to all stakeholders, including preparers, investors and
regulators.”
The SEC’s backing of the easier formatting language
may not be enough, however, to soothe all of its critics. One of the more
vocal ones, Rep Darrell Issa (R-Calif), chairman of the House Oversight
Committee, sent
a comment letter last week to SEC Chair Mary Jo
White asking for an explanation from the Commission on why it hasn’t
embraced XBRL more internally and used the data it collects from companies
that way.
While Issa did not specifically address Inline XBRL
in his comment letter, he believes by not using XBRL the SEC is not only
wasting time and money, it is thwarting the enforcement of its original
mandate to require the use of XBRL.
In his letter, he said the SEC “does not fully
utilize the structured financial data it already collects, continues to
buy-back from commercial databases the same data it collects from filers and
has failed to address concerns about the quality of structured-data
filings.” In contrast to XBRL, an automated language in which users employ
interactive data tags to assign a unique identifier to each piece of
financial data, Issa complains that SEC staff members continue to monitor
the information manually.
So what’s the harm? The agency, according to Issa,
continues to ask for more resources to pay for increased staff to check
corporate data instead of integrating the XBRL data from the corporate
filers.
The quality of the data itself, however, could be
one reason for the perceived slowdown in the project. According to Issa,
more than 1.4 million errors have been identified as stemming from corporate
filers using XBRL.
Improvements to XBRL can only come, he writes, as
“the SEC integrates structured data into its existing review processes,
enforces the quality of data submitted under the Interactive Data Rule, and
articulates a vision for the transformation of its whole disclosure system
from inaccessible documents into structured data.”
Jensen Comment
One of the areas where the IASB and FASB have diverged is in the area of hedge
effectiveness testing. The IASB plays loosey-goosey on this one with the
so-called principles-based standard that will roll along when IAS 9 comes into
play. To me this means that one company's effective hedge is ineffective in
another company.
The IASB is tougher on the shortcut method and does not allow the shortcut
method for interest rate swap hedge effectiveness testing.
The FASB still has a rules-based effectiveness testing standard, but there is
more looseness allowed in such tests than I would like. Kawaller and Koch have
renewed our focus on hedge effectiveness testing that that can greatly affect
partitioning huge amounts of derivatives instruments gains and losses between
OCI and current earnings.
Lehman’s accounting was especially opaque, even
relative to other investment banks (and that’s really saying something). Their
Level 3 assets were described as “mark-to-make-believe.” The firm was
especially evasive when asked for hard numbers for its liabilities. After the
collapse of Bear Stearns they were the next obvious bank to collapse. They were
smaller, more heavily leveraged and with greater exposure to the mortgage
market. Even a cursory review of Lehman’s books revealed lots of red flags.
"10 Things You May Not Have Known About Lehman Brothers," by Barry Ritholtz,
Ritholtz Blog, September 18, 2013 ---
http://www.ritholtz.com/blog/2013/09/10-things-you-may-not-have-known-about-lehman-brothers/
Short list:
1. At the Ira Sohn Investment Research
Conference in May 2008, hedge fund manager David Einhorn explained why
he believed Lehman Brothers was insolvent. At the time, Lehman was
already significantly off its highs but still trading above $40.
2. Lehman’s accounting was especially opaque,
even relative to other investment banks (and that’s really saying
something). Their Level 3 assets were described as
“mark-to-make-believe.” The firm was especially evasive when asked for
hard numbers for its liabilities. After the collapse of Bear Stearns
they were the next obvious bank to collapse. They were smaller, more
heavily leveraged and with greater exposure to the mortgage market. Even
a cursory review of Lehman’s books revealed lots of red flags.
3. The
WSJ pointed out
the complicity of Lehman’s accountants in their collapse. Management
chose to “disregard or overrule the firm’s risk controls on a
regular basis,” even as the credit and real-estate markets were
showing signs of strain. In May 2008, a Lehman Sr VP alerted management
about accounting irregularities, a warning ignored by Lehman auditors
Ernst & Young.
4. The infamous REPO 105 — a fraudulent
accounting gimmick that temporarily removed over $50 billion in
securities inventory from its balance sheet — existed for the sole
purpose of hiding liabilities from shareholders. By creating a
materially misleading picture of the firm’s financial condition in late
2007 and 2008, Lehman’s management and its accountants were engaging in
fraud. This also suggests that LEH was much more leveraged and at far
greater risk for insolvency than was realized at the time (So, no,
short-sellers did not kill Lehman).
5. Warren Buffett made an offer to Lehman, one
that turned out to be more generous than the offer later accepted by
Goldman Sachs. (One may surmise that Fuld’s rejection of Buffett’s bid
was the last straw as far as the Fed and Treasury were concerned. If
they were unwilling to help themselves, why should the taxpayer write
another $30 billion check?)
6. Many potential suitors kicked the tires at
Lehman – but none could get past their massive liabilities or their
opaque accounting. Too many toxic assets on books that were
untrustworthy led to no serious buyer appearing.
7. Once Lehman filed for bankruptcy, Barclays
scooped up most of the U.S. and U.K. operations—without any of that
toxic junk paper to worry about. Nomura Securities took over Lehman’s
Asian operations.
8. Neuberger Berman had been bought by Lehman
Brothers in the 1990s. Its management purchased the wealth management
unit post bankruptcy. They essentially bought themselves back at a huge
discount.
9. Lehman Brothers CEO Dick Fuld was wildly
over-compensated. A Harvard study calculated that Fuld earned $522.7
million from 2000 to 2007. He garnered $461.2 million of that from
selling 12.4 million shares of Lehman. (BusinessWeek)
10. Lehman Brothers was dissolved 158 years
after its founding.
Did I miss any of the lesser known factoids about
Lehman Brothers?
Washington State is neither among the highest nor lowest states of the USA in
terms of various definitions of poverty. The Washington Post, however,
claims Washington State taxes poor people at a significantly higher level than
all other states.
The state that easily handed President Obama a
victory last November while passing voter-approved referendums legalizing
same-sex marriage and marijuana consumption also happens to have the
nation’s highest tax burden on the poor.
Poor families in Washington state pay 16.9 percent
of their total income in state and local taxes, more than any other state in
the nation, according to a new report from the nonprofit Institute on
Taxation and Economic Policy, which advocates for progressive tax policies.
Washington takes the top spot by a sizable lead.
For the poor in Illinois, 13.8 percent of their income goes to paying state
and local taxes. In Florida, those taxes eat up 13.3 percent of the income
of the poor. The share in Hawaii is 13 percent, followed by Arizona at 12.9
percent.
Tax policy can do a lot of things—spur good
economic activity and discourage the bad—but ITEP argues it can also be used
to fight poverty.
“Any time when one in six americans are living in
poverty it’s important to ask what our public policies can do to make that
better,” says ITEP Executive Director Matt Gardner. “It’s important to
remember that state tax codes can play a role in mitigating poverty as
well.”
New Census data released on Thursday showed that
while poverty rates showed no change in 43 states last year, they remained
high. Even in the best-performing states, such as New Hampshire, Alaska and
Maryland, a tenth of the population still lives in poverty. The rate was
highest in Mississippi, where nearly a fourth of the state—24 percent—were
living in poverty last year.
ITEP argues that states can implement and expand
four simple, effective tax strategies to ease the tax burden on states’
poorest residents. Some 26 states have enacted a state Earned Income Tax
Credit based on the federal version, which ITEP encourages states to expand
or consider implementing. Eighteen states have “true” property tax “circuit
breakers,” which are designed to offset the burden of property taxes that
are high relative to income. Other targeted low-income credits and
child-related credits would also reduce the burden on the poor, ITEP argues.
Continued in article
Jensen Comment
Oddly, Washington State is one of the seven states that do not have a state
income tax:
Alaska
Florida
Nevada
South Dakota
Texas
Washington
Washington State ranks 37 to 42 in state poverty rankings depending upon the
definition of poverty. See the 2008 Table 6 at
http://www.irp.wisc.edu/research/povmeas/UKCPR_PovertyReport_April2010.pdf
There are 50 states plus the District of Columbia which ranks 1-11 depending on
the definition of poverty on a scale of 1-51. Mississippi ranks 1 with highest
poverty under all definitions. New Hampshire ranks lowest with a 51 ranking
under all definitions of poverty. Washington State is closest to Wisconsin and
Nevada in this Table 6.
For states without income taxes the 2008 rankings are as follows under the
various poverty definitions:
Alaska (Poverty Ranks 49-50)
Florida (Poverty Ranks 18-22)
Nevada (Poverty Ranks 37-40)
South Dakota (Poverty Ranks 27-29)
Texas (Poverty Ranks 4-6)
Washington (Poverty Ranks 37-42)
Thus Washington State is neither among the highest nor lowest states of the
USA in terms of various definitions of poverty. The Washington Post,
however, claims Washington State taxes poor people at a significantly higher
level than all other states.
Jensen Comment
What I found is that the Internet makes me aware of knowledge that I certainly
would not have stumbled upon before the days of the Internet. Some may argue
that this is like learning a little bit about a lot of things. But I'm currently
writing a technical article invited by a journal. The Internet has most
certainly helped me drill deeper and deeper to learn more about an angel on the
head of a pin.
I saw an segment on ABC News where San Antonio has a new public library
without books.
Trinity University Upgrades its Department of Business (with no Dean) to a
School of Business Status (with a Dean)
President’s Campus Update - September 2013
Dear Trinity Community,
The fall 2013 semester roared into action in late
August, launched by a whirlwind of “Welcome Week” events. Penelope and I
welcomed international students and their families, who typically arrive
early to campus, with a reception at our home. We joined other members of
the Trinity community for move-in day to help first-years’ families unload
their cars and get their new Trinity student settled. Activities culminated
with the New Student Convocation, where first-years sign the academic honor
code, followed by the All-Campus Picnic and the traditional climb to the top
of Murchison Tower, where Penelope and I greeted each student who made the
trek – and most did!
While the start of a new school year is always
exhilarating, we are especially pleased that the stunning new Center for the
Sciences and Innovation (CSI) is three-quarters complete and students are
enjoying the sophisticated classrooms and state-of-the-art labs. The final
phase is scheduled for completion in January, and the facility will be fully
operational for the spring semester.
Over the summer a number of other construction
projects were completed. First-year residence hall Witt-Winn was fully
renovated, the pathways through campus were rebuilt and widened so that now
you will see groups of students and faculty stopping to chat without
impeding the flow of people on campus, and the Admissions and Financial Aid
offices were moved to Northrup Hall to better serve students. The campus is
a delight – come and visit!
On the academic front, we are excited about the new
School of Business, the result of a restructuring in the department of
business administration that will significantly enrich our business program
and create opportunities for students through the involvement of an advisory
board and close relationships with the local business community. You will be
hearing more about this in Trinity magazine. Rich Butler has been appointed
Interim Dean of the Business School while a national search for a dean takes
place. Trinity’s business program is more than 100 years old, making it one
of the oldest in the nation.
. . .
Dennis A. Ahlburg
President
Trinity University
Victims of a Paperless Digital (e.g., Amazon's Kindle) World: Except
when it comes to toilet paper, paper towels, and tissues
Jensen Comment
Just about all the business office paper mills are idle pigeon roosts in New
England. Now the closures are moving south. About all we can do to save paper
mill jobs is promote prune and bran and coconut milk sales. Nor is it a good
time to be in the printing business.
Jensen Comment
This marketing promotion presents some interesting accounting questions. At what
point does this become delayed revenue recognition versus warranty accounting?
Or is this a type of repo accounting problem?
In any case this a plan offers customers all sorts of moral hazards. For
example, some might pack toilet stoppers.
Teach With Movies ---
http://www.teachwithmovies.org/
I think this site needs a better search engine. The term accounting led to all
hits with the word "account," most of which were not about accounting. The
search term "finance" had zero hits even though there are hundreds of movies
about finance.
"The CAPM Debate and
the Logic and Philosophy of Finance," by
David Johnstone, Abacus, Volume 49, Issue Supplement S1, pages 1–6,
January 2013 ---
http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6281.2012.00378.x/full
Although most Abacus articles not free, this is a free editorial
download.
Finance, and particularly financial decision
making, has much in common with the discipline of statistics and statistical
decision theory. Both fields involve conceptual models and related methods
by which to make numerical assessments that are meant to assist users to
draw inferences about future states and to make choices between possible
actions. In both fields, inferences and decisions are reached by
implementing quantitative methods, and in both fields those methods require
either empirical or subjective inputs (e.g., sample estimates of relevant
input parameters or human estimates of the same sorts of variables).1
This is not merely saying that finance theory makes
use of statistical theory. That is incidental, as is the fact that
statistics now adopts the language and ideas of finance in some of its
important applications. Rather, the point is that the two disciplines are
fundamentally analogous in their purposes and construction. They differ
markedly, however, in their states of philosophical introspection, as is
natural given that finance arose as a field only in the 1960s or later, and
has therefore had much less time to mature and look back at itself and its
development in a critical philosophical way.
A stark difference between the two fields is that
in statistics there exists a formalized branch of enquiry called ‘the logic,
methodology and philosophy of statistical inference and decision theory’,
whereas in finance there is as yet no equivalent well-defined or
orchestrated subfield. The philosophy of statistics is a highly developed
discipline, built upon hundreds of papers and books, written by
statisticians, logicians, philosophers of science and practitioners in
applied fields (e.g., psychology, medicine, economics) since the early
1900s. All of the great names in statistical theory, including Karl Pearson,
R. A. Fisher, Neyman, Savage, von Neumann and de Finetti, have contributed
philosophically as well as technically to the field we know as statistics,
and indeed virtually all of the empirical work that is done in finance today
is licensed by one or other of these philosophers. Similarly, very
influential modern statistical theorists such as Lindley, Kadane, Bernardo,
Seidenfeld and Berger have contributed numerous papers and books to the
big-picture philosophical issues in statistics.
By comparison, the philosophy, logic and
methodology of finance are yet to expressly emerge, or to obtain the
overarching respect and influence that such work has in statistics. This of
itself is something for explanation from positivist and sociological
perspectives. In the early years of finance, there was a great deal of such
work published, but in later years the majority of published research in
finance has been predominantly descriptive or empirical (data driven) rather
than conceptual or philosophical. There are some obvious practical reasons
for this, such as for example the modern availability of excellent
unexplored data bases and fast inexpensive computing. More fundamentally,
however, there has been a cultural shift away from critical philosophical
analysis of financial logic and financial methods within finance.
As one simple example, early generations of
students in finance spent much time trying to understand the NPV versus IRR
debate, and the mathematical explanations of how these techniques can
coincide or clash. Theoretical papers were written on this topic, not just
in finance but also in economics and engineering. By comparison, current
finance students are not asked to think about the logical foundations of DCF
analysis, and are mostly unaware of the related debate and mathematical
enquiry that once took centre stage. The most that a modern finance student
can be expected to know of the issue is that undergraduate textbooks list
some important problems of IRR and conclude that NPV does not have the same
troubles, and that essentially the case is closed. Generally this
superficial appreciation comes from pre-scripted lecture slides rather than
from any individual research or thought on the issue. Most textbooks give no
academic references to the related historical literature and no inkling of
how subtle matters of interpretation of NPV and IRR can be.
Research students might once have discovered such
issues for themselves, through curiosity and unstructured background
reading, but the modern way of PhD research is much narrower and usually
involves a substantial commitment of time and thought to learning
statistical techniques, and how to implement them using different software
packages, and to cleaning, merging and reconstructing large data files.
There is obviously less time and appetite for philosophical critique, out of
which potential research outcomes are no doubt less ‘safe’ than those from a
well-conceived empirical investigation.
. . .
The issue nearly 50 years after its invention is
where finance stands on the CAPM. The papers published in this issue contain
the unedited positions on the CAPM of well-known finance researchers. They
are reactions to the main paper of Dempsey, who adopts a critical and
therefore provocative standpoint. Consistent with the sentiments expressed
above, it is my belief that the free and frank academic discussion provoked
by Dempsey's paper is not only essential to a mature field but is also of
great academic and communal enjoyment. Those who have provided comments on
Dempsey's paper did so willingly and apparently with the thought that it
would be worthwhile to put in print some ideas and opinions that are usually
reserved for informal or unguarded tearoom conversations.
By chance, this issue of Abacus on the status of
the CAPM coincides with the publication of a wonderful book on the same
subject, written by one of the founders of the field. This book by Haim Levy
(2012) titled The Capital Asset Pricing Model in the 21st Century covers
much of the history and debate over the CAPM and its theoretical, empirical
and practical validity. Readers will likely be interested in how the
arguments advanced by Dempsey and others in this issue of Abacus compare
with the position taken by Levy. There is in fact a great deal of
reinforcement between Levy and some of the commentators. Levy's essential
conclusion is that the CAPM stands, in his words, ‘alive and well’. This is
for philosophical reasons, including particularly that the CAPM is a model
of ex ante decision making and hence does not need to be, and cannot be
expected to be, mirrored neatly by historical data. Levy's faith in the CAPM
is also for practical reasons, particularly for the close approximation with
which it mimics ex ante optimal investment, and the returns thereof, over a
wide class of utility functions.
I conclude this introduction to Dempsey and others
on the topic of the CAPM in the twenty-first century with the spur that only
when we openly discuss what is inadequate or questionable with our own
theories can we lay claim to scientific ‘objectivity’. Technical or
empirical positions adopted routinely, untempered by philosophical
scepticism or appreciation, can prove greatly inadequate, misleading and
ultimately costly to users and to the scientific reputation of the field,
even when used for strictly practical purposes (such as choosing
investments).
Finance as a field embodies more than sufficient
theoretical substance to warrant its own subfield in philosophy—the logic
and philosophy of finance. By nature, philosophical critique is normative,
so any aversion in principle to normative research needs to be overcome. I
began this introduction with the claim that finance and statistics are like
twins. Note, however, that published research in statistics is predominantly
normative (e.g., Bayes versus non-Bayes, etc.) whereas most finance research
is largely empirical. If we look more closely, however, empirical finance,
which is sometimes championed as ‘positive’ and ‘anti-normative’, is replete
with normative discussion about matters such as how to construct an
experiment or a statistical test, or how to define a key measure such as the
cost of capital. There should therefore be no in-principle resistance to the
reinvigoration of normative or philosophical thought concerning finance
theory proper.
Footnotes
1 For example, applications in finance of portfolio theory and the CAPM
require an ex ante joint probability distribution of the future returns on
all firms in the market. That distribution is usually estimated empirically
but is in principle a subjective probability distribution.
2 ‘There is no inevitable connection between the validity
of the expected utility maxim and the validity of portfolio analysis based
on, say, expected return and variance’ (Markowitz, 1959, p. 209).
The model assumes that the variance of returns is an adequate
measurement of risk. This would be implied by the assumption that returns
are normally distributed, or indeed are distributed in any two-parameter
way, but for general return distributions other risk measures (like
coherent risk measures) will reflect the active and potential
shareholders' preferences more adequately. Indeed risk in financial
investments is not variance in itself, rather it is the probability of
losing: it is asymmetric in nature.
Barclays Wealth have published some research on asset allocation with
non-normal returns which shows that investors with very low risk tolerances
should hold more cash than CAPM suggests.[7]
The model assumes that all active and potential shareholders have access
to the same information and agree about the risk and expected return of all
assets (homogeneous expectations assumption).[citation
needed]
The model assumes that the probability beliefs of active and potential
shareholders match the true distribution of returns. A different possibility
is that active and potential shareholders' expectations are biased, causing
market prices to be informationally inefficient. This possibility is studied
in the field of
behavioral finance, which uses psychological assumptions to provide
alternatives to the CAPM such as the overconfidence-based asset pricing
model of Kent Daniel,
David Hirshleifer, and Avanidhar Subrahmanyam (2001).[8]
The model does not appear to adequately explain the variation in stock
returns. Empirical studies show that low beta stocks may offer higher
returns than the model would predict. Some data to this effect was presented
as early as a 1969 conference in
Buffalo, New York in a paper by
Fischer Black,
Michael Jensen, and
Myron Scholes. Either that fact is itself rational (which saves the
efficient-market hypothesis but makes CAPM wrong), or it is irrational
(which saves CAPM, but makes the EMH wrong – indeed, this possibility makes
volatility arbitrage a strategy for reliably beating the market).[citation
needed]
The model assumes that given a certain expected return, active and
potential shareholders will prefer lower risk (lower variance) to higher
risk and conversely given a certain level of risk will prefer higher returns
to lower ones. It does not allow for active and potential shareholders who
will accept lower returns for higher risk.
Casino gamblers pay to take on more risk, and it is possible that some
stock traders will pay for risk as well.[citation
needed]
The model assumes that there are no taxes or transaction costs, although
this assumption may be relaxed with more complicated versions of the model.[citation
needed]
The market portfolio consists of all assets in all markets, where each
asset is weighted by its market capitalization. This assumes no preference
between markets and assets for individual active and potential shareholders,
and that active and potential shareholders choose assets solely as a
function of their risk-return profile. It also assumes that all assets are
infinitely divisible as to the amount which may be held or transacted.[citation
needed]
The market portfolio should in theory include all types of assets that
are held by anyone as an investment (including works of art, real estate,
human capital...) In practice, such a market portfolio is unobservable and
people usually substitute a stock index as a proxy for the true market
portfolio. Unfortunately, it has been shown that this substitution is not
innocuous and can lead to false inferences as to the validity of the CAPM,
and it has been said that due to the inobservability of the true market
portfolio, the CAPM might not be empirically testable. This was presented in
greater depth in a paper by
Richard Roll in 1977, and is generally referred to as
Roll's critique.[9]
The model assumes economic agents optimise over a short-term horizon,
and in fact investors with longer-term outlooks would optimally choose
long-term inflation-linked bonds instead of short-term rates as this would
be more risk-free asset to such an agent.[10][11]
The model assumes just two dates, so that there is no opportunity to
consume and rebalance portfolios repeatedly over time. The basic insights of
the model are extended and generalized in the
intertemporal CAPM (ICAPM) of Robert Merton,
[12] and
the
consumption CAPM (CCAPM) of Douglas Breeden and Mark Rubinstein.[13]
CAPM assumes that all active and potential shareholders will consider
all of their assets and optimize one portfolio. This is in sharp
contradiction with portfolios that are held by individual shareholders:
humans tend to have fragmented portfolios or, rather, multiple portfolios:
for each goal one portfolio — see
behavioral portfolio theory[14]
and
Maslowian Portfolio Theory.[15]
Empirical tests show market anomalies like the size and value effect
that cannot be explained by the CAPM.[16]
For details see the
Fama–French three-factor model.[17]
Alternative to
CAPM: Dual-Beta
Dual-beta
model differentiates
downside beta from
upside
beta. The difference between CAPM and dual-beta model is that the CAPM
assumes that upside and downside betas are the same while the dual-beta model
does not. Since this assumption is rarely accurate, the dual-beta model is
considered to provide better information for investors.[2]
Jensen Comment
My own threads on how the CAPM has been misleading for much of accountics
research are at
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Be patient, this document is very slow to load at the second stage (#AccentTheObvious)due
to the immense size of the document.
You have to scroll down quite a ways for the CAPM tidbits.
Two tidbits of particular interest are as follows:
For example, in the figures below I’ve plotted the
Fama-French 25 (portfolios ranked on size and book-to-market) against beta.
In the first figure, I plot the average excess
return to the FF 25 against the average excess return one would expect,
given beta.
If you’d like to see how I calculated the charts
above, please reference the excel file
here.
Given such a poor track record, is anyone
still using the CAPM?
Lot’s of people, apparently…
Welch (2008) finds that ~75% of professors
recommend the use of the model when estimating the cost of capital, and
Graham
and Harvey (2001) find that ~74% of CFOs use the
CAPM in their work.
A few quotes from Graham and Harvey 2001 sum up
common sentiment regarding the CAPM:
“While the CAPM is popular, we show later that
it is not clear that the model is applied properly in practice. Of
course, even if it is applied properly, it is not clear that the CAPM is
a very good model [see Fama and French (1992)].
“…practitioners might not apply the CAPM or NPV
rule correctly. It is also interesting that CFOs pay very little
attentionto risk factors based on momentum and book-to-market-value.”
Of course, there are lots of arguments to consider
before throwing out the CAPM. Here are a few:
Everyone learns about it and knows how to use
it (although, Graham and Harvey suggest that many practitioners don’t
even apply the CAPM theory correctly)
Data is easy to obtain on betas.
Roll’s critique–maybe the CAPM isn’t a junk
theory, rather, the empirical tests showing the CAPM doesn’t work are
bogus.
Regardless, being that this blog is dedicated to
empirical data and evidence, and not about ‘mentally masturbating about
theoretical finance models,’ we’ll operate under the assumption that the
CAPM is dead until new data comes available.
The Fama French Alternative?
Given the CAPM doesn’t work that well in practice,
perhaps we should look into the Fama French model (which isn’t perfect or
cutting edge, but a solid workhorse nonetheless). And while the FF model
inputs are highly controversial, one thing is clear: the FF 3-factor model
does a great job explaining the variability of returns. For example,
according to
Fama French 1993, the 3-factor model explains over
90% of the variability in returns, whereas the CAPM can only explain ~70%!
The 3-factor model is great, but how the heck
does one estimate the FF factors?
Dartmouth Professor Ken French comes in for the
rescue!
Abstract:
We
investigate the relation between various alternative risk measures and
future daily returns using a sample of firms over the 1988-2009 time period.
Previous research indicates that returns are not normally distributed and
that investors seem to care more about downside risk than total risk.
Motivated by these findings and the lack of research on upside risk, we
model the relation between future returns and risk measures and investigate
the following questions: Are investors compensated for total risk? Is the
compensation for downside risk different than the compensation for upside
risk? and which measure of risk (i.e., upside, downside, or total) is most
important to investors? We find that, although investors seem to be
compensated for total risk, measures of downside risk, such as the lower
partial moment, better explain future returns. Further, when downside and
upside risk are modeled simultaneously, investors seem to care only about
downside risk. Our findings are robust to the addition of control variables,
including prior returns, size, book-to-market ratio of equity (B/M), and
leverage. We also find evidence of short-run mean reversals in daily
returns. Our findings are important because we document a positive
risk-return relationship, using both total and downside risk measures;
however, we find that investors are concerned more with downside risk than
total risk.
An alternative to CAPM theory is Arbitrage Pricing Theory. Bob Jensen's long
critique of APT was rejected by the Journal of Finance. The Editor said if he
did not understand it nobody else would probably understand it. In retrospect is
should have been rejected because it was poorly written ---
http://www.trinity.edu/rjensen/default4.htm#BigOnes
The reason for the disdain in which classical
financial accounting research has come to held by many in the scholarly
community is its allegedly insufficiently scientific nature. While many have
defended classical research or provided critiques of post-classical
paradigms, the motivation for this paper is different. It offers an
epistemologically robust underpinning for the approaches and methods of
classical financial accounting research that restores its claim to
legitimacy as a rigorous, systematic and empirically grounded means of
acquiring knowledge. This underpinning is derived from classical
philosophical pragmatism and, principally, from the writings of John Dewey.
The objective is to show that classical approaches are capable of yielding
serviceable, theoretically based solutions to problems in accounting
practice.
Jensen Comment
When it comes to "insufficient scientific nature" of classical accounting
research I should note yet once again that accountics science never attained the
status of real science where the main criteria are scientific searches for
causes and an obsession with replication (reproducibility) of findings.
"Research
on Accounting Should Learn From the Past" by Michael H. Granof and Stephen
A. Zeff, Chronicle of HigherEducation, March 21, 2008
The unintended consequence has been that interesting and researchable questions
in accounting are essentially being ignored.
By confining the major thrust in research to phenomena that can be
mathematically modeled or derived from electronic databases, academic
accountants have failed to advance the profession in ways that are expected of
them and of which they are capable.
Academic research has unquestionably broadened the views of standards setters as
to the role of accounting information and how it affects the decisions of
individual investors as well as the capital markets. Nevertheless, it has had
scant influence on the standards themselves.
Continued
in article
"Research on Accounting Should Learn From the Past,"
by Michael H. Granof and
Stephen A. Zeff, Chronicle of Higher Education, March 21, 2008
. . .
The narrow focus of today's research has also resulted in a disconnect between
research and teaching. Because of the difficulty of conducting publishable
research in certain areas — such as taxation, managerial accounting, government
accounting, and auditing — Ph.D. candidates avoid choosing them as specialties.
Thus, even though those areas are central to any degree program in accounting,
there is a shortage of faculty members sufficiently knowledgeable to teach them.
To be sure, some accounting research, particularly that pertaining to the
efficiency of capital markets, has found its way into both the classroom and
textbooks — but mainly in select M.B.A. programs and the textbooks used in those
courses. There is little evidence that the research has had more than a marginal
influence on what is taught in mainstream accounting courses.
What needs to be done? First, and most significantly, journal editors,
department chairs, business-school deans, and promotion-and-tenure committees
need to rethink the criteria for what constitutes appropriate accounting
research. That is not to suggest that they should diminish the importance of the
currently accepted modes or that they should lower their standards. But they
need to expand the set of research methods to encompass those that, in other
disciplines, are respected for their scientific standing. The methods include
historical and field studies, policy analysis, surveys, and international
comparisons when, as with empirical and analytical research, they otherwise meet
the tests of sound scholarship.
Second, chairmen, deans, and promotion and merit-review committees must expand
the criteria they use in assessing the research component of faculty
performance. They must have the courage to establish criteria for what
constitutes meritorious research that are consistent with their own
institutions' unique characters and comparative advantages, rather than
imitating the norms believed to be used in schools ranked higher in magazine and
newspaper polls. In this regard, they must acknowledge that accounting
departments, unlike other business disciplines such as finance and marketing,
are associated with a well-defined and recognized profession. Accounting
faculties, therefore, have a special obligation to conduct research that is of
interest and relevance to the profession. The current accounting model was
designed mainly for the industrial era, when property, plant, and equipment were
companies' major assets. Today, intangibles such as brand values and
intellectual capital are of overwhelming importance as assets, yet they are
largely absent from company balance sheets. Academics must play a role in
reforming the accounting model to fit the new postindustrial environment.
Third, Ph.D. programs must ensure that young accounting researchers are
conversant with the fundamental issues that have arisen in the accounting
discipline and with a broad range of research methodologies. The accounting
literature did not begin in the second half of the 1960s. The books and articles
written by accounting scholars from the 1920s through the 1960s can help to
frame and put into perspective the questions that researchers are now studying.
The Stanford
Graduate School of Business is getting into the
MOOC game. Its first foray into the market for “massive open online courses”
is focused on retirement finance and pension policy and will be launched
Oct. 14.
“We’re living in a time when more and more people
are responsible for their own retirement,” says Ranga Jayaraman, associate
dean and chief information officer at the Stanford B-school. “Yet many find
their retirement is not secure.”
Joshua Rauh, the professor who developed the
eight-week course,
will cover topics such as how much people should save
for retirement, stocks and mutual funds, and the impact of public policy
debates on retirement and pensions. The course, to be offered on the NovoEd
platform, will differentiate itself with high-quality video content and
navigation tools that will allow students to review topics that are of the
most interest to them, he adds.
In addition to the 45-minute video lectures broken
down into segments of five to seven minutes, the course includes quizzes,
assignments, and an interactive forum moderated by Stanford GSB alumni,
according to Stanford’s Sept. 17 announcement.
Students will form teams to complete a final
“capstone” project, and representatives from the top five teams will go to
campus and present their projects to a panel of experts and faculty in
January 2014. Stanford and the Hoover Institution will foot the bill for
travel expenses.
Based on participation in MOOCs offered by other
schools at Stanford, GSB expects tens of thousands to sign up, says
Jayaraman.
MOOC companies are hardly universities unto
themselves, but now a provider wants to move beyond offering one-off
courses.
MITx, a division of the Massachusetts Institute of
Technology that offers courses on the nonprofit edX’s platform,
announced on Tuesday that it would soon offer
special certificates to students who completed a prescribed sequence of
massive open online courses from MIT. The sequences will be called XSeries.
MIT plans to offer its first XSeries sequence,
Foundations of Computer Science, beginning this fall. The computer-science
series will consist of seven courses that together “will cover content
equivalent to two to four traditional residential courses and take between
six months and two years to complete,” according to a news release.
EdX is working with SoftwareSecure, a major player
in the
online-proctoring industry, to make sure that
students who pass each course in an XSeries are who they say they are and
aren’t cheating. The fee for a proctored final examination is roughly $100
per course, meaning students who aim to earn XSeries certificates can expect
to pay about $700 each, said Anant Agarwal, president of edX.
The
failure of MOOCs to penetrate the traditional
system of credits and degrees has made the fate of “alternative credentials”
like XSeries certificates more interesting.
Getting a
Wharton MBA involves taking off from work for two
years, moving to Philadelphia, and spending about $200,000 on tuition and
expenses. Now, with the addition of three new courses on the online learning
platform Coursera, you can get much of the course content for free.
While you won’t get the full Wharton on-campus
experience—or an internship, career services, or alumni network, for that
matter—the new courses in financial accounting, marketing, and corporate
finance duplicate much of what you would learn during your first year at the
elite business school, says Don Huesman, managing director of the innovation
group at Wharton.
A fourth course in operations management that’s
been offered since September rounds out the “foundation
series.” Along with five existing electives, which
include courses on sports business and health care, the new offerings make
it possible to learn much of what students in Wharton’s full-time MBA
program learn, and from the same professors. All nine courses are massive
open online courses, or MOOCs, expected to attract students from around the
world.
Continued in article
Jensen Comment
The 2013 graduating MBA class had more females than males.
The Wharton MBA Program is nearly always ranked in the Top Five by US
News.
San Jose State University on Wednesday
quietly released the full research report on the for-credit online courses
it offered this spring through the online education company Udacity. The
report, marked by delays and procedural setbacks, suggests it may be
difficult for the university to deliver online education in this format to
the students who need it most.
The report's release lands on the
opposite end of the spectrum from the hype generated in January, when
university officials, flanked by the Udacity CEO Sebastian Thrun and
California Governor Jerry Brown, unveiled the project during a 45-minute
press conference. The pilot project, featuring two math courses and one
statistics course, aimed to bring high-quality education to students for a
fraction of the cost of the university's normal tuition. Wednesday's report went
live on the university’s website sometime before
noon Pacific time, appearing with little fanfare on the research page of the
principal investigator for the project, Elaine D. Collins. Collins serves as
associate dean in the College of Science.
The report provides a long-awaited look
into how the pilot project has fared. The initials results from the spring
pilot led the university to put
its partnership with Udacity on “pause” for the fall semester.
Last month, the university
released results from the summer pilot, showing
increased retention and student pass rates. However, those reports barely
scratched the surface of the data the university collected during the
project.
The report, funded by the National
Science Foundation, details the setbacks the research team encountered as it
began to evaluate results from the spring pilot project. In particular, it
took months to obtain usable data from Udacity that tracked how students
used instructional resources and accessed support services. The research
team then had to spend several weeks awaiting clarifications and corrections
to resolve accuracy questions.
“The result ... is that the research
lagged behind the implementation whereas, ideally, it would be running
alongside, providing just-in-time information about what works and where
improvements can be made,” the report reads.
The Udacity team contested the research
team's findings in a blog post. They said they received the first data
request on May 31, which was modified on June 3. Udacity submitted the data
on June 28. The RP Group asked Udacity to reformat the data on July 25,
which was performed by the next day.
"[T]he reason for this is it’s the first
time we’ve collaborated with an external entity," Thrun said. "Whatever
picture is being drawn here, I don’t understand why this is being said."
Ellen Junn, provost at San Jose State,
declined to comment on Wednesday.
Another data source, student responses to
three surveys, also proved less useful than anticipated. The spring pilot
produced just 213 students whose results could be used for statistical
purposes -- the remaining 61 received an incomplete grade, dropped a course
or were removed after data were pruned for inconsistencies. Survey response
rates ranged from 32 to 34 percent, and the research team found “significant
differences” between those who responded and the general student population.
“Most importantly, successful students
were overrepresented among the survey population and almost no students from
the partner high school completed the surveys,” the report reads.
The surveys were further complicated by
internal delays. The spring pilot began before San Jose State’s
institutional review board could approve the project, which meant the first
survey, billed as an entry survey, was not conducted until the fifth week of
classes.
The research team consisted of members
from the Research and Planning Group for California Community Colleges and
Sutee Sujitparapitaya, associate vice president for institutional research
at San Jose State. Despite the complications, the report concludes the
results provide pointers to how students enrolled in SJSU Plus courses
learn.
“[M]easures of student effort eclipse all
other variables examined in the study, including demographic descriptions of
the students, course subject matter and student use of support services,”
the report reads. That means students who took charge of their own education
and submitted more problem sets, logged in more often and watched more
videos than the course mean were more likely to succeed than their peers
were.
The importance of student effort
highlights the pilot project’s difficulties in targeting disadvantaged
students, who Udacity's online support providers early on felt “lacked
adequate preparation for the courses and were very unlikely to succeed.”
Results from the first survey showed 39
percent of students had never before taken an online course. The
unfamiliarity with the new platform meant less than half “partially
understood” the online support services available to them, including video
conferencing with faculty members and discussion forums.
By the end of the semester, four in every
five students said they wanted more help with the content -- yet few
scheduled appointments with faculty members during office hours. Instead,
one faculty member said she answered “hundreds” of e-mails with questions
that were answered in the syllabus. Another instructor “noted that she had
out of necessity learned to write colorful boldfaced e-mails to draw
students’ attention.”
During focus group sessions, student
reported they were confused by having to interact with both San Jose State’s
and Udacity’s websites, and that important e-mails arrived either too late
or were flagged as spam.
While pass rates among students outside
San Jose State in the introductory statistics course were more than double
those in the two math courses, the report suggests the course’s weekly
assignments “helped this group of students overcome, to some degree, their
lack of online preparation.”
Research has shown that at-risk students
tend to struggle in online classes, said the education consultants Michael
Feldstein and Phil Hill. That disadvantaged students enrolled in SJSU Plus
courses posted similarly poor pass rates suggests the spring pilot was
rushed, they said.
"We have to be careful that our sense of
altruism doesn’t overcome our sense of common sense," Hill said. "If we know
that at-risk students don’t tend to do well in online courses, you can’t
just wish away that problem. "
San Jose State and Udacity attempted to
address many of the issues presented in the report on its
summer pilot. Instead of being inundated by
e-mails, students received more notifications while engaging with the course
content online. The summer courses, which expanded to include psychology and
computer programming, also featured orientation sessions.
Student pass rates from the summer pilot
were superior to those in the spring pilot, with two-thirds of students
receiving a C or better in four of five of the courses. Yet results in the
remedial math course still lagged, with less than one-third of students
receiving a passing grade.
The summer pilot also featured a vastly
different student population: 53 percent of students had completed a
postsecondary degree, including some doctoral degree holders. Only 15
percent were active high school students, compared to about half of the
spring pilot’s students.
Earlier this year, it looked as if a high-profile
online-education experiment at San Jose State University had gone on the
rocks. In the first courses the university ran with technology from Udacity,
the online-learning company, students’ grades were, frankly, dismal.
But now the pilot program appears to be back on
course, buoyed by encouraging data from this summer’s trials, in which the
university offered tweaked versions of the same courses to a much different
mix of students.
In the spring, the university adapted three courses
for Udacity’s platform and offered them to small groups of online students
for credit. The idea was to test whether Udacity’s technology and teaching
methods, which the company originally developed for its massive open online
courses, could be useful in a more conventional online setting.
But the pass rates in all three Udacity-powered
courses trailed far behind the rates in comparable face-to-face courses at
San Jose State. The university
decided not to offer any trial courses through
Udacity in the fall.
The trials that had been planned for the summer
went forward, however, with tweaked versions of the same three courses, plus
two others. The results have been more promising. Pass rates in each of the
three repeated courses leaped upward, approaching and sometimes exceeding
the pass rates in the face-to-face sections.
For example, in the spring trial, only 25 percent
of the students taking the “Udacified” version of a statistics course earned
a C grade or higher; in the summer trial, 73 percent made at least a C. Only
students in the adapted version of an entry-level mathematics course
continued to lag well behind those in the face-to-face version on the San
Jose State campus.
The results come with an important caveat: Unlike
the spring trials, which drew on San Jose State undergraduates as well as
underprivileged high-school students, the summer trials were open to anybody
who wanted to register.
In an interview with The Chronicle, Sebastian
Thrun, the founder of Udacity, said that half the students in the summer
trials already held bachelor’s degrees and 20 percent had advanced degrees.
In general, the summer students were older, with more work experience and
higher levels of educational attainment. Given the difference in
populations, trying to compare the pass rates for the spring and summer
trials is probably not a particularly profitable exercise.
It's too late for the 2013 EDUCAUSE event on MOOCs, but Many of the EDUCAUSE
resources are still available
Events
EDUCAUSE
Sprint 2013, July 30–August 1. During this free, online progam we
explored the theme of Beyond MOOCs: Is IT Creating a New, Connected
Age? Each day the community shared thoughts and ideas through webinars,
articles, videos, and online discussions on the daily topics.
Looking for more sessions on MOOCs? check out our other
event recordings on the topic.
Additional MOOC Resources
Copyright Challenges in a MOOC Environment, EDUCAUSE Brief, July
2013. This brief explores the intersection of copyright and the scale
and delivery of MOOCs highlights the enduring tensions between academic
freedom, institutional autonomy, and copyright law in higher education.
To gain insight into the copyright concerns of MOOC stakeholders,
EDUCAUSE talked with CIOs, university general counsel, provosts,
copyright experts, and other higher education associations.
Learning and the MOOC, this is a list of
MOOC related resources gathered by the EDUCAUSE Learning Initiative.
Learning and the Massive Open Online Course: A Report on the ELI Focus
Session, ELI White Paper, May 2013. This report is a synthesis of
the key ideas, themes, and concepts that emerged. This report also
includes links to supporting focus session materials, recordings, and
resources. It represents a harvesting of the key elements that we, as a
teaching and learning community, need to keep in mind as we explore this
new model of learning.
The
MOOC
Research Initiative (MRI) is funded by the
Bill & Melinda Gates Foundation as part of a set of investments intended
to explore the potential of MOOCs to extend access to postsecondary
credentials through more personalized, more affordable pathways.
The Pedagodgy of MOOCs, May 11, 2013. This
Paul Stacy blog posting provides a brief history of MOOCs, the early
success in Canada and the author's own pedagogical recommendations for
MOOCs.
What Campus Leaders Need to Know About MOOCs,” EDUCAUSE, December
2012. This brief discusses how MOOCs work, their value proposition,
issues to consider, and who the key players are in this arena.
The MOOC Model: Challenging Traditional Education, EDUCAUSE
Review Online (January/February 2013),A turning
pointwill occur in the higher education model when a
MOOC-based program of study leads to a degree from an accredited
institution — a trend that has already begun to develop.
General copyright issues for Coursera/MOOC courses,
Penn Libraries created a copyright resource page for schools using the
MOOC Coursera platform. This page provides an overview of special
copyright considerations when using Coursera.
Online Courses Look for a Business Model,
Wall Street Journal, January 2013. MOOC providers, Udacity,
Coursera and edX, seek to generate revenue while they continue to
experiment with open platforms.
Massive Open Online Courses as Drivers for Change,
CNI Fall Meeting, December 2012. Speaker Lynne O'Brien discusses Duke
University's partnership with Coursera, and their experiments with
massive open online courses (MOOCs)
MOOCs: The Coming Revolution?, EDUCAUSE 2012 Annual Conference. This
November 2012 session informs viewers about Coursera and the impact it
is having on online education and altering pedagogy, provides insights
into how and why one university joined that partnership.
The Year of the MOOC, New York Times,
November 2, 2012. MOOCs have been around in one form or another for a
few years as collaborative tech oriented learning events, but this is
the year everyone wants in.
Challenge and Change,” EDUCAUSE Review (September/October
2012). Author George Mehaffy discusses various aspects of innovative
disruption facing higher education including MOOCs.
A True History of the MOOC,” September 26,
2012. In this webinar panel presentation delivered to Future of
Education through Blackboard Collaborate, host Steve Hargadon discusses
the "true history" of the MOOC. It’s also available in
mp3.
The MOOC Guide. This resource offers
an online history of the development of the MOOC as well as a
description of its major elements.
Reviews
for Open Online Courses is a Yelp like
review system from CourseTalk for students to share their experiences
with MOOCs (Massive Open Online Courses).
MOOCs of Interest
Current/Future State of Higher Education 2012.
Eleven organizations, including EDUCAUSE, have come together to provide
a course that will evaluate the change pressures that face universities
and help universities prepare for the future state of higher education.
Getting a
Wharton MBA involves taking off from work for two
years, moving to Philadelphia, and spending about $200,000 on tuition and
expenses. Now, with the addition of three new courses on the online learning
platform Coursera, you can get much of the course content for free.
While you won’t get the full Wharton on-campus
experience—or an internship, career services, or alumni network, for that
matter—the new courses in financial accounting, marketing, and corporate
finance duplicate much of what you would learn during your first year at the
elite business school, says Don Huesman, managing director of the innovation
group at Wharton.
A fourth course in operations management that’s
been offered since September rounds out the “foundation
series.” Along with five existing electives, which
include courses on sports business and health care, the new offerings make
it possible to learn much of what students in Wharton’s full-time MBA
program learn, and from the same professors. All nine courses are massive
open online courses, or MOOCs, expected to attract students from around the
world.
Continued in article
Jensen Comment
The 2013 graduating MBA class had more females than males.
The Wharton MBA Program is nearly always ranked in the Top Five by US
News.
MOOC companies are hardly universities unto
themselves, but now a provider wants to move beyond offering one-off
courses.
MITx, a division of the Massachusetts Institute of
Technology that offers courses on the nonprofit edX’s platform,
announced on Tuesday that it would soon offer
special certificates to students who completed a prescribed sequence of
massive open online courses from MIT. The sequences will be called XSeries.
MIT plans to offer its first XSeries sequence,
Foundations of Computer Science, beginning this fall. The computer-science
series will consist of seven courses that together “will cover content
equivalent to two to four traditional residential courses and take between
six months and two years to complete,” according to a news release.
EdX is working with SoftwareSecure, a major player
in the
online-proctoring industry, to make sure that
students who pass each course in an XSeries are who they say they are and
aren’t cheating. The fee for a proctored final examination is roughly $100
per course, meaning students who aim to earn XSeries certificates can expect
to pay about $700 each, said Anant Agarwal, president of edX.
The
failure of MOOCs to penetrate the traditional
system of credits and degrees has made the fate of “alternative credentials”
like XSeries certificates more interesting.
For decades the Ph.D. program in economics at the
University of Florida flourished. Highly regarded econometricians, like the
late Henri Thiel and G.S. Maddala, taught there. Until the late 1990s, the
department had been ranked among the top 20 of American public universities
by prominent economics journals and associations.
Now, the 71-year-old doctoral program, housed in
the Warrington College of Business Administration, is near death.
Like many public universities, the University of
Florida faced significant budget cuts in the recent economic downturn. Such
cuts led to reductions and eliminations of Ph.D. programs across the
country, including at Florida, where the computer-science, engineering,
psychology, and statistics programs have downsized. But it is rare for an
economics program to be on the chopping block.
The number of economics Ph.D. programs housed in
business colleges has held steady since 2008, according to a survey of 407
American institutions accredited by the Association to Advance Collegiate
Schools of Business, and the job market for new economics Ph.D.'s is
relatively healthy. In 2010-11, almost 89 percent of all economics graduates
who sought employment got jobs, and 62 percent of those landed academic
positions, according to a
survey of 191 economics departments by the Center
for Business and Economic Research.
So what went wrong at Florida, which received up to
300 applicants for about 15 slots each year in the Ph.D. program's heyday,
in the early 1990s? What does Florida's story say about the precariousness
of doctoral programs elsewhere? If a program in economics isn't safe, is
any? And what are the ripple effects when a thriving program slips away?
Florida announced last year that it would stop
financing its economics doctoral program. Before that decision, the
business-college dean gave the faculty the option to leave Warrington for
the liberal-arts college, where, deans say, the Ph.D. program might have
survived. The faculty voted not to move because, they say, the liberal-arts
college has its own financial problems, and they were concerned about
salaries, research budgets, and teaching loads.
If Florida loses all of its graduate students in
the discipline, it would become the third university in the prestigious
Association of American Universities without a Ph.D. offering in economics.
Case Western Reserve University no longer has one, and Emory University
suspended its program last year.
Since 1990 the number of professors in the
department has shrunk from 38 to 11; the average age of those who remain is
63, according to the department's chairman.
Because of budget constraints, the all-male
department hasn't made new hires since 2005 and has had to admit Ph.D.
students on an every-other-year basis since 1995. A new cohort would have
been admitted this fall under that schedule, but professors in the program
decided not to admit a class without having any fellowships to offer.
Nineteen students remain in the Ph.D. program, and
they will receive financial support for two more years. A few worry that
graduating from a dying program could stigmatize them in the job market.
Some faculty members raise concerns about ripple
effects across the university. Without a Ph.D. program in economics, some
professors say, the selection of undergraduate courses in the subject will
be limited. The university's stature as a whole also might take a hit, some
faculty and students say, even as Florida seeks to become one of the
nation's top 10 public institutions.
Fend for
Yourself
The provost of the university and deans in
Warrington say the program could still revive. But to continue, it will have
to fend for itself.
Provost Joseph Glover says the department can still
offer a Ph.D. and admit students, but those students will be responsible for
paying the annual $30,000 tuition. None of the students now enrolled in the
program are paying their own tuition. In past years, faculty members say,
the department has admitted only a few students who paid their own way. By
cutting off financial support, the administration has effectively sentenced
the Ph.D. program to death, they say.
"They don't have to officially get rid of a
program. They can accomplish the same goal by defunding a program," says
Roger D. Blair, chair of the department. Such a move, he and other faculty
members say, can allow administrators to escape the scrutiny of a
faculty-senate process and campus backlash.
Daniel S. Hamermesh, a professor of economics at
the University of Texas at Austin, said it is rare for economics programs to
be singled out for cuts. But being housed in a business school seems to make
Ph.D. programs in economics more vulnerable, he said in an e-mail, because a
business dean might see the program as "an easy target for cannibalization"
in lean times.
Economics remains a popular undergraduate major at
Florida and across the country, but student interest doesn't always
determine a program's fate. At UF the undergraduate economics major has been
growing since 2011, when it had 405 students. Last semester there were 693
undergraduate majors, according to Steven M. Slutsky, graduate coordinator
of the economics department.
Daniel R. LeClair, who earned a Ph.D. in economics
from the program in 1992 and is executive vice president of the Association
to Advance Collegiate Schools of Business, says it's hard to generalize
about when or why economics programs are vulnerable.
Despite a robust job market and the popularity of
the discipline, Mr. LeClair says, "decisions about cutting programs depend
on factors like institutional priorities, the allocation of resources, and
local politics."
Severe declines in financial resources prompted
Florida to adopt an approach to budgeting called "responsibility-centered
management" that requires individual departments and academic units to
generate their own revenue. Mr. Glover, the provost, says this system, which
started three years ago, creates more openness about how money is allocated
and gives deans more control over their budgets.
The economics program, says John Kraft, dean of the
business college, has long been troubled by operating deficits because it is
undergraduate-oriented, with three times the majors in liberal arts than in
the business college. As such, revenue goes to the liberal-arts college, not
the business college. "They are the weakest program in business, have the
weakest Ph.D. program, and have the highest gap between revenue and costs,"
Mr. Kraft says.
He expects to save the university $3-million each
year by cutting funds for the economics Ph.D. program and reducing the
faculty to six through retirement.
The program's resources are also being cut, Mr.
Kraft adds, because an internal review of doctoral programs gave economics a
grade of D. Its deficiencies included low program rankings and
tenure-track-job placement records that failed to compare well with other
business disciplines.
Professors in the economics department defend their
program's record. Since the spring of 2000, the department has awarded 51
Ph.D.'s. Of those graduates, 27 have landed tenure-track positions, 16 found
jobs in government, research institutions, and consulting firms, and seven
went to non-tenure-track academic jobs, according to a 2011 report provided
by Mr. Slutsky, the graduate coordinator. Only one graduate, who did not
enter the job market because of family circumstances, has not been placed.
And, Mr. Slutsky says, the economics department
supports the university in many ways, including by teaching large numbers of
students in introductory courses. The tuition students pay for those
courses, he says, more than covers the expense of running the department.
Jensen Comment
I think a case can be made for bringing leases onto balance sheets. But there's
a difference between that in general and the particular proposed rules being
advocated by the IASB and FASB ---
http://www.trinity.edu/rjensen/Theory02.htm#Leases
Equipment
lease-financing companies and related trade groups are pushing hard to
change the proposed converged leasing accounting standard. The deadline for
comments is Friday. More than 60 letters have been sent
in, most of them critical of the standard as presented in the exposure
draft.
The converged proposal on financial
reporting for leases continues to face resistance with the deadline for
comment letters little more than one week away.
FASB’s
Investor Advisory Committee (IAC) last week
declined to support the
proposal, stating that the proposal is not an
improvement to current accounting. And the Equipment Leasing and Finance
Association (ELFA), a U.S. trade group, continued its campaign against the
proposal with a news release drawing attention to the advisory committee’s
dissent.
“This raises another key question,” ELFA
President and CEO William Sutton said Tuesday in a news release seizing upon
the IAC’s conclusion. “Is the cost-benefit analysis in the exposure draft
sound if key users and other stakeholders maintain that current GAAP gives
them better information than the proposed exposure draft and that the
proposed rules are too complex?”
Comments are due Sept. 13 on the
proposal at the websites of
FASB and the International Accounting Standards
Board (IASB).
The proposal calls for lessees to report a straight-line lease expense in
their income statement for most real estate leases. In most equipment and
vehicle leases, lessees would recognize leases as a nonfinancial asset
measured at cost, less amortization. This would result in a total lease
expense that generally would decrease over the lease term.
Former FASB Chairman Leslie Seidman said
when the proposal was released that it reflects investors’ views that leases
are liabilities that belong on the balance sheet.
During the IAC’s meeting with FASB on Aug.
27, IAC member David Trainer, CEO of investor research company New
Constructs, said it’s helpful to get more transparency on the liabilities
related to leases. But he said the complexities of leasing activity make it
almost impossible to create a one-size-fits-all solution that can be put on
the balance sheet.
The IAC recommended that the boards
increase disclosure requirements about leases rather than placing them on
the balance sheet.
“Having to unwind an accounting construct
put on the balance sheet and then having to do my own analysis is not very
desirable,” Trainer said. “I’d rather just have the data there, and let me
do with it what I think I ought to do with it.”
In the spring, Moody’s Investors
Service Managing Director Mark LaMonte
expressed
a similar view, saying the proposal would force
investors and analysts to deconstruct the information placed on the balance
sheet before performing their own calculations to determine lease
liabilities.
"Operating Leases Are Forward Contracts, Not Debt," by Dane Mott
Research, August 15, 2013 ---
http://www.danemott.com/leasecommentletter/
I thank Tom Selling for pointing this letter out to me.
Jensen Comment
This seems like a very sophisticated argument against reporting operating leases
as debt. But I have some questions about the analysis.
1. Mott makes a distinction between operating leases and capital leases
without defining operating leases for this particular analysis. There's not
always a clear distinction in some lease contracts, which is why FAS 13 drew
four highly controversial bright lines.
2. Mott's analysis is the same whether or not the operating lessee has a
series of renewal options. For example, Consider Mott's Example 2:
Example
1:
Assume Coffee Shop signed an operating lease in
2010 with an initial lease term of 10 years and four 5-year renewal
options. Coffee Shop has a weighted-average cost of capital (WACC) of 10%.
The initial annual rent in 2010 is $100,000 and is scheduled to grow at 3%
each year in the initial lease term and renewal option periods. The
risk-free rate yield curve and time value of money discount factors are
presented in the table that follows.
Jensen Comment
Mott's illustration calculations make no difference between an initial lease
of 30 years versus a lease of 10 years with four 5-year renewal options
versus a lease on one year with 30 1-year renewal options. There are
tremendous differences between these three operating lease contracts. An
academic can add lease renewal probabilities into the analysis, but the
lessee wants renewal options because of the difficulties of setting such
probabilities, especially for probabilities of renewals 20 or more years
into the unknown future.
More importantly, Mott assumes that the bundle of forward contracts
covers a fixed 30 year period. In fact, the embedded renewal options means
that, possibly at no cost, the lessee can opt out of future forward
contracts. What we have is a bundle of "possible forward contracts," and
that's a whole lot different than having a bundle of "actual forward
contracts." Mott makes no distinction between the "possible" forward
contracts versus the "actual" forward contracts in a lease "bundle" of
forward contracts. I would argue that this distinction is enormous.
3. Mott makes a belabored argument that the operating lease contract is a
"bundle of forward contracts" between the lessor and the lessee. Forward
contracts are indeed custom contracts not traded on exchanges, but beyond that
there are differences between forward contracts in the derivative financial
instruments literature and lease contracts.
Firstly, forward contracts generally assume spot prices are set by a deep
market for fungible items like corn, wheat, gold, stocks, and bonds. A
leased item like a coffee shop at 113 Main Street is highly unique and not a
fungible item relative to any other coffee shop like the one on 346 State
Street. And if Starbucks leases the both coffee shops with 1-year leases for
30 years there is no spot price set in a deep market of spot prices set by
potential lessees at the end of each year because potential lessees would
only bid on available leased property if Starbucks does not exercise its
renewal option. With the lessee having an option to renew each year the
property is not available until the current lessee declines the option.
Hence the market for a non-fungible, unique leased item is at best
hypothetical.
Secondly, in forward contracts it's generally assumed that all cash flows
of the forward contract flow between parties to the contract (e.g., lessors
and lessees) and that the party going long on the contract (the lessee) will
have a gain/loss equal to the party going short on the contract (the lessor)
for each forward contract in the "bundle" of contracts. In other bundles
like swap bundles of forward contracts, each contract is often net settled
for cash between the parties to each forward contract.
Suppose that at the end of 2019 in the above Example 1, the 113 Main
Street location has become a complete bummer due demolition of all nearby
office buildings (e.g., as in Detroit) and startup of a giant pig farm. The
lessee, Starbucks, decides not to renew and simply cancels all the remaining
four renewal contracts at virtually zero cost to the lessee. The lessor,
however, has a huge loss if the lessee cancels the future forward contracts
in the bundle, because the anticipated lease payments for the next 25 years
will be much smaller and even zero if there is no longer any demand for this
piece of poorly located property next to a stinking pig farm.
The lease contract actually has two sources of cash flow for the lessee.
Firstly there's the rent cash flow that's specified in the lease contract.
Secondly, there's the operating cash flow such as the revenue coming in from
sales of coffee and other items in a coffee shop. Unless the rents are
directly tied in some way to operating profits of the lessee, there can be
very low correlation between the cash flows of the lease contract and the
cash flows of the business using the leased property. This can lead to great
disparity between the value of the lease renewal options and the lease
contract cash flows. Mott does not factor in the value of the renewal
options into the bundle of lease forward contracts when in fact the lease
renewal options may be far more valuable then the forward contract cash
flows.
Hence, if Mott is going to carry through the forward contract accounting,
the lease renewal options should be bifurcated and valued separately.
However, there is no deep market for such options and they would be very
difficult to value. And they are not settled separately from the forward
contracts making the valuation even more difficult.
Jensen Conclusion
The main problem that neither the accounting standard setting boards nor Dane
Mott want to address is how to value renewal options. If lessees are hell-bent
to keep operating lease debt off the balance sheet under the FASB/IASB proposed
solution, lessees will simply write shorter leases with more renewal options.
Mott's proposed solution is no panacea because he offers no solution to how to
value renewal options since there is no forward contract cash flow tied to the
renewal options --- only the operating cash flows of the business using the
leased property. Valuing a renewal option 20 years out for a noin-fungible
unique asset boggles the mind in the real world.
The assumption of a known and fixed WACC across 30 years can be assumed to be
to simplify the illustration. But the real world estimation is extremely
complicated and enormously uncertain. Fortunately solutions are not so
sensitive to WACC errors 20 or more years into the future.
It all started back in 2001 when the energy giant
Enron collapsed. After the dust settled , the results were dramatic:
shareholders lost an unprecedented $60 billion in investments and 49,000
employees of Enron and Arthur Anderson, Enron’s accounting firm, lost their
jobs and pensions. One of the main reasons behind the collapse was the way
Enron used its Special Purpose Entities (SPEs) to borrow money, park bad
assets and enter complex derivative arrangements. At that time, Accounting
Standards didn’t require Enron to report SPE’s operations on their financial
statements as long as at least 3% of SPEs were owned by an outside investor.
In accordance with the Accounting Standards, Enron’s financial statements
were excluding SPE’s operations and failed to show all its debt, bad assets
and losses.
To combat the issue of SPEs encountered in Enron’s
case, a new accounting rule came out in 2003 to outline tests that a company
must perform to determine if it had variable interest and was the primary
beneficiary of an entity. If both tests were positive, such an entity was
required to be consolidated into company’s financial statements. Since then,
the ruling has gone through few amendments but the intention of the rule has
stayed the same – companies must consolidate entities they control whether
they own them or not.
The question of variable interest entity VIE is
important for companies involved in M&A activities and complicates
accounting when the acquirer is buying the company’s assets instead of the
company’s stock. The complication arises from the contradiction in
accounting standards for recording assets at cost under assets acquisition
rules and, at the same time, requiring fair market valuations under the VIE
rules with no goodwill allowed under both scenarios. With no goodwill
allowed, the difference between the fair market value and the cost may
result in gain or loss being recognized upon purchase. Imagine completing an
acquisition of a company. The transaction makes good sense and accountants
record the assets at acquisition cost. Later that year, the VIE test was
performed and at that time you realize that the purchase would have to be
recorded at fair market value. And what if the fair market value of assets
purchased appeared to be lower than what was initially paid for those
assets? With no goodwill allowed, now you have to realize a loss – and
believe me – the loss won’t go well with the Board of Directors who
initially had approved the acquisition on the premises that it was a good
buy. Some companies have been successful in arguing that what they paid for
the assets was equal to their fair market value, therefore no gain or loss
needs to be recorded. To make such an argument successful may take some
conversations with your technical accountants, auditors, and, in some cases,
Securities and Exchange Commission.
VIE and Asset Acquisition accounting guidance is
not clear on how to deal with the situation described above. With changing
accounting rules and differences between International and US Accounting
Standards, it is imperative to talk through your acquisitions with corporate
technical accounting group and seek technical accountants’ expertise for
your transactions. As accounting rules can complicate things, ask the
technical accounting group to write up an accounting memo for your
transaction before it occurs.
I have learned from some investors that there has
been a major challenge against the VIE structure of a U.S. listed Chinese
company. The challenge relates to whether the VIE can be consolidated into
the financial statements. The SEC has been aggressively examining VIE
arrangements, but I have been unable to learn whether this challenge is a
result of an SEC investigation, or who the company or auditor are.
Bear with me; this discussion has to get technical.
Under the VIE accounting rules, consolidation of
the VIE is allowed if the public company is considered to be the primary
beneficiary of the VIE (ASC 810-25-20). In a typical VIE arrangement, there
are two potential beneficiaries of the VIE: 1) the Chinese individual who
owns the shares in the VIE, and 2) the public company that has contracts
with both that individual and the VIE that transfer control and economic
interests to the public company. VIE arrangements are structured to make it
clear that all of the control and economic interest flows to the public
company.
Clear until now, anyway.
In many VIEs the founder of the company is the
owner of the VIE. The founder also usually has voting control over the
public company, which is often retained after the IPO by use of two classes
of shares. Founders typically retain voting control even if their share
holdings are reduced to a minority position. The two class of shares
approach to retaining control by founders is common in technology offerings,
most famously in Facebook. Two classes of stock are not allowed on the Hong
Kong exchange, and that presents a challenge for U.S. listed companies that
may want to move onto the Hong Kong exchange if they get kicked out of the
U.S., but that is another story.
Under typical VIE agreements, the founder agrees to
transfer his VIE shares to another VIE shareholder at the public company's
request, and to otherwise vote those shares and select VIE management at the
public company’s direction. Since the public company can remove the VIE
owner at will, it has been thought that the VIE owner has no rights, and
accordingly no interest in the VIE. Therefore the public company is the only
beneficiary of the VIE and can consolidate it into their financial
statements.
The founder, however, could stop any attempt to
remove him as the owner of the VIE since he has voting control over the
public company. With voting control, the founder has the power to elect the
board that selects, terminates and sets the compensation of management, and
establishes operating and capital decisions of the company. Do these powers
mean that the founder is actually the primary beneficiary of the VIE? If the
founder is the primary beneficiary, the public company cannot consolidate
the VIE and instead will report its share of earnings as it receives them.
What happens if the SEC or auditors decide that
this is the correct approach? Companies with this fact pattern will be
forced to deconsolidate their VIEs, and restate prior financial statements.
The VIE will drop out of the financial statements, possibly turning income
into losses in some companies, while having a minor effect on some others.
Companies affected by this are likely to
restructure their VIEs to be allowed to consolidate in the future. The easy
solution seems to be to pick someone other than the founder to own the VIE.
While that may fix the accounting problem, it introduces a huge amount of
risk. One reason that the VIE is usually held by the founder is to align the
interests of the VIE shareholder with the interests of the public
shareholders. The idea is that the founder will not steal the VIE since
doing so would destroy the value of his shares in the public company.
If the SEC is making this position clear to the
accounting firms, we could see some real surprises when companies file their
Form 20F over the next few weeks.
A VIE is an entity meeting one of the following
three criteria as elaborated in FASB ASC 810-10 [formerly FIN 46 (Revised)]:
The equity-at-risk is not sufficient to
support the entity's activities (e.g.: the entity is thinly
capitalized, the
group of
equity holders
possess no substantive voting rights, etc.);
As a group, the equity-at-risk holders cannot
control the entity; or
The economics do not coincide with the voting
interests (commonly known as the "anti-abuse rule").
Jensen Comment
When I was teaching the mathematics of finance one of my favorite illustrations
was not mentioned in the above "scams." Scam 22 should be understating the
annual percentage rate (APR) of a car financing contract. My bottom line advice
to my students is to never, never indicate that the purchase will be anything
other than a cash purchase until the very last moment before signing the
purchase contract.
Presumably a buyer is shrewd enough to have negotiated a rock-bottom cash
price. For new cars this is easy since there are various Web sites for comparing
new car purchases. It's bit more difficult for used cars since every used car is
unique.
Are you compatible with your car? A new site set to
launch in a few days called
Carzen
(http://new.carzen.com/)
aims to help you find the car that is perfect for you. The main feature of
the site is a car consulting tool that asks you basic questions about the
qualities you are looking for in a car (price, size, fuel economy,
reliability) and then spits back a list with the best matches
CarZen is extremely detailed. You can narrow your
search by brand, options (sunroof, power seats), cargo capacity, safety, or
performance characteristics. Looking for a car with a high baby-seat score
or on ethat is particularly easy to park in tight city spots? No problem.
Once you finish answering the questions, which at times seem more like a
personality test, the site generates a list of cars that can be sorted by
best match, price, miles per gallon, or brand.
If you are looking for a new car and don't already
know what you want, it is a good way to generate an initial list. You can
drill down to get more details for each car. There is even a button to get a
price quote, although that doesn't seem to be working at the moment.
(Nevertheless, the business model is to create a trusted research tool for
car buyers and generate lead-generation fees). The site is still in private
beta, but you can check it out by clicking on the "learn more" button in the
widget below and then clicking through to the site.
Jensen Comment
There is also a page entitled "Advice" for advice on such things as lease vs.
buy ---
http://www.carzen.com/advice
After negotiating the rock-bottom cash price is the time to then ask about
financing alternatives. Devious dealers who report low APR financing rates often
do so on the basis of a car price higher than the rock-bottom cash price. Shrewd
car buyers will whip out a financial calculator, tablet computer, or laptop and
then verify the true annual percentage rate of the car dealer's financial deal.
The city reached a $40 million out-of-court
settlement this morning with its former auditors and Fifth Third Bank, who
the city said were to blame for former Comptroller Rita Crundwell's theft of
nearly $54 million over two decades.
Mayor Jim Burke made the announcement this morning
during a special meeting of the Dixon City Council, during which the council
approved the settlement...
A Gretna woman has pleaded guilty to three counts
of tax evasion in connection with $4.1 million she admitted stealing from an
Omaha tobacco and candy distributor.
Caroline K. Richardson, 54, will be sentenced in
December. She faces up to five years in prison.
In return for her pleas, Sarpy County prosecutors
dropped three counts of filing a false income tax return.
The World-Herald first reported on Richardson's
case in April. Court documents indicated she admitted to taking $4.1 million
over the 2½ years she worked as an accountant for Colombo Candy & Tobacco, a
distributor.
Instead of going after Richardson, Colombo and
owner Monte Brown sued Ameristar Casino. They said the casino should have
known that Richardson was making huge wagers with ill-gotten money. The
casino is fighting that lawsuit in federal court.
Colombo also sued Richardson's former boss — saying
the boss recommended that Colombo hire Richardson despite her alleged
history of theft. Richardson's former boss denied any knowledge of theft by
Richardson at her prior company.
Richardson also admitted to stealing $110,000 from
a La Vista business in 2009. However, Sarpy County sheriff's investigators
never referred that case for prosecution, and Richardson subsequently became
an accountant at Colombo.
Spain’s anti-corruption prosecutor accused 61
PricewaterhouseCoopers LLP partners of committing tax crimes, saying they
failed to declare a total of 21 million euros ($28.4 million) in bonus
payments.
The PwC partners categorized the 2002 bonus
payments as part of the price of the sale of a consulting division to IBM
that carried a lower tax rate, the prosecutor said in an e-mailed statement
today. The agency presented a written accusation requesting a criminal
trial, according to the statement.
“The partners omitted to establish in their tax
returns that the sums were payments from work,” the prosecutor said.
PwC “roundly denies” the accusations against its
partners and is convinced that the case will be thrown out once the truth is
recognized, the firm’s Madrid office said in an e-mailed statement today.
“There has been no concealment or fraud,” PwC said.
“All the operations and amounts have been declared and formulated with all
the legal requirements.”
Spain is clamping down on tax evasion as part of
its drive to tackle a budget deficit that risks slipping from its target.
The budget shortfall, excluding municipalities, was 5.27 percent of gross
domestic product in the first seven months of the year, compared with a
full-year target of 6.5 percent.
The prosecutor is seeking jail terms of as much as
14 years and 10 months and fines of more than 102 million euros.
Jensen Questions
Does Hal the Bartender converse about Obamacare, psychotherapy, football,
politics, jokes, tax law, women, fair value accounting, and existentialism?
Does Hal spill a bit more than a shot into your glass all evening if you put
$20 in the tip jar when you sit down at the bar?
Magnus von Buddenbrock and Stefanie
Giesselbach arrived in Chicago in 2006 full of hope. He was 30, she was 28,
and they had both won their first overseas assignments at ALW Food Group, a
family-owned food-trading company based in Hamburg. Von Buddenbrock had
joined ALW—the initials stand for its founder, Alfred L. Wolff—four years
earlier after earning a degree in marketing and international business, and
he was expert in the buying and selling of gum arabic, a key ingredient in
candy and soft drinks. Giesselbach had started at ALW as a 19-year-old
apprentice. She worked hard, learned quickly, spoke five languages, and
within three years had become the company’s first female product manager.
Her specialty was honey. When the two colleagues began their new jobs in a
small fourth-floor office a few blocks from Millennium Park in downtown
Chicago, ALW’s business was growing, and all they saw was opportunity.
On March 24, 2008, von Buddenbrock came to the
office around 8:30 a.m., as usual. He was expecting a quiet day: It was a
holiday in Germany, and his bosses there had the day off. Giesselbach was on
holiday, too; she had returned to Germany to visit her family and boyfriend.
Sometime around 10 a.m., von Buddenbrock heard a commotion in the reception
area and went to have a look. A half-dozen armed federal agents, all wearing
bulletproof vests, had stormed in. “They made a good show, coming in with
full force,” he recalls. “It was pretty scary.”
The agents asked if anybody was hiding anywhere,
then separated von Buddenbrock and his assistant, the only two employees
there. Agents brought von Buddenbrock into a conference room, where they
questioned him about ALW’s honey business. After a couple of hours they
left, taking with them stacks of paper files, copies of computer hard
drives, and samples of honey.
Giesselbach returned from Germany three days later.
Her flight was about to land at O’Hare when the crew announced that everyone
would have to show their passports at the gate. As Giesselbach walked off
the plane, federal agents pulled her aside. She, too, answered their
questions about ALW’s honey shipments. After an hour, they let her leave.
The agents, from the U.S. Department of Commerce and the Department of
Homeland Security, had begun to uncover a plot by ALW to import millions of
pounds of cheap honey from China by disguising its origins.
Americans consume more honey than anyone else in
the world, nearly 400 million pounds every year. About half of that is used
by food companies in cereals, bread, cookies, and all sorts of other
processed food. Some 60 percent of the honey is imported from Argentina,
Brazil, Canada, and other trading partners. Almost none comes from China.
After U.S. beekeepers accused Chinese companies of selling their honey at
artificially low prices, the government imposed import duties in 2001 that
as much as tripled the price of Chinese honey. Since then, little enters
from China legally.
Von Buddenbrock and Giesselbach continued to
cooperate with the investigators, according to court documents. In September
2010, though, the junior executives were formally accused of helping ALW
perpetuate a sprawling $80 million food fraud, the largest in U.S. history.
Andrew Boutros, assistant U.S. attorney in Chicago, had put together the
case: Eight other ALW executives, including Alexander Wolff, the chief
executive officer, and a Chinese honey broker, were indicted on charges
alleging a global conspiracy to illegally import Chinese honey going back to
2002. Most of the accused executives live in Germany and, for now, remain
beyond the reach of the U.S. justice system. They are on Interpol’s list of
wanted people. U.S. lawyers for ALW declined to comment.
In the spring of 2006, as Giesselbach, who declined
requests for an interview, was preparing for her job in Chicago, she started
receiving e-mail updates about various shipments of honey moving through
ports around the world. According to court documents, one on May 3 was
titled “Loesungmoeglichkeiten,” or “Solution possibilities.” During a rare
inspection, U.S. customs agents had become suspicious about six shipping
containers of honey headed for ALW’s customers. The honey came from China
but had been labeled Korean White Honey.
A few months ago, Ceith and Louise
Sinclair of Altadena, California, were told that their home had been sold.
It was the first time they’d heard that it was for sale.
Their mortgage servicer, Nationstar, foreclosed on
them without their knowledge, and sold the house to an investment company.
If it wasn’t for the Sinclairs going to a local
ABC affiliate and describing their horror story,
they would have been thrown out on the street, despite never missing a
mortgage payment. It’s impossible to know how many homeowners who didn’t get
the media to pick up their tale have dealt with a similar catastrophe, and
eventually lost their home.
From the CFO Journal's Morning Ledger on September 25, 2013
‘Little GAAP’ could drive accounting simplification A push from privately held companies for simpler accounting
standards could jump-start a plan by
U.S. accounting rulemakers to remove some complexity
from GAAP, writes Emily Chasan. Concerns
from private companies that accounting standards have grown too costly and
complex pushed U.S. accounting overseers last year to establish a Private
Company Council that creates exceptions and modifications to U.S. GAAP for
private companies—essentially, a “Little GAAP” for private businesses. While
the council is still working on its first proposals to reduce complexity, it
is highlighting similar concerns for public companies as well, said Jeffrey
Mechanick, assistant director for Nonpublic Entities at the FASB. “As we
seek to bring a better cost-benefit balance within GAAP for private
companies, we’re initiating at least potential simplification for all
entities from yet another direction,” Mr. Mechanick said at an accounting
roundtable hosted by the NYU Stern School of Business. “We’ve often looked
at public companies first and here we’re looking at private companies
first.”
A recent decision in a closely watched accounting malpractice matter –
the first of its kind initiated by the FDIC – may suggest cause for concern
for accountants. As receiver for a failed bank, the FDIC may sue
professionals who played a role in the failure of the institution. In the
wake of recent bank failures, the FDIC has targeted officers and directors,
attorneys, and brokers. Until recently, however, the FDIC had not pursued an
audit firm. That all changed on November 1, 2012 when the FDIC, as receiver
for the failed Colonial Bank, initiated a $1 billion malpractice claim
against the bank’s auditors PricewaterhouseCoopers and Crowe Horwath. This
lawsuit, and a recent decision denying the defendants’ motion to dismiss,
raise critical questions.
In theory these auditors were supposed to force banks with impaired loan
assets (those poisoned subprime mortgages) down to fair value (read that $0) ---
Yeah Right!
From the CFO Journal's Morning Ledger on September 27, 2013
New swaps rules stoke fears
Banks, brokers and investors are warning of potential turmoil in a major
part of the derivatives market on
Oct. 2,
when new U.S. rules kick in governing how swaps are traded,
the WSJ reports. Under the new rules, most swaps must
be transacted through registered venues, routed through central clearing
houses and reported to data warehouses known as trade repositories. Industry
officials are lobbying the CFTC to delay the rules, arguing that the new
standards have been applied too quickly and could throw the market into
disarray. Others complain that the time frame for trading platforms to
comply with the rules, and for traders to test new systems, is so tight it
could propel trading to lightly regulated jurisdictions and venues that
aren’t subject to the rules.
From the CFO Journal's Morning Ledger on September 25, 2013
J.P. Morgan offers $3 billion to end mortgage probes J.P.
Morgan
has offered to pay about $3 billion as it seeks to
settle criminal and civil investigations by
federal and state prosecutors into its mortgage-backed-securities
activities, the WSJ reports. The Justice Department rejected that sum as
billions of dollars too low for the number of cases involved, but the
discussions have widened to include other investigations of J.P. Morgan, and
the final tally could be larger. The offer from the bank shows that its top
executives and board are weighing the time and effort needed to fight, as
well as the impact on the bank’s reputation and employee morale.
Three billion one day and $11 billion the
next: When will we be talking real money?
From the CFO Journal's Morning Ledger on September 26, 2013
J.P. Morgan
discussing $11 billion settlement
J.P. Morgan is in
discussions to settle probes related to
mortgage-backed securities for $11 billion,
the WSJ reports. The amount being discussed would
include $7 billion in cash and $4 billion in relief to consumers. As large
as the potential settlement may be, two people familiar with the matter
cautioned that even if a deal is reached, it may not resolve one of the
biggest dangers for the bank: the potential for criminal charges stemming
from the mortgage-backed securities probe.
Prosecutors pursue big SAC settlement U.S. prosecutors proposed
settling a criminal insider-trading case against
SAC Capital Advisors for $1.5 billion to $2 billion, the
WSJ reports. SAC lawyers are expected to present a counteroffer to
prosecutors in coming weeks. The negotiations between SAC and the government
still are at an early stage; as part of a deal, the government would insist
on a guilty plea by SAC. Steven A. Cohen, SAC’s high-profile founder, hasn’t
been personally accused of wrongdoing, but an investigation into his
activities is continuing.
In its second quarter, Fiat reported a net profit of
€435 million ($587 million). Excluding Chrysler's contributions, it would have
had a net loss of €247 million.
Teaching Case
From The Wall Street Journal Accounting Weekly Review on September 26, 2013
TOPICS: business combinations, Stock Valuation, Stockholders'
Equity
SUMMARY: Chrysler Corp. has filed to make a public offering of its
shares after having been taken private through bankruptcy proceeding in a
U.S. government-led restructuring. Chrysler is now profitable and is owned
41.5% by the United Auto Workers (UAW) Retiree Medical Benefits Trust; the
remainder is owned by Fiat SpA of Italy who "currently is using Chrysler to
help return its mass-market cars to the U.S. market, with a particular focus
on the Fiat and Alfa Romeo brands....Fiat [also] is using Chrysler
technology to expand its range of products...."
CLASSROOM APPLICATION: The article may be used to introduce
stockholders' equity or business combinations topics. The author clearly
describes the benefits, and tribulations, of cross-company holdings of
equity ownership.
QUESTIONS:
1. (Introductory) Who owns the outstanding shares of Chrysler
Corp.? When was this ownership structure established?
2. (Advanced) What strategic operating benefits does the current
structure give to Italian auto manufacturer Fiat SpA?
3. (Advanced) Why did Chrysler Corp. file to make an initial public
offering (IPO) of its shares? Are the shares to be offered to the public
owned by someone now or will they be new shares issued by Chrysler? Explain
your answer.
4. (Advanced) What is a holding company? How would the Chrysler IPO
make Fiat a holding company?
5. (Introductory) Why have Chrysler and Fiat been unable to agree
upon a price for Fiat to buy out the shares that are now on public offer?
How can the public offering resolve that issue?
6. (Introductory) What do bankers and analysts expect to happen as
a result of the IPO?
Reviewed By: Judy Beckman, University of Rhode Island
Fiat SpA F.MI -1.49% is making noise that it could
scale back its alliance with Chrysler Group LLC if it can't get full control
of the U.S. auto maker. But given how critical the partnership has become to
the Italian car maker, many consider the warning to be hollow.
The Turin, Italy, company has come to depend
heavily on Chrysler, as Fiat's FI.MI +0.20% European business hemorrhages
hundreds of millions of euros a year amid a severe slump in demand for cars
in the region, say analysts. Fiat's plan to take full control of Chrysler,
tap its cash, and work more closely on new vehicles is key to its own
turnaround and ambitions to go toe-to-toe with larger rivals.
On Monday, Chrysler filed for an IPO of shares
owned by the UAW Retiree Medical Benefits Trust. The trust holds a 41.5%
Chrysler stake obtained for concessions before and through its U.S.
government-led bankruptcy restructuring. The filing was the result of a
contractual demand by a union health-care trust that is Chrysler's
second-largest shareholder.
While the IPO registration is widely seen as a way
to set a market price on the trust's shares, it also puts a spotlight on
Fiat Chief Executive Sergio Marchionne's urgent need to fully merge the two.
Fiat has sought to avoid the IPO because it would
prevent it from tapping more of Chrysler's cash to help revive its
operations in Europe, where car sales are running near 20-year lows, and
expand them abroad, particularly in the U.S. and China, which are growing
strongly. Under the conditions of Fiat's rescue of Chrysler, the U.S. auto
maker pays out half of its net profit to Fiat and the trust.
A Fiat spokesman declined to comment.
Given the high risk should the two fail to merge,
analysts and bankers say they doubt Fiat intends to make good on any threat
to abandon Chrysler. Instead, they say the talk is designed largely to
strengthen its bargaining position. They expect Fiat and the union
health-care trust to ultimately reach agreement on a price, most likely
before an IPO can be completed.
"If [an IPO] materializes, we maintain that it
would be a negative event [for Fiat] because it would transform Fiat into a
holding" company instead of single entity, Equita brokerage analyst Martino
De Ambroggi wrote in a note. That unsatisfactory prospect, he said, would
argue for Fiat to reach an agreement with the trust ahead of an IPO share
sale.
In its second quarter, Fiat reported a net profit
of €435 million ($587 million). Excluding Chrysler's contributions, it would
have had a net loss of €247 million.
Fiat's total available liquidity, including undrawn
credit lines, stood at €21 billion; excluding Chrysler, it was half that
amount.
Apart from the U.S., the only other auto market
where Fiat makes good money is in Brazil, where it has a dominant position.
But that market is tapering from the strong growth of recent years, making
it less of a cash cow for Fiat. Sales in that Latin American country are
likely to grow between 1% and 2% this year, to about 3.88 million vehicles,
below the local car industry's original estimate of 4.5%.
Acquiring the remaining shares of Chrysler would
allow Fiat to unify the two auto makers under a single board, management and
balance sheet, allowing it to use resources more effectively to compete
against rivals such as Volkswagen AG VOW.XE -0.70% and General Motors Co. GM
-0.62% Fiat has badly lagged behind bigger rivals, particularly the German
car makers, in investing in new models.
Fiat currently is using Chrysler to help return its
mass-market cars to the U.S. market, with a particular focus on the Fiat and
Alfa Romeo brands. It has started with the Fiat 500 and recently added its
500L family version to sales.
Continued in article
From the CFO Journal's Morning Ledger on September 25, 2013
Fiat needs Chrysler
more than ever Fiat‘s
warning it could scale back its alliance with Chrysler if it
can’t get full control amounts to a
threat against a partnership that has become key to the Italian auto maker’s
fortunes, writes the WSJ’s Gilles Castonguay. Fiat’s plan to take full
control of Chrysler, tap its cash, and work more closely on new vehicles is
key to its own turnaround and ambitions to go toe-to-toe with larger rivals.
Given the high risk should the two fail to merge, analysts and bankers say
they doubt Fiat intends to make good on any threat to abandon Chrysler.
Instead, they say the talk is designed largely to strengthen its bargaining
position. They expect Fiat and the union health-care trust to ultimately
reach agreement on a price, most likely before an IPO can be completed.
GM raises $4.5
billion in debt placement
General Motors said it issued $4.5
billion in a private debt offering, its
first major placement since emerging from bankruptcy protection, the WSJ
reports. “We’re taking advantage of a favorable market to lower our cost of
capital, increase our financial flexibility and further strengthen our
fortress balance sheet,” said finance chief Dan Ammann. The auto maker will
spend $3.2 billion of the proceeds from the placement of three series of
senior unsecured notes to repurchase 120 million shares of preferred shares
held by a United Auto Workers union retiree health-care trust. Additionally,
GM said it would use $1.2 billion to prepay in full its 7% notes held by the
Canadian Auto Workers’ Union Health Care Trust. Those notes were due in
periodic installments through 2018, including accrued interest.
From the CFO Journal's Morning Ledger on September 20, 2013
Currency swings are costing companies money
U.S.
businesses reported
losing more than $4 billion to foreign-exchange swings
last quarter, and volatility could get worse in the third quarter,
writes CFOJ’s Emily Chasan. Some 233 U.S. companies
said currency swings hit their revenue and earnings in Q2, according to an
analysis of conference calls by FiREapps. “Due to the political uncertainty,
the U.S. dollar, yen and Australian dollar continue to surprise,” said
FiREapps CEO Wolfgang Koester. “U.S. corporations are going on three years
now where they’ve had no tailwind from currencies.”
Some companies have taken steps to try to protect
themselves. After an earnings hit from foreign exchange in the second
quarter,
Thermo Fisher Scientific
said it was adding $10 million to its restructuring actions to offset such
impacts. But despite hedging efforts, many companies still face a higher
level of currency volatility than they’re used to, Mr. Koester said.
Fitch Ratings
said in a note to clients this week that companies should expect more
foreign-exchange volatility as Brazil, Russia, India and China experience
growth strains. Even if companies are spending local currency to fund
operations in those countries, they still face risks from the need to import
special components and raw materials. “A depreciating currency can
significantly raise input costs, forcing manufacturers to offset margin
pressure,” the Fitch analysts wrote in the note.
From the CFO Journal's Morning Ledger on September 19, 2013
The Fed is holding back on tapering and markets are
cheering Asia and Europe are soaring after the Dow closed at a
record high yesterday and yields on 10-year
Treasury notes dropped to 2.701%. And DJIA futures are pointing to a higher
opening. Fed officials got cold feet after spending months signaling that
they might begin to pare
their $85 billion-a-month bond-buying program at the
September policy meeting, the WSJ’s Jon
Hilsenrath and Victoria McGrane write. At the end of their two-day meeting,
they actually lowered their growth estimates for this year and next and
expressed worry that the recent jump in long-term interest rates could
squeeze an already-weak upturn. “The tightening of financial conditions
observed in recent months, if sustained, could slow the pace of improvement
in the economy and labor market,” the Fed said in a statement after the
meeting. “The [Fed] decided to await more evidence that progress will be
sustained before adjusting the pace of its purchases.”
Fed Chairman
Ben Bernanke also
sounded the alarm on the potential economic damage that could result from
looming brinksmanship in Washington. “A government shutdown, and perhaps
even more so a failure to raise the debt limit, could have very serious
consequences for the financial markets and for the economy,” Mr. Bernanke
said in his press conference following the policy meeting.
Meanwhile, it’s
looking more likely that
President Obama will nominate
Janet Yellen
to take over from Mr. Bernanke. Two Democratic aides said Ms. Yellen’s name
has come up in at least two of those conversations, and a White House
official confirmed the Fed vice chairwoman is the front-runner for the post,
the WSJ’s Damian Paletta and Peter Nicholas report.
From the CFO Journal's Morning Ledger on September 19, 2013
Monitoring and communicating compliance programs' effectiveness is crucial,
but the metrics some companies use may be too basic and possibly inadequate,
according to a new report from Deloitte and Compliance Week. Almost
one-third of the nearly 200 companies surveyed do not measure the
effectiveness of their compliance programs. Managing employee compliance
with policies and monitoring third parties are the top two operational
issues around managing compliance risks.
From the CFO Journal's Morning Ledger on September 18, 2013
Bloomberg’s Lisa Abramowicz notes that America’s companies are saving about
$700 billion in interest payments thanks to the Fed’s stimulus
Corporate-bond yields over the past four years have
fallen to an average of 4.6% from 6.14% in the five years before Lehman
Brothers’ demise, a savings equal to $15.4 million annually for every $1
billion borrowed. “The stimulus was a huge saving grace in the economy
overall,” Kroger
Chief Financial Officer J. Michael Schlotman tells Abramowicz. His company
estimates it’s paying about $80 million less in interest than it would have
before the crisis. “It probably kept some businesses from failing because
they were able to refinance their debt at lower interest payments.”
Jensen Comment
This doesn't count the hundreds of millions of dollars of savings that were
consumed because people who wanted safe investment returns could only get less
than 1% per annum from CDs and other safe investments. Retirees were forced to
consume savings to pay their bills.
Paul Krugman and Ben Bernanke don't much care about losses in interest income
for people who save. Their concern is to distribute more funding to people who
don't save --- we're becoming a nation that assumes the government will always
care for us.
GAO Report
"Social Security Overpays $1.3 Billion in Benefits," by Joel Seidman,
CNBC, September 13, 2013 --- http://www.cnbc.com/id/101032599
An upcoming GAO
report obtained by NBC News says the federal government may have paid
$1.29 billion in
Social Security
disability benefits to 36,000 people who had too much income from work
to qualify.
At least one recipient
collected a potential overpayment of $90,000 without being caught by the
Social Security Administration, according to the report, which will be
released Sunday, while others collected $57,000 and $74,000.
The GAO also said
its estimate of "potentially improper" payments, which was based on
comparing federal wage data to Disability Insurance rolls between 2010
and 2013, "likely understated" the scope of the problem, but that an
exact number could not be determined without case by case
investigations.
To qualify for
disability, recipients must show that they have a physical or mental
impairment that prevents gainful employment and is either terminal or
expected to last more than a year. Once approved, the average monthly
payment to a recipient is just under $1,000.
There is a five-month
waiting period during which monthly income cannot exceed $1,000 before
an applicant can qualify for disability, as well as a nine-month trial
period during which someone who is already receiving benefits can return
to work without terminating his or her disability payments.
The GAO said that its
analysis showed that about 36,000 individuals either earned too much
during the waiting period or kept collecting too long after their
nine-month trial period had expired. The report recommended that "to the
extent that it is cost-effective and feasible," the Social Security
Administration's enforcement operation should step up efforts to detect
earnings during the waiting period.
In fiscal 2011, more
than 10 million Americans received disability benefits totaling more
than $128 billion. The GAO's report estimates that less than half of one
percent of recipients might be receiving improper payments.
A spokesperson for the
Social Security Administration said the agency had a "more than 99
percent accuracy rate" for paying disability benefits. "While our paymen
taccuracy rates are very high, we recognize that even small payment
errors cost taxpayers. We are planning to do an investigation and we
will recoup any improper payments from beneficiaries."
"It is too soon to
tell what caused these overpayments," said the spokesperson, "but if we
determine that fraud is involved, we will refer these cases to our
Office of the Inspector General for investigation."
Abstract:
This study
uses For Official Use Only data on U.S. military operations to evaluate the
large-scale Army policies to replace relatively light Type 1 Tactical
Wheeled Vehicles (TWVs) with more heavily protected Type 2 variants and
later to replace Type 2s with more heavily protected Type 3s. We find that
Type 2 TWVs reduced fatalities at $1.1 million to $24.6 million per life
saved, with our preferred cost estimates falling below the $7.5 million
cost-effectiveness threshold, and did not reduce fatalities for
administrative and support units. We find that replacing Type 2 with Type 3
TWVs did not appreciably reduce fatalities and was not cost-effective.
Harvard Business Review Blog, September 10, 2013
In substituting heavily armored combat vehicles at
a cost of $170,000 each for lighter, $50,000 vehicles during the 2000s, the
U.S. Army reduced infantry deaths by 0.04-0.43 per month at an estimated
cost per life saved that is below the $7.5 million commonly accepted "value
of a statistical life," say Chris Rohlfs of Syracuse University and Ryan
Sullivan of the U.S. Naval Postgraduate School. However, the Army's
subsequent replacement of about 9,000 of those new vehicles with even more
heavily armored vehicles, costing $600,000 each, did not appreciably reduce
fatalities and was not cost-effective for less-active infantry units,
according to the researchers' analysis of Army data.
Jensen Comment
I'm not quite sure about how or why "$7.5 million (is)
a commonly accepted 'value of a statistical life.'"
In courts of law other factors are used in valuing human life, including age
where younger people are valued more highly. The value of us old has beens
declines rapidly. Most infantry soldiers are relatively young (certainly
compared to me).
Of course in courts of law settlements must be doubled or tripled for the
so-called value of the lawyers.
Jensen Comment
I remember that in K-12 school students traded papers and checked answers. Now
we're coming full circle in distance education in the 21st Century. But there's
a huge difference between grading answers for work done in a classroom versus
work done remotely by distance education students. For example, an algebra or
calculus problem solved in class has controls on cheating when each student is
observed by other students and a teacher. Remotely, what is to prevent a student
from having Wolfram Alpha solve an algebra or calculus problem? --- http://www.wolframalpha.com/
But when a MOOC or SMOC has over 10,000 students I have difficulty imagining
how cheating can be controlled unless students are required to take examinations
under observation of a trusted person like the village vicar or a K-12 teacher
who is being paid to observe a student taking a MOOC or SMOC examination. Having
many such vicars or teachers attest to the integrity of the examination is both
expensive and not aperfect solution. But it sounds much better to me than having
remote students grading each other without being able to observe the examination
process.
The CrowdGrader software sounds like a great idea when students are willing
to help each other. I don't buy into this tool for assigning transcript grades.
San Jose State University on Wednesday
quietly released the full research report on the for-credit online courses
it offered this spring through the online education company Udacity. The
report, marked by delays and procedural setbacks, suggests it may be
difficult for the university to deliver online education in this format to
the students who need it most.
The report's release lands on the
opposite end of the spectrum from the hype generated in January, when
university officials, flanked by the Udacity CEO Sebastian Thrun and
California Governor Jerry Brown, unveiled the project during a 45-minute
press conference. The pilot project, featuring two math courses and one
statistics course, aimed to bring high-quality education to students for a
fraction of the cost of the university's normal tuition. Wednesday's report went
live on the university’s website sometime before
noon Pacific time, appearing with little fanfare on the research page of the
principal investigator for the project, Elaine D. Collins. Collins serves as
associate dean in the College of Science.
The report provides a long-awaited look
into how the pilot project has fared. The initials results from the spring
pilot led the university to put
its partnership with Udacity on “pause” for the fall semester.
Last month, the university
released results from the summer pilot, showing
increased retention and student pass rates. However, those reports barely
scratched the surface of the data the university collected during the
project.
The report, funded by the National
Science Foundation, details the setbacks the research team encountered as it
began to evaluate results from the spring pilot project. In particular, it
took months to obtain usable data from Udacity that tracked how students
used instructional resources and accessed support services. The research
team then had to spend several weeks awaiting clarifications and corrections
to resolve accuracy questions.
“The result ... is that the research
lagged behind the implementation whereas, ideally, it would be running
alongside, providing just-in-time information about what works and where
improvements can be made,” the report reads.
The Udacity team contested the research
team's findings in a blog post. They said they received the first data
request on May 31, which was modified on June 3. Udacity submitted the data
on June 28. The RP Group asked Udacity to reformat the data on July 25,
which was performed by the next day.
"[T]he reason for this is it’s the first
time we’ve collaborated with an external entity," Thrun said. "Whatever
picture is being drawn here, I don’t understand why this is being said."
Ellen Junn, provost at San Jose State,
declined to comment on Wednesday.
Another data source, student responses to
three surveys, also proved less useful than anticipated. The spring pilot
produced just 213 students whose results could be used for statistical
purposes -- the remaining 61 received an incomplete grade, dropped a course
or were removed after data were pruned for inconsistencies. Survey response
rates ranged from 32 to 34 percent, and the research team found “significant
differences” between those who responded and the general student population.
“Most importantly, successful students
were overrepresented among the survey population and almost no students from
the partner high school completed the surveys,” the report reads.
The surveys were further complicated by
internal delays. The spring pilot began before San Jose State’s
institutional review board could approve the project, which meant the first
survey, billed as an entry survey, was not conducted until the fifth week of
classes.
The research team consisted of members
from the Research and Planning Group for California Community Colleges and
Sutee Sujitparapitaya, associate vice president for institutional research
at San Jose State. Despite the complications, the report concludes the
results provide pointers to how students enrolled in SJSU Plus courses
learn.
“[M]easures of student effort eclipse all
other variables examined in the study, including demographic descriptions of
the students, course subject matter and student use of support services,”
the report reads. That means students who took charge of their own education
and submitted more problem sets, logged in more often and watched more
videos than the course mean were more likely to succeed than their peers
were.
The importance of student effort
highlights the pilot project’s difficulties in targeting disadvantaged
students, who Udacity's online support providers early on felt “lacked
adequate preparation for the courses and were very unlikely to succeed.”
Results from the first survey showed 39
percent of students had never before taken an online course. The
unfamiliarity with the new platform meant less than half “partially
understood” the online support services available to them, including video
conferencing with faculty members and discussion forums.
By the end of the semester, four in every
five students said they wanted more help with the content -- yet few
scheduled appointments with faculty members during office hours. Instead,
one faculty member said she answered “hundreds” of e-mails with questions
that were answered in the syllabus. Another instructor “noted that she had
out of necessity learned to write colorful boldfaced e-mails to draw
students’ attention.”
During focus group sessions, student
reported they were confused by having to interact with both San Jose State’s
and Udacity’s websites, and that important e-mails arrived either too late
or were flagged as spam.
While pass rates among students outside
San Jose State in the introductory statistics course were more than double
those in the two math courses, the report suggests the course’s weekly
assignments “helped this group of students overcome, to some degree, their
lack of online preparation.”
Research has shown that at-risk students
tend to struggle in online classes, said the education consultants Michael
Feldstein and Phil Hill. That disadvantaged students enrolled in SJSU Plus
courses posted similarly poor pass rates suggests the spring pilot was
rushed, they said.
"We have to be careful that our sense of
altruism doesn’t overcome our sense of common sense," Hill said. "If we know
that at-risk students don’t tend to do well in online courses, you can’t
just wish away that problem. "
San Jose State and Udacity attempted to
address many of the issues presented in the report on its
summer pilot. Instead of being inundated by
e-mails, students received more notifications while engaging with the course
content online. The summer courses, which expanded to include psychology and
computer programming, also featured orientation sessions.
Student pass rates from the summer pilot
were superior to those in the spring pilot, with two-thirds of students
receiving a C or better in four of five of the courses. Yet results in the
remedial math course still lagged, with less than one-third of students
receiving a passing grade.
The summer pilot also featured a vastly
different student population: 53 percent of students had completed a
postsecondary degree, including some doctoral degree holders. Only 15
percent were active high school students, compared to about half of the
spring pilot’s students.
Earlier this year, it looked as if a high-profile
online-education experiment at San Jose State University had gone on the
rocks. In the first courses the university ran with technology from Udacity,
the online-learning company, students’ grades were, frankly, dismal.
But now the pilot program appears to be back on
course, buoyed by encouraging data from this summer’s trials, in which the
university offered tweaked versions of the same courses to a much different
mix of students.
In the spring, the university adapted three courses
for Udacity’s platform and offered them to small groups of online students
for credit. The idea was to test whether Udacity’s technology and teaching
methods, which the company originally developed for its massive open online
courses, could be useful in a more conventional online setting.
But the pass rates in all three Udacity-powered
courses trailed far behind the rates in comparable face-to-face courses at
San Jose State. The university
decided not to offer any trial courses through
Udacity in the fall.
The trials that had been planned for the summer
went forward, however, with tweaked versions of the same three courses, plus
two others. The results have been more promising. Pass rates in each of the
three repeated courses leaped upward, approaching and sometimes exceeding
the pass rates in the face-to-face sections.
For example, in the spring trial, only 25 percent
of the students taking the “Udacified” version of a statistics course earned
a C grade or higher; in the summer trial, 73 percent made at least a C. Only
students in the adapted version of an entry-level mathematics course
continued to lag well behind those in the face-to-face version on the San
Jose State campus.
The results come with an important caveat: Unlike
the spring trials, which drew on San Jose State undergraduates as well as
underprivileged high-school students, the summer trials were open to anybody
who wanted to register.
In an interview with The Chronicle, Sebastian
Thrun, the founder of Udacity, said that half the students in the summer
trials already held bachelor’s degrees and 20 percent had advanced degrees.
In general, the summer students were older, with more work experience and
higher levels of educational attainment. Given the difference in
populations, trying to compare the pass rates for the spring and summer
trials is probably not a particularly profitable exercise.
This is the second post from Dr. Emelee, a former
Big 4 employee who is in process of obtaining his PhD. Read his first
post
here.
Now for the second statement,
“The PhD is not really about teaching.”
You know how you thought those
professors you only saw two days a week were chilling out the rest of
the week? Well, some are. Especially if they have tenure. Being a
professor can be a cake job, but to get to the gravy you still have to
grind out around five brutal years after getting the doctorate. Many of
the professors you only see two days a week are not chilling out. They
are working somewhere else where students and bored colleagues can’t
come by to bother them every half hour. They are at home working on
research papers. And
you now know that means they are reading up on psychology theory
and thinking about how to design an experiment to
see if financial compensation alters people’s risk tolerances. Or they
are out teaching CPE to professionals hoping that some of these same
professionals will allow the researcher to administer experiments to
their employees. Or they are working with a dataset with millions of
observations and spending weeks cleaning it up just to get it ready for
some brutal statistical analysis. Or they are using multivariate
calculus, sometimes with just a pencil and lots of scratch paper, to
make sure they understand the behind-the-scenes workings of an
econometric technique they are applying.
You’ll notice that teaching isn’t
connected to any of that. Universities vary, but professors typically
teach between one and three classes during a given semester. If profs
only teach two or three classes each semester, you can do the math and
see that the majority of their time is, in fact, not spent teaching.
That’s why publications are the backbone of getting tenure at a
university- because research truly is the main part of being a
professor.
It makes perfect sense that the average person’s preconceived
notions of the PhD are off the mark. Think about why people go to
college. People go to college to learn to do something they don’t
know how to do. For accounting, people learn the accounting rules as
undergrads. They then go on for master’s degrees to hone their
skills even more. So, if the undergrad and masters were about
becoming better accountants, doesn’t it make sense that the PhD
teaches you even more about accounting and… you become…. a Super
Accountant!?!? Or even a Super Accountant that’s also a Super
Teacher?!?!
This line of reasoning may make sense,
but that’s not at all what happens in a PhD program. Your first classes
as a PhD student will teach you about experimental design, threats to
validity, the scientific method applied to social phenomenon,
measurement theory, and statistics.
What about taking classes on how to
teach? Do PhD programs at least train PhD students to be effective in
the classroom? The answer ranges from not at all to not really. Some
doctoral programs require PhD students to teach and some do not. The
programs that require teaching may just make the PhD student teach
without first taking any formal classes about how to teach. There are
programs that require PhD students to do teaching mentorships or even
take classes on teaching, but this is still rare. When classes about
effective teaching are required, they are still a small fraction of what
the PhD student focuses on.
So,
see…we really don’t need those financial statements after
all, do we? But in “Please
Twitter, Just Stay Weird,” Fahad
Manjoo raises a number of strategic concerns which this
grumpy Twitter user wants answered, and soon! For example,
once a public company, Twitter will be forced to run more
ads. We already see this coming as the Company “Strikes
Deal with the NFL” and “Pitches
Itself to TV Networks.” How will
monetization ultimately affect the user experience? And
then there is the continuing social media company
dilemma…who is the customer? The media user who pays little
or nothing, or the advertiser who is so key in revenue
creation?
Taking care
of the advertiser might actually chase off users. As the
Wall Street Journal’s Yoree Koh and Keach Hagey indicate:
“Getting companies to pay for Twitter publicity is a
crucial distinction for the seven-year-old company as it
tries to convert its online influence into a business
model—especially when rival Facebook Inc. also wants to
become a hub for real-time conversations.”
If Twitter
simply “devolves” into another Facebook News Feed, one could
argue that the Company may be sacrificing the very identity
that made it special in the first place.
And the
concerns/questions don’t stop there. Why all the sudden
pre-IPO buzz on NFL contracts, new ad products, and new
acquisitions? How do all these tie into the Company’s
strategy, or do they? Why the sudden pre-IPO need for
working capital? Is there some sense of urgency to look
like a real company? Or could this just be another
Grouponesque scenario designed to enrich a select few by
bringing to market a neat idea and platform with no real
proven way to make money with it. Few would disagree that
Groupon’s initial premise was exciting…using technology to
bring merchants and customers together. However, initially
the company had no real strategy, model, or sense of market
competition, all of which has contributed to its recent
operating struggles. And it doesn’t help that Twitter
turned to a
former Zynga player
to lead it to market, or that it just now is looking for a
financial reporting manager.
Just some of the concerns running through this Twitter
loving grumpy old accountant’s head.
“[Twitter] must release its data at least 21 days before
marketing the IPO, which, in today’s highspeed cyber
world, is more than sufficient for investors and others
to examine and evaluate the company.”
Twenty-one days
may be enough to push some numbers around in a spreadsheet,
but it is clearly inadequate to promote a meaningful
dialogue with management to address the unanswered questions
about strategy and business model and leadership. Yet,
people are still going to buy into the Twitter IPO, just
like they did for Groupon and Zynga. Hopefully, the outcome
will be more positive. If not, Twitter’s 140
character limit should be sufficient for the eulogy…
Jensen Comment
I think there's more involved in killing this deal than accounting magic ---
things like having monopoly over most of the gates at some major airports.
Jensen Comment
What Joe does not explain is why students who really, really, really want to
learn what you are teaching think you're a bad teacher. The RateMyProfessor.com
site is replete with examples of students who want to learn and feel they've
been given terrible teachers.
And some students who don't care two hoots about the subject matter (such as
in a general education core course in anthropology) may think that the teacher
is terrific for reasons other than giving out easy top grades.
I hesitate to say it's a necessary condition, but it's almost a necessary
condition for a great teacher to exude enthusiasm for the subject matter of the
course. Then if the course is small enough for an instructor to get to know
her/his students, then genuine caring about what they learn in the course is a
real plus for great teaching. The problem of course is that there are exceptions
to almost every "rule" in teaching.
Always remember that what students think makes a great teacher does not
always make a great teacher. Students want complicated things to learn made
easy. Really great teachers will make them learn it on their own for
metacognitive reasons ---
http://www.trinity.edu/rjensen/265wp.htm
Students may not appreciate that fact until years after graduation when all they
can remember about a course is what they learned on their own.
The problem of course is that there are exceptions to almost every "rule" in
teaching.
Jensen Comment
Think of how revolutionary this would be if we could make human beings remember
technical things that they never learned --- like FAS 133 and IAS 39. The
hardest part would be making them understand technical things they "memorized."
When people talk about independence in connection
with the FASB, they usually mean
one of several things:
Independence from the influence of powerful
stakeholders who have a vested interest in the outcome of a particular
standard-setting decision;
Independence from political
interference; or in some cases, (emphasis added)
Independence from meddling – perceived or real
–by our governing body, the Financial Accounting Foundation.
Each of these is a valid concern that, I believe,
the Board must take seriously. Independence is critical to the establishment
of high-quality accounting standards that promote decision-useful financial
reporting. But in my view, the independence of the FASB is not a right to be
exercised. It‘s a privilege to be earned – every day – through all that we
undertake.
Here's an example of how pressure is or might be placed upon accounting
standards setters, thereby threatening their "independence"
From the CFO Journal on September 16, 2013
Banks in Spain and
Italy look for relief in accounting
Italian and Spanish banks are trying to improve the
appearance of their financial health by
persuading their governments to change accounting-related rules, the WSJ
reports. In Spain, bank executives are lobbying to transform potentially
worthless tax assets into government-guaranteed tax credits that would
bolster the banks’ capital positions. And in Italy, top banking executives
are pushing for a revaluation of the Bank of Italy that would translate into
an accounting windfall for the banks and thereby inflate their capital
levels. But critics say the requested changes are sleight-of-hand maneuvers
that don’t improve the banks’ abilities to weather future losses. “If
capital-adequacy measures can be manipulated to make banks appear better
without really improving their financial health, the purpose of the
[capital] regulation is undermined,” said Anat Admati, a finance professor
at Stanford University’s business school. She described the Spanish effort
in particular as “disturbing.”
European Union banks would
have more breathing space from losses on Greek bonds if the bloc adopted a
new international accounting rule, a top standard setter said on Tuesday.
The International Accounting
Standards Board (IASB) agreed under intense pressure during the financial
crisis to soften a rule that requires banks to price traded assets at fair
value or the going market rate.
This led to huge writedowns,
sparking fire sales to plug holes in regulatory capital.
The new IFRS 9 rule would
allow banks to price assets at cost if they are being held over time.
The European Commission has
yet to sign off on the new rule for it to be effective in the 27-nation
bloc, saying it wants to see remaining parts of the rule finalized first.
As the convergence era comes to a clowe, the FASB
has the opportunity to strategically consider its next moves.
. . .
The (July 2012 SEC) report noted, however, that
adoption of IFRS is not currently supported by the vast majority of
participants in the US capital markets.
“Liquidate labor, liquidate stocks, liquidate real
estate,” Treasury Secretary Andrew Mellon
may or may not have told Herbert Hoover in the
early years of the Great Depression. “It will purge the rottenness out of of
the system.” This is what has since become known as the “Austrian” view
(although most of its modern proselytizers are American): economic actors
need to learn from their mistakes, “malinvestment”
must be punished, busts are needed to wring out the
excesses created during boom times.
Within the economic mainstream, there is some
sympathy for the idea that crisis interventions can create “moral hazard” by
bailing out the irresponsible. But the argument that financial crises should
be allowed to wreak their havoc unchecked has few if any adherents. As
Milton Friedman
put it in 1998:
I think the Austrian business-cycle theory has
done the world a great deal of harm. If you go back to the 1930s, … you
had the Austrians sitting in London, Hayek and Lionel Robbins, and
saying you just have to let the bottom drop out of the world. You’ve
just got to let it cure itself. You can’t do anything about it. You will
only make it worse. You have Rothbard saying it was a great mistake not
to let the whole banking system collapse. I think by encouraging that
kind of do-nothing policy both in Britain and in the United States, they
did harm.
When a financial crisis hit in 2008 that was
probably worse than anything the world had seen since the early 1930s, it
was this mainstream view that won out. The bailout of the big banks in late
2008, while hugely unpopular with the general populace, has garnered
near-unanimous support from the economics profession. In a paper eventually
published in the Journal of Financial Economics in 2010, the
University of Chicago’s Pietro Veronesi and Luigi Zingales — two economists
who aren’t generally big fans of government economic intervention —
concluded that even
without including the impossible-to-measure systemic benefits, the cash
infusions and guarantees orchestrated by Treasury Secretary Hank Paulson
created between $73 billion and $91 billion in economic value after costs.
The Federal Reserve’s subsequent (and continuing)
support of asset markets has been somewhat more controversial, but still
meets widespread approval among economists. More controversial yet have been
fiscal stimulus efforts like the
American Recovery and Reinvestment Act of 2009,
but the tide of economic opinion and evidence seems to have turned in their
favor too, with the
bulk of post-stimulus empirical studies showing a
positive effect and the former austerity advocates at the International
Monetary Fund
dramatically changing their tune starting late
last year.
In sum, the economic mainstream got its way, the
Austrians didn’t, and we all appear to be better off for it. It has been a
tough five years, but not nearly as tough as the early 1930s. And the
biggest economic policy mistake made was probably not the bailouts or the
deficit spending or the printing of money, but the failure to stop Lehman
Brothers from failing on Sept. 15, 2008.
Yet despite this record of relative success, most
the commentaries being published in the lead-up to the fifth anniversary of
that fateful day seem to focus instead on the opportunities missed.
Princeton economist
Alan Blinder’s op-ed piece in the Wall Street
Journal is a prime example of this. Blinder laments that the dangerous
financial-sector practices that precipitated the crisis have mostly been
left in place. Contrasting the tepid regulatory measures taken since 2008
with the remaking of the financial system that took place during and after
the Great Depression, he writes:
Far from being tamed, the financial beast has
gotten its mojo back — and is winning. The people have forgotten — and
are losing.
What Blinder and his kindred spirits (and I should
add that I am one of them) generally fail to discuss, though, is that one of
the main reasons the people have forgotten is because economic policy-makers
succeeded in averting anything quite as memorable as the wave after wave of
bank failures and widespread economic misery that swept the U.S. in the
early 1930s. By giving us a Great Recession in place of a Great Depression,
they made it much harder to assemble a political consensus for truly
dramatic change.
NEARLY five years after the bankruptcy of Lehman
Brothers touched off a global financial crisis, we are no safer. Huge,
complex and opaque banks continue to take enormous risks that endanger the
economy. From Washington to Berlin, banking lobbyists have blocked essential
reforms at every turn. Their efforts at obfuscation and influence-buying are
no surprise. What’s shameful is how easily our leaders have caved in, and
how quickly the lessons of the crisis have been forgotten.
We will never have a safe and healthy global
financial system until banks are forced to rely much more on money from
their owners and shareholders to finance their loans and investments. Forget
all the jargon, and just focus on this simple rule.
Mindful, perhaps, of the coming five-year
anniversary, regulators have recently taken some actions along these lines.
In June, a committee of global banking regulators based in Basel,
Switzerland, proposed changes to how banks calculate their leverage ratios,
a measure of how much borrowed money they can use to conduct their business.
Last month, federal regulators proposed going
somewhat beyond the internationally agreed minimum known as Basel III, which
is being phased in. Last Monday, President Obama scolded regulators for
dragging their feet on implementing Dodd-Frank, the gargantuan 2010 law that
was supposed to prevent another crisis but in fact punted on most of the
tough decisions.
Don’t let the flurry of activity confuse you. The
regulations being proposed offer little to celebrate.
From Wall Street to the City of London comes the
same wailing: requiring banks to rely less on borrowing will hurt their
ability to lend to companies and individuals. These bankers falsely imply
that capital (unborrowed money) is idle cash set aside in a vault. In fact,
they want to keep placing new bets at the poker table — while putting
taxpayers at risk.
When we deposit money in a bank, we are making a
loan. JPMorgan Chase, America’s largest bank, had $2.4 trillion in assets as
of June 30, and debts of $2.2 trillion: $1.2 trillion in deposits and $1
trillion in other debt (owed to money market funds, other banks, bondholders
and the like). It was notable for surviving the crisis, but no bank that is
so heavily indebted can be considered truly safe.
The six largest American banks — the others are
Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley —
collectively owe about $8.7 trillion. Only a fraction of this is used to
make loans. JPMorgan Chase used some excess deposits to trade complex
derivatives in London — losing more than $6 billion last year in a
notoriously bad bet.
Risk, taken properly, is essential for innovation
and growth. But outside of banking, healthy corporations rarely carry debts
totaling more than 70 percent of their assets. Many thriving corporations
borrow very little.
Banks, by contrast, routinely have liabilities in
excess of 90 percent of their assets. JPMorgan Chase’s $2.2 trillion in debt
represented some 91 percent of its $2.4 trillion in assets. (Under
accounting conventions used in Europe, the figure would be around 94
percent.)
Basel III would permit banks to borrow up to 97
percent of their assets. The proposed regulations in the United States —
which Wall Street is fighting — would still allow even the largest bank
holding companies to borrow up to 95 percent (though how to measure bank
assets is often a matter of debate).
If equity (the bank’s own money) is only 5 percent
of assets, even a tiny loss of 2 percent of its assets could prompt, in
essence, a run on the bank. Creditors may refuse to renew their loans,
causing the bank to stop lending or to sell assets in a hurry. If too many
banks are distressed at once, a systemic crisis results.
Prudent banks would not lend to borrowers like
themselves unless the risks were borne by someone else. But insured
depositors, and creditors who expect to be paid by authorities if not by the
bank, agree to lend to banks at attractive terms, allowing them to enjoy the
upside of risks while others — you, the taxpayer — share the downside.
Implicit guarantees of government support
perversely encouraged banks to borrow, take risk and become “too big to
fail.” Recent scandals — JPMorgan’s $6 billion London trading loss, an HSBC
money laundering scandal that resulted in a $1.9 billion settlement, and
inappropriate sales of credit-card protection insurance that resulted, on
Thursday, in a $2 billion settlement by British banks — suggest that the
largest banks are also too big to manage, control and regulate.
NOTHING suggests that banks couldn’t do what they
do if they financed, for example, 30 percent of their assets with equity (unborrowed
funds) — a level considered perfectly normal, or even low, for healthy
corporations. Yet this simple idea is considered radical, even heretical, in
the hermetic bubble of banking.
Bankers and regulators want us to believe that the
banks’ high levels of borrowing are acceptable because banks are good at
managing their risks and regulators know how to measure them. The failures
of both were manifest in 2008, and yet regulators have ignored the lessons.
If banks could absorb much more of their losses,
regulators would need to worry less about risk measurements, because banks
would have better incentives to manage their risks and make appropriate
investment decisions. That’s why raising equity requirements substantially
is the single best step for making banking safer and healthier.
The transition to a better system could be managed
quickly. Companies commonly rely on their profits to grow and invest,
without needing to borrow. Banks should do the same.
Banks can also sell more shares to become stronger.
If a bank cannot persuade investors to buy its shares at any price because
its assets are too opaque, unsteady or overvalued, it fails a basic “stress
test,” suggesting it may be too weak without subsidies.
Ben S. Bernanke, chairman of the Federal Reserve,
has acknowledged that the “too big to fail” problem has not been solved, but
the Fed counterproductively allows most large banks to make payouts to their
shareholders, repeating some of the Fed’s most obvious mistakes in the
run-up to the crisis. Its stress tests fail to consider the collateral
damage of banks’ distress. They are a charade.
Dodd-Frank was supposed to spell the end to all
bailouts. It gave the Federal Deposit Insurance Corporation “resolution
authority” to seize and “wind down” banks, a kind of orderly liquidation —
no more panics. Don’t count on it. The F.D.I.C. does not have authority in
the scores of nations where global banks operate, and even the mere
possibility that banks would go into this untested “resolution authority”
would be disruptive to the markets.
The state of financial reform is grim in most other
nations.
“Liquidate labor, liquidate stocks, liquidate real
estate,” Treasury Secretary Andrew Mellon
may or may not have told Herbert Hoover in the
early years of the Great Depression. “It will purge the rottenness out of of
the system.” This is what has since become known as the “Austrian” view
(although most of its modern proselytizers are American): economic actors
need to learn from their mistakes, “malinvestment”
must be punished, busts are needed to wring out the
excesses created during boom times.
Within the economic mainstream, there is some
sympathy for the idea that crisis interventions can create “moral hazard” by
bailing out the irresponsible. But the argument that financial crises should
be allowed to wreak their havoc unchecked has few if any adherents. As
Milton Friedman
put it in 1998:
I think the Austrian business-cycle theory has
done the world a great deal of harm. If you go back to the 1930s, … you
had the Austrians sitting in London, Hayek and Lionel Robbins, and
saying you just have to let the bottom drop out of the world. You’ve
just got to let it cure itself. You can’t do anything about it. You will
only make it worse. You have Rothbard saying it was a great mistake not
to let the whole banking system collapse. I think by encouraging that
kind of do-nothing policy both in Britain and in the United States, they
did harm.
When a financial crisis hit in 2008 that was
probably worse than anything the world had seen since the early 1930s, it
was this mainstream view that won out. The bailout of the big banks in late
2008, while hugely unpopular with the general populace, has garnered
near-unanimous support from the economics profession. In a paper eventually
published in the Journal of Financial Economics in 2010, the
University of Chicago’s Pietro Veronesi and Luigi Zingales — two economists
who aren’t generally big fans of government economic intervention —
concluded that even
without including the impossible-to-measure systemic benefits, the cash
infusions and guarantees orchestrated by Treasury Secretary Hank Paulson
created between $73 billion and $91 billion in economic value after costs.
The Federal Reserve’s subsequent (and continuing)
support of asset markets has been somewhat more controversial, but still
meets widespread approval among economists. More controversial yet have been
fiscal stimulus efforts like the
American Recovery and Reinvestment Act of 2009,
but the tide of economic opinion and evidence seems to have turned in their
favor too, with the
bulk of post-stimulus empirical studies showing a
positive effect and the former austerity advocates at the International
Monetary Fund
dramatically changing their tune starting late
last year.
In sum, the economic mainstream got its way, the
Austrians didn’t, and we all appear to be better off for it. It has been a
tough five years, but not nearly as tough as the early 1930s. And the
biggest economic policy mistake made was probably not the bailouts or the
deficit spending or the printing of money, but the failure to stop Lehman
Brothers from failing on Sept. 15, 2008.
Yet despite this record of relative success, most
the commentaries being published in the lead-up to the fifth anniversary of
that fateful day seem to focus instead on the opportunities missed.
Princeton economist
Alan Blinder’s op-ed piece in the Wall Street
Journal is a prime example of this. Blinder laments that the dangerous
financial-sector practices that precipitated the crisis have mostly been
left in place. Contrasting the tepid regulatory measures taken since 2008
with the remaking of the financial system that took place during and after
the Great Depression, he writes:
Far from being tamed, the financial beast has
gotten its mojo back — and is winning. The people have forgotten — and
are losing.
What Blinder and his kindred spirits (and I should
add that I am one of them) generally fail to discuss, though, is that one of
the main reasons the people have forgotten is because economic policy-makers
succeeded in averting anything quite as memorable as the wave after wave of
bank failures and widespread economic misery that swept the U.S. in the
early 1930s. By giving us a Great Recession in place of a Great Depression,
they made it much harder to assemble a political consensus for truly
dramatic change.
NEARLY five years after the bankruptcy of Lehman
Brothers touched off a global financial crisis, we are no safer. Huge,
complex and opaque banks continue to take enormous risks that endanger the
economy. From Washington to Berlin, banking lobbyists have blocked essential
reforms at every turn. Their efforts at obfuscation and influence-buying are
no surprise. What’s shameful is how easily our leaders have caved in, and
how quickly the lessons of the crisis have been forgotten.
We will never have a safe and healthy global
financial system until banks are forced to rely much more on money from
their owners and shareholders to finance their loans and investments. Forget
all the jargon, and just focus on this simple rule.
Mindful, perhaps, of the coming five-year
anniversary, regulators have recently taken some actions along these lines.
In June, a committee of global banking regulators based in Basel,
Switzerland, proposed changes to how banks calculate their leverage ratios,
a measure of how much borrowed money they can use to conduct their business.
Last month, federal regulators proposed going
somewhat beyond the internationally agreed minimum known as Basel III, which
is being phased in. Last Monday, President Obama scolded regulators for
dragging their feet on implementing Dodd-Frank, the gargantuan 2010 law that
was supposed to prevent another crisis but in fact punted on most of the
tough decisions.
Don’t let the flurry of activity confuse you. The
regulations being proposed offer little to celebrate.
From Wall Street to the City of London comes the
same wailing: requiring banks to rely less on borrowing will hurt their
ability to lend to companies and individuals. These bankers falsely imply
that capital (unborrowed money) is idle cash set aside in a vault. In fact,
they want to keep placing new bets at the poker table — while putting
taxpayers at risk.
When we deposit money in a bank, we are making a
loan. JPMorgan Chase, America’s largest bank, had $2.4 trillion in assets as
of June 30, and debts of $2.2 trillion: $1.2 trillion in deposits and $1
trillion in other debt (owed to money market funds, other banks, bondholders
and the like). It was notable for surviving the crisis, but no bank that is
so heavily indebted can be considered truly safe.
The six largest American banks — the others are
Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley —
collectively owe about $8.7 trillion. Only a fraction of this is used to
make loans. JPMorgan Chase used some excess deposits to trade complex
derivatives in London — losing more than $6 billion last year in a
notoriously bad bet.
Risk, taken properly, is essential for innovation
and growth. But outside of banking, healthy corporations rarely carry debts
totaling more than 70 percent of their assets. Many thriving corporations
borrow very little.
Banks, by contrast, routinely have liabilities in
excess of 90 percent of their assets. JPMorgan Chase’s $2.2 trillion in debt
represented some 91 percent of its $2.4 trillion in assets. (Under
accounting conventions used in Europe, the figure would be around 94
percent.)
Basel III would permit banks to borrow up to 97
percent of their assets. The proposed regulations in the United States —
which Wall Street is fighting — would still allow even the largest bank
holding companies to borrow up to 95 percent (though how to measure bank
assets is often a matter of debate).
If equity (the bank’s own money) is only 5 percent
of assets, even a tiny loss of 2 percent of its assets could prompt, in
essence, a run on the bank. Creditors may refuse to renew their loans,
causing the bank to stop lending or to sell assets in a hurry. If too many
banks are distressed at once, a systemic crisis results.
Prudent banks would not lend to borrowers like
themselves unless the risks were borne by someone else. But insured
depositors, and creditors who expect to be paid by authorities if not by the
bank, agree to lend to banks at attractive terms, allowing them to enjoy the
upside of risks while others — you, the taxpayer — share the downside.
Implicit guarantees of government support
perversely encouraged banks to borrow, take risk and become “too big to
fail.” Recent scandals — JPMorgan’s $6 billion London trading loss, an HSBC
money laundering scandal that resulted in a $1.9 billion settlement, and
inappropriate sales of credit-card protection insurance that resulted, on
Thursday, in a $2 billion settlement by British banks — suggest that the
largest banks are also too big to manage, control and regulate.
NOTHING suggests that banks couldn’t do what they
do if they financed, for example, 30 percent of their assets with equity (unborrowed
funds) — a level considered perfectly normal, or even low, for healthy
corporations. Yet this simple idea is considered radical, even heretical, in
the hermetic bubble of banking.
Bankers and regulators want us to believe that the
banks’ high levels of borrowing are acceptable because banks are good at
managing their risks and regulators know how to measure them. The failures
of both were manifest in 2008, and yet regulators have ignored the lessons.
If banks could absorb much more of their losses,
regulators would need to worry less about risk measurements, because banks
would have better incentives to manage their risks and make appropriate
investment decisions. That’s why raising equity requirements substantially
is the single best step for making banking safer and healthier.
The transition to a better system could be managed
quickly. Companies commonly rely on their profits to grow and invest,
without needing to borrow. Banks should do the same.
Banks can also sell more shares to become stronger.
If a bank cannot persuade investors to buy its shares at any price because
its assets are too opaque, unsteady or overvalued, it fails a basic “stress
test,” suggesting it may be too weak without subsidies.
Ben S. Bernanke, chairman of the Federal Reserve,
has acknowledged that the “too big to fail” problem has not been solved, but
the Fed counterproductively allows most large banks to make payouts to their
shareholders, repeating some of the Fed’s most obvious mistakes in the
run-up to the crisis. Its stress tests fail to consider the collateral
damage of banks’ distress. They are a charade.
Dodd-Frank was supposed to spell the end to all
bailouts. It gave the Federal Deposit Insurance Corporation “resolution
authority” to seize and “wind down” banks, a kind of orderly liquidation —
no more panics. Don’t count on it. The F.D.I.C. does not have authority in
the scores of nations where global banks operate, and even the mere
possibility that banks would go into this untested “resolution authority”
would be disruptive to the markets.
The state of financial reform is grim in most other
nations.
There is more evidence that Chrysler is not the
growth machine it was in 2011 and 2012. In the June quarter, production was
only up 5% to 660,000. Revenue rose only 7% to $18 million. These numbers
show Chrysler as something less than a growth company, even though
Marchionne has argued vehemently that it is one.
Chrysler’s long-term problem in the United States
is its very limited model line, particularly its flagship brand. Chrysler
has three basic models — the 200, the 300 and the Town & Country. It has no
premium model. It does not have a model priced well below $20,000. Its lack
of products that use alternative energy also limits its product line appeal.
Finally, Chrysler cannot make the argument that
giants like General Motors Co. (NYSE: GM) and Volkswagen can. GM’s largest
single market now is China, the biggest car market in the world, where GM is
number one. China also has the greatest growth potential of any big market,
particularly in contrast to Europe, where the recession has crippled car
sales.
Car sales in the United States may remain strong
for some time. But when they do begin to flatten out, Chrysler has nowhere
to go and has a model line that is not broad enough to satisfy many American
drivers.
From the CFO Journal's Morning Ledger on September 16, 2013
Auditor reports headed for new disclosure era
Audit regulators will propose a rule by the end of the
year
that could require auditors’ names to be revealed in
corporate annual reports, Emily Chasan reports. Along with other suggested
changes, it would mark a milestone in accountability and transparency.
Auditors are traditionally quiet participants in a company’s final annual
report, signing their firm’s name on a form letter with a simple pass or
fail grade. But a push to gain more insight into their process is growing
globally, meeting demands for more disclosure from both regulators and
investors. The PCAOB said it will issue a proposal on auditor identification
by December.
From the CFO Journal's Morning Ledger on September 12, 2013
What would Eno do? In 1974, English musician and composer Brian Eno and Peter Schmidt,
a visual artist, authored, packaged and sold Oblique Strategies, a pack of
cards designed to help artists find inspiration and battle creative
roadblocks. Each card in the deck held a koan-like suggestion—“go outside
and shut the door,” for example—and the idea was that an artist would draw
upon the deck in the face of a creative crisis. Musicians have most famously
tapped Oblique Strategies over the years, but they are not the only ones. In
this week’s Foreign
Policy, Jeffrey Lewis shuffles the deck to
help explain, of all things, President Obama’s Syria strategy. “Honour thy
error as a hidden intention,” best explains how Secretary of State John
Kerry’s verbal stumbling led to a breakthrough (possibly) on Syria’s
chemical weapons, Lewis writes. All of this is just a long way of saying
that if Oblique Strategies can work for President Obama and a Berlin-era
David Bowie, it can certainly work for executives decades removed from their
time at Harvard Business School. Imagine a world where Hewlett Packard CEO
Meg Whitman drew the card, “Would anyone want it?”…where Google CEO Larry
Page turned over “Voice your suspicions”…where Apple CEO Tim Cook pulled
“Make a sudden destructive unpredictable action; incorporate.”
The analogy would be proposing to your sweetheart in June without revealing
your previous marital record until the day of the wedding in December. Why
should your new bride know early on that you had five previous wives and eight
children about to be released from reform school? The same goes for your own
secret prison record for two statutory rapes.
From the CFO Journal's Morning Ledger on September 13, 2013
The NYT’s Steven M. Davidoff says that the situation
with Twitter is exactly the kind of thing
opponents of the JOBS Act had warned about: A prominent company, known
around the world, has filed for what will most likely be the most
anticipated stock offering since Facebook—and we know precious little about
its business. “No selected financial data, no information about
capitalization or operations, no ‘risk factors’” or anything else you
typically find in a company’s S-1. Under the Act, companies don’t have to
make their public filing until 21 days before they launch a “roadshow,” and
the filing doesn’t obligate Twitter to set a timeline for selling its
shares, the Journal notes.
Twitter is already valued at more than $9 billion, as
judged by private sales by employees of their stock to BlackRock earlier
this year, people familiar with that transaction tell the WSJ. And if it
goes public soon, it could reap rewards from a buoyant market and a hot
period for IPOs.
Aside from my hero Frank Partnoy, one of my favorite writers about Wall
Street frauds is Michael Lewis. Aside from being experts on frauds they are
extremely humorous writers. You can find a timeline of their books and articles
and
CBS Sixty Minutes interviews at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Was Lehman unjustly singled out when it was
allowed to fail?
Lehman Brothers was the only one that experienced justice. They should’ve
all been left to the mercy of the marketplace. I don’t feel, oh, how sad
that Lehman went down. I feel, how sad that
Goldman Sachs (GS)
and
Morgan Stanley (MS)
didn’t follow. I would’ve liked to have seen the crisis play itself out
more. The problem is, we would’ve all paid the price. It’s a close call, but
I think the long-term effects would’ve been better.
What surprised you most while reporting on
the crisis?
The realization that it had actually paid for everyone to behave the way
they behaved. Working on The Big Short, I first thought of it as this bet,
and there were winners and losers on both sides of the bet. In one sense
there was—but on Wall Street, even the losers got rich. So that was the
thing I couldn’t get out of my head: that failure was so well-rewarded. It
wasn’t that they’d been foolish and idiotic. They’d been incentivized to do
disastrous things.
Henry Paulson, the man behind the bank
bailouts, recently said, “The root cause of every financial crisis is flawed
government policies.” Is that fair?
Some of the government’s policies have been idiotic. But the idea that the
story begins and ends with government policy is insane. Wall Street, all by
itself, orchestrated the crisis by a web of deceit that was breathtaking. If
Wall Street continues to operate in that spirit, I would argue that there’s
almost nothing the government can do to prevent them from doing bad things.
Incentives are at the bottom of it all. At the gambling end of Wall Street,
the people who are making decisions are making decisions not with their
money, but with other people’s money, [so] they themselves are not
personally responsible.
The other things at the bottom of it all
are core to the human condition—optimism, gullibility, greed, panic. Is
there any way, finally, to prevent people from behaving this way?
Yeah, what can you do? Well, you can lessen the reward for behaving this
way. You can punish people more for behaving in this way. Part of this story
is the story of a moral problem, and the moral problem grows out of the
change in the structure of Wall Street. When there were partnerships and
people’s money was on the line … they were encouraged to behave in ways that
were to the long-term benefit of the organizations they belonged to.
Long-term behavior is just much different from short-term behavior—it
encourages a different morality. And for several decades on Wall Street, the
short-term sensibility has been encouraged and compensated very highly. So
what you’ve got is a culture that is all about that. Whether they say it or
not, that’s sort of the water in which the fish swim. I think as a result
you have, basically, total neglect of social responsibility.
Is this related to wealth inequity, the 1
Percent?
It isn’t because of what people are worth. It’s because their incentive
system has changed, [which has] changed the values of people who were there.
I think that’s a big problem. And the result is that people don’t trust the
system. Why would you? The cost of the mistrust is hard to measure, but it’s
big. If you’d asked me [in 2008], is the reform process going to play itself
out the way that it has, I’d have said, No way—there’s going to be a more
drastic change in the system. But there hasn’t been. I don’t know what it
takes, what other crises would have to come down the pipe.
Has Silicon Valley replaced Wall Street as
the place for bright young people to make their millions?
My sense is that even though the financial crisis has lessened the appeal of
the big Wall Street firm, it’s still appealing to kids in school, for the
simple reason that unlike Silicon Valley, where you do have to know
something to break in, the barriers to entry on Wall Street are quite low
once you have the [Ivy League] credentials. If you’re a certain kind of kid
who doesn’t actually know anything about anything, Wall Street is still a
great place to go.
Are you able to sleep easier now, or
are things as tenuous as ever?
I’m in an emotionally complicated position: The worse it gets, the better it
is for me. In a weird way, the worst thing that could happen is for the
financial sector to figure out how to behave.
Continued in article
From the CFO Journal's Morning Ledger on September 12, 2013
Where is Dick Fuld now?
Almost five years ago, Lehman
Brothers went into the largest bankruptcy in U.S. history, the
fission bomb trigger to the thermonuclear event we now call the financial
crisis. Since then, many former Lehman executives have found employment on
Wall Street. Not so former CEO Dick Fuld, a character so outsize—even for a
Wall Street filled with such types—that peers called him “the Gorilla” for
his “brutish manner and aggressiveness.” Post-Lehman, Mr. Fuld might as well
be called “the Dodo” because he has disappeared from his native habitat, the
big money Wall Street scene. Mr. Fuld has sold off real-estate properties
and art from his wife’s collection to pay for lawsuits filed by those
organizations that lost heavily when Lehman’s $40 billion real-estate
business went bust. True, he has pitched deals to Blackstoneand BlackRock, among others, but to no success Wall
Street insiders tell Businessweek’s Joshua Green.
Mr. Fuld and his wife are now major investors in a
tiny Phoenix-based chemical company that grew out a holding company for a
San Francisco strip club. “His real problem is that he’s forever associated
with the Lehman bankruptcy, and anyone who hires him, or even speaks up for
him, risks having this connection rub off on them,” writes Green. “Fuld has
become Wall Street’s Hester Prynne, forever branded.”
Jensen Comment
If the SEC had any guts this gorilla should be looking out through bars.
Bob Jensen's threads on Dick Fuld's wrong doings aided and abetted by a
Big Four auditing firm are at
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst Scroll down to the Lehman Bros. fraudulent reporting.
From the CFO Journal's Morning Ledger on September 11, 2013
CFOs are relying more on part-time workers
That’s partly due to the looming rollout of the Affordable Care Act, but
it’s also a reaction to lingering uncertainty about the economy,
according to the latest Duke University/CFO Global
Business Outlook Survey. The third-quarter
survey findings were pretty positive overall, though the U.S. Business
Optimism Index edged down to 58 on a scale of zero to 100 after shooting
above 60 in Q2. In a nutshell: Profits are expected to jump by more than
10%, capital spending is seen rising by nearly 5% and full-time employment
is anticipated to increase by 2%. And 59% of CFOs say they’ve increased the
proportion of their workforce made up of temporary and part-time workers or
shifted toward outside advisers and consultants.
Among the companies making that shift, 38% say it’s
due to health-care overhaul, while 44% say it’s down to extreme economic
uncertainty. “Another trend that is affecting the growth in domestic
employment is the hiring by U.S.-based companies of full-time employees in
foreign countries,” says John Graham, professor of finance at Duke Fuqua
School of Business and director of the survey. “More than one in four U.S.
CFOs say their firms have hired full-time employees in other countries, and
that number is expected to accelerate.” (Prof. Graham
discusses the findings in this video.)
Another key finding is
that
finance chiefs are starting to think more about their
competitors and less about their legislators,
CFO’s David Owens writes. The survey shows that “price
pressure from competitors” overtook “federal government agenda/policies” on
the list of external concerns for respondents. Bill Velasco, controller for
the Engineered Products Division at
Flowserve, a supplier
of industrial and heavy machinery, tells Owens that price competition is
heating up, but it’s still unclear who gets the credit—or the blame. “We
know the pressure is coming,” he says, “but I don’t know how much is being
generated by activity in the market, and how much comes from customers
asking us to be more efficient.”
More health-industry players are launching such
private exchanges, which are separate from the government-operated
marketplaces being created in each state. And insurers are creating their
own versions.
Aetna plans to launch a “proprietary”
marketplace model next year.
WellPoint
already has one, and
UnitedHealth Group‘s Optum
health-services arm owns an exchange operator.
Sears Holdings and
Darden Restaurants adopted this approach
last year. The idea has been gaining the most traction among small and
midsize employers, but interest is growing among companies of all sizes,
Matthews writes.
Bob Evans Farms,
which owns about 560 restaurants and has about 34,000 employees including
part-timers, will start directing workers to an exchange from
Xerox's Buck unit
that’s set to launch next January.
From the CFO Journal's Morning Ledger on August 22, 2013
Health-care law fuels part-time hiring
U.S. businesses are hiring, but three out of four of the nearly one million
hires this year are part-time and many of the jobs are low-paid, writes
Reuters’s Lucia Mutikani.
Executives at several staffing firms told Reuters that
the Affordable Care Act, which requires
employers with 50 or more full-time workers to provide health-care coverage,
was a frequently cited factor in requests for part-time workers. A memo that
leaked out from retailer
Forever 21 last week showed it was reducing a number of full-time
staff to positions where they will work no more than 29.5 hours a week, just
under the law’s threshold. “They have put some of the full-time positions on
hold and are hiring part-time employees so they won’t have to pay out the
benefits,” said Client Staffing Solutions’ Darin Hovendick. “There is so
much uncertainty. It’s really tough to design a budget when you don’t know
the final cost involved.”
Deloitte's “Heads Up” discusses the PCAOB's proposal
for new auditing standards intended to increase the informational value,
usefulness and relevance of the auditor's report and expand the auditor's
responsibilities and related procedures for information outside the
financial statements. The PCAOB's proposal represents the most significant
expansion of tailored information provided about a financial statement audit
by auditors to the user community in the profession's history.
From the CFO Journal's Morning Ledger on September 12, 2013
Rising rates are forcing CFOs to recalibrate
As
interest rates for long-term business borrowing climb to two-year highs,
companies are reassessing borrowing and refinancing strategies, adjusting
pension contributions and rethinking overseas trade and deal-making,
CFOJ’s Noelle Knox and Vipal Monga write in this must-read
story in today’s WSJ.
Rising rates were likely a driving force in the
Verizon-Vodafone
deal, because fresh funds for acquisitions will only get more expensive as
rates go higher. Companies are eager to see if the Fed reels in its stimulus
efforts when it meets next week—a move that would put more upward pressure
on rates. With that meeting looming,
Verizon rushed to market yesterday with a record $49
billion package of bonds to finance the
Vodafone deal. And a lot of companies have jumped at the chance to refinance
high-interest bonds and other types of loans while the going is still good.
There are upsides and downsides to rising rates, Knox
and Monga note. For example,
Ford warned
investors last month that higher rates will drive up its interest expenses
by $50 million this year. But on the flip side, the company’s U.S. pension
plan is experiencing a big improvement. Ford chipped in $2 billion for its
pension plan, but rising discount rates were the big reason the company has
narrowed its $9.7 billion funding gap by about $4 billion this year. “We’re
very encouraged by the progress we’re seeing,” said CFO Bob Shanks.
From the CFO Journal's Morning Ledger on September 10, 2013
Europe financial-transaction tax hits legal wall Europe’s plan for
an
expansive financial-transaction tax has hit a
legal wall after the top legal adviser to finance ministers concluded it
exceeds national jurisdiction, “infringes” on EU treaties and is
"discriminatory” to nonparticipating states, the FT reports. A confidential
paper from the EU Council Legal Service, seen by the Financial Times, finds
that one of the core provisions of the European Commission proposal goes
beyond the law. While the conclusions are non-binding, the legal opinion is
a significant intervention that will probably mean any common levy will be
far less ambitious than initial plans.
The Securities and Exchange Commission is ending
its push to punish financial-crisis misconduct in the same way it
started—with a new chairman vowing that Wall Street's top cop will be
tougher in the future.
In 2009, at the depths of the recession, Mary
Schapiro took the reins at the SEC promising to "move aggressively to
reinvigorate enforcement" at the agency. She created teams to target various
types of alleged misconduct, including one focused on the complicated
mortgage bonds that helped set off a global financial panic.
The agency has filed civil charges against 138
firms and individuals for alleged misconduct just before or during the
crisis, according to an analysis by The Wall Street Journal. And it received
$2.7 billion in fines, repayment of ill-gotten gains and other penalties.
But some of the SEC's highest-profile probes of top Wall Street executives
have stalled and are being dropped.
In April, former federal prosecutor Mary Jo White
started work as SEC chairman with a simple enforcement motto: "You have to
be tough." She tossed out the SEC enforcement policy that allowed almost all
defendants to settle cases without admitting wrongdoing. In August,
hedge-fund manager Philip Falcone became the first example of this new
approach when he and his firm, Harbinger Capital Partners LLC, admitted
manipulating bond prices and improperly borrowing money from a fund. A
representative of Mr. Falcone declined to comment.
The policy shift comes as the SEC turns the page on
its financial crisis work. New investigations into misconduct linked to the
meltdown have slowed to a trickle. And a statute-of-limitations deadline
that generally restricts the sanctions the SEC can get for conduct more than
five years old is looming for many cases.
The SEC's crisis-related actions are producing
diminishing financial returns. In 2010, the SEC filed enforcement actions
against companies that brought average settlements of $212 million, the
Journal analysis shows. Settlements from actions filed last year have
averaged $61 million.
It is a similar story with settlements reached with
individuals. The SEC has collected $95 million in such settlements since the
crisis began, but more than two-thirds of this total came from the agency's
pact nearly three years ago with Angelo Mozilo. The Countrywide Financial
Corp. founder agreed in 2010 to the payment of $67.5 million to settle
allegations he misled investors and engaged in insider trading, without
admitting or denying wrongdoing. A lawyer representing Mr. Mozilo didn't
respond to a request for comment.
"We're at the outer end of credit-crisis cases,"
SEC co-chief of enforcement George Canellos said this summer. Ms. White is
mulling plans on how to use resources freed up by the rapid drop in those
probes, according to people close to the agency.
Some critics say the SEC should have done far more
in the past five years. There have been "almost no legal, political or
economic consequences" for the big banks, says Phil Angelides, former
chairman of the Financial Crisis Inquiry Commission, a panel created by
Congress to examine the causes of the crisis. "What has Wall Street really
learned? Very little."
Ms. Schapiro says the SEC shouldn't be judged on
the size of its settlements alone. "A fair scorecard looks at the importance
and significance of the cases, as well as the numbers," she said. "Broadly
speaking, the SEC's enforcement program does well on all those metrics."
In 2009, Ms. Schapiro says she arrived at a
demoralized SEC that was facing calls for its abolition, amid widespread
criticisms of its effectiveness.
The agency's failure to clamp down on the practices
that led to the financial crisis wasn't the only blemish. Officials missed
signs of Bernard L. Madoff's Ponzi scheme until the $17.5 billion fraud
collapsed in late 2008.
Rebuilding the SEC's reputation has been hard. In
August 2009, a team of SEC lawyers came to a Manhattan courthouse expecting
a federal judge to rubber stamp a settlement with Bank of America Corp., BAC
+0.27% according to people close to the agency.
The case was the SEC's first against a Wall Street
firm related to the financial crisis and marked an important milestone in
the agency's efforts to bolster its standing.
The proposed deal followed a familiar blueprint by
the regulator. Bank of America had agreed to write a $33 million check to
settle allegations that investors were misled about bonuses paid to
employees of Merrill Lynch & Co. shortly before Bank of America acquired it
in January 2009. Bank of America didn't admit or deny wrongdoing.
Continued in article
Jensen Comment
I think it's serious when the size of the settlements are just wrist slaps that
do little to deter repeated stealing of investor savings.
SUMMARY: Perpetual preferred shares offer high yields similar to
debt but have no maturity date. The shares may fluctuate in value in
opposition to changes in overall interest rates, as bonds do, making them a
risky investment for loss of principal value. The author, the CFO Journal
editor, emphasizes that investors should look to purchase perpetual
preferred shares from companies with "high, stable cash-flow" such as banks
and insurance companies, which have added security because of regulation,
and real-estate investment trusts.
CLASSROOM APPLICATION: The article may be used when discussing
accounting for stock issuances, particularly preferred stock, to demonstrate
to students the need to satisfy investor demand with the terms of a
company's stock.
QUESTIONS:
1. (Introductory) What is preferred stock? What are perpetual
preferred shares of stock?
2. (Advanced) Why does the issuance of perpetual preferred shares
avoid "...altering debt-to-equity ratios and credit ratings"?
3. (Advanced) How are perpetual preferred shares like debt in the
eyes of investors?
4. (Introductory) According to the author, what type of company is
most able to issue perpetual preferred shares to provide investors with a
secure investment?
5. (Advanced) How did AT&T use its own perpetual preferred shares?
Why do you think the company needs approval from the U.S. Labor Department
to take this step?
Reviewed By: Judy Beckman, University of Rhode Island
Rising interest rates this summer have dried up the
market for perpetual preferred shares, but some companies are finding novel
ways to squeeze out deals.
Perpetual preferred shares—a sort of hybrid between
debt and equity with no maturity date—offer companies a way to raise money
quickly without issuing debt or diluting the holdings of their current
common shareholders. That avoids altering debt-to-equity ratios and credit
ratings, but it risks saddling a company with high dividend payments.
For investors, however, the high yields come with
the risk that the shares could lose some of their principal value as rising
interest rates make them harder to sell.
"It's very long-term capital, which is a good match
for financing assets with very long lives," said James Jackson, chief
financial officer of BreitBurn Energy Partners LP. He has been considering
perpetual preferred shares as an alternative source of financing for his
company.
The shares are a relatively new form of financing
for companies structured like BreitBurn that are known as master limited
partnerships. One of BreitBurn's competitors, Vanguard Natural Resources
LLC, VNR +0.47% became the first such company to sell perpetual preferred
shares this summer, and its shares are trading above face value in the
secondary market because of strong demand.
In addition, AT&T Inc. T +1.18% got tentative
approval from the U.S. Labor Department last week to make a pension-fund
contribution of 320 million perpetual preferred shares in its mobility
business, at a value of up to $9.5 billion. The AT&T deal is expected to
bring the pension fund close to fully funded status and lower the company's
taxes.
Final approval could open the door for other
companies to use the same approach.
"It's a novel way to address some of these pension
issues, and if other companies have an asset like this they could review
it," said John Culver, an AT&T analyst at Fitch Ratings in Chicago.
Perpetual preferreds gained popularity during the
financial crisis in 2008 and 2009, when banks raised more than $400 billion
using them. But banks, while still the leading issuer this year, have been
pulling out of the market because of cheaper financing elsewhere and
concerns that some types of perpetual preferred shares can run afoul of
bank-capital requirements.
As banks have left the market, companies with
strong cash flows, including real-estate investment trusts, utilities and
energy firms, have filled the void.
"Companies definitely want to issue them. There's
been a bit of a hiatus due to the rate environment and the summer. Now that
the summer is over, new issuance will crank up again, but probably at higher
yields," said William Scapell, who oversees investments in preferred stock
funds at Cohen & Steers.
Companies have raised more than $27 billion from
perpetual preferred shares so far this year, according to data provider
Dealogic. Since May, however, when long-term interest rates started to
increase, the pace of deals has plummeted 62% compared with the same period
a year earlier.
Real-estate investment trusts completed some 30
perpetual preferred deals this year, the most of any nonfinancial sector,
but they have also pulled back since May.
"The market is not the right market today," said
Glenn Cohen, the chief financial officer of Kimco Realty Corp., KIM -1.17%
which raised $800 million in three perpetual preferred deals over the past
two years at yields as low as 5.5%. Today, he said, the company would be
better off raising cash with traditional 10-year bonds.
In June, Houston-based Vanguard Natural Resources
VNR +0.47% offered $61 million in preferred shares at a competitive 7.88%
yield. The company told investors it wouldn't seek to redeem the perpetual
preferred shares for at least 10 years, as opposed to a more typical
five-year wait.
It was the first such deal from a master limited
partnership. The company found a novel way to help investors simplify the
tax filings related to the shares.
"It puts another tool in our toolbox to go out
there and raise more capital," said Vanguard Treasurer Ryan Midgett. The
firm intends to fund acquisitions with the proceeds, he said.
Jensen Comment
What nonsense. This illustrates on macro big data can mislead relative to micro
data. Any analyst who flat out claims robots are not destroying any jobs has not
been inside many factories in the 21st Century. When a Chevrolet dealer submits
an order for a new part a computer processes the order and submits a picking
order to a robots who retrieve the part, package it, and ships it to that dealer
along with a payment invoice. Not a single human is involved in getting this new
part to dealers.
Every symphony in the world incurs an operating
deficit
"Financial Leadership Required to Fight Symphony Orchestra ‘Cost Disease’,"
by Stanford University's Robert J Flanagan, Stanford Graduate School of
Business, February 8, 2012 ---
http://www.gsb.stanford.edu/news/headlines/symphony-financial-leadership.html
What if you sat down in the concert hall one
evening to hear Haydn’s Symphony No. 44 in E Minor and found 5 robots
scattered among the human musicians? To get multiple audiences in and out of
the concert hall faster, the human musicians and robots are playing the
composition in double time.
Today’s orchestras have yet to go down this road.
However, their traditional ways of doing business, as economist Robert J.
Flanagan explains in his new book on symphony orchestra finances, locks them
into limited opportunities for productivity growth and ensures that costs
keep rising.
I think somebody needs to take Robert Atkinson on a tour of factories where
robots have replaced workers.
From the CFO Journal's Morning Ledger on September 9, 2013
Verizon and the FCC are set to
battle it out in court today over “net neutrality”
rules
At the heart of the case is whether
the FCC has the authority to tell broadband Internet providers that they
can’t give priority to some services or adjust fees and speeds to handle
data-heavy traffic like video, the WSJ reports. The FCC argues that, except
for reasonable network management, such prioritization would undermine the
openness that has allowed the Internet to flourish. But Verizon says the FCC
is overstepping its bounds. The bigger issue is the balance of power between
Internet firms like Google and Facebook and carriers like Verizon and
Comcast when it comes to pricing and profiting from fast-growing Web
traffic.
All eyes will be on
Appletomorrow,
when the company is expected to
unveil a new iPhone with a faster processor and
another model that will be cheaper. A
lower-cost smartphone could allow Apple to expand its share of overseas
markets — especially in China, where the iPhone is highly desired but just
out of reach of many consumers because of its price, the NYT says.
Jensen Comment
In general, the term "adjunct" should apply both the the employer and employee.
Adjuncts are advised not to become dependent upon jobs of any kind that are low
paying, have almost no benefits, and have low reappointment security
amidst other workers who earn seniority (not necessarily tenure). Many "adjunct"
college jobs are like minimum wage jobs at McDonalds. They really never were
intended to be careers. McDonalds used to envision low paying jobs to be
temporary jobs for young people and other transition workers intent on
eventually moving into higher paying careers. It becomes sad when the labor
economy is so rotten that people begin to look at these low paying transitional
jobs as long-term careers.
Walmart is a bit different. Walmart subsidizes online training and education
with the intent that unskilled workers have help in lifting themselves higher
within or outside Walmart. Older workers who work at Walmart to simply
supplement retirement incomes are a lot different that a very young single
parent in need of opportunities for advancement. Walmart is at least offering
some opportunities for low paid employees willing to take the time and effort to
get an education.
A university should do the same for its adjuncts.
Older workers like retired CPA partners who simply supplement retirement incomes
are a lot different than young Ph.D. graduates who cannot find a tenure-track
jobs. A college that employs adjuncts should have programs to assist adjuncts
find better employment in the case where these adjuncts seemingly are locking
into long-term careers as adjunct teachers or low-paid research assistants.
It's an enormous problem when younger college adjunct faculty begin to look
at their adjunct positions as long-term careers. In part, this explains the
success of the AACSB's Bridging Program where non-business Ph.D.s have an
opportunity to become qualified for employment in tenure-track business faculty
opportunities where tenure-track openings are more prevalent than in many
humanities and science disciplines.
Margaret Mary Vojtko is a sad case in the "gray zone" of adjunct employment.
The "gray zone" includes an adjunct employee who is perhaps not qualified for
AACSB bridging such as an adjunct teacher without a Ph.D. degree. The "gray
zone" includes a Ph.D. who is perhaps too old for bridging into a new career
such as a 59-year old recently divorced adjunct who has almost no savings and
supplemental income. The "gray zone" includes an adjunct employee who was
content to live of the margin for decades and then encounters a health issue
with no savings, no TIAA-CREF retirement plan, and no family safety net.
Jensen Comment
It would really be interesting to compare the estimated shipping costs of this
giant new container ship with conventional container ships to date. This is a
hint for some accounting researcher team to take up the task.
Other considerations include the increased bribes (err fees) that must
be paid to longshoremen to load and unload these giants plus the costs of port
modifications to handle each floating "Empire State Building." It may take so
long to load and unload such a big container vessel that other vessels become
backed up for days or weeks outside the ports.
Enough of these ships put to sea may even add to the globally-warmed rising
sea levels. (Just kidding)
It would have been a disaster to have such large cargo ships in WW II. The
Germans could have made long-range torpedoes that could hit their easy
targets from U Boats hundreds of miles distant at sea.
In any case, they can't make enough of these floating Empire State Buildings
to meet the demand for marijuana imports in the the USA.
For the fourth consecutive summer, teen employment
has stayed anchored around record lows, prompting experts to fear that a
generation of youth is likely to be economically stunted with lower earnings
and opportunities in years ahead.
The trend is all the more striking given that the
overall unemployment rate has steadily dropped, to 7.4 percent in August.
And employers in recent months have been collectively adding almost 200,000
new jobs a month. It led to hopes that this would be the summer when teen
employment improved.
In 1999, slightly more than 52 percent of teens
16 to 19 worked a summer job. By this year, that number had plunged to about
32.25 percent over June and July. It means that slightly more than three in
10 teens actually worked a summer job, out of a universe of roughly 16.8
million U.S. teens.
“We have never had anything this low in our lives.
This is a Great Depression for teens, and no time in history have we
encountered anything like that,” said Andrew Sum, director of the Center for
Labor Market Studies at Northeastern University in Boston. “That’s why it’s
such an important story.”
Summer is traditionally the peak period of
employment for teens as they are off from school and get their first brush
with employment and the responsibilities that come with it. Falling teen
employment, however, is just as striking in the 12-month numbers over the
past decade.
The picture these teen employment statistics
provide looks even worse when viewed through the complex prism of race. Sum
and colleagues did just that, comparing June and July 2000 and the same two
months of 2013. In 2000, 61.28 percent of white teens 16 to 19 held a job, a
number that fell to 39.25 percent this summer. For African-Americans, a
number that was dismal in 2000, 33.91 percent of 16 to 19 year olds holding
a job, fell to a staggering low of 19.25 percent this June and July.
It wasn’t terribly better for Hispanics, who saw
the percentage of employed teens fall from 40.31 percent in the two-month
period of 2000 to 26.7 percent in June and July 2013.
One of the more surprising findings of Sum’s
research is that teens whose parents were wealthy were more likely to have a
job than those whose parents had less income. Some 46 percent of white male
teens whose parents earned between $100,000 and $149,000 held a job this
summer, compared with just 9.1 percent of black male teens whose family
income was below $20,000 and 15.2 percent for Hispanic teen males with that
same low family income.
That finding is important because a plethora of
research shows that teens who work do better in a wide range of social and
economic indicators. The plunging teen employment rate is likely to mean
trouble for this generation of young workers of all races.
“Kids that get work experience when they are 17 or
18 end up graduating from college at a higher rate,” said Michael Gritton,
executive director of the Workforce Investment Board, which promotes job
creation and teen employment in Louisville, Ky., and six surrounding
counties. “There are economic returns to those young people because they get
a chance to work. Almost every person you ask remembers their first job
because they started to learn things from the world of work that they can’t
learn in the classroom.”
The teen employment numbers are calculated from the
Current Population Survey, carried out by the Census Bureau for the Labor
Department’s Bureau of Labor Statistics. This survey of households is used
in determining estimates for the size of the civilian workforce, the number
of employed nationally and the unemployment rate.
Unemployment data is calculated in a different
fashion, and while it tells a similar story of hardship for teens, it is not
considered by researchers to be as accurate as the employment data because
it underestimates the severity of the slow economy.
The weak employment numbers sometimes prompt a
mistaken narrative that younger workers are just staying in college longer
rather than entering the workforce, or are going on to graduate school given
the impaired jobs market.
“I think there is this myth out there that there is
some silver lining for young people, that they are going on to college. . .
. You don’t see an increase in enrollment rates over and above the long-term
trend. You can’t see a Great Recession blip,” said Heidi Scheirholz, a labor
economist at the liberal Economic Policy Institute, a research group. “They
are not in school. There’s been a huge spike in the not-in-school, not
employed. It’s just a huge missed opportunity.”
Even before the economic crisis exploded in the
summer of 2008, workers ages 16 to 19 made up a declining share of the
overall workforce, in part because of a decades-long climb in college
enrollment, and in part because universities now place less importance on
work and more on life experiences and community service.
But most of this decline in youth in the workforce
is thought to be the result of the severe economic crisis and its aftermath,
with older workers taking the jobs of teens.
Volunteer work for for charity seldom is the best place for job training
since charities are often seeking "gofer" helpers rather than using their
resources for education and training purposes only. Actual jobs and internships
in the private sector are often better for job training. However, teens cannot
volunteer below minimum wage for work with companies that might provide
higher job skills. They might, however, be able to get unpaid internships in the
nonprofit sector ---
http://www.dol.gov/whd/regs/compliance/whdfs71.pdf
Fact Sheet #71: Internship
Program s Under The Fair Labor Standards Act
This fact sheet provides general information to help determine whether
interns must be paid the minimum wage and overtime under the Fair Labor
Standard s Act for the services that they provide to “for-profit” private
sector employers. Background The Fair Labor Standards Act (FLSA) defines the
term “employ” very broadly as including to “suffer or permit to work.”
Covered and non-exempt individuals who are “suffered or permitted” to work
must be compensated under the law for the services they perform for an
employer. Internships in the “for-profit” private sector will most often
be viewed as employment, unless the test described below relating to
trainees is met. Interns in the “for-profit” private sector who qualify as
employees rather than trainees typically must be paid at least the minimum
wage and overtime compensation for hours worked over forty in a workweek.
The Test For Unpaid Interns
There are some circumstances under which individuals who participate in
“for-profit” private sector internships or training programs may do so
without compensation. The Supreme Court has held that the term "suffer or
permit to work" cannot be interpreted so as to make a person whose work
serves only his or her own interest an employee of another who provides aid
or instruction. This may apply to interns w ho receive training for their
own educational benefit if the training meets certain criteria. The
determination of whether an internship or training program meets this
exclusion depends upon all of the facts and circumstances of each such
program. The following six criteria must be applied when making this
determination:
1. The internship, even though it includes
actual operation of the facilities of the employer, is similar to
training which would be given in an educational environment;
2. The internship experience is for the benefit
of the intern;
3. The intern does not displace regular
employees, but works under close supervision of existing staff;
4. The employer that provides the training
derives no immediate advantage from the activities of the intern; and on
occasion its operations may actually be impeded;
5. The intern is not necessarily entitled to a
job at the conclusion of the internship; and
6. The employer and the intern understand that
the intern is not entitled to wages fo r the time spent in the
internship. If all of the factors listed above are met, an employment
relationship does not exist under the FLSA, and the Act’s minimum wage
and overtime provisions do not apply to the intern. This exclusion from
the definition of employment is necessarily quite narrow because the
FLSA’s definition of “employ” is very broad. Some of the most commonly
discussed factors for “for-profit” private sector internship programs
are considered below.
Continued in article
Jensen Comment
In the budget squeeze since the 2008 recession, organizations are likely to
offer less and less of internship training that meet the above Labor Department
tests for non-compensated internships. The reason is that the above internships
will drain resources for the benefit of interns without any cost savings in
labor.
Thus in the USA teens face fewer and fewer jobs and internships. In Germany,
however, employers are given more incentives to hire teens in apprenticeships.
For as long as he can remember, German teenager
Robin Dittmar has been obsessed with airplanes. As a little boy, the sound
of a plane overhead would send him into the backyard to peer into the sky.
Toys had to have wings. Even today, Dittmar sees his car as a kind of ersatz
Boeing.
"I've got the number 747 as the number plate of my
car. I'm really in love with this airplane," the 18-year-old says.
Less-than-perfect school grades dashed Dittmar's
dream of becoming a commercial pilot. But they were good enough to earn him
a coveted apprenticeship slot with Lufthansa Technik, the technical arm of
Europe's largest airline, responsible for aircraft maintenance and repair
across the globe.
One-third of the way through his three-and-a-half
years of training at Lufthansa technical headquarters in Hamburg, Dittmar is
honing the skills required to become an aircraft mechanic — and
all-but-guaranteeing himself a job.
The protracted European debt crisis and austerity
measures have made career prospects for many of the continent's youth
bleaker than ever. In and , nearly half of all those under age 25 are
unemployed.
But as Dittmar's experience illustrates, that's not
the case in Germany. In stark contrast, Germany's youth employment is the
highest in Europe, with only a 7.8 percent jobless rate. At the heart of
that success is a learn-on-the-job apprenticeship system that has its roots
in the Middle Ages but is thriving today in Germany's modern,
export-oriented economy.
On-The-Job Training
A brightly lit Lufthansa workshop in Hamburg is
part of that apprenticeship system. Teenagers like Dittmar, many dressed in
the company's navy blue shirts and overalls, are busy learning the basics:
drilling, filing, soldering and manipulating sheet metal.
Dittmar's apprenticeship is part of Germany's
well-established and successful "dual system," so-called because training is
done both in-house at a company and partly at local vocational colleges.
About two-thirds of his time is spent on the job at
Lufthansa — split between workshops and classrooms, and actually working on
real aircraft and engines supervised by an experienced full-time mechanic, a
"training buddy."
"[The training buddies] are taking the apprentice
with them in their work. They are integrating them in their work and they
are making real training on the job," says Hans-Peter Meinhold, Lufthansa's
head of vocational training."So it's a one-to-one
situation."
For an aviation buff like Dittmar, getting to work
on real machines so soon is not only a sign that his employers see potential
in him, but also fuels his passion for planes.
"I could work anyplace in the world. I like the
system here," the teenager says. "I know that I will be a good aircraft
mechanic when I'm out of the apprenticeship, so that's very cool to know."
About 60 percent of German high school graduates
travel the same path as Dittmar, choosing vocational over academic
education. Throughout his training, Lufthansa pays Dittmar the equivalent of
$1,000 a month, one-third of the starting wage a qualified mechanic would
get. That's part of the system that some foreign visitors can't comprehend,
director Meinhold says.
"I tell them [the apprentices] don't pay anything
for it, they get paid by the companies. They get money for their training,"
Meinhold says. "'You are training them and you are paying them for that?'
They can't understand this."
Once qualified, these skilled aeronautical and
engine mechanics feed into a fairly robust European aviation industry,
either directly at Lufthansa or at one of its subsidiaries or competitors.
For many, the potential of being hired permanently
is the key attraction. Germany's industry still offers a majority of skilled
workers the elusive "job for life," a long-gone legend in many other Western
countries.
Meinhold believes that despite the costs, the
apprentice system is an investment vital to the ongoing success of Germany's
export-dependent economy by creating loyal, well-trained employees.
"It's a quite expensive way we go," he says. "The
benefit we get from the system later, that's a great benefit and makes
everything economical."
A Model For The Rest Of Europe?
Germany's dual system trains 1.5 million people
annually. Across the board, from bakers and car mechanics to carpenters and
violin-makers, about 90 percent of apprentices successfully complete their
training, German government figures show. The apprenticeships vary in
length, between two and three-and-a-half years. The average training
"allowance" is 680 euros a month (approximately $900), and about half of the
apprentices stay on in the company that trained them.
British Prime Minister David Cameron recently
called for his country to emulate parts of the German system by
reinvigorating British apprenticeships with higher-level training.
With headlines announcing unemployment rates above
8% in some parts of the country, many people I talk to are surprised to
learn that jobs by the hundreds of thousands remain vacant.
The reason for that is clear: American employers do
not have enough applicants with adequate skills, especially in science,
technology, engineering and math. The "STEM-related" positions that U.S.
industry needs to fill are not just for biochemists, biophysicists and
engineers. More and more jobs are applying cutting-edge technologies and now
demand deeper knowledge of math and science in positions that most people
don't think of as STEM-related, including machinists, electricians, auto
techs, medical technicians, plumbers and pipefitters.
In fact, after more than 30 years working in the
energy industry, and now as I work with business leaders from every sector
of the American economy, I can attest that your high-school math teacher was
right: Algebra matters.
These days the energy industry tests for math and
science aptitude when hiring for entry-level positions. Our industry is
seeking to fill positions that range from mechanics and lab support to blend
and process technicians. But many applicants fail these basic tests, losing
out on opportunities for good pay and good benefits.
The U.S. military is also being forced to turn away
applicants because of a lack of preparation in math, science and other
subjects. Each year, approximately 30% of high-school graduates who take the
Armed Forces entrance exam fail the test.
Even more concerning, many of these educational
shortfalls are apparent before students reach high school. According to the
2011 National Assessment of Educational Process, only 35% of eighth graders
performed at grade level or above in math.
As a nation, we must unite in recognizing the
mounting evidence that the U.S. is falling behind international competitors
in producing students ready for 21st-century jobs. According to the most
recent Program for International Assessment, U.S. students rank 14th in the
world in reading, 17th in science and 25th in math—and the trend line is
moving in the wrong direction.
We have an opportunity to reverse this trend but it
will take setting the right priorities. That starts with establishing high
standards. It means leaders from government and business, and parents, need
to defend the Common Core State Standards, which have been adopted wholly or
in part by dozens of states in recent years but are increasingly under
attack from across the political spectrum.
These voluntary, state-driven standards are a set
of expectations for the knowledge and skills that students from kindergarten
to 12th grade need to master for college and career readiness. Some oppose
the standards, complaining that they undermine the autonomy of teachers;
others decry the standards as a takeover of local schools by big government.
The criticism is misguided. The Common Core State
Standards are based on the best international research. They are built on
the standards used by the most effective education systems around the world,
including Singapore, Finland, Canada and the U.K. The standards are also
designed to allow each state to make its own decisions regarding the
curriculum, technology and lesson plans to be used in local schools.
In other words, the standards stipulate what we
want all students to know and be able to do, but each state retains the
explicit authority to determine how it teaches its students. The standards
are a tool to help educators, not a straitjacket for them.
A major benefit of the Common Core State Standards
is that they encourage students to analyze and apply critical reasoning
skills to the texts they are reading and the math problems they are solving.
These are the capabilities that students need as they prepare for high-skill
jobs.
We need to raise expectations at every grade level
so that, for instance, students who do well in math in lower grades are
spurred to take algebra and more advanced math. But we need high standards
to drive efforts to improve educational outcomes in every subject.
With these education standards under attack in many
states where they have been adopted or are being considered, the Common Core
needs support now more than ever if America is going to reverse its
education decline and prepare its young people to compete in today's dynamic
global economy. To abandon the standards is to endanger America's ability to
create the technologies that change the world for the better.
The Common Core State Standards are the path to
renewed competitiveness, and they deserve to be at the center of every
state's effort to improve the education—and future—of every American child.
Mr. Tillerson is the chairman and CEO of Exxon Mobil Corp. and the
chairman of the Business Roundtable's Education & Workforce Committee.
Caron once stood out as one of the few serious tax
bloggers out there; now that there are a lot more tax blogs online, he
stands out even more -- because they all refer to him and his
near-comprehensive content.
Near-comprehensive? In
any event, I am flattered to be on the list with such high-powered
people in the tax and accounting worlds, including:
Jensen Comment
Only one accounting professor, Karen Pincus, made the 2013 list. This listing
has consistently ignored Mary Barth (current President of the AAA) who has
amassed one of the most outstanding accounting research records in history and,
until recently, was on the IASB almost from its beginning. Who I would view as
the "most influential" living accounting professors have never made this
listing.
I guess accounting professors are just not very important in accounting. A
professor wrote to me privately saying that it's the position rather than the
person that makes it to this list. Perhaps Mary Barth, like Karen Pincus, will
make it in 2014 when she's a Past President of the AAA. But Past Presidents
won't stay of the list more than a year.
Paul Caron was a long time law professor at Cincinnati who this summer moved
to Pepperdine. He's best known for his blog, although Paul's SSRN papers are
among the most popular law school articles sought out on SSRN.
Congress's investigation into the IRS targeting of
conservatives has been continuing out of the Syria headlines, and it's
turning up news. Emails unearthed by the House Ways and Means Committee
between former Director of Exempt Organizations Lois Lerner and her staff
raise doubts about IRS claims that the targeting wasn't politically
motivated and that low-level employees in Cincinnati masterminded the
operation.
In a February 2011 email, Ms. Lerner advised her
staff—including then Exempt Organizations Technical Manager Michael Seto and
then Rulings and Agreements director Holly Paz—that a Tea Party matter is
"very dangerous," and is something "Counsel and [Lerner adviser] Judy
Kindell need to be in on." Ms. Lerner adds, "Cincy should probably NOT have
these cases."
That's a different tune than the IRS sang in May
when former IRS Commissioner Steven Miller said the agency's overzealous
enforcement was the work of two "rogue" employees in Cincinnati. When the
story broke, Ms. Lerner suggested that her office had been unaware of the
pattern of targeting until she read about it in the newspaper. "So it was
pretty much we started seeing information in the press that raised questions
for us, and we went back and took a look," she said in May.
Earlier this summer, IRS lawyer Carter Hull, who
oversaw the review of many Tea Party cases and questionnaires, testified
that his oversight began in April 2010. Tea party cases under review are
"being supervised by Chip Hull at each step," Ms. Paz wrote to Ms. Lerner in
a February 2011 email. "He reviews info from TPs, correspondence to TPs etc.
No decisions are going out of Cincy until we go all the way through the
process with the c3 and c4 cases here." TP stands for Tea Party, and she
means 501(c)(3) and 501(c)(4) nonprofit groups.
The emails also put the targeting in the context of
the media and Congressional drumbeat over the impact of conservative
campaign spending on the 2012 elections. On July 10, 2012 then
Lerner-adviser Sharon Light emailed Ms. Lerner a National Public Radio story
on how outside money was making it hard for Democrats to hold their Senate
majority.
The Democratic Senatorial Campaign Committee had
complained to the Federal Election Commission that conservative groups like
Crossroads GPS and Americans for Prosperity should be treated as political
committees, rather than 501(c)(4)s, which are tax-exempt social welfare
groups that do not have to disclose their donors.
"Perhaps the FEC will save the day," Ms. Lerner
wrote back later that morning.
That response suggests Ms. Lerner's political
leanings, and it also raises questions about Ms. Lerner's intentions in a
separate email exchange she had when an FEC investigator inquired about the
status of the conservative group the American Future Fund. The FEC and IRS
don't have the authority to share that information under section 6103 of the
Internal Revenue Code. But the bigger question is why did they want to?
After the FEC inquiry, the American Future Fund also got a questionnaire
from the IRS.
Ms. Lerner famously invoked her right against
self-incrimination rather than testify under oath to Congress. The House
Oversight and Government Reform Committee reported this summer that its
investigation had found Ms. Lerner had sent official IRS documents to her
personal email account, and many questions remain unanswered. Democrats want
to pretend the IRS scandal is over, but Ms. Lerner's role deserves much more
exposure.
SUMMARY: "More than 800 movies and television shows have been
filmed in North Carolina since the 1980s, when 'Dirty Dancing' was shot
along the banks of...mountain-ringed [Lake Lure]....In 2012 it paid $69
million in incentives to draw such productions as 'The Hunger Games,' and it
has netted an average of $168 million in direct production spending a year
over the past six years, according to the North Carolina Film Office." Yet
the state legislature is considering allowing the tax benefit to sunset on
January 1, 2015. Part of the reasoning is that the
expenditures don't lead to long-term, high end jobs in the state, only short
term economic infusion from each film and lower wage employment such as
restaurants. NOTE: INSTRUCTORS MAY WANT TO DELETE THE RELATED ARTICLE
INFORMATION IN ORDER TO HAVE STUDENTS RESEARCH THE QUESTIONS IN THE RELATED
GROUP PROJECT.
CLASSROOM APPLICATION: The article may be used to discuss state tax
systems in general, tax credits, or the policy choices implemented via tax
laws.
QUESTIONS:
1. (Introductory) What incentive does North Carolina offer to
filmmakers to do productions in its state? Is it a tax credit or another
type of benefit? In your answer, define the term tax credit.
2. (Introductory) For what reasons is North Caroline considering
letting the tax benefit program "sunset" on
January 1, 2015?
3. (Advanced) What are the arguments for keeping the film industry
tax benefits? How can these benefits be evaluated in a return on investment
framework?
4. (Advanced) Nevada is just now beginning to offer tax incentives
to the film industry. Given the widespread use of these tax policies, what
is the danger of eliminating them now?
SMALL GROUP ASSIGNMENT:
Convene students in groups with differing home states or assign different
states for students to investigate. Have each find an example of a tax
benefit offered to a specific industry or business entity by his/her home or
assigned state. Answer the following questions for class discussion. To what
industry or company was the benefit offered? For what reason did the
government offer the tax benefit? Is the benefit a tax credit, a special tax
rate, or is it structured in another way? Do you think the benefit offers
long term benefits to the state? Explain.
Reviewed By: Judy Beckman, University of Rhode Island
North Carolina is close to dropping one of the most
extensive programs for awarding tax breaks to film companies, in what would
be a high-profile retreat from an arms race among states to lure Hollywood
productions.
More than 800 movies and television shows have been
filmed in North Carolina since the 1980s, when "Dirty Dancing" was shot
along the banks of this mountain-ringed lake. The state started offering
incentives in the early 2000s. In 2012, it paid $69 million in incentives to
draw such productions as "The Hunger Games," and it has netted an average of
$168 million in direct production spending a year over the past six years,
according to the North Carolina Film Office.
The Motion Picture Association of America says the
quality of the state's studios and film crews rival those found in Hollywood
and New York City. The state trails only California, New York, Georgia and
Louisiana in production revenue, according to the N.C. Film Office.
But the budget for the next two fiscal years
approved in July by the state legislature lets the incentive program sunset
on Jan. 1, 2015. Republican lawmakers, who took full control of state
government this year for the first time since Reconstruction, as well as
some Democrats, say North Carolina would be better off cutting taxes across
the board or giving incentives to manufacturers offering long-term jobs.
North Carolina's program consists of a 25%
refundable tax credit. The state first offsets the production's state tax
liability, typically a small amount, and then issues the remainder of the
value of the credit as a refund. Nonetheless, the state has lost some
production business as Georgia and Louisiana have raised their transferable
tax credits to as much as 30% of production costs—which means, critics note,
that taxpayers foot 30 cents of each dollar spent.
The number of states offering incentives has
declined as they cite shifting priorities or problems with individual
programs or productions, according to Dama Claire, a tax expert who advises
producers on where to film.
Some still see opportunity: Nevada is launching a
15% transferable tax credit starting next year.
"Is it nice and glitzy? Yeah, everybody likes
'Homeland,' " said Sen. Bob Rucho, a Republican who leads North Carolina's
Senate finance committee and represents Mecklenberg County, where the
popular Showtime TV series is filmed. "But is it worth spending the money on
film credits? There's no evidence that it is."
"We spent $70 million on film incentives last year,
and what else could we have done with that $70 million?" said Rep. Mike
Hager, the GOP majority whip, who hails from Rutherford County, where "Dirty
Dancing" was shot. "We could have paid more teachers, kept our teacher
assistants, given raises to our highway patrol."
State Commerce Secretary Sharon Decker is lobbying
Republican leaders, including her boss, Gov. Pat McCrory, to maintain at
least some incentives. The program is necessary to retain the film industry,
which employs 4,000 people full-time and had an economic impact of $376
million last year, she said.
But some think tanks on the right and the left
argue that film-incentive programs don't offer enough bang for the buck.
Most states pay a subsidy worth about 25 cents for every dollar of
production expense, return on investment is hard to quantify, and the
highest-paying jobs go to people out of state, says the left-leaning Center
on Budget and Policy Priorities in Washington.
The Motion Picture Association of America says film
incentives have a multiplier effect, citing a recently commissioned study
that shows North Carolina's $20 million in incentives last year for "Iron
Man 3" led to $180 million in local spending, or nearly $9 for each $1
invested.
The association's senior vice president, Vans
Stevenson, told state leaders in a July letter that 21st Century Fox decided
to film the new television show "Salem" in Louisiana in part because of
uncertainty over North Carolina's incentives, and that Paramount Pictures is
reluctant to consider the state for big-budget films in its pipeline.
"The state stands to lose thousands of jobs and
hundreds of millions in spending planned here," Mr. Stevenson said.
About 1,500 people came to Lake Lure in mid-August
for the fourth-annual "Dirty Dancing" festival, capped by a "lake leap"
contest, an homage to actress Jennifer Grey's jump into Patrick Swayze's
arms in the frigid lake. The film is an anchor of the county's growing and
much-needed tourism industry, even 26 years after its release, said Ms.
Decker, who is also from Rutherford County and commonly cites "Dirty
Dancing" in her speeches on the importance of keeping the film industry.
Mr. Hager said film-related tourism hasn't helped
much. "People come and spend $100 or $200, but very few end up buying a home
on the lake," he said.
GAO Report
"Social Security Overpays $1.3 Billion in Benefits," by Joel Seidman,
CNBC, September 13, 2013 --- http://www.cnbc.com/id/101032599
An upcoming GAO
report obtained by NBC News says the federal government may have paid
$1.29 billion in
Social Security
disability benefits to 36,000 people who had too much income from work
to qualify.
At least one recipient
collected a potential overpayment of $90,000 without being caught by the
Social Security Administration, according to the report, which will be
released Sunday, while others collected $57,000 and $74,000.
The GAO also said
its estimate of "potentially improper" payments, which was based on
comparing federal wage data to Disability Insurance rolls between 2010
and 2013, "likely understated" the scope of the problem, but that an
exact number could not be determined without case by case
investigations.
To qualify for
disability, recipients must show that they have a physical or mental
impairment that prevents gainful employment and is either terminal or
expected to last more than a year. Once approved, the average monthly
payment to a recipient is just under $1,000.
There is a five-month
waiting period during which monthly income cannot exceed $1,000 before
an applicant can qualify for disability, as well as a nine-month trial
period during which someone who is already receiving benefits can return
to work without terminating his or her disability payments.
The GAO said that its
analysis showed that about 36,000 individuals either earned too much
during the waiting period or kept collecting too long after their
nine-month trial period had expired. The report recommended that "to the
extent that it is cost-effective and feasible," the Social Security
Administration's enforcement operation should step up efforts to detect
earnings during the waiting period.
In fiscal 2011, more
than 10 million Americans received disability benefits totaling more
than $128 billion. The GAO's report estimates that less than half of one
percent of recipients might be receiving improper payments.
A spokesperson for the
Social Security Administration said the agency had a "more than 99
percent accuracy rate" for paying disability benefits. "While our paymen
taccuracy rates are very high, we recognize that even small payment
errors cost taxpayers. We are planning to do an investigation and we
will recoup any improper payments from beneficiaries."
"It is too soon to
tell what caused these overpayments," said the spokesperson, "but if we
determine that fraud is involved, we will refer these cases to our
Office of the Inspector General for investigation."
The past 10 years have seen a growing number of
economists and financial analysts questioning the propriety of the methods
used to forecast pension fund liabilities. This is more than an academic
exercise, as the numbers you choose to base your models upon make massive
differences in the projected outcomes. As we will see, those differences can
run into the trillions of dollars and can mean the difference between
solvency and bankruptcy of municipalities and states. The implicit
assumption in many actuarial forecasts is that states and cities have no
constraints on their ability to raise money. If liabilities increase, then
you simply raise taxes to meet the liability. However, fiscal reality has
begun to rear its head in a few cities around the country and arrived with a
vengeance in Detroit this summer. It seems there actually is a limit to how
much cities and states can raise.
"Aah," cities assure themselves, "we are not
Detroit." And it must be admitted that Detroit truly is a basket case. But
it may behoove us to remember that Spain and Italy and Portugal and Ireland
and Cyprus all said "We are not Greece" prior to arriving at the point where
they would lose access to the bond market without central bank assistance.
In response to growing concerns over public pension
debt, the Governmental Accounting Standards Board (GASB) and Moody's have
both proposed revisions to government reporting rules to make state and
local governments acknowledge the real scope of their pension problems.
(While it is possible to ignore Moody's, based on the fact that it is just
one of three private rating agencies, it is impossible to ignore GASB, which
is the official source of generally accepted accounting principles (GAAP)
used by state and local governments in the United States.
Under the new GASB rules, governments will be
required to use more appropriate investment targets than most public pension
plans have been using, bringing them more in line with accounting rules for
private-sector plans. Pension plans can continue to use current investment
targets for the amounts the plans have successfully funded; but for the
unfunded amounts, pension plans must use more reasonable investment
forecasts, such as the yield on high-grade municipal bonds, currently
running between 3 and 4 percent. From my perspective, not requiring
reasonable investment forecasts on already funded accounts is still
unrealistic, but the new GASB rules are a major step in the right direction,
and I applaud GASB for taking a very politically difficult stance.
This research was conducted by a doctoral student and her faculty
advisor in the Graduate School of Business at Stanford
University. The findings are consistent with earlier findings about
women physicians.
Hypothesized reasons female doctors
earn less than male physicians ---
http://thegrindstone.com/career-management/study-female-doctors-paid-much-less-than-their-male-counterparts-991/
What I would like to see is whether there is a significantly higher
ratio of males to females in the highest paying medical careers. For
example, do women tend to avoid those specialties taking the longest
time to complete slave-driving residencies (such as neurosurgery)?
Do women tend to avoid those specialties requiring more strength and
endurance such as orthopedics? A friend who is a physician tells me
this is the case, but I've not investigated the data.
Having said this, it should be noted
that there are significant variances in these findings. My own
female physician is one of the hardest working physicians I've ever
seen. She works what seems to be 12-hour days on average 24/7. She's
never been married and to my knowledge only has a relationship with
her work. I also know a number of female professors who work about
at the same pace.
The difference between indicative and counterfactual conditionals, in a
context of past time reference, can be illustrated with a pair of examples
in which the if clause is in the past indicative in the first example
but in the pluperfect subjunctive in the second:
If Oswald had not shot Kennedy, then someone else would
have.
The
protasis (the if clause) of the first sentence may or may not be
true according to the speaker, so the
apodosis (the then clause) also may or may not be true; the
apodosis is said by the speaker to be true if the protasis is true. In this
sentence the if clause and the then clause are both in the
past tense of the
indicative mood. In the second sentence, the speaker is speaking with a
certainty that Oswald did shoot Kennedy (according to the speaker,
the protasis is false), and therefore the main clause deals with the
counterfactual result — what would have happened. In this sentence the if
clause is in the
pluperfect subjunctive form of the
subjunctive mood, and the then clause is in the
conditional perfect form of the
conditional mood.
A corresponding pair of examples with present time reference uses the
present indicative in the if clause of the first sentence but the
past subjunctive in the second sentence's if clause:
If it is raining, then he is inside.
If it were raining, then he would be inside.
Here again, in the first sentence the if clause may or may not be
true; the then clause may or may not be true but certainly (according
to the speaker) is true conditional on the if clause being true. Here
both the if clause and the then clause are in the present
indicative. In the second sentence, the if clause is not true, while
the then clause may or may not be true but certainly would be true in
the counterfactual circumstance of the if clause being true. In this
sentence the if clause is in the
past subjunctive form of the subjunctive mood, and the then
clause is in the conditional mood.
Psychology
People engage in
counterfactual thinking frequently. Experimental evidence indicates that
people's thoughts about counterfactual conditionals differ in important ways
from their thoughts about indicative conditionals.
Comprehension
Participants in experiments were asked to read sentences, including
counterfactual conditionals, e.g., 'if Mark had left home early he would
have caught the train'. Afterwards they were asked to identify which
sentences they had been shown. They often mistakenly believed they had been
shown sentences corresponding to the presupposed facts, e.g., 'Mark did not
leave home early' and 'Mark did not catch the train' (Fillenbaum, 1974). In
other experiments, participants were asked to read short stories that
contained counterfactual conditionals, e.g., 'if there had been roses in the
flower shop then there would have been lilies'. Later in the story they read
sentences corresponding to the presupposed facts, e.g., 'there were no roses
and there were no lilies'. The counterfactual conditional 'primed' them to
read the sentence corresponding to the presupposed facts very rapidly; no
such priming effect occurred for indicative conditionals (Santamaria, Espino,
and Byrne, 2005). They spend different amounts of time 'updating' a story
that contains a counterfactual conditional compared to one that contains
factual information (De Vega, Urrutia, and Riffo, 2007) and they focus on
different parts of counterfactual conditionals (Ferguson and Sanford, 2008).
Reasoning
Experiments have compared the inferences people make from counterfactual
conditionals and indicative conditionals. Given a counterfactual
conditional, e.g., 'If there had been a circle on the blackboard then there
would have been a triangle', and the subsequent information 'in fact there
was no triangle', participants make the
modus tollens inference 'there was no circle' more often than they do
from an indicative conditional (Byrne and Tasso, 1999). Given the
counterfactual conditional and the subsequent information 'in fact there was
a circle', participants make the
modus ponens inference as often as they do from an indicative
conditional.
Psychological accounts
Ruth M.J. Byrne proposed in
The Rational Imagination: How People Create Alternatives to Reality
that people construct
mental representations that encompass two possibilities when they
understand, and reason from, a counterfactual conditional, e.g., 'if Oswald
had not shot Kennedy, then someone else would have'. They envisage the
conjecture 'Oswald did not shoot Kennedy and someone else did' and they also
think about the presupposed facts 'Oswald did shoot Kennedy and someone else
did not' (Byrne, 2005). According to the
mental model theory of reasoning, they construct
mental models of the alternative possibilities, as described in
Deduction (Johnson-Laird and Byrne, 1991).
Jensen Comment
It might be interesting for 10th graders to draw pictures imagining accountants
at work . Some of the best outcomes might be candidates to become cartoons
published in The New Yorker. For examples from professional cartoonists,
go to The New Yorker and observe some cartoons in the category of
"accountant" or "accounting" ---
http://www.newyorker.com/cartoons
One of my favorites of a CEO worriedly speaking to a wimpy accounting and
stating:
"This company's going to be dead, Digby, unless you can come up with an
accounting miracle."
Forwarded by Gene and Joan
Complete versus Finished
No English dictionary has been able to adequately explain the difference
between these two words.
In a recently held linguistic competition held in London and attended by
supposedly the best in the world, Samsundar Balgobin, a Guyanese man, was the
clear winner with a standing ovation which lasted over 5 minutes.
The final question was:.. How do you explain the difference between COMPLETE
and FINISHED in a way that is easy to understand.
Some people say there is NO difference between COMPLETE and FINISHED.
Here is his astute answer……..
When you marry the right woman, you are COMPLETE. When you marry the wrong
woman, you are FINISHED, and when the right one catches you with the wrong one,
you are COMPLETELY FINISHED!!
He won a trip to travel the world in style and a case of 25 year old rum.
Forwarded by Paula
A former Sergeant in the Marine Corps took a new job as a high school
teacher. Just before the school year started, he injured his back. He was
required to wear a plaster cast around the upper part of his body, but
fortunately, the cast fit under his shirt and wasn't noticeable. On the first
day of class, he found himself assigned to the toughest students in the school.
The smart aleck punks, having already heard the new teacher was a former Marine,
were leery of him and he knew they would be testing his discipline in the
classroom. Walking confidently into the rowdy classroom, the new teacher opened
the window wide and sat down at his desk. When a strong breeze made his tie
flap, he picked up a stapler and stapled the tie to his chest.
Dead silence...
The rest of the year went very smoothly.
"Life Is Short. Live It To The Fullest. It Has An Expiration Date" by John
Grosskopf
What deep thinkers men are... I mowed the lawn
today, and after doing so I sat down and had a cold beer. The day was really
quite beautiful, and the drink facilitated some deep thinking. My wife
walked by and asked me what I was doing and I said 'nothing'. The reason I
said that instead of saying 'just thinking' is because she would have said
'about what'. At that point I would have to explain that men are deep
thinkers about various topics which would lead to other questions. Finally I
thought about an age old question: Is giving birth more painful than getting
kicked in the nuts? Women always maintain that giving birth is way more
painful than a guy getting kicked in the nuts.
Well, after another beer, and some heavy deductive
thinking, I have come up with the answer to that question. Getting kicked in
the nuts is more painful than having a baby; and here is the reason for my
conclusion. A year or so after giving birth, a woman will often say, "It
might be nice to have another child." On the other hand, you never hear a
guy say, "You know, I think I would like another kick in the nuts." I rest
my case.
Time for another beer.
Forwarded by Maureen
A lawyer boarded an airplane in New Orleans with a box of frozen crabs and
asked a blonde flight attendant to take care of them for him. She took the box
and promised to put it in the crew's refrigerator.
He advised her that he was holding her personally responsible for them
staying frozen, mentioning in a very haughty manner that he was a lawyer, and
proceeded to rant at her about what would happen if she let them thaw out.
Needless to say, she was annoyed by his behavior.
Shortly before landing in New York, she used the PA to announce to the entire
cabin, "Would the lawyer who gave me the crabs in New Orleans , please raise
your hand?" Not one hand went up... so she took them home and ate them.
Two lessons here:
1. Lawyers aren't as smart as they think they are.
2. Blondes aren't as dumb as most folks think.
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down) CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access.
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation.
Concerns That Academic Accounting Research is Out of Touch With Reality
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of theshift from Gemeinschaftto
Gesellschaft.Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
Jensen Comment
One of the most misleading things analysts can do is to compare compensation of
high-end careers. For example, the above "most popular jobs" leaves out owners
of farms in the Midwest who own and farm (i.e., work the land) really big farms,
say 2,500-acre grain farms or larger. How does one compare "profits" on
multimillion farm investments with salaries of "Marketing Managers" who
invest nothing but their labor?
How does one compare the "profits" of a one-neurosurgeon corporation with the
salaries of "Marketing Managers" who may have not even invested in a college
education? The neurosurgeon may have invested hundreds of thousands of dollars
plus years of her life as a student. Her ultimate annual compensation is really
a return on lost opportunity value and a large investment.
How does one compare the profits by partners in a small law firm with the
salaries of lawyers employed in house by an enormous tobacco company?
One of the most misleading types of rankings is where the rankings are based
on averages (means or medians) when there are enormous variances and/or high
kurtosis. And there may be enormous changes over time. A shyster law firm may
really struggle with partners barely earning minimum wage until they win the
legal lottery --- that patient in a coma for 43 years after slipping on a
burrito in a Taco Bell restaurant.
The bottom line is that it is not so misleading to compare hourly wages of
McDonalds workers versus Pizza Hut workers. But don't try to compare the profit
sharing plans of large law firms and medical practices with the salaries of
"Marketing Managers."
Cynical Jensen Comment
Years ago I had a full-time tax professor one time who also owned a Colorado
ranch and ran a successful tax practice. He quite literally worked 12 hours a
week on campus and spent the rest of his working hours on his ranch and his tax
practice. Although he was quite a good teacher I have to admit that it was him
more than any other professor who inspired me to become an accounting
academic. I liked this idea of drawing a full-time teaching salary for a 12-hour
per week job (with summers free and long holiday breaks thrown in to boot).
At the time, I really, really wanted to be a ski bum without being poor as
most ski bums. If the pass between Aspen and Gunnison had not been closed in the
winter, I most certainly would have signed the contract put before me to teach
at the state university in Gunnison (which has since had a name change).
However, when I learned that the pass was closed in the winter I laid down my
pen and took Stanford up on a free ride to get an accounting Ph.D. I never
seriously skied after laying down that pen. And I eventually discovered that the
full time work week of an academic is 60+ hours even in the summer. Sigh!
Jensen Comment
Keep in mind that "best" is a relative term. The "best" teachers in the first
two years of college (where inspiration is extremely important) are not
necessarily the "best" teachers in advanced courses where scholarship depth
takes on greater importance.
In some colleges the two basic accounting courses are "filler" courses in a
professor's workload. For example, the professor might be assigned two sections
of advanced accounting and one section of basic accounting on the assumption
that the basic accounting course takes almost no preparation. However, to be
really good at teaching the basic accounting course there should be a lot of
preparation and thought given to pedagogy.
In some colleges, administrators teach sections of basic course. If the
administrators are very busy with their administrative duties this can be a
mistake.
In some universities the two basic accounting courses are taught by teaching
assistants (from the doctoral program) and adjuncts (hired from the street).
This usually leads to high variance in course quality. For example, it is
sometimes assumed that a practicing accountant will be very inspiring in terms
of looking toward accounting as a career. My experience, however, is that this
is often a very bad assumption. Sometimes accountants from the street seek to
supplement their incomes with teaching because they are not busy enough being
great practicing accountants.
The "best" lecture-method teachers are often not the best case-method
teachers where nevewrt giving out answers becomes an art and a science
for deeper and long-lasting metacognitive learning ---
http://www.trinity.edu/rjensen/265wp.htm
The "most popular" teachers are often not the "best" teachers. Much depends
on how "most popular" is defined. The RateMyProfessor site is replete with
comments that recommend teachers who are easy graders in spite of being lousy
teachers in the eyes of the students going for the easy grades ---
http://www.ratemyprofessors.com/
Cynical Jensen Comment
Years ago I had a full-time tax professor one time who also owned a Colorado
ranch and ran a successful tax practice. He quite literally worked 12 hours a
week on campus and spent the rest of his working hours on his ranch and his tax
practice. Although he was quite a good teacher I have to admit that it was him
more than any other professor who inspired me to become an accounting
academic. I liked this idea of drawing a full-time teaching salary for a 12-hour
per week job (with summers free and long holiday breaks thrown in to boot).
At the time, I really, really wanted to be a ski bum without being poor as
most ski bums. If the pass between Aspen and Gunnison had not been closed in the
winter, I most certainly would have signed the contract put before me to teach
at the state university in Gunnison (which has since had a name change).
However, when I learned that the pass was closed in the winter I laid down my
pen and took Stanford up on a free ride to get an accounting Ph.D. I never
seriously skied after laying down that pen. And I eventually discovered that the
full time work week of an academic is 60+ hours even in the summer. Sigh!
Jensen Comment
I question how the deterministic properties of probabilities in prospect theory
make this theory truly relevant to tax compliance issues where probabilities are
in the realm of the unknowns. In other words, there is huge risk of Garbage-In,
Garbage Out.
A VIE is an entity meeting one of the following
three criteria as elaborated in FASB ASC 810-10 [formerly FIN 46 (Revised)]:
The equity-at-risk is not sufficient to
support the entity's activities (e.g.: the entity is thinly
capitalized, the
group of
equity holders
possess no substantive voting rights, etc.);
As a group, the equity-at-risk holders cannot
control the entity; or
The economics do not coincide with the voting
interests (commonly known as the "anti-abuse rule").
TOPICS: Audit Quality, Audit Report, Auditing, Auditor Changes,
Auditor/Client Disagreements, business combinations, Business Ethics,
Fraudulent Financial Reporting
SUMMARY: The series of events leading to questions about auditing
practices at Olympus that failed to uncover a decades-long coverup of
investment losses is highlighted in this review. The company must submit its
next financial statement filing to the Tokyo Stock Exchange by December 14,
2011 for the period ended September 30, 2011 or face delisting.
CLASSROOM APPLICATION: The review focuses on auditing questions
about sufficient competent evidence, change of auditors, and ability to
provide an audit report given knowledge of the length of time this coverup
has been ongoing.
QUESTIONS:
1. (Introductory) What fraudulent accounting and reporting
practices has Olympus, the Japanese optical equipment maker, admitted to
committing?
2. (Advanced) What services is Mr. Woodford calling for to
investigate the inappropriate payments and accounting practices by Olympus?
Specifically name the type of engagement for which Mr. Woodford thinks that
Olympus should contract with outside accountants.
3. (Introductory) Refer to the related articles. What questions
have been raised about outside accountants' examinations of Olympus's
financial statements for many years?
4. (Advanced) Based only on the discussion in the article, what
evidence did Olympus's auditors rely on to resolve their questions about the
propriety of accounting for mergers and acquisitions? Again, based only on
the WSJ articles, how reliable was that audit evidence?
5. (Advanced) What happened with Olympus's engagement of KPMG AZSA
LLC as its outside auditor? What steps must be taken under U.S. requirements
when a change of auditors occurs?
6. (Introductory) What challenges will Olympus face in meeting the
deadline of December 14 to file its latest financial statements? What will
happen to the company if it cannot do so?
Reviewed By: Judy Beckman, University of Rhode Island
As XBRL use continues and the Taxonomy is updated
annually, the board's staff has narrowed the number of changes necessary,
according to data provided by FASB. In the 2011 GAAP Taxonomy, the staff
made thousands of changes to reflect new definitions as well as new and
deprecated elements. With the transition from 2013 to 2014, the changes in
each category number fewer than 500.
Jensen Caution
Don't treat distance education courses and MOOC courses as synonyms. President
Obama is suggesting priority for distance education courses and online degree
programs that are neither free nor "massive" in size. Smaller distance education
courses can have intense communications between students and an instructor plus
intense communications between students in a course (including team projects).
Grading in these distance education courses is very similar to onsite course
grading.
MOOCs present an entire new dimension to student communications and grading.
I don't think President Obama was thinking in terms of MOOCs in his latest
proposal. However, MOOCs are on the horizon, especially for very specialized
courses that colleges cannot afford to teach on campus. Credit in such courses
may be given on the basis of competency testing.
Developing online classes and other nontraditional
teaching approaches could earn colleges money under new federal financing
priorities
proposed on Thursday by President Obama.
More colleges should be encouraged “to embrace
innovative new ways to prepare our students for a 21st-century economy and
maintain a high level of quality without breaking the bank,” the president
said in a
speech at the University at Buffalo, part of the
State University of New York.
The financial rewards for such innovation would be
part of a larger retooling of financing priorities, Mr. Obama said.
Under his proposal, the Department of Education
would have two years to create a college-rating system to help students and
their parents determine the value of an institution. Criteria would include
graduation rates, graduates’ competitiveness in the work force, and their
debt load upon graduation, among others.
As one example of innovation in online learning
that meets students’ needs, Mr. Obama cited an
online master’s program in computer science at the
Georgia Institute of Technology. The program will make its debut in January
and cost a fraction of a traditional on-campus degree.
In a speech at Knox College last month, President
Obama said he would "shake up higher education" with an "aggressive
strategy" aimed at making college more affordable.
On Thursday, the president embarks on a two-state,
three-campus tour where he'll lay out what he has in mind. In a
letter sent to his supporters this week, he
promises "real reforms that would bring lasting change."
"Just tinkering around the edges won't be enough,"
he says in the letter. "To create a better bargain for the middle class, we
have to fundamentally rethink about how higher education is paid for in this
country."
The plan, he continues, "won't be popular with
everyone—including some who've made higher education their business—but it's
past time that more of our colleges work better for the students they exist
to serve."
But it's hard to see how the president will tackle
two of the root causes of tuition growth: labor costs and state budget cuts.
Despite productivity gains, and a move toward self-guided,
"competency-based" learning, higher-education remains an industry that's
highly dependent on skilled labor. At the same time, many states have
slashed their spending on higher-education, forcing public colleges to raise
tuition to cover costs.
Taking Colleges
to Task
Over the past year-and-a-half, Mr. Obama has become
a frequent critic of colleges, taking them to task over rising tuition and
warning that the government won't continue to pour money into an
"undisciplined system." He has threatened to withhold some federal aid from
colleges that fail to hold down tuition growth, and has proposed grants for
states and colleges that adopt cost-saving measures.
So far, those ideas have fallen flat, largely
because of federal budget constraints. The president has had better luck
increasing aid to students and making debt more manageable, through expanded
income-based repayment options and lower interest rates on student loans.
His administration has also made information about
college costs and student debt more transparent, through the use of an
online College Scorecard and a standardized financial-aid award letter, or
"shopping sheet."
This week's college tour is the latest in a string
of campaign-style events the White House is using to promote its economic
policies in the run-up to debates in Congress over the federal budget and
the debt ceiling. It includes stops on Thursday and Friday at two State
University of New York campuses—the University at Buffalo and Binghamton
University—and at Lackawanna College, in Scranton, Pa.
Details of the president's proposals aren't yet
available, but some observers expect Mr. Obama to recycle a plan that would
tie some money from the campus-based aid programs to efforts to rein in
tuition growth, and to repeat his call for a "Race to the Top"-style grant
program for colleges and states that take steps to control costs.
He might also propose an expansion of his signature
Pay-as-You-Earn student-loan repayment plan, or declare use of the
financial-aid shopping sheet mandatory for all colleges.
To address state budget cuts, he might propose
requiring states to sustain their spending on higher education to receive
certain federal funds. But past maintenance-of-effort provisions haven't
proven particularly effective, and some members of Congress oppose their
expansion. Tackling labor costs would be even trickier.
"When it comes down to it, there's not all that
much the president can do, besides using the bully pulpit" to exhort states
and colleges to do more, said Daniel T. Madzelan, a longtime Education
Department official who retired last year. "It just comes down to the price
of labor."
From Benefactor
to Critic
During his first years in office, President Obama
focused on expanding student aid, pushing for increases in the maximum Pell
Grant and the creation of a more generous tuition tax credit. Those changes
helped make college more affordable for current students, but they didn't do
anything to slow tuition growth, and skeptics say they may have even fueled
it.
In 2010, the administration turned its attention to
for-profit colleges, proposing to cut off federal student aid to
institutions where borrowers struggle to repay their debt. The resulting
"gainful employment" regulation was overturned by the courts, and the
Education Department is opening negotiations to rewrite the rule this fall.
But it was not until 2012, in his State of the
Union address, that the president began to apply pressure to all of higher
education, putting colleges "on notice" that his administration would not
continue to subsidize
"skyrocketing tuition."
"If you can't stop tuition from going up, the
funding you get from taxpayers will go down," he said.
Three days later, in a speech
at the University of Michigan, he issued a
"blueprint for keeping college affordable,"
repeating proposals to shift more money from the campus-based student-aid
programs to colleges that "do their fair share to keep tuition affordable,"
and create new incentive programs for colleges and states. The plan also
included a call for the
College Scorecard that would provide families with
"essential information" for choosing a college, including data on
institutions' costs, graduation rates, and the potential earnings of
graduates.
He returned to those themes in his 2013 State of
the Union address, calling on colleges to
"do their part to keep costs down," and urging
Congress to consider "affordability and value" when awarding federal aid. In
a
policy plan that accompanied the speech, he
suggested incorporating measures of value and affordability into the
existing accreditation system or establishing a new, alternative system of
accreditation "based on performance and results."
Sidestepping
Congress
Getting Congress to agree to any of those ideas
will be difficult, given budget realities and competing priorities—not to
mention the partisan gridlock currently gripping Washington. Recognizing
this, Mr. Obama has vowed to use the powers of his office to get things
done.
Continued in article
It's troubling enough to study one university's
financial reports. It's a nightmare to compare universities.
"So You Want to Examine Your University's Financial Reports?" by Charles
Schwartz, Chronicle of Higher Education, February 7, 2012 ---
http://chronicle.com/article/So-You-Want-to-Examine-Your/130672/
The University of Texas System released data
Thursday designed to help the system's regents gauge the productivity of
faculty members, The Texas Tribune
reported -- one part of
an accountability push that has concerned many
professors and troubled some lawmakers. The massive spreadsheet -- which
system officials insisted was raw and unverified, and should be treated as a
draft -- contained numerous data points about all individual professors,
including their total compensation, tenure status, total course enrollments,
and information about research awards. A similar effort this spring at Texas
A&M University -- also undertaken in response to pressure from Gov. Rick
Perry --
created a stir there.
Issues in Computing a College's Cost of Degrees Awarded and "Worth" of
Professors (including discussions of the Texas A&M cost allocation study) ---
See below
Jensen Comment
Also think living costs. The costs of housing in San Francisco and NYC are such
that you may have to take on multiple roommates with lice and body odor. In
Dallas and Houston you can be more restrictive regarding the hygiene of your one
roommate.
MAAW's Accounting Job Boards
Our open sharing retired accounting professor, Jim Martin, who maintains the
MAAW Website and Blog made the following posting on August 2, 2013 --- http://maaw.blogspot.com/
I have developed a new section on MAAW that
includes four categories of Accounting Job Boards. These include
Professional Associations and Organizations that Provide Certifications,
Employment or Staffing Agencies, Government Organizations, and News
Organizations.
Our open sharing retired accounting professor, Jim Martin, who maintains the
MAAW Website and Blog made the following posting on August 24, 2013 --- http://maaw.blogspot.com/
I have developed an index of accounting systems for
business to make it easier to find information related to a specific type of
business, industry, or activity. I think you will find it interesting and
you might also find it useful in your work. It is an ongoing project that I
will update on a continuous basis.
Fleck, L. H. 1926.
The incidence of abandonment losses. The Accounting Review
(June): 48-59. (JSTOR
link).
Accounting Changes
(Also see Changes)
Hall, J. O. and C.
R. Aldridge. 2007. Changes in accounting for changes.
Journal of Accountancy
(February): 45-50.
Schwieger, B. J.
1977. A summary of accounting for and reporting on accounting changes.
The Accounting Review (October): 946-949. (JSTOR
link).
Accounting and
Business Machines
Gould, S. W. 1935.
The application of tabulating and accounting machines to real estate and
mortgage accounting procedure. N.A.C.A. Bulletin (November 15):
261-277.
Walker, R. 1947.
Synchronized budgeting in the business machine industry. N.A.C.A.
Bulletin (August 1): 1453-1470.
Whisler, R. F.
1933. Factory payroll budget of the National Cash Register Company.
N.A.C.A. Bulletin (February 1): 853-861.
Woodbridge, J. S.
1959. The inventory concept of accounting as expressed by electronic
data-processing machines and applied to international air
transportation. N.A.A. Bulletin (October): 5-12. (International
airline revenue accounting).
Accounts Receivable
Records
Zeigler, N. B.
1938. Accounts receivable records and methods. N.A.C.A. Bulletin
(January 15): 581-594.
Jensen Comment
I'm surprised to disbelief about some on the list, especially bricklayers and
tile setters. Up here the shortage is in the skilled craftsman who lay bricks
and tiles. There's no shortage in jobs to a point where I had to wait almost a
year to get my chimneys repointed. The jobs may be declining somewhat in terms
of new home construction, but it would surprise me if the jobs are not
increasing for existing remodeling jobs.
I think there is somewhat a problem of defining a "computer operator." Most
universities and larger companies still have computer centers and technicians in
those centers keeping the servers humming. The main frame computer operators may
be declining but the computer center technicians seem to be increasing in
numbers, and it's very hard to find those that are skilled in the programming
and hardware skills that are combined in network serving machines.
Jensen Comment
These days it's amazing how many enormous companies are in search of more viable
business models, including Microsoft, HP, and Yahoo. Many small businesses are
also in search of new models, including our local old fashioned hardware store
and a local country greenhouse facing increased winter heating prices and
serious competition from the big box stores. Our regional inns and restaurants
are also seeking revised business models given the changing patterns of demand.
For example, tourists and customers are increasingly seeking package-deal
discounts and discount coupons. This is forcing our inns and restaurants to
revise their business models and offerings. The Sunset Hill House Hotel down the
road installed ten large solar panels on the roof.
Many of New England's ski resorts have shut down, and those that are still in
business must have snow-making machines. It's not that we're getting less snow,
but keeping it deep enough on the ground is problematic. In this era of global
warming a hard winter rain on top of five feet of snow can be a disaster.
Many paper mills have shut down and cannot find an alternate business model.
Smaller biomass plants for generating electricity are giving some relief to
timber harvesters who used to mostly cut trees for paper and pulp mills. Our
regional hospital, for example, is now building a small biomass electrical
generating plant.
The Vermont Yankee Nuclear Power Plant could not find an alternate business
model and is now shutting down. The claim is that nuclear can no longer compete
with such alternate fuels as natural gas and biomass burners. This may be true,
but the price of our electricity keeps going up rather than down.
Can your students learn more from the various free accounting and finance
modules learning modules at the Khan Academy?
https://www.khanacademy.org/
Have you reviewed the teaching ideas and resources in Issues in Accounting
Education from the AAA over the past few years?
http://aaahq.org/pubs/electpubs.htm
Constituents disagreed with one another on numerous
aspects of the models, including the following:
Immediate recognition of all lifetime
expected credit losses—Many U.S. investors and some regulators
supported the FASB’s impairment model, which requires up-front
recognition of all expected credit losses over the term of the financial
asset (rather than only a portion of those expected credit losses in
certain circumstances, as the IASB proposes); they maintained that
reserve adequacy is imperative. However, U.S. preparers generally raised
concerns about recognizing all lifetime expected credit losses
immediately. Specifically, they noted that (1) the asset’s net carrying
amount would be understated on day 1 and (2) interest income (i.e.,
compensation for credit risk) would not be matched with the recognition
of credit-loss expense.
Immediate recognition of
less-than-lifetime expected credit losses—Unlike proponents of
the FASB’s impairment model, investors, preparers, and others outside
the United States generally supported the IASB’s approach, which would
require entities to immediately recognize only 12 months of expected
credit losses in certain circumstances. They disliked the FASB’s
approach of recognizing all lifetime expected credit losses on all
assets for two reasons. First, they observed that it would be difficult
to estimate such losses reliably, especially for assets that are still
performing and not considered at risk of not performing. Second, they
noted that a model that immediately recognizes lifetime expected credit
losses on all assets ignores the idea that pricing of financial assets
incorporates some expectation of credit loss.
Aspects of the proposals on which constituents
generally agreed include the following:
Need for convergence—Because
of the global impact of the credit crisis, convergence has been a
consistent theme of feedback throughout the history of the joint
impairment project. Although commenters and constituents have expressed
their belief that convergence is important and have encouraged the FASB
and IASB to continue working together, their opinions differ on what a
converged model should look like. Further, some have stated that the
boards should first focus on improving current guidance in a timely
fashion.
Expected credit loss model—Most
respondents supported the transition to an expected credit loss model.
Under that model, entities would estimate credit losses on the basis of
historical information, current information, and reasonable and
supportable forecasts of expected collectability of cash flows and
recognize such losses earlier than they would under the incurred loss
model in current guidance. However, because much confusion was expressed
about the meaning of “reasonable and supportable forecasts” during the
FASB’s outreach activities, the FASB explained the types of information
that entities could use to make forecasts and assured stakeholders that
forecasts and predictions of economic conditions over the entire life of
the asset would not be required.
Single model—Most respondents
agreed that a single impairment model for all financial assets measured
at amortized cost or at fair value through other comprehensive income
(FV-OCI) would be preferable to the current multiple impairment models,
which can vary (e.g., depending on whether the asset is a security).
Some respondents favored the current approach for debt securities, and a
number stated that more practical expedients should be permitted for
such instruments.
Simpler approach for PCI assets—Most
respondents to the FASB’s proposal agreed on the need to simplify the
accounting for losses on purchased creditimpaired (PCI) financial assets
under current U.S. GAAP, which in some cases requires a different
treatment for changes in expectations depending on whether such changes
are favorable or unfavorable. Also, most respondents agreed that PCI
assets should be presented “gross” on the financial statements.
Disclosures—Most users agreed
with the disclosure requirements proposed by both boards. Most other
respondents agreed with the objective of the disclosures, but noted that
they might be too detailed, restrictive, and onerous.
Next Steps
The FASB and IASB will most likely begin
redeliberations in September of this year. Give the disparate feedback and
the general preference by constituents of each board for that board’s own
model, it is unclear whether the boards can fully converge their respective
standards. Final guidance is not expected until 2014. No effective date has
been set, but feedback generally indicated that constituents would need at
least two to three years to implement a final standard (i.e., if a standard
is finalized in 2014, it should be effective no earlier than 2017).
Question
Why do banks hate the new loan loss (bad debt estimation) model proposed by the
FASB in place of the prior fair value estimation model?
More than a dozen of the biggest U.S. banks have
questioned a proposed accounting change meant to boost reserves for risky
loans, saying the results would be vastly different from those of a similar
rule being developed by global standard-setters.
A key reform arising out of the 2007-08 global
financial crisis, the proposal would require banks to look ahead and reserve
for expected losses on the day a loan is made.
Currently, banks do not have to reserve for risky
loans until there are signs of a loss.
Reserves were criticized as being "too little, too
late" during the global crisis, when major banks were buffeted by defaults
on loans and other debt. Many had to be bailed out because they had not set
aside enough for losses.
Numerous banking regulators have called for more
timely reserves, though critics have also warned that proposed accounting
changes would make quarterly earnings more volatile as banks adjust their
expectations for losses.
In a letter to accounting rule-makers, banks
suggested that trying to predict losses too far ahead would be unreliable.
Banks signing the letter included Bank of America
Corp, Citigroup Inc, JPMorgan Chase & Co and Morgan Stanley. Spokesmen for
the banks either declined to comment or did not respond to requests for
comment.
The letter, dated May 10, was addressed to the
Connecticut-based Financial Accounting Standards Board, which sets U.S.
accounting standards, and the London-based International Accounting
Standards Board, which sets international rules.
FASB is seeking comment on its proposal through May
31, and its details may change. Analysts said it would likely not be
effective before 2015. A separate rule on loan losses was proposed by the
IASB in March.
50 PCT JUMP IN RESERVES POSSIBLE
The letter intensified pressure on the two boards
to align their rules. U.S. companies use FASB's generally accepted
accounting principles, or GAAP. Much of the rest of the world uses IASB's
international financial reporting standards (IFRS).
The two boards have been working for over a decade
to merge their standards. Financial accounting has been a key focus since
the global crisis, but the boards parted ways on loan loss accounting last
year.
"Relative to the IASB's proposal, the FASB's
proposal would generally require entities to recognize allowances for credit
losses sooner and in larger amounts," said Bruce Pounder, director of
professional programs at Loscalzo Associates, a Shrewsbury, New Jersey-based
accounting education company.
The balance sheets of U.S. banks could look
significantly worse than that of banks using international standards, even
in identical economic conditions, he said.
Continued in article
Will bad loans look worse under U.S. GAAP versus IFRS?
How Bad is a Bad Bank Loan: Rule Split to Put U.S. Banks at a Loss
From the CFO Morning Ledger on February 28, 2013
How bad is a bad bank loan?
Accounting regulators in the U.S. and Europe disagree on the standards for
how banks book loan losses, and their rift could lead to tens of billions of
dollars being carved off U.S. lenders’ current profits, writes the WSJ’s
Michael Rapaport. The FASB and the IASB have separate proposals in the works
that would require banks to record losses on soured loans earlier than they
do now. But the U.S. proposal goes a step further and would force
American banks to accelerate even more losses more quickly than foreign
banks would. If U.S. and overseas banks end up using different models
for booking losses, that could create an apples-to-oranges situation that
would make it more difficult for investors to tell how they stack up against
one another.
How bad is a bad bank loan? Accounting regulators
in the U.S. and Europe disagree, and their rift could lead to tens of
billions of dollars being carved off U.S. lenders' current profits.
American and global rule makers have separate
proposals in the works that would require banks to record losses on soured
loans earlier than they do now. The plans aim to give investors a more
accurate picture of banks' health, after many critics felt banks, both in
the U.S. and abroad, took losses too slowly during the financial crisis.
But the U.S. proposal goes a step further: In a
split with their overseas counterparts, U.S. rule makers would force
American banks to accelerate even more losses more quickly than foreign
banks would.
That could severely crimp current results for U.S.
banks, some observers believe—an example of how a host of regulatory actions
on both sides of the Atlantic may cause disparities. It also could hurt how
investors perceive the health and performance of U.S. banks versus their
competitors.
"If overseas banks don't have to record losses as
early as U.S. banks, I think that puts [the U.S. banks] at a disadvantage,"
said Patrick Dolan, a finance and securitization attorney with Dechert LLP.
The gap between the two proposals is "a big
difference," said Donna Fisher, a senior vice president at the American
Bankers Association. Banks "all agreed globally that we want one standard"
for booking losses, she said.
If U.S. and overseas banks end up using different
models for booking losses, that could create an apples-to-oranges situation
that would make it more difficult for investors to tell how they stack up
against one another.
"They will be harder to compare than they are at
present," said Peter Elwin, head of European pensions, valuation and
accounting research for J.P. Morgan JPM +3.41% Cazenove, part of J.P. Morgan
Chase & Co.
The changes aren't imminent. The plans from both
the U.S.'s Financial Accounting Standards Board and International Accounting
Standards Board, its London-based global counterpart, are still in the early
stages: The IASB proposal hasn't even been formally issued yet, and both
boards will listen to public comment on their plans before making a final
decision. No changes are expected to take effect before 2015.
But FASB has suggested that some large U.S. banks
might have to increase bad-loan reserves by 50% in some areas of their
business. U.S. industry-wide reserves were $162 billion at the end of 2012,
according to the Federal Deposit Insurance Corp. Currently, banks wait to
record loan losses until there is evidence that losses have actually
occurred.
During the financial crisis, net loan charge-offs
booked by U.S. banks didn't peak until late 2009, according to FDIC data,
more than a year after the heart of the crisis.
That left banks carrying huge piles of bad loans
even after it was apparent they were souring in droves, making the banks
appear healthier to investors than they really were and delaying the banks'
reckoning with the crisis's impact.
Banks charged off $189 billion in bad loans in 2009
and $187 billion in 2010, according to the FDIC—much of which arguably
should have been charged off earlier. (Charge-offs were $100 billion in 2008
and only $44 billion in 2007.)
Both FASB and IASB now want to change that system,
so that projections of future losses would be the standard for booking loan
losses. That is expected to speed up recognition of bad loans.
Until last summer, the two panels also had agreed
on the details of how and when to book the losses: Largely, only those
losses based on events expected over the following 12 months would be booked
upfront. But FASB pulled away from that method, saying that it had heard
concerns from some banks, investors and regulators that it was too complex.
Now, the FASB proposal, issued in December, calls
for all losses banks expect over the life of a loan to be booked upfront. If
that expectation changes, so will the recorded amount of losses.
Age and experience have much to recommend them over
youth and enthusiasm but the advantages don't always show up in teaching.
That's the finding of a new study, "Early Retirement Incentives and Student
Achievement," published by the National Bureau of Economic Research.
According to Cornell University economists Maria
Fitzpatrick and Michael Lovenheim, when young, inexperienced teachers
replaced older, more experienced faculty in Illinois, the newcomers did as
well or better at getting students to learn.
The study doesn't discount the value of seasoned,
motivated teachers. It does indicate that teachers going through the motions
to qualify for a pension can be a drag on student achievement. The study is
more evidence that students do better when teachers are graded on
performance, not seniority.
Illinois uses a combination of age and years on the
job to calculate when a teacher may retire with full benefits. In the
1992-93 school year and again in 1993-94, the state offered teachers over
age 50 the option of "buying" additional years of age and service. By paying
a one-time fee, experienced teachers could boost their numbers and retire
early. The offer was generous, the authors report, and Illinois public
schools lost 10% of their teachers over two years "with experienced teachers
making up the vast majority of the exits."
Reducing the experienced-teacher roster generated
salary savings to local school districts, but pension costs rose so Illinois
taxpayers didn't save money. Yet the politicians seem to have accidentally
helped the students by clearing out the deadwood. The authors report that
"the median retiring teacher had 27 years of experience and was replaced by
a teacher with less than 3 years of experience."
That shift to less experienced teachers "did not
reduce test scores and instead led to increased student achievement in most
cases," the authors find. Even better, there is "suggestive evidence that
[the early retirement program] had larger positive effects in more
disadvantaged schools." In reading, for example, students in poor schools
had better gains in test scores after the program relative to their
wealthier counterparts.
The authors say that in poor schools it is possible
that fewer productive teachers retired and that replacements may have had
"more previous experience, rather than being novices." But the key finding
concerns those who leave: "Teachers who remain in poorer schools at the end
of their careers are lower-performing than the teachers who replace them."
The authors also estimate that to achieve similar improvements in test
scores by reducing class size would cost, on average, $96 more per student
than the net cost of $51 per student of the early retirement initiative.
Experienced teachers who kept teaching, as the
authors delicately put it, "are those with stronger labor force attachment."
In other words, they care more about educating the next generation than
about their pension.
"Early Retirement Incentives and Student Achievement"
by Maria D. Fitzpatrick, Michael F. Lovenheim
NBER Working Paper No. 19281 Issued in August 2013
http://www.nber.org/papers/w19281
Early retirement incentives (ERIs) are increasingly
prevalent in education as districts seek to close budget gaps by replacing
expensive experienced teachers with lower-cost newer teachers. Combined with
the aging of the teacher workforce, these ERIs are likely to change the
composition of teachers dramatically in the coming years. We use exogenous
variation from an ERI program in Illinois in the mid-1990s to provide the
first evidence in the literature of the effects of large-scale teacher
retirements on student achievement. We find the program did not reduce test
scores; likely, it increased them, with positive effects most pronounced in
lower-SES schools.
Posted by out-in-the-pasture former accounting professor Bob Jensen
A new state law will give open access to the
research conducted at public universities in Illinois.
The Open Access to Research Articles Act requires
each public university to set up a task force by Jan. 1, 2014, that will
consider how to meet open access goals. Traditionally, faculty research is
not available publically, but is published in scholarly academic journals
that charge subscription fees.
But Illinois universities will now consider making
their research available at no charge online. They'll also look at how other
universities and the federal government are handling open access. The news
comes on the heels of the University of California's recent announcement
that its faculty adopted an open access policy.
The Illinois legislation went through significant
changes since it was introduced in February. Initially, the language
required universities to develop an open access policy within 12 months. But
it later scratched the mandatory policy and left it up to university task
forces to come up with their own ideas.
Continued in article
Jensen Comment
This law could adversely affect such accounting research journals as JAR, JAE,
AOS, and many others. I say "adversely" in the sense that if those journals
refuse open access, accounting researchers in Illinois may no longer submit
articles to those journals. Of course those journals are incresingly providing
some open access on a limited basis. Perhaps open access will also be extended
to articles having one or more authors from Illinois.
This law could eventually restrain campus libraries from subscribing to
closed-access research journals.
Jensen Comment
The pay outs are coming from the usual U.K. organized crime banks --- Barclays,
HSBC and Royal Bank of Scotland. These are the same banks paying out billions
because of LIBOR fraud conspiracies.
...
The ACT is generally regarded as being composed of somewhat easier questions
(versus the SAT), but the time allotted to complete each section increases
the overall difficulty (equalizing it to the SAT).
What is the best way to put this for ACT admissions testing outcomes?
26% of students who took the ACT are fully "college ready."
74% of students who took the ACT are not fully "college ready."
Jensen Comment
I always remember one of Bob Anthony's Harvard Cases (in his famous managerial
accounting textbook) where a newly-minted MBA proposes a naive application of
CVP analysis to increase operating margins. He failed to comprehend the basic
assumptions of the linear model that he superficially learned in an accounting
course. His older and wiser boss clued him in on how so much of what in learned
in college courses more often than not do not fit realities of the world of
business.
SUMMARY: The lead article was printed ahead of the Williams-Sonoma
earnings release and highlights current profits versus expectations for the
future. The company's sales have risen with the rebound in the housing
market, leading to a 36% gain in the company's stock price. Results by brand
show that Pottery Barn is driving the results with 43% of the company's
group revenue and a 7.6% increase in sales. Despite these good results, the
company faces strong competition as well. Pricing to meet that competition
in on-line sales is highlighted as the likely reason that gross margin fell
slightly. The related article was published after the company's quarterly
results were inadvertently released early during the day
on Wednesday, August 38, 2013; they had been
expected to be released after trading closed for the day.
CLASSROOM APPLICATION: The article can be used to define and
discuss revenues versus gross margin, segment reporting, and he retailer's
measure of growth in same-store sales. INSTRUCTORS WILL WANT TO REMOVE THE
FOLLOWING STATEMENTS AS THEY ANSWER QUESTIONS RELATED TO SEGMENT REPORTING.
The company defines its operating segments by retail stores versus
direct-to-consumer (on-line)-see the linked filing through the questions
below. In its 10-Q filing, the company states, "Our retail merchandising
concepts are operating segments, which have been aggregated into one
reportable segment, retail. Management's expectation is that the overall
economic characteristics of each of our operating segments will be similar
over time based on management's judgment that t he operating segments have
had similar historical economic characteristics and are expected to have
similar long-term financial performance in the future." Source: 10-Q
quarterly financial statements segment disclosures at
http://www.sec.gov/cgi-bin/viewer?action=view&cik=719955&accession_number=0001193125-13-259605&xbrl_type=v#
Authoritative guidance on aggregating operating segments can be found in the
Accounting Standards Codification at ASC 280-10-50-11, Aggregation criteria.
To be combined, operating segments must be similar in all of 5 criteria: •
The nature of the products and services • b. The nature of the production
processes • c. The type or class of customer for their products and services
• d. The methods used to distribute their products or provide their services
• e. If applicable, the nature of the regulatory environment,
QUESTIONS:
1. (Introductory) How has Williams-Sonoma performed financially
this year? What has been the resulting stock market performance?
2. (Introductory) What are the company's specific results in terms
of sales revenue? Which of its brands is driving that result?
3. (Advanced) Define the term gross margin and compare it to sales
revenue. How is this measure used to analyze the company's performance in
on-line sales?
5. (Advanced) Further scroll down to the table entitled Operating
Margin By Segment. How does this information add to what is disclosed in the
financial statements?How are these segment disclosures used in the article
to assess the Williams-Sonoma quarterly results?Are the companies' operating
segments the same as their brands? Explain.
6. (Advanced) Define the terms operating segment and reportable
segment in accordance with authoritative accounting requirements.How does
the company explain its presentation in accordance with authoritative
guidance? To answer, access the Form 10-Q filing of the quarterly financial
statements, available at
http://www.sec.gov/cgi-bin/viewer?action=view&cik=719955&accession_number=0001193125-13-259605&xbrl_type=v#
Locate the segment reporting footnote.
7. (Introductory) Refer to the related article. What happened with
the timing of the release of the company's quarterly results? What did the
stock market do in response?
8. (Introductory) The company "raised is full-year outlook
targets." Why do you think management issues guidance about its expected
earnings like this?
9. (Advanced) Return to the press release filing and find the
guidance. Describe how the information is presented and compare it to the
statements made in the article.
10. (Advanced) How do you think the comparison of "same-store
sales" is made year to year? How does this metric help to analyze a
retailer's results? Given the segment results examined above, what is
challenging about using this metric for Willaims-Sonoma?
Reviewed By: Judy Beckman, University of Rhode Island
Williams-Sonoma Inc. WSM -0.79% has felt as safe as
houses lately. But the shelter may not last.
Shares of the upscale home-furnishing retailer have
risen 36% this year as new housing construction and signs of economic
recovery sparked demand for furniture. The big winner has been Pottery Barn,
Williams-Sonoma's largest division with about 43% of group revenue. Its
sales rose a healthy 7.6% from a year earlier in the fiscal first quarter
ended in early May.
nvestors hope the run continues when
Williams-Sonoma on Wednesday reports fiscal second-quarter results. After
all, Commerce Department data show furniture and home-furnishings sales rose
3.6% in that time. Even struggling retailerJ.C. Penney JCP +0.18% recently
called its home division an area of strength.
Yet Pottery Barn faces hurdles that won't go away
anytime soon. One is fast-rising rivals such as Restoration Hardware, RH
-1.42% a more-upmarket retailer that recently expanded its store format to
let shoppers view more merchandise in person. There are signs the strategy
is working: Restoration Hardware's sales at stores open at least a year rose
41% in the quarter ended May 4. And there is room to grow, given the company
had just 70 retail stores at the end of that period, against 195 Pottery
Barn locations.
Pottery Barn's online sales also may come under
pressure as consumers seek better deals on shipping. Williams-Sonoma no
longer discloses these costs. Several years ago, though, they accounted for
only 80% of the shipping fees charged to customers, suggesting the company
made plenty of money putting merchandise in boxes.
Rivals may force William-Sonoma's hand. As Matt
Nemer of Wells Fargo WFC -0.33% notes, rivals such as Restoration and Crate
& Barrel offer fixed-rate shipping to some regions for any quantity of
furniture. Pottery Barn still charges by the piece.
In 2010, students coming out of the
University of Rochester’s
Simon Graduate School of Business were not doing
well. At graduation, fewer than half of that year’s MBA class had received a
job offer. Employers simply weren’t coming to campus, and students were not
happy. “Ultimately, we succeed based on how well our graduates do,” says
Simon Dean Mark Zupan.
So Robert Park, assistant dean of career management
and professional development, decided to flip the recruitment process by
prescreening students and then taking the ones who were the best fits
directly to the potential employers. “You don’t have to come to campus to
interview 10 students, so you can hire the four who are the right fit,” he
now tells companies interested in hiring Simon MBAs. “I’ll bring the four to
you.”
The school also hired five people, who are
responsible for individual industries, to serve as “salespeople,” using
sales tactics, such as analyzing metrics and marketing talent, to get the
right students in front of employers.
Now in the third year of a five-year plan, the
school’s career center is seeing positive results. While still collecting
data, Park expects that about 70 percent of the Class of 2013 had a job
offer at graduation. Zupan expects that increase will also help future
students get jobs by expanding the school’s reach.
Continued in article
Jensen Comment
It did not help when the MBA program at the University of Rochester dropped to
Rank 37 (tied with the University of Maryland and the University of Texas at
Dallas) in the US News rankings, far below top MBA programs like at Harvard,
Stanford, Chicago, Wharton, Dartmouth, Columbia, Duke, MIT, Northwestern, USC,
Indiana, Washington, Georgia Tech, etc.
http://grad-schools.usnews.rankingsandreviews.com/best-graduate-schools/top-business-schools/mba-rankings?int=acf0d6
Jensen Comment
The title of this article is very misleading. MBA degrees differ like night and
day between universities. For example, having an MBA from the Tuck School at
Dartmouth means being in a tight and very supportive alumni cohort that can
affect opportunities not only upon graduation but opportunities in life as well.
Erika Andersen assumes that getting an MBA degree is like getting a masters
in history where the graduate studies are probably 80% learning and 20% applying
for doctoral programs. An MBA degree is 60% learning and 40% networking.
Her article is reasonably good about learning, especially lifelong learning.
But it is naive about what students really get out of MBA programs. The degree
of learning varies a great deal with academic background before coming into the
program. The courses can be amazing eye openers for engineers, scientists, and
humanities undergraduates who know very little about accounting, finance,
marketing, and management. The courses are less eye opening to former economics
or business majors. There really is learning in an MBA program and in some
programs like the Harvard Business School program there's a ton of writing every
week with grading by course professors and not teaching assistants. A good MBA
program is not a trade school. People that claim otherwise probably do not have
MBA degrees from top schools.
Networking like MBA students get in the Ivy League and at Stanford and
Northwestern can be extremely inspirational and motivational when combined with
the truly exceptional faculty encountered along the way.
MBA degrees can be very important in rounding out essential knowledge for
starting and successfully starting your own business. Great engineers and
computer scientists might otherwise start businesses that crash and burn without
knowing the basics that are covered in good MBA programs. Top MBA programs only
admit smart students. Those students are among the best in the world in learning
what is required of them in MBA programs.
MBA degrees also open doors to careers. Ask the many professionals on Wall
Street, especially the managers and executives, who hold MBA degrees from top
universities.
Hence spending $150K on an MBA is a bargain for many MBA graduates,
especially graduates from leading MBA programs. It may be more of a
bargain than spending $250K on a law degree from that same institution. It may
even worth more than a medical degree, especially if getting a medical degree
means leaving the campus with $750K in student loans and bleak prospects without
borrowing more and spending another four more years in residency Hell getting a
specialty.
MBA degrees from some state universities may be cheaper and have worthwhile
learning content. But without the great networking these are not necessarily as
MBA degrees from top universities. Also MBA graduates from some state
universities may have much more difficulty landing jobs that they had hoped for
when beginning the MBA program.
One factor in getting a good starting job is the undergraduate specialty. MBA
graduates with engineering and computer science degrees generally have an easier
time than MBA graduates with art history, music, and some other humanities
degrees.
Undergraduate majors in accounting probably will find it easier to get a job
with a masters in accounting degree rather than an MBA. A MBA degree is not an
especially good idea for accounting majors unless the degree is from one of the
very top MBA programs.
The first graduating class of the Penn State Smeal College of Business
One-Year Master of Accounting (MAcc) Program has announced both a 100 percent
internship placement rate and a 100 percent job placement rate at graduation.
The students received their diplomas at Penn State’s summer 2013 commencement
ceremony on Saturday, Aug. 10.
Rutgers, the State University of New
Jersey - New Brunswick and Newark
Rutgers Business School
Newark, NJ
6
North Carolina State University
Poole College of Management,
Jenkins Graduate School
Raleigh, NC
7
George Washington University
George Washington University
School of Business
Washington, DC
8
University of Florida
Hough Graduate School of
Business
Gainesville, FL
9
Pennsylvania State University
Smeal College of Business
University Park, PA
10
Arizona State University
W.P. Carey School of
Business
Tempe, AZ
Jensen Comment
For some reason the above ranking leaves out the University of North Carolina
--- http://onlinemba.unc.edu/about/mba-at-unc/
Richard Sansing later pointed out that UNC comes in at Rank 11.
Jensen Comment
This is a perfect example of how to write a great one-sided PR article. But if
journalism is in a "Golden Age" why are journalism schools in universities
struggling to survive. The fact of the matter, sadly, is that there are very few
"paying" jobs for graduates that, in turn, has let to a dearth of journalism
majors. Some universities like the University of Colorado dropped their
journalism schools.
We need more rather than less reporters on the streets of the world.
Jensen Comment
Bill has written a nice summary of what motivates white collar crime, although
the article could use a few more footnotes and references to both case studies
and empirical research that investigated white collar criminals.
The really hard part of predicting who will commit white collar crime arises
when some of of the major factors leading to such crime are in place (e.g.,
personal debt, addictions, infidelity, feelings of resentment, etc.) are in
place for those who commit white collar crime versus those who do not commit
white collar crime on the job. The problem is the phrase "on the job." For some,
fear of loss of a job just seems to outweigh all the other temptations to steal.
For example, for every employee who wants a bigger house or better horses enough
to steal from employers, there are more employees who really want bigger houses
and better horses who will not steal for such things. There are some who steal
millions for such things, especially a particular woman accountant from Dixon,
Illinois who stole $30 million for faster horses and more money.
Whereas it's pretty easy to understand why an unemployed drug addict in dire
need of a fix robs a convenience store, it's far more complicated to understand
multimillionaires like CFO like Andy Fastow or hedge fund manager Bernie Madoff
want to stack millions more to their piles of loot. In some instances it's more
than the money, but I think more often than not its still primarily the money.
But what stops a really greedy CFO or hedge fund manager from committing a crime
while others become criminals like Andy and Bernie? I don't think we know enough
to fine tune our predictions about who will and who won't steal.
White collar crime is often very complicated. For example, some shoplifters
really want the merchandise they steal. But the wife of one of my low-income
coaches in school was known in my small Iowa home town to be a shoplifter who
really didn't much want the high-end clothing and fancies she stole. I lived in
town during high school, and the coach and his wife also happened to be our
neighbors. They were good neighbors, although unlike most of our other neighbors
in this small town they had no children. Perhaps this shoplifter was a bit
more bored without having a job and children to occupy her time. But certainly
most spouses who have no jobs and children do not become shoplifters.
My coach visited each of retail merchants on Main Street and explained
beforehand that his wife had a mental problem that nobody seemed to understand.
He asked them to report to him rather than the police when they detected her
shoplifting. He promised to return the merchandise and pay for any damages and
inconvenience. Of course this is not an ideal solution since there could be and
probably were instances where her shoplifting was not detected. It also
presented a moral hazard in that an unscrupulous merchant might have taken
advantage by extorting extra money from the coach as an incentive not to report
her crime.
I suspect that in private my coach pleaded over and over with his wife to
stop shoplifting. This couple eventually moved to New Mexico, and I don't know how
her "addiction to shoplifting" was eventually resolved.
What bothers me most about white collar crime is that more often than not it
pays even when you know you are most likely going to get caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
It can be very lucrative since sentences are relatively light for such crimes.
Bernie Madoff's life sentence is an exceptionally rare, very rare event. But
then he stole more than anybody else.
The law does not pretend to punish
everything that is dishonest. That would seriously interfere with business.
Clarence Darrow ---
Click Here
Why white collar crime pays for Chief Financial Officer:
Andy Fastow's fine for filing false Enron financial statements: $30,000,000
Andy Fastow's stock sales benefiting from the false reports: $33,675,004
Andy Fastow's estimated looting of Enron cash:
$60,000,000
That averages out to winnings, after his court fines, of $10,612,500 per year
for each of the six years he spent in prison.
You can read what others got at
http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales
Nice work if you can get it: Club Fed's not so bad if you earn $29,075 per day
plus all the accrued interest over the past 15 years (includes years where he
got away with it).
August 21, 2013 reply from Bill Barrett
Thanks for the kind
words, Bob. The article, like many I write, was more for practitioner mass
consumption.
I like your
dialogue on white-collar criminal motivation (as well as your postings on
forensic accounting:
http://www.trinity.edu/rjensen/fraud.htm) . Yes,
I have found that many W-C Cs have socked away funds to “retire” after they
get out; serving their time as model prisoners eligible for early release.
You may be aware of
behavioral consistency theory which postulates that the same criminal
will behave in relatively the same way across offenses (i.e. Barry Minkow of
ZZZZ Best Carpet Cleaning Services).
On another note is
Andrew Fastow, whom your cite in closing, and the difference between
‘occupational’ and ‘organizational’ fraud. Fastow turned state’s evidence,
enjoying pretrial federal prison (i.e. conjugal visits, but only a 9-hole
golf course …). However, he was not a good witness until he was put in
solitary confinement for three to six months. It was during this time that
he came to truly realized how fraudulent and destructive his, and Enron’s,
business activities actually were.
Oh, well. I claim I will
never be out of work.
Best2U,
Bill
Book Cooking at the Highest Levels of USA Government
Why all this controversy over new lease accounting standard revisions to show
more debt on the books.
The best way to not show more debt is to simply stop booking more debt when you
borrow more money to pay your bills.
When you delve deeper into what the Treasury
Department did, you see that there is a magic number of $16,699,421,000,000
to reach the debt limit set in a law passed by Congress and signed by the
King himself. Isn’t it odd that the number reached when the
clock stopped ticking was about $25 million below the limit?
If the clock had continued to click, by the end of
July it would have gone over the legal debt limit and would have been in
violation of the law. However, according to the Monthly Treasury Statement
for July, even though money was spent, their reports didn’t show a change in
the debt by even one penny. Isn’t that the definition of “cooking the
books”?
When it became apparent that the debt was going to
exceed the limit, Jack Lew sent a “cover my behind” letter to Speaker John
Boehner explaining that he was going to take “extraordinary measures” to
prevent the Treasury from exceeding the legal limit on the Federal debt.
This massaging of the numbers has been going on for months now.
Jensen Comment
The GAO declared the Pentagon and the IRS are impossible to audit. Why should it
come as a surprise that the Treasury Department of the U.S. Government is
incapable of being audited? Why all this debate about whether QE is tantamount
to printing money. Our Treasury Secretary has a better idea. Borrow all you want
and just don't book it into the accounts. Why didn't I think of that?
This is the first post from Mr. Emelee, a former Big 4 employee who is in
process of obtaining his Ph.D.
So you want to be a professor? Teaching looks like it would be fun (it is),
you see that some professors are only on campus two days a week (they are), and
you’ve heard that professors get paid well (they do). What could possibly be the
down side?
Jensen Note
Mr. Emelee has agreed to become a contributor to the Going Concern Blog and will
probably have more postings about his experience in accounting doctoral
programs.
Arrington, C E and W Schweiker (1992), “The Rhetoric and Rationality of
Accounting Research”, Accounting, Organizations and Society , v 17, pp 511 -
533
Accounting Theory as Rhetoric
Rhetoric is an old discipline dating back to the fourth century BC. Its
contemporary meaning is the art of persuasive communications and eloquence.
Some time ago Arrington and Francis pointed out that:
Every author attempts to persuade (or
perhaps seduce) readers into accepting his or her text as believable.
(1989, p 4) It is important to note here the terms author, persuade and
text.
The author will subjectively select the rhetorical
devices she or he feels will be most useful in persuading others of a
particular position. The word text is widely used and means more than a
written document – it now refers to many other things in which meanings are
being conveyed such as films, speeches, advertisements, instruction manuals,
conversation and, of course, financial reports.
As indicated in Gaffikin (2005a), Mouck (1992)
demonstrated how positive accounting theorists employed several rhetorical
devices to persuade others that positive accounting theory is the only way
to truth. Rhetoric is most commonly encountered in literary studies,
however, in 1980 McCloskey published a paper in the Journal of Economic The
Critique of Accounting Theory, p16 Literature entitled “The Rhetoric of
Economics” which spawned a new movement in economics, consistent with
similar movements in other social sciences, which has seen rhetoric as an
alternative to positivist epistemology ††† . Whereas epistemology is based
on a set of established abstract criteria, rhetoricians hold that truth
emerges from within specific practices of persuasion.
One of McCloskey’s primary aims was to draw the
attention of economists to how they use language and how language shapes
their theories. Similarly, Arrington and Francis seek to show how “the
prescriptions of positive theory function linguistically rather than
foundationally and cannot purge themselves of the rhetorical and ideological
commitments” (1989. p 5). Arrington and Francis move beyond a simplistic
analysis of language and draw on the work of Derrida to make their case.
Derrida’s work is highly complex and extends the discussion of signs and
language to extremes. His concern is with deconstructing the text. That is,
unpacking the text “to reveal, first, how any such central meaning was
constructed, and, second, to show how that meaning cannot be sustained”
(Macintosh, 2002, p 41).
Largely due to its complexity and its controversial
reception by some quarters of the academic community there have been very
few studies in accounting drawing on Derrida’s work. However, his central
message that language cannot be the unambiguous carrier of truth that is
assumed in many methodological positions should never be forgotten or
overlooked. As with other poststructuralists, Derrida saw all knowledge as
textual – comprised of texts. Derrida believed that all western thought is
based on centres. In this sense, a centre was a “belief” from which all
meanings are derived; that which was privileged over other “beliefs”. For
example, most western societies are based (centred) on Christian principles.
Perhaps it could be st ated that accounting is centred on capitalist
ideology. Deconstruction usually involves decentering in order to reveal the
problematic nature of centres. So, it could be argued that many accounting
problems arise from problems with capitalism – it has changed so mu ch over
the years that it is hard to be precise. Another example could be the way so
much accounting thought has been centred on historical cost measurement. In
many di scussions over the years, until recently, it has been “assumed” that
historical cost is the basis for measuring accounting transactions.
Therefore, advocates of alternative measurement bases were viewed as if they
were heretics.
Accounting Theory as Hermeneutics
Hermeneutics is the study of in terpretation and meaning and, as a formal
discipline, was initially used several hundred years ago by biblic al
scholars interpreting biblical texts. In McCloskey later expanded the
argument and published a book by the same name: The Rhetoric of Economics ,
University of Wisconsin Press, 1998. Other economic rhetoricians have
criticized that work as being too conservative and deferential to
neoclassical economics and have greatly extended the arguments of the
rhetoric of economics movement; for example, James Arnt Aune’s Selling the
Free Market: The Rhetoric of Economic Correctness , New York: The Guilford
Press, 2001. Arnt Aune’s argues, like Mouck (1992) that neoclassical have
resorted to various rhetorical devices to sell the idea of the free market
but he goes further by demonstrating that politicians and commentators
(including novelists) have also rhetorically contributed to the selling of
liberalisation, privatisation, globalisation and transnationalisation (ie
the free market and minimum political intervention) economic (and social)
policies.
Last week, while rushing to finish up a review of
Francois Cusset’s French Theory: How Foucault, Derrida, Deleuze, & Co.
Transformed the Intellectual Life of the United States (University of
Minnesota Press), I heard that Stanley Fish had just published a
column about the book for The New York Times.
Of course the only sensible thing to do was to ignore this development
entirely. The last thing you need when coming to the end of a piece of work
is to go off and do some more reading. The inner voice suggesting
that is procrastination disguised as conscientiousness. Better, sometimes,
to trust your own candlepower — however little wax and wick you may have
left.
Once my own cogitations were complete (the piece
will run in the next issue of Bookforum), of course, I took a look at the
Times Web site. By then, Fish’s column had drawn literally hundreds of
comments. This must warm some hearts in Minnesota. Any publicity is good
publicity as long as they spell your name right — so this must count as
great publicity, especially since French Theory itself won’t actually be
available until next month.
But in other ways it is unfortunate. Fish and his
interlocutors reduce Cusset’s rich, subtle, and paradox-minded book (now
arriving in translation) into one more tale of how tenured pseudoradicalism
rose to power in the United States. Of course there is always an audience
for that sort of thing. And it is true that Cusset – who teaches
intellectual history at the Institute d’Etudes Politiques and at Reid
Hall/Columbia University, in Paris – devotes some portions of the book to
explaining American controversies to his French readers. But that is only
one aspect of the story, and by no means the most interesting or rewarding.
When originally published five years ago, the cover
of Cusset’s book bore the slightly strange words French Theory. That the
title of a French book was in English is not so much lost in translation as
short-circuited by it. The bit of Anglicism is very much to the point: this
is a book about the process of cultural transmission, distortion, and
return. The group of thinkers bearing the (American) brand name “French
Theory” would not be recognized at home as engaged in a shared project, or
even forming a cohesive group. Nor were they so central to cultural and
political debate there, at least after the mid-1970s, as they were to become
for academics in the United States. So the very existence of a phenomenon
that could be called “French Theory” has to be explained.
To put it another way: the very category of “French
Theory” itself is socially constructed. Explaining how that construction
came to pass is Cusset’s project. He looks at the process as it unfolded at
various levels of academic culture: via translations and anthologies, in
certain disciplines, with particular sponsors, and so on. Along the way, he
recounts the American debates over postmodernism, poststructuralism, and
whatnot. But those disputes are part of his story, not the point of it.
While offering an outsider’s perspective on our interminable culture wars,
it is more than just a chronicle of them..
Instead, it would be much more fitting to say that
French Theory is an investigation of the workings of what C. Wright Mills
called the “cultural apparatus.” This term, as Mills defined it some 50
years ago, subsumes all the institutions and forms of communication through
which “learning, entertainment, malarky, and information are produced and
distributed ... the medium by which [people] interpret and report what they
see.” The academic world is part of this “apparatus,” but the scope of the
concept is much broader; it also includes the arts and letters, as well as
the media, both mass and niche.
The inspiration for Cusset’s approach comes from
the French sociologist Pierre Bourdieu, rather than Mills, his distant
intellectual cousin from Texas. Even so, the book is in some sense more
Millsian in spirit than the author himself may realize. Bourdieu preferred
to analyze the culture by breaking it up into numerous distinct “fields” –
with each scholarly discipline, art form, etc. constituting a separate
sub-sector, following more or less its own set of rules. By contrast, Cusset,
like Mills, is concerned with how the different parts of American culture
intersect and reinforce one another, even while remaining distinct. (I
didn’t say any of this in my review, alas. Sometimes the best ideas come as
afterthoughts.)
The boilerplate account of how poststructuralism
came to the United States usually begins with visit of Lacan, Derrida, and
company to Johns Hopkins University for a conference in 1966 – then never
really imagines any of their ideas leaving campus. By contrast, French
Theory pays attention to how their work connected up with artists,
musicians, writers, and sundry denizens of various countercultures. Cusset
notes the affinity of “pioneers of the technological revolution” for certain
concepts from the pomo toolkit: “Many among them, whether marginal academics
or self-taught technicians, read Deleuze and Guattari for their logic of
‘flows’ and their expanded definition of ‘machine,’ and they studied Paul
Virilio for his theory of speed and his essays on the self-destruction of
technical society, and they even looked at Baudrillard’s work, in spite of
his legendary technological incompetence.”
And a particularly sharp-eyed chapter titled
“Students and Users” offers an analysis of how adopting a theoretical
affiliation can serve as a phase in the psychodrama of late adolescence (a
phase of life with no clearly marked termination point, now). To become
Deleuzian or Foucauldian, or what have you, is not necessarily a step along
the way to the tenure track. It can also serve as “an alternative to the
conventional world of career-oriented choices and the pursuit of top grades;
it arms the student, affectively and conceptually, against the prospect of
alienation that looms at graduation under the cold and abstract notions of
professional ambition and the job market....This relationship with knowledge
is not unlike Foucault’s definition of curiosity: ‘not the curiosity that
seeks to assimilate what it is proper for one to know, but that which
enables one to get free of oneself’....”
Much of this will be news, not just to Cusset’s
original audience in France, but to readers here as well. There is more to
the book than another account of pseudo-subversive relativism and neocon
hyperventilation. In other words, French Theory is not just another Fish
story. It deserves a hearing — even, and perhaps especially, from people who
have already made up their minds about “deconstructionism,” whatever that
may be.
Jensen Comment
It's pretty difficult to trace these French theories to accounting research and
scholarship, but the leading accounting professor trying to do so is probably my
former doctoral student Ed Arrington who even moved to Europe for a while to
carry on his studies in these theories ---
http://www.uncg.edu/bae/acc/accfacul.htm#arrington
A Google search turns up some of his publications in this area as they relate
to accounting, economics, and business. His publications also branch off into
other areas since Ed has wide ranging interests and is an excellent speaker as
well as a researcher and writer. His thesis was an application of the Analytic
Hierarchy Process in decision modelling, but he's expanded well beyond that
since he got his PhD.
http://en.wikipedia.org/wiki/Analytic_Hierarchy_Process
For years my interests and publications were in AHP, although in latter years I
was mostly critical of Saaty's precious and arbitrary eigenvector mathematical
scaling (but I was not critical of Ed's thesis).
I recall that Tony Catanach was at a loss when he was considering a new
blogging platform for The Grumpy Old Accountants blog. Our AECM advice
was sort of ad hoc. The following article may have been of more help.
Jensen Comment
The second digital generation may also change the world of accounting and
finance. Instead of just becoming experts on the use of software available in
the market they may be more active in in writing their own apps and invented
ways of dealing with financial data. The "Second Digital Generation" will be
writing software as well as using software.
Limits of Human Knowledge (and calculating power)
The traveling salesman problem provides the mathematical basis for modern
transportation systems --- "Unhappy Truckers and Other Algorithmic Problems: Transportation
optimization starts with math, but ends in understanding human behavior," by Tom
Vanderbilt, Nautilus, August 2013 ---
http://nautil.us/issue/3/in-transit/unhappy-truckers-and-other-algorithmic-problems
Welfare benefits continue to outpace the income
that most recipients can expect to earn from an entry-level job, and the
balance between welfare and work may actually have grown worse in recent
years. The current welfare system provides such a high level of benefits
that it acts as a disincentive for work. Welfare currently pays more than a
minimum-wage job in 35 states, even after accounting for the Earned Income
Tax Credit, and in 13 states it pays more than $15 per hour.
Jensen Comment
Hawaii is the most generous state, although living costs are also much higher in
Hawaii. New England's Vermont, Massachusetts, Rhode Island, and (groan) New
Hampshire come in at Ranks 2-5 respectively.
It could be worse for New Hampshire if most of its gaming welfare recipients
didn't move to Vermont where welfare benefits are much higher and easier to get
for those gaming the system.
Jensen Comment
Walmart is the largest American employer --- with a workforce of 2.2 million
people worldwide. However only 1.3 million of those were employed in the United
States. Similarly some of the other large employers hire many workers outside
and well as inside the USA.
Some large retailers like Walmart, Target, McDonalds, and other fast food
chains are not unionized. Others like Kroger. GE, IBM, and UPS are
unionized.
Automobile manufacturing companies dramatically cut work forces following the
2007 economic crisis. Many moved manufacturing to southern states to shed
themselves of union plants, and others like Chrysler went further south into
Mexico. GM and Ford have many foreign workers, but their production plants in
Europe and Asia largely serve their markets in those parts of the world.
Automobile and defense manufacturers are heavily reducing labor needs with
robots and other automation technology. One day fast food restaurants may become
much more automated with robot-cooked Big Macs popping out of vending machines
for drive through and inside customers. Retailers may reduce inventory costs by
following Amazon's lead of direct shipping from manufacturers. Shoppers might
browse among display items and then place online orders that will be shipped to
their homes or offices in less than a week at discounted prices. The historic
"cash and carry" discounts are not necessarily efficient since retailers must
carry inventories and, thereby, incur the costs of carrying and financing
inventories. And customers become irritated when they cannot find their
preferred sizes, colors, styles, and freshness in the stores.
Tax credits
will be available to subsidize premiums for people who buy their insurance
in the new marketplaces, do not have access to other affordable coverage,
and have incomes between 100 percent and 400 percent of the federal poverty
level (between about $11,500 and $46,000 for a single person, and $24,000
and $94,000 for a family of four).
An estimated 48
percent of people who currently have individual market coverage will be
eligible for tax credits, according to the study. Tax credits among those
eligible will average $5,548 per family, and subsidies will average $2,672
across all families now purchasing their own insurance. Many people who are
now uninsured also will be eligible for subsidies in the new marketplaces,
and their tax credits will likely be higher on average because they have
lower incomes than those who now buy their own coverage.
There are many
reasons why premium costs in the individual insurance market will change
under the ACA before tax credits are applied. For instance, insurance
companies will be prohibited from discriminating against people with
pre-existing conditions, leading to higher enrollment of people with
expensive health conditions. More young, healthy people may also enroll due
to the ACA's individual mandate and premium subsidies.
Furthermore,
insurance providers will be required to meet a minimum level of coverage
that will raise premiums for people buying skimpier coverage today, but also
lower their out-of-pocket costs on average when they use those services.
Premiums before and after the law goes into effect are not necessarily
comparable, as health plans in the new marketplaces will be required to
cover a broader range of services than are found in many current individual
market policies, and the health needs of people who will enroll are likely
to be different.
The Kaiser
Family Foundation also has developed a health reform
subsidy calculator
that estimates the premiums and tax credits available
to people next year through the insurance marketplaces based on their income
levels, family size, ages, and tobacco use.
About the
study:
Based on data from the Congressional Budget Office
(CBO) and the federal government's Survey of Income and Program
Participation, the Kaiser Family Foundation analysis estimates the
average impact of the Affordable Care Act on the individual market by
quantifying how current enrollees will fare once relevant provisions of the
health law are implemented. Premium data released by states to date suggest
that the CBO premium projection is reliable. While subsidies and premiums
will vary widely depending on each enrollee's personal characteristics, the
analysis focuses on averages to provide an indication of how much overall
assistance the law will provide to people buying their own coverage today.
Jensen Comment
Note that a tax credit is much more lucrative than a tax deduction. For example,
a deduction for home mortgage interest and medical expenses is subject to
various adjustments to where each dollar of deduction may results in a much
lower net tax benefit. Each dollar of credit, however, may be a full one dollar
of benefit in the pocket of a taxpayer. And for some credits like the earned
income credit, taxpayers having zero tax to pay can receive cash back from the
government for the credit. It's a lot like getting a tax-free government
paycheck without being a government employee. Nobel Economist Milton Friedman
might have called it a negative income tax. He proposed replacing the the
welfare system with a negative income tax system.
CAPITALISM is culture. To sustain it, laws and
institutions are important, but the more fundamental role is played by the
basic human spirit of independence and initiative.
The decisive role of the
“spirit of capitalism” is an old concept, going back at least to Max Weber,
but it needs refreshing today with new evidence and new thinking.
Edmund S. Phelps, a professor of economics at
Columbia University and a
Nobel laureate, has
written an interesting new book on the subject. It’s called “Mass
Flourishing: How Grassroots Innovation Created
Jobs, Challenge and Change” (Princeton University Press), and it contains a
complex new analysis of the importance of an entrepreneurial culture.
Professor Phelps discerns a
troubling trend in many countries, however, even the United States. He is
worried about corporatism, a political philosophy in which economic activity
is controlled by large interest groups or the government. Once corporatism
takes hold in a society, he says, people don’t adequately appreciate the
contributions and the travails of individuals who create and innovate. An
economy with a corporatist culture can copy and even outgrow others for a
while, he says, but, in the end, it will always be left behind. Only an
entrepreneurial culture can lead.
Is the United States really
becoming corporatist? I don’t entirely agree with such a notion. Even so,
President Obama has
been talking a lot about innovation as a job creator this year, and while
some of his intentions may be good, I’m afraid that some of his proposals
look a little corporatist, and might suppress individual initiative.
In his
State of the Union address in January, for
example, the president proposed that the government should create
15 new “innovation institutes,” modeled on a
public-private partnership that he helped start in
Youngstown, Ohio, that is devoted to developing 3-D printers. There was more
in this vein in his administration’s 2014 budget, offered in April. And in a
speech on July 30 in Chattanooga, Tenn., Mr. Obama
suggested extending the number of innovation institutes to 45, or almost one
for every state. The institutes, he said, would be “getting businesses,
universities, communities all to work together to develop centers of
high-tech industries all throughout the United States.”
Will such measures work?
Should the government really be trying to start a 3-D printer center? And
why in Youngstown? It is easy to be skeptical of such a plan, especially
when it was started in a swing state just before the presidential election.
Web sites of the two senators and two representatives introducing
bills this month supporting the president’s latest
proposals are suggesting, in not-too-subtle terms, that the legislation
would bring jobs to their own states.
Successful companies aren’t
usually started this way. Professor Phelps, citing a McKinsey study,
suggests that in free-market capitalism, “from 10,000 business ideas, 1,000
firms are founded, 100 receive venture capital, 20 go on to raise capital in
an initial public offering, and two become market leaders.” It is easy to
doubt, as
Professor Phelps does, that the odds are favorable
for a Youngstown 3-D printer center.
How you view the innovation
institutes, and the topic of capitalism and culture, may depend on your own
experience. Many people have never seen the hatching of a successful
business idea. That makes it hard to judge the subtle changes that may be
occurring in the nation’s culture and in its potential for innovation.
My own business experience
has certainly helped shape my thinking. Yale, like many other universities,
sensibly allows its professors to spend limited time in business, providing
the opportunity for faculty members to gain valuable experience outside of
the ivory tower and to offer their technical skill to the business world.
In 1991, I started a
business with
Karl Case, an economics professor at Wellesley
College, and Allan Weiss, a former student of mine at Yale. We called it
Case Shiller Weiss, Inc., and it was devoted to an innovation we dreamed up.
The idea was a new “repeat sale” home price index — which would track the
changes in the value of the same houses over time.
At the time, this was an
entirely new line of business. And, at first, that posed a problem: we were
spectacularly unsuccessful in raising money. We talked to venture
capitalists and their committees, to no avail. They just didn’t seem to get
our business plan. We must have appeared odd to them — overly academic,
perhaps. One remarked that we’d do better proposing a new shopping center.
But we went ahead with our
idea anyway. At first, Allan worked without pay. A friend of Professor Case,
Chuck Longfield, contributed some money. And in 1995, I took out a home
equity line of credit on my house in New Haven so I could personally lend
more money to help keep our business afloat. The experience was stressful,
especially when adding it to the burdens of my main job, as a professor. I
have much to thank my wife, Virginia, for her tolerance of my overwork and
my worrying, and for allowing me to put our family savings at risk.
In the end, our business was
successful, and I think a big part of it was that we relied on our own ideas
and energy and, to a large extent, our own money. In 2002, we sold the
business to Fiserv Inc., then licensed Standard & Poor’s to create what are
now known as the S&P/Case-Shiller Home Price Indices. In 2006, the Chicago
Mercantile Exchange began trading futures on 11 of our indexes. Fiserv sold
the index business to CoreLogic early this year.
In short, our business made
its mark without any help from the government.
This little real-life
experiment convinces me that committees of experts, even at smart venture
capital firms, will often not recognize real innovation. I think that
America’s business success through the decades has occurred because we have
so many people with specialized knowledge who are willing to put their
money, time and resources on the line for ideas that can’t be proved to a
committee.
THAT experience may also
help explain why I think the new
crowdfunding initiative, started by the Jobs Act
that the president signed last year, is an exciting step forward. It’s all
about finding and mobilizing people who really understand specific,
hard-to-prove ideas for important investments.
At the same time, other of
my experiences incline me to think that government-appointed committees of
experts can help set the stage for an entrepreneurial culture,
under certain limited circumstances.
Long before I started any
commercial ventures of my own, I received some federal government support —
in the form of National Science Foundation research grants, awarded to me
decades ago as a young professor. They allowed me to do research, and though
it was not directly related to my later business endeavors, the process
developed my expertise and reinforced a sense of entrepreneurial
opportunity.
MIT, like Harvard, places enormous value on having both feet planted in
the real world The professions of architecture, engineering, law, and medicine are heavily
dependent upon the researchers in universities who focus on needs for research
on the problems of practitioners working in the real world.
If accountics scientists want to change their ways and focus more on problems
of the accounting practitioners working in the real world, one small step that
can be taken is to study the presentations scheduled for a forthcoming MIT Sloan
School Conference.
Learning best practice from the best practitioners
MIT Sloan invites more than 400 of the world’s
finest leaders to campus every year. The most anticipated of these visits
are the talks given as part of the Dean’s Innovative Leader Series, which
features the most dynamic movers and shakers of our day.
At a school that places enormous value on having
both feet planted in the real world, the Dean’s Innovative Leader Series is
a powerful learning tool. Students have the
rare privilege of engaging in frank and meaningful discussions with the
leaders who are shaping the present and future marketplace.
In the fall of 2010, Dr. Ferric C. Fang made an
unsettling discovery. Dr. Fang, who is editor in chief of the journal
Infection and Immunity, found that one of his authors had doctored several
papers.
It was a new experience for him. “Prior to that
time,” he said in an interview, “Infection and Immunity had only retracted
nine articles over a 40-year period.”
The journal wound up retracting six of the papers
from the author, Naoki Mori of the University of the Ryukyus in Japan. And
it soon became clear that Infection and Immunity was hardly the only victim
of Dr. Mori’s misconduct. Since then, other scientific journals have
retracted two dozen of his papers, according to the watchdog blog Retraction
Watch.
“Nobody had noticed the whole thing was rotten,”
said Dr. Fang, who is a professor at the University of Washington School of
Medicine.
Dr. Fang became curious how far the rot extended.
To find out, he teamed up with a fellow editor at the journal, Dr. Arturo
Casadevall of the Albert Einstein College of Medicine in New York. And
before long they reached a troubling conclusion: not only that retractions
were rising at an alarming rate, but that retractions were just a
manifestation of a much more profound problem — “a symptom of a
dysfunctional scientific climate,” as Dr. Fang put it.
Dr. Casadevall, now editor in chief of the journal
mBio, said he feared that science had turned into a winner-take-all game
with perverse incentives that lead scientists to cut corners and, in some
cases, commit acts of misconduct.
“This is a tremendous threat,” he said.
Last month, in a pair of editorials in Infection
and Immunity, the two editors issued a plea for fundamental reforms. They
also presented their concerns at the March 27 meeting of the National
Academies of Sciences committee on science, technology and the law.
Members of the committee agreed with their
assessment. “I think this is really coming to a head,” said Dr. Roberta B.
Ness, dean of the University of Texas School of Public Health. And Dr. David
Korn of Harvard Medical School agreed that “there are problems all through
the system.”
No one claims that science was ever free of
misconduct or bad research. Indeed, the scientific method itself is intended
to overcome mistakes and misdeeds. When scientists make a new discovery,
others review the research skeptically before it is published. And once it
is, the scientific community can try to replicate the results to see if they
hold up.
But critics like Dr. Fang and Dr. Casadevall argue
that science has changed in some worrying ways in recent decades —
especially biomedical research, which consumes a larger and larger share of
government science spending.
In October 2011, for example, the journal Nature
reported that published retractions had increased tenfold over the past
decade, while the number of published papers had increased by just 44
percent. In 2010 The Journal of Medical Ethics published a study finding the
new raft of recent retractions was a mix of misconduct and honest scientific
mistakes.
Several factors are at play here, scientists say.
One may be that because journals are now online, bad papers are simply
reaching a wider audience, making it more likely that errors will be
spotted. “You can sit at your laptop and pull a lot of different papers
together,” Dr. Fang said.
But other forces are more pernicious. To survive
professionally, scientists feel the need to publish as many papers as
possible, and to get them into high-profile journals. And sometimes they cut
corners or even commit misconduct to get there.
To measure this claim, Dr. Fang and Dr. Casadevall
looked at the rate of retractions in 17 journals from 2001 to 2010 and
compared it with the journals’ “impact factor,” a score based on how often
their papers are cited by scientists. The higher a journal’s impact factor,
the two editors found, the higher its retraction rate.
The highest “retraction index” in the study went to
one of the world’s leading medical journals, The New England Journal of
Medicine. In a statement for this article, it questioned the study’s
methodology, noting that it considered only papers with abstracts, which are
included in a small fraction of studies published in each issue. “Because
our denominator was low, the index was high,” the statement said.
Hmmmm. I wonder. Does accounting research culture
also need to be reformed?
August 14, 2013 reply from Bob Jensen
Hi Dennis,
Academics have debated the need for reform in academic accounting
research for decades. There are five primary areas of recommended reform,
but those areas overlap a great deal.
One area of suggested reform is to make it less easy to cheat and commit
undetected errors in academic accounting research by forcing/encouraging
replication, which is part and parcel to quality control in real science ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
A second area of improvement would turn accountics science from a pseudo
science into a real science. Real science does not stop inferring causality
from correlation when the causality data needed is not contained in the
databases studied empirically with econometric models.
A third area of improvement would arise if accountics scientists were
forced to communicate their research findings better with accounting
teachers and practitioners. Accountics scientists just do not care about
such communications and should be forced to communicate in other venues such
as having publication in a Tech Corner of the AAA Commons ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Commons
A fourth area of improvement would be expand research methods of
accountics science to take on more interesting topics that are not so
amenable to traditional quantitative and statistical modeling. See Cargo
Cult mentality criticisms of accountics scients at
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays
It might be argued that accountics scientists don't replicate their findings
because nobody gives a damn about their findings ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#CargoCult
That's taking the criticisms too far. I find lots of accountics science
findings interesting. It's just that accountics scientists ignore topics
that I find more interesting --- particularly topics of interest to
accounting practitioners.
Jensen Comment
This program at Northern Arizona differs from the competency-based programs at the University of
Wisconsin, the University of Akron, Capella University, and Southern New Hampshire University in
that students at Northern Arizona must sign up for online courses at Northern Arizona before
becoming eligible for the competency-based transcript. It differs from Western
Governors University in that there are two transcripts rather than just a
competency-based transcript for online courses.
Capella may have a more difficult time getting employers and graduate schools
to accept Capella's competency-based transcript credit in general relative
to the University of Wisconsin, the University of Akron, and Southern New
Hampshire University. Time will tell. Much depends upon other criteria such as
SAT scores, GRE scores, GMAT scores, LSAT scores, MCAT scores, and professional
licensing examination scores.
It’s unclear what discipline Payne might face. In
its 1997 reform of the IRS, Congress specified “willful” understatement of
tax liability as one of 10 offenses for which IRS employees must be
fired. (Eight of the nine relate to abuse of taxpayer rights or official
position, while the 10th is willful failure to file a return.)
Jensen Comment
She even pleaded ignorance of the law which, if true, is worse than deliberate
cheating.
It's almost certain she won't get the same deal as Lois Lerner who continues
to draw her $16,000 per month full salary from the IRS for keeping her mouth
shut about taxpayer abuses of the IRS and no longer comes to work at her IRS
office ---
http://en.wikipedia.org/wiki/IRS_Scandal
OK, we get it, Google — you want to be a hardware
company.
Well, guess what? You’re actually doing a pretty
good job of it!
One year ago, you offered a seven-inch tablet
called the Nexus 7. You priced it at a remarkably low $200. You admitted
that you didn’t make any money on it, in hopes of selling more books,
movies, music and TV shows
¶You priced the new Nexus 7 higher: $230 for the
16GB model. The 16GB iPad Mini has a larger screen, but it’s also $100 more.
The value of the Nexus 7 looks even better next in the configurations with
32 gigabytes of storage ($270, versus $430 on the Mini) and, coming soon,
LTE cellular Internet ($350, versus $560 on the Mini).
¶Meanwhile, you’ve improved the tablet in dozens of
ways. You’ve added a (mediocre) camera on the back, although, bizarrely,
you’ve moved the front camera way off-center. You added stereo speakers:
they are fine, but not as strong or clear as the Kindle Fire’s. You threw in
(very slow) wireless charging, meaning that you can set the thing down onto
a compatible charging base without actually plugging in a cable.
¶You’ve made the thing slightly slimmer, slightly
lighter (0.64 pounds) and slightly narrower — only 4.5 inches wide, which
means that a large hand can hold the entire thing edge to edge and still
have a free thumb to tap the screen.
¶And that screen — wowsers. It’s glorious, bright
and sharp. You maintain, Google, that at 323 dots per inch, it’s the
sharpest of any 7-inch tablet. I believe you’re right.
¶It’s too bad you made those design compromises,
though. That nice pleather back is gone — on the new model, it’s just hard
plastic with a slightly rubbery coating. The corners are sharper. And you
made the margins on the short ends much bigger than on the long sides,
making this long, skinny tablet look even longer and skinnier.
¶I’m so glad you focused on speed, Google.
According to CNET’s benchmark testing, the new Nexus 7 was faster in most
tests against the Mini and rival tablets from Samsung and Sony. Responses to
touches on the screen are smooth and fluid. Battery life is around a day and
a half of typical on-and-off use.
¶The operating system, Android 4.3 (which you still
call Jelly Bean), has a few tiny tweaks and a couple of bigger improvements.
First, parents can set up a children’s account so that children can access
only apps that parents approve. (And it can restrict access to in-app
purchases). Weirdly, though, parents can’t make the Settings app off-limits,
so the truly rebellious offspring can still wreak some havoc.
¶Second, you added Bluetooth 4.0, which lets
certain accessories — usually activity trackers like the Fitbit Flex —
communicate wirelessly without draining the battery much.
"Should Repurchase Transactions be Accounted for as Sales or Loans?"
by Justin Chircop , Paraskevi Vicky Kiosse , and Ken Peasnell,
Accounting Horizons, December 2012, Vol. 26, No. 4, pp. 657-679 ---
http://aaajournals.org/doi/full/10.2308/acch-50176
Abstract
In this paper, we discuss the accounting for repurchase transactions,
drawing on how repurchase agreements are characterized under U.S. bankruptcy
law, and in light of the recent developments in the U.S. repo market. We
conclude that the current accounting rules, which require the recording of
most such transactions as collateralized loans, can give rise to opaqueness
in a firm's financial statements because they incorrectly characterize the
economic substance of repurchase agreements. Accounting for repurchase
transactions as sales and the concurrent recognition of a forward, as “Repo
105” transactions were accounted for by Lehman Brothers, has furthermore
overlooked merits. In particular, such a method provides a more
comprehensive and transparent picture of the economic substance of such
transactions.
My forthcoming paper in Accounting Horizons
(Rasmussen 2013; “Revenue Recognition, Earnings Management, and Earnings
Informativeness in the Semiconductor Industry”) examines the implications of
revenue recognition for companies with product return and pricing adjustment
uncertainties. Although these uncertainties are typically minimal for sales
to end customers, they can pose large risks for sales to distributors. The
reason being is that distributors’ product return and pricing adjustment
rights often do not lapse until the distributor resells the product to an
end customer. In the midst of these risks, companies recognize revenue upon
delivery of product to distributors (sell-in), when the distributor resells
the product to end customers (sell-through), or under some combination
(sell-in for some distributors and sell-through for others).
I examine two implications of revenue recognition
for companies with product return and pricing adjustment uncertainties.
First, I examine whether the incidence of earnings management is higher for
companies that recognize revenue before their product return and pricing
adjustment uncertainties are resolved. This expectation is motivated by the
fact that more opportunities exist to manage earnings when revenue is
immediately recognized under the sell-in method compared to when at least
some revenue recognition is deferred under the sell-through and combination
methods. Specifically, managers using the sell-in method (1) maintain (and
have opportunities to manipulate) product return and pricing adjustment
accruals, and (2) can boost earnings through channel stuffing activities.
Second, I examine whether earnings informativeness
(proxied for with the earnings response coefficient) differs among the
revenue recognition methods used by companies with product return and
pricing adjustment uncertainties. On one hand, immediate revenue recognition
more quickly incorporates new accounting information into the financial
statements. If this new information is useful to the market, earnings should
be more informative under the sell-in method compared to the other revenue
recognition methods. On the other hand, more opportunities exist for both
intentional performance manipulations and unintentional estimation errors
when revenue is immediately recognized. Thus, if earnings are (or are
perceived to be) more inaccurate under the sell-in method, earnings
informativeness should be higher when revenue recognition is deferred until
distributors have resold products to end customers.
In order to study these research questions, I limit
my sample to semiconductor companies because they sell to distributors and
naturally face product return and pricing adjustment uncertainties due to
rapid product obsolescence and declining prices over product life cycles. I
find that sell-in companies are more likely to meet or beat analysts’
consensus earnings forecast compared to sell-through and combination
companies, suggesting that earnings management is more likely when companies
immediately recognize revenue for sales to distributors. I also find that
the earnings response coefficient is significantly larger (meaning the
returns-earnings relationship is stronger) for sell-through companies
compared to sell-in and combination companies. This finding suggests that
earnings are more informative when revenue recognition is deferred until the
distributor has resold the product to end customers. Collectively, these
results suggest that revenue recognition should be deferred until all
product return and pricing adjustment uncertainties are resolved.
This study should be of interest to the FASB and
IASB as they finalize a joint revenue recognition standard. The current
exposure draft of the new standard states that revenue recognition should
occur when the customer obtains control of the product or service. Control,
as described in the exposure draft, is likely to be transferred when a
manufacturer delivers product to a distributor except for cases where a
consignment agreement exists. At the time control is transferred, the
standard directs the manufacturer to estimate variable consideration (e.g.,
product returns and pricing adjustments), determine the transaction price,
and recognize revenue so long as receipt of the estimated transaction price
is reasonably assured. Recent technical briefs from the Big 4 accounting
firms suggest that the new standard’s provisions regarding variable
consideration may require many manufacturers that have historically used the
sell-through method to change to the sell-in method. Such a shift is
concerning as my findings suggest that earnings management is more likely
and earnings informativeness is lower when revenue is recognized at sell-in.
SUMMARY: "Boeing reported that first-quarter profit at its
Commercial Airplanes division more than doubled to $1.08 billion from a year
earlier. But the company acknowledges that accounting for the costs of each
individual plane would have resulted in a first-quarter loss of $138
million... The losses don't show up on Boeing's bottom line, because
accounting rules let the company spread the Dreamliner's costs over
years-effectively booking earnings now from future Dreamliners that it
expects to produce more profitably. With previous models, Boeing initially
spread its costs over 400 planes, but with the Dreamliner it is distributing
the costs over 1,100 planes-a number it says reflects unprecedented demand.
Boeing already has 854 Dreamliner orders from 57 customers." The losses to
date "...are 'larger than anything in the company's history,' said...an
aerospace analyst for Barclay's Capital who believes demand for the jet will
eventually make up for the losses..." though other analysts believe the
company's estimates which lead to the profits currently being recorded may
be too optimistic.
CLASSROOM APPLICATION: The article is useful to introduce revenue
recognition for long term contracts in a financial accounting class and to
discuss the effects of learning curves on costs in a managerial accounting
course.
QUESTIONS:
1. (Introductory) Based on the overall description in the article,
what method of revenue recognition do you think Boeing is using for the
income statement amounts generated by sales of aircraft? Support your
answer.
3. (Introductory) According to the article, what do analysts
estimate as the profitability of the Dreamliners currently being sold? How
do you think the analysts make these estimates? Cite the points in the
article you use to make this assessment.
4. (Advanced) How do analysts judge the amount of investment in
early Dreamliner production that Boeing is making, across time or across
companies? Explain your answer with reference to the article.
5. (Advanced) What is a learning curve? How do estimated learning
rates affect costs and profits at Boeing?
Reviewed By: Judy Beckman, University of Rhode Island
Boeing Co. BA +1.10% rolled out the first 787
Dreamliner from its main factory that won't need major additional work
before delivery, a long-delayed milestone that reflects streamlined
manufacturing of the company's flagship passenger jet but also points up the
program's enormous costs.
This week's achievement comes as the aerospace
giant races to both increase output and cut costs on the Dreamliner program,
which Boeing hopes will sustain the company in future decades. Analysts,
however, estimate Boeing is now effectively losing more than $100 million
for each plane sold. The Dreamliner's accumulated production losses—which
analysts say are far larger than any previous Boeing plane—put increasing
pressure on Boeing's other commercial jetliners to churn out hefty profits.
Assembling the 787—the first jetliner made from
mostly carbon-fiber composites—involves tens of thousands of steps, from
installing galleys and complex electrical systems to fusing the wings to the
body. Boeing, which started making 787s in 2007, had been sending them out
of its main factory in Everett, Wash., with many of those steps—sometimes
thousands—unfinished, due to parts shortages and design changes on the
advanced new jet. Those planes went to a separate facility in Boeing's giant
campus to be completed.
The plane that rolled out this week—Boeing's 66th
Dreamliner—skipped that costly step. Workers had only around 300 mostly
small assembly tasks left to complete, about 100 more than the company's
goal, but far fewer than the roughly 6,000 on the earliest Dreamliners, said
a person familiar with the plane.
Boeing, in a statement, confirmed the plane "will
be the first airplane to go straight into preflight operations" from the
Everett plant. The minor tasks left for plane No. 66 can be handled outside
of the factory before being prepared for delivery.
Boeing also makes Dreamliners in North Charleston,
S.C., where the first 787 recently rolled out with just under 100 tasks
remaining. But that aircraft spent nearly eight months in production,
compared to the average of five weeks at the main plant in Everett, which
pushes a 787 out of its football-field sized doors every six-to-eight days.
Analysts aren't sure exactly how much Boeing will
save by producing finished planes, but they agree it is an important step to
reduce costs.
Quickly cutting production costs is essential for
Boeing, which spent an estimated $14 billion developing the Dreamliner,
according to Barclays Capital, and has already suffered costly delays. UBS
analysts estimated last month that Boeing spends about $242 million to build
each plane, and sells them for an average of $113 million. They and other
analysts estimate that Boeing's losses will sink to at least $20 billion by
the time costs fall enough that each Dreamliner sells for a profit, likely
in 2014 or later. Boeing doesn't say exactly what year it expects to hit
that milestone.
The aggregate losses are "larger than anything in
the company's history," said Carter Copeland, an aerospace analyst for
Barclays Capital, who believes demand for the jet will eventually make up
for the losses. The comparable hole for Boeing's last new twin-aisle jet,
the 777, first delivered in 1995, was about $3.7 billion, adjusted for
inflation, according to data provided by Boeing.
The losses don't show up on Boeing's bottom line,
because accounting rules let the company spread the Dreamliner's costs over
years—effectively booking earnings now from future Dreamliners that it
expects to produce more profitably. With previous models, Boeing initially
spread its costs over 400 planes, but with the Dreamliner it is distributing
the costs over 1,100 planes—a number it says reflects unprecedented demand.
Boeing already has 854 Dreamliner orders from 57 customers.
Boeing reported that first-quarter profit at its
Commercial Airplanes division more than doubled to $1.08 billion from a year
earlier. But the company acknowledges that accounting for the costs of each
individual plane would have resulted in a first-quarter loss of $138
million—a drop UBS analyst David Strauss says is almost entirely
attributable to the Dreamliner.
The Dreamliner's drain on cash is balanced by
strong sales of the profitable single-aisle 737 and long-range 777 models.
And analysts estimate Boeing is reducing the losses per Dreamliner by about
$10 million each quarter. But maintaining the pace of cost reduction gets
harder as the simplest problems are solved. Meanwhile, Boeing aims to
increase production of Dreamliners to 10 per month at the end of 2013, up
from 3.5 per month today—meaning the losses per plane will be magnified, but
will also be tempered by the decreasing cost of each jet.
Some analysts believe Boeing's target for cost
reduction on the Dreamliner could be too optimistic. Mr. Strauss of UBS says
the company appears to be assuming it can reduce its cost 50% faster than it
did with the 777. If instead the pace of cost reduction matches the 777,
says one of UBS's models, the estimated $20 billion hole could double.
title:
Going to School on
Revenue Recognition
citation:
"Going to School on
Revenue Recognition," by Tom Selling, The Accounting Onion,
December 5, 2009 ---Click Here
Jensen Comment
Another question is consistency and whether inconsistencies suggest
earnings management.
Abstract:
I examine whether managers use discretion in the two accounts related
to revenue recognition, accounts receivable and deferred revenue, to
avoid three common earnings benchmarks. I find that managers use
discretion in both accounts to avoid negative earnings surprises. I find
that neither of these accounts is used to avoid losses or earnings
decreases. For a common sample of firms with both deferred revenue and
accounts receivable, I show that managers prefer to exercise discretion
in deferred revenue vis-à-vis accounts receivable. I provide a reason
for why managers might prefer to manage a deferral rather than an
accrual: lower costs to manage (i.e., no future cash consequences). My
results suggest that if given the choice, managers prefer to use
accounts that incur the lowest costs to the firm.
Today I would like to commence with an illustration of "boilerplate" in the
television commercials of at least three different drug companies that advertise
erectile dysfunction (ED) pills. In the USA viewers of television are constantly
bombarded with ED commercials, and every commercial for each of the
manufacturers of ED pills has the same 30-second segment of warnings. Since the
message of these warnings is identical in every ED commercial this message is an
example of "boilerplate" that always contains the familiar statement: "For an
erection lasting more than four hours contact your doctor ...."
Marketing departments of these drug companies would prefer not to have to pay
for 30 seconds of boilerplate warnings in each TV commercial. But the legal
departments who are paranoid about tort lawyers of the USA insist upon having
this boilerplate in every ED advertisement.
There are various definitions of "boilerplate" dating back to the stamp
placed upon heavy iron boilers used in steam heating systems.
Legal Definition Boilerplate = A description of uniform language
used normally in legal documents that has a definite, unvarying meaning in the
same context that denotes that the words have
not been individually fashioned to address the
legal issue presented.
3. Breaking the boilerplate.
Behavioural change in financial disclosures The third
and final topic I would like to discuss is the need to improve financial
reporting disclosures. For many companies, the size of their annual report
is ballooning. The amount of useful information contained within those
disclosures has not necessarily been increasing at the same rate. The risk
is that annual reports become simply compliance documents, rather than
instruments of communication.
In January this year we got regulators, preparers,
auditors, users and standard - setters in the same room and refused to let
them out until we had all understood the various perspectives of this
problem. A common conclusion was that m any aspect s of the disclosure
problem have to do with behavioural factors.
For example, many preparers will err on the side of
caution and throw everything into the disclosures . They do not want to risk
being asked by the regulator to restate their financials . After all, no CFO
has ever been sacked for producing voluminous disclosures, while
restatements may be career - limiting. Moreover, excessive disclosures can
even be very handy for burying unpleasant, yet very relevant information!
And sometimes it’s just easier to follow a checklist, rather than put in the
effort to m ake the information more helpful and understandable
Continued in article (appealing for simplifying financial statement
footnotes by removing most of the boilerplate)
If the FASB and IASB are doing such a good job
mucking up financial statements by working together on convergence projects,
why have they decided to go their separate ways in their quests to seek a
cure for disclosure dysfunction?
Based on a recent
speech by IASB chair Hans Hoogervorst and the
FASB’s
discussion paper, the boards can’t even agree on
what the problem is, much less how to fix it. Mr. Hoogervorst says that
“behavioral” factors add ”boilerplate” that gets in the way of the decision
usefulness of disclosures. As I pointed out in a previous
post, the FASB’s putative objectives are a sack of
mush (my new pet phrase!), yet it explicitly states that reducing the volume
of notes is not a primary focus.
Even if boilerplate were the primary source of
disclosure dysfunction, it’s hard to come up with specific examples of the
behaviors that Mr. Hoogervorst finds objectionable. That’s because he won’t
actually come out and say that boilerplate is irrational. To the contrary,
everybody knows that it is an attempt to rationally respond to a specific
risk – e.g., litigation risk from disgruntled investors.
Imagine yourself as an auditor, informing your
client that a disclosure must be deleted because the IASB discourages (or
even expressly forbids) boilerplate. ”Guidance” from the IASB that would
merely discourage the practice will have no effect whatsoever. And
specifically prohibiting it will be absurd; the IASB could not possibly
alter the economic incentives that give rise to boilerplate.
Enough said. It ain’t gonna happen.
As to the eight specific suggestions Mr.
Hoogervorst has made for quick changes to IFRS that should help “break the
boilerplate,” they are hardly worth further consideration except to have a
good chuckle; and to admire Mr. Hoogervorst’s talent to keep a straight face
while filling a vacuum with hot air, lest the IASB should be seen to let
fall through the cracks a problem that the FASB is pretending to work on.
Starting at the top:
“1. We should clarify in IAS 1 that
the materiality principle does not only mean that material
items should be included, but also that it can be better to exclude
non-material disclosures. Too much detail can make the material
information more difficult to understand— so companies should
proactively reduce the clutter! In other words, less is often more.”
[italics added]
“Less is often more” may be an appropriate
admonition to a storyteller seeking to maximize the emotional impact of
one’s creative work, but trying telling it to a corporate lawyer.
As to the “materiality principle,” IFRS actually
(and predictably) has extremely little to say about that foundational
concept. This is pretty much it:
“Information is material if omitting it or
misstating it could influence decisions that users make on the basis of
financial information about a specific reporting entity. In other words,
materiality is an entity-specific aspect of relevance based on the
nature or magnitude, or both, of the items to which the information
relates in the context of an individual entity’s financial report. … ”
[Conceptual Framework for Financial Reporting 2010, ¶ QC11]
If this sack of mush is the putative “materiality
principle” to which Mr. Hoogervorst refers, then he must be saying that the
IASB has intended all along that the converse is also principle-level
guidance. Just for fun, let’s spell that out: ‘…immaterial information
cannot influence decisions that users make about a specific reporting
entity; therefore, immaterial information should be excluded from financial
statements and disclosures.’
Really? It ain’t gonna happen.
Numbers 2 through 6 have their absurd elements, but
in the interests of brevity, I’ll move on to the next big doozie:
“7. We will look into the creation of either
general application guidance or educational material on materiality.
Doing so should provide auditors, preparers and regulators with a much
clearer, more uniform view of what constitutes material information. We
want to work with the IAASB and IOSCO on this important matter.”
[emphasis added]
Perhaps Mr. Hoogervorst has not read SEC Staff
Accounting Bulletin No.
99, Materiality
(I’m not being sarcastic; I would not be surprised at all if he hasn’t read
it). In that landmark document from 1999, the SEC sets forth specific
factors to consider by all issuers under its jurisdiction, including
the 450 foreign private issuers that use IFRS as the basis for accounting in
their filings with the Commission. If Mr. Hoogervorst were truly interested
in making progress quickly, he would immediately realize that SAB 99 fits
the bill. Moreover as a technical matter, he has no choice but to embrace
it. There is absolutely nothing that the IASB can do, say or write that
would alter the guidance that so many foreign companies already follow as a
matter of law, and which in Mr. Hoogervorst’s own words “represents
trillions of dollars in market capitalisation.”
But realistically, the IASB, with or without IOSCO,
is not politically capable of producing a statement on materiality that
could rival SAB 99 for its principled reasoning or its explicit exposition
of the consequences of that reasoning. Moreover, writing a separate
statement that could lead to different conclusions on materiality would be
just the ticket for closing off any possibility of converging IFRS with U.S.
GAAP.
It ain’t gonna happen.
* * * * * *
Mr. Hoogervorst is right about one thing: that “…
the simplest solutions are usually the most effective at tackling seemingly
intractable problems.” The problem, though, is that boilerplate is not a
“seemingly intractable” problem. To assume otherwise is to ignore the
lessons from the history of countless semantic domains, not just financial
reporting, showing that boilerplate it not only incurable, it is rampant.
Continued in article
Jensen Comment
As far as the USA legal departments of most USA companies are concerned, most
boilerplate in financial statements should not be removed solely for the purpose
of reducing the number of pages in those financial statements. If fact, those
legal departments so adept at writing the "fine print" of contracts would prefer
to add more boilerplate to financial statements even if it takes a high-powered
microscope to read that fine print.
A compromise solution might be to replace the pages of identical boilerplate
in financial statements to one Web link to the boilerplate for a company's
financial statements or perhaps all companys' boilerplates.
But this Web link compromise may not may not work well in court
The estate of an unfortunate old guy with a weak heart having an erection for
258 seconds who did not click on the ED boilerplate Web link will most certainly
sue the ED pill manufacturer for $40 million. And if his wife did not make it as
well, the amount may increase to $100 million.
Lease Accounting Controversies
August 12, 2013 message from Bill Bosco
This email is being sent to you
because you are either a client, business associate or
colleague. Feel free to pass on the info in this email
and attached to the email.
Comment letters to the Leases ED are due
9/23/2013
so far 21 have been received with only 3 in full support
of the ED, 14 are totally negative and 4 have negative
comments but some positive comments
To help with your letter I attach
my comment letter,
some discussion points I put together to gather
thoughts for the ELFA comment letter,
an E&Y analysis of the ED
an announcement of a AAA study that shows that off
balance sheet info on op leases is processed effectively
by the capital markets and anlysts
some quotes from the AAA study - I cannot give you
the actual study as you would have to buy it
ELFA comment letter guidance from the ELFAonline
website
an AAA commentary on the G4+1 papers that gives
recommendations that are in line with my views
This message (including any attachments) contains
confidential information intended for a specific
individual and purpose, and is protected by law. If you
are not the intended recipient, you should delete this
message.
Also I should have attached the AAA g4+1 analysis - see attached - it os an
important document as it was advice given the FASB on the leases project -
much of the advice is in line wih my thinking but the FASB chose not to take
the advice
IMA to Endorse Universities Preparing Students for Careers in Management
Accounting: Pennsylvania State University and Washington State University
Vancouver Endorsed in Pilot Program ---
http://www.businesswire.com/news/home/20130807005147/en
Jensen Criteria
I was disappointed that the criteria focused mostly on curriculum rather than
placement. I would recommend the addition of the proportion of corporate
accounting recruiters who visit a campus and the numbers of entry-level job
offers to newly-minted accounting graduates in the four-year and five-year
programs.
The IMA struggles to keep managerial accounting from dying in accounting
programs. But without more entry-level job offers in corporate accounting it;s
an uphill battle.
Sue Haka, former AAA President, commenced a thread on the AAA Commons
entitled "Saving Management Accounting in the Academy,"
---
http://commons.aaahq.org/posts/98949b972d
A succession of comments followed.
The latest comment (from James Gong) may be of special interest to some of
you.
Ken Merchant is a former faculty member from Harvard University who form many
years now has been on the faculty at the University of Southern California.
Here are my two cents. First, on the teaching side,
the management accounting textbooks fail to cover new topics or issues. For
instance, few textbooks cover real options based capital budgeting, product
life cycle management, risk management, and revenue driver analysis. While
other disciplines invade management accounting, we need to invade their
domains too. About five or six years ago, Ken Merchant had written a few
critical comments on Garrison/Noreen textbook for its lack of breadth. Ken's
comments are still valid. Second, on the research and publication side,
management accounting researchers have disadvantage in getting data and
publishing papers compared with financial peers. Again, Ken Merchant has an
excellent discussion on this topic at an AAA annual conference.
Jensen Comment
No single factor is driving the explosion in MOOC and other distance education
courses.
But I think the major driver is concern by the world's most
prestigious universities to that education opportunity is too skewed toward
students from higher income families leaving the students from low income
families with virtually no higher education opportunity or highly inferior
education opportunities.
The rails of the online "locomotive" commenced at the MIT University Open
Knowledge Initiative (OKI) station.
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
MIT formed a consortium of some (not all) of the most prestigious universities
in the USA and some outside the USA. Initially OKI was not a distance education
initiative. Rather is was a educational materials sharing initiative.
Prestigious universities, especially MIT, commenced to share the learning
materials of their own courses, including readings, lecture notes, assignments,
examinations, etc. Eventually this led to sharing of lecture videos. Of
course these were only free open-shared study materials. Users could not get
transcript credit for mastering these study materials. MIT Open Courseware ---
http://ocw.mit.edu/courses/
The OKI Consortium of MIT, Yale, Stanford, etc. shook the academic world like
an academic earthquake after Columbia University's Fathom Project folded its
tent! Why would prestigious universities, especially private universities with
very high tuition, commence sharing most of their intellectual property? I
think the main reason was to commence to overcome elitism where low income
students from everywhere on earth to catch the learning train.
The second shock also commenced at the MIT Station.
MIT and other prestigious universities commenced to attach entire MOOC courses
behind the online locomotive! Users could now enroll in courses (often in search
of attendance certificates) from the best specialist teachers in the Academy.
The third shock commenced with prestigious universities contracting with MOOC
corporations to administer competency-based examinations and issue transcript
credits.
"What You Need to Know About MOOC's," Chronicle of Higher Education,
August 20, 2012 ---
http://chronicle.com/article/What-You-Need-to-Know-About/133475/
. . .
Who are the major players?
Several start-up companies are working with
universities and professors to offer MOOC's. Meanwhile, some colleges are
starting their own efforts, and some individual professors are offering
their courses to the world. Right now four names are the ones to know:
A nonprofit effort run jointly by
MIT, Harvard, and Berkeley.
Leaders of the group say they intend to slowly add
other university partners over time. edX plans to freely give away the
software platform it is building to offer the free courses, so that anyone
can use it to run MOOC’s.
A for-profit company founded by two computer-science
professors from Stanford.
The company’s model is to sign contracts with colleges that agree to use
the platform to offer free courses and to get a percentage of any revenue.
More than a dozen high-profile institutions, including Princeton and the U.
of Virginia, have joined.
Another for-profit company founded
by a Stanford computer-science professor.
The company, which works with individual professors
rather than institutions, has attracted a range of well-known scholars.
Unlike other providers of MOOC’s, it has said it will focus all of its
courses on computer science and related fields.
A for-profit platform that lets
anyone set up a course.
The company encourages its instructors to charge a
small fee, with the revenue split between instructor and company. Authors
themselves, more than a few of them with no academic affiliation, teach many
of the courses.
The fourth shock was when less prestigious state universities and community
colleges to provide education opportunity for low income statements commenced to
emulate MIT and other prestigious universities in providing both non-credit
courses and courses for credit as MOOCs.
The fifth shock was when the University of Wisconsin, Southern New Hampshire
University, and the University of Akron commenced to offer competency-based
transcript credit without requiring students to take courses.
"College Degree, No Class Time Required
University of Wisconsin to Offer a Bachelor's to Students Who Take Online
Competency Tests About What They Know," by Caroline Porter, The Wall Street
Journal, January 24, 2013 --- "
http://online.wsj.com/article/SB10001424127887323301104578255992379228564.html
Underlying all of are the thousands of free learning module videos of the
Khan Academy where students can pick and choose topics that they want to learn
--- Khan Academy ---
http://en.wikipedia.org/wiki/Khan_Academy
Ruth Bender, Ph.D. is an accounting professor in
the United Kingdom
June 17, 2013 message from Ruth Bender
I did the MOOC ‘A Beginner’s Guide to Irrational Behavior’ from Dan Ariely
at Duke (it uses Coursera). I registered just to see what it was like, with
no expectation of doing the work. I ended up doing all of the video
lectures, all of the required readings, many of the optional readings, some
of the optional videos, all of the tests, the written assignment,
peer-reviews of others’ assignments… I even spent time swotting for the
final exam! And when I got my certificate, even though it is covered in
disclaimers (they can’t know that I really am the one who did the work) I
felt a real sense of achievement.
On the other hand, I also started a Strategy course, and lasted only one
lecture.
And I have just started a Finance course, but am struggling with it as it’s
a bit tedious. (Not sure how much of that relates to the fact that I
understand the time value of money, and how much of it is due to style, with
a presenter speaking to camera for long periods.)
I wrote down, for Cranfield colleagues, some features of the Ariely course. Here
they are.
1.A lot of time had been spent getting this right. They reckoned,
about 3000 hours. The videos are very professional. The cartoon
drawings that accompany them every so often are quite nice as a
(relevant) distraction.
2.As well as Dan Ariely, they had two teaching assistants on the
course to answer queries.
3.I didn’t use the discussion for a or the live hangouts. I don’t
know about the hangouts, but I did occasionally browse the discussion
for a to see how they were being used. They seemed quite active. Likewise, I didn’t participate in the course Wiki but it did seem
active.
4.There was a survey done before at the start of the course and at
the start of every single week. The surveys covered attitudes, to the
course and the subjects covered. (This is a psychology course, after
all.)
5.A final exercise, voluntary that I am not joining, is to write a
group essay on the course.
6.The videos ranged from 5 minutes to over 20. The readings ranged
from 1-2 pages through to academic working papers of about 40 pages.
7.There are two tests each week – on the videos, and on the
readings. You can re-sit the tests up to 15 times
8.The closing exam was closed-book. People were selling revision
notes, and also providing them for free. Some very complex mind
maps here – this was unexpected and very interesting.
9.A lot of interaction with Dan, including the weekly Q&A video.
Overall, I think it was a success because the material was interesting, and
because it was presented really well. They kept my interest with short-ish
videos, and with quizzes. Ariely is an entertaining presenter. In order to
get a grade you had to peer-review at least 3 other people’s written
assignments. I ended up reading 11, just because I wanted to see the
standard. A couple were dire, but most were high.
Hope this helps. Happy to give more information if you like.
Ruth
---------------
Dr Ruth Bender
Cranfield School of Management
UK
August 6, 2013 message from Charlene Budd
Just for
fun, I (a retired professor emeritus) enrolled in a six-week "Crash
Creativity" course from Stanford University. Enrollment at the beginning of
the course was about 22,000 students. Assignments were due weekly; the
first two were individual submissions, the next three were "group"
assignments (teams were self-formed during the second week or automatically
assigned at the beginning of week three), the final assignment was an
individual assignment.
The only
feedback was from other students: each member (or "team") had to evaluate
the submissions of eight other members. From comments, I learned that some
people had previously taken this same course -- some had taken it multiple
times.
I formed a
team and invited members: three people responded -- one from Scotland, one
from Saudi Arabia, and one from Virginia (I am in the Atlanta, Georgia
area). The member from Saudi Arabia never participated after the team was
formed, one dropped off the team after the first team assignment, the member
from Scotland contributed to all team assignments.
Sample of
assignments: Prepare a cover for your life story, take a 30-minute silent
walk and prepare a mindmap, reframe gum, create a Chindogu (impractical
invention), prepare a failure resume.
The
schedule was grueling -- no assignments were submitted early. Email
certificates were sent to all members who submitted at least five or the six
assignments.
Lessons
learned:
1.MUCH perseverance
is required to stay up with course demands.
2.Working with team
members across time zones requires an incredible amount of time.
3.Keeping all team
members involved and participating (a common complaint from all team
leaders) is extremely difficult.
4.The course forced
me to learn new presentation techniques -- for example, how to embed music
in Powerpoint presentations to make them more "pleasing" to reviewers.
5.In summary, MOOCs
can be successful, but not for everyone.
Jensen Comment
Traditionalists, especially faculty on campus, in higher education, many of them
feeling threatened by the online locomotive, think of every possible negative
that might derail the online locomotive. But I think it's too late.
The best thing we can do is be totally honest about the advantages and
disadvantages of hitching a ride behind the online locomotive.
The underlying purpose of this online locomotive is too important to the
entire world to derail.
July 26, 2013 Message from Bob Jensen
Hi Steve and others
We are probably all being naive and
narrowly focused. The universities and their faculties who are
teaching MOOCs have varied and complicated reasons. Here's an
article that provides some responses from faculty who I think
are telling the truth.
It's not all altruism, although the survey below reveals that
this is the overwhelming motivation. It's not the money. It's
not an attempt by big bad administrators to steal faculty
intellectual property. Sometimes its just curiosity combined
with a nagging intellectual challenge and temptation to compete
with others who have taken up the challenge.
Professors
who responded to The Chronicle survey reported a variety of
motivations for diving into MOOCs. The most frequently cited
reason was altruism—a desire to increase access to higher
education worldwide. But there were often professional motivations
at play as well.
The Professors Who Make the MOOCs
http://chronicle.com/article/The-Professors-Behind-the-MOOC/137905/#id=overview
What is it like
to teach 10,000 or more students at once, and does it really
work? The largest-ever survey of professors who have taught
MOOCs, or massive open online courses, shows that the process is
time-consuming, but, according to the instructors, often
successful. Nearly half of the professors felt their online
courses were as rigorous academically as the versions they
taught in the classroom.
The survey,
conducted by The Chronicle, attempted to reach every professor
who has taught a MOOC. The online questionnaire was sent to 184
professors in late February, and 103 of them responded.
Hype around
these new free online courses has grown louder and louder since
a few professors at Stanford University drew hundreds of
thousands of students to online computer-science courses in
2011. Since then MOOCs, which charge no tuition and are open to
anybody with Internet access, have been touted by reformers as a
way to transform higher education and expand college access.
Many professors teaching MOOCs had a similarly positive outlook:
Asked whether they believe MOOCs "are worth the hype," 79
percent said yes.
Princeton
University's Robert Sedgewick is one of them. He had never
taught online before he decided to co-lead a massive open online
course titled "Algorithms: Part I."
Like many
professors at top-ranked institutions, Mr. Sedgewick was very
skeptical about online education. But he was intrigued by the
notion of bringing his small Princeton course on algorithms,
which he had taught for 40 years, to a global audience. So after
Princeton signed a deal with an upstart company called Coursera
to offer MOOCs, he volunteered for the front lines.
His online
course drew 80,000 students when it opened last summer, but
Sedgewick was not daunted. He had spent hundreds of hours
readying the material, devoting as much as two weeks each to
recording and fine-tuning videotaped lectures. The preparation
itself, he said, was "a full-time job."
It paid off. By
the time his six-week course was over, the Princeton professor
had changed his mind about what online education could do. Mr.
Sedgewick now classifies himself as "very enthusiastic" about
virtual teaching, and believes that soon "every person's
education will have a significant online component."
The Chronicle
survey considered courses open to anyone, enrolling hundreds or
even thousands of users (the median number of students per class
was 33,000). About half of the professors who responded were
still in the process of teaching their first MOOC, while the
rest had led an open online course that had completed at least
one full term.
Many of those
surveyed felt that these free online courses should be
integrated into the traditional system of credit and degrees.
Two-thirds believe MOOCs will drive down the cost of earning a
degree from their home institutions, and an overwhelming
majority believe that the free online courses will make college
less expensive in general.
The findings are
not scientific, and perhaps the most enthusiastic of the MOOC
professors were the likeliest complete the survey. These early
adopters of MOOCs have overwhelmingly volunteered to try
them—only 15 percent of respondents said they taught a MOOC at
the behest of a superior—so the deck was somewhat stacked with
true believers. A few professors whose MOOCs have gone publicly
awry did not respond to the survey.
But the
participants were primarily longtime professors with no prior
experience with online instruction. More than two-thirds were
tenured, and most had taught college for well over a decade. The
respondents were overwhelmingly white and male. In other words,
these were not fringe-dwelling technophiles with a stake in
upending the status quo.
Therefore the
positive response may come as a surprise to some observers.
Every year the Babson Survey Research Group asks chief academic
administrators to estimate what percentage of their faculty
members "accept the value and legitimacy of online education";
the average estimate in recent years has stalled at 30 percent,
even as online programs have become mainstream.
Professors at
top-ranked colleges are seen as having especially entrenched
views. For years, "elite" institutions appeared to view online
courses as higher education's redheaded stepchild—good enough
for for-profit institutions and state universities, maybe, but
hardly equivalent to the classes held on their own campuses. Now
these high-profile professors, who make up most of the survey
participants, are signaling a change of heart that could
indicate a bigger shake-up in the higher-education landscape.
Why They MOOC
Professors who
responded to The Chronicle survey reported a variety of
motivations for diving into MOOCs. The most frequently cited
reason was altruism—a desire to increase access to higher
education worldwide. But there were often professional
motivations at play as well.
John Owens was
drawn to MOOCs because of their reach. He also did not want to
be left behind.
Mr. Owens, an
associate professor of electrical and computer engineering at
the University of California at Davis, liked the idea of
teaching parallel computing, a method that allows computers to
execute many tasks at once, to a global audience. Putting his
course on Udacity's platform would be good for the 15,000
students who registered at no cost, he figured.
But it might
also be good for him. It does not take a programming expert to
decrypt the writing on the wall: No matter where you teach,
online education is coming. "I would rather understand this at
the front end," said Mr. Owens, "than be forced into it on the
back end."
A number of the
professors in the survey said they hoped to use MOOCs to
increase their visibility, both among colleagues within their
discipline (39 percent) and with the media and the general
public (34 percent).
This opportunity
was not lost on Mr. Sedgewick, the Princeton professor. "Every
single faculty member has the opportunity to extend their reach
by one or two or three orders of magnitude," he said.
For heavyweights
like Mr. Sedgewick, who co-wrote a popular textbook on
algorithms, allowing somebody else to beat him to the punch on
that opportunity would be risky. By volunteering for duty, he
was, in part, defending his roost. "I wouldn't want anybody
else's algorithms course to be out there," said Mr. Sedgewick.
He was one of the few professors in the survey who recommended
that students buy a textbook—his own.
Nevertheless,
most professors did not seem to think that a MOOC-related boost
to their professional profile would equate to a payday. Just 6
percent were looking to increase their earning power, and only
one hoped that his MOOC work would help him get tenure. Learning
From Online
In May 2012,
when the presidents of Harvard University and the Massachusetts
Institute of Technology announced that they would enter the MOOC
fray with $60-million to start edX, they were emphatic that
their agenda was to improve, not supplant, classroom education.
"Online
education is not an enemy of residential education," said Susan
Hockfield, president of MIT at the time, from a dais at a hotel
in Cambridge, "but an inspiring and liberating ally."
This has become
a refrain for traditional universities that have been early
adopters of MOOCs, and many of the professors in The Chronicle
survey seem to have taken the message to heart. Thirty-eight
percent of those surveyed said one motivation was to pick up
tips to help improve their classroom teaching.
Continued in article
Jensen Comment
Whatever the reasons, altruism versus evil intentions, the fact of the
matter is that the MOOC locomotive becoming too important to low income
people around the world who have very few alternatives to learn other
than from open-sharing of course materials (MIT's OKI), the unbelievable
Khan Academy, and the MOOCs who give them access, albeit very limited
access, to the best teaching professors in our Academy.
If we think of providing the poor around
the world with buffets, knowledge has a unique advantage. Each morsel
eaten by each person in a food buffet has a marginal cost. Each
vaccination in a vaccination buffet has a marginal cost. Each vial of
medicine in a a pharmacy buffet has a marginal cost. Each teacher in a
remote village school has a marginal cost. Each hard copy book in a
school library has a marginal cost. But knowledge per se can be
delivered at almost no marginal cost to students who have access to the
Internet. A module in Wikipedia can be consumed by each person in a
Wikipedia buffet at almost no marginal cost beyond the cost of access to
the Internet. There's zero incremental cost whether one student reads
the module on the "Phillips Curve" or 10 million people read this
"Phillips Curve" module in Wikipedia.
MOOC buffets are a bit more complicated
than Wikipedia but far less costly than bringing a food buffet to poor
people around the world. There's virtually no marginal cost to adding a
million learners to the 10,000 learners who are already signed up for a
MOOC course. But there is a serious marginal cost to provide transcript
credit for mastering a MOOC course. But the cost is not in the learning.
The cost is in providing opportunity (e.g., jobs or graduate school)
based upon assessment of that learning for each and every MOOC student
who wants transcript credit. This is the main stumbling block of MOOC
efficiency, but it is a stumbling block that the world will one day
overcome with innovations.
MOOCs will be failures by traditional measures of success.
There will be very high dropout rates. There will be very high failure
rates if MOOCs maintain academic standards (which is the major reason we
want prestigious universities to put their reputations on the line).
There will be many hopeful students who just are not prepared to tackle
the material in courses they sign up for with naive optimism. There will
be many hopefuls, particularly parents will small children they must
tend, who just cannot find the time to study.
But MOOCs must survive if low income students from every part of the
world are to have any hope at all for learning, especially those who are
only being held back by their poverty.
I truly believe that MOOCs are a lot like Wikipedia. Traditionalists
in our faculty find every reason under the sun why Wikipedia and MOOCs
will never be sustained. But free services are currently growing and
getting better in spite of all the negativism.
MOOCs will fail if MIT, Yale, Stanford, Princeton, Rice, Oxford,
Cambridge, and the other top universities throw in the towel like
Columbia University threw in the towel on Fathom. But I think Hell will
freeze over before these these other universities give up on MOOCs or
invent another way of reaching learning-starved poor people around the
world.
MOOCs will fail if they become a sham much like so many for-profit
universities have become diploma mills. But MIT, Yale, Stanford,
Princeton, Rice, Oxford, Cambridge, and the other top universities will
not become MOOC diploma mills. I think Hell will freeze over before
these universities give up on MOOCs or invent another way of reaching
learning-starved poor people around the world.
Jensen Comment
Most of the poor people of the world, the intended altruistic targets of free
MOOCs, are not in these beginning years of MOOCs using the MOOCs. Firstly,
there's the problem of Internet access in many parts of the world, especially
rural areas. Secondly, there are language barriers until students have learned
to speak English or some other language used in the MOOC courses.
Table of Contents
Why This Topic?
Methodology
MOOCs: Definition and Overview
MOOCs and cMOOCs
MOOC Market Participants
MOOC Student Profile
Market Size, Structure, and Performance
Market Forecast
Key Trends and Market Drivers
Potential Disruptive Forces
Competitive Landscape
11 to Watch
Essential Actions
Related Research 41
Especially Note Figure 2
Coursera Students Broken Down By
Country, as of August 2012
. . .
Outsell estimates that by the end of 2012, about
3.17 million unique students worldwide were enrolled in courses from the
major MOOC providers (edX, Udacity, Coursera, and Udemy) and other smaller
providers. Some students may have enrolled in more than one course – this
analysis takes account of that, and is a measure of the unique number of
students, rather than the number of courses taken. Using data available from
Coursera and Udacity, and discussed earlier, we also estimated how the MOOC
audience breaks down geographically, as Figure 3 shows. We assume that the
number of courses and institutional partnerships will both increase through
2015, and that broad-line geographic growth trends and overall growth will
loosely model trends visible in other kinds of distance education courses.
We expect the size of the student cohort to grow by a CAGR of 24% over this
period, resulting in a total student audience of just over 6 million MOOC
students by 2015.
Jensen Comment
The hope is to greatly change the distribution pie chart in the above Figure 2.
The hope is also to greatly increase the numbers of students who successfully
complete the MOOCs. Completion rates are understandably quite low due to many
factors.
Many students started MOOCs out of curiosity and then discovered that
really learning the material takes more time and sweat than they
anticipated.
Many students did not have the prerequisite knowledge for the level of
the MOOC.
Many students were older and in established careers. They were not
really motivated like younger students seeking to get ahead in life.
Among the Target Audiences to Date Are Potential Teachers of MOOCs
There's also the problem of curriculum. MOOCs courses to date are probably more
of use to existing college students than K-12 students other than exceptional
K-12 students. Consider for example, the following MOOCs from Stanford:
"Stanford Makes Open Source Platform, Class2Go, Available to All; Launches MOOC
on Platform Today," Open Culture, January 15, 2013 ---
http://www.openculture.com/2013/01/stanford_makes_open_source_platform_class2go_available_to_all.html
. . .
Although still under development, Class2Go is ready for action. In the
fall, Stanford offered two MOOCs through Class2Go (Computer
Networking and Solar
Cells, Fuel Cells, & Batteries). And it has a new MOOC getting started
today: Introduction
to Databases taught by
Jennifer Widom, the Chair of Stanford’s famed Computer Science
department. (Watch her intro above.) You can take
the course for
free and learn all about database development. Or you can use it as an
opportunity to see Class2Go up close.
Naubahar Sharif has been teaching science,
technology and innovation for some years at Hong Kong University of Science
and Technology. He drew on his lectures to develop a massive open online
course, or MOOC, on “Science, Technology and Society in China”, and this
month it was launched on the Coursera platform – billed as Asia’s first MOOC.
Some 17,000 students registered for the three-week
course, which began on 4 April.
“I was astonished and overwhelmed. This is far more
than the 8,000-10,000 students we were expecting,” said Sharif, an associate
professor.
Around 60% of the students are from the United
States, the United Kingdom, Canada and other rich nations, with the rest
from countries like Brazil, Mexico and South Africa, and middle-income
countries in Asia.
Inviting Hong Kong University of Science and
Technology, or HKUST, onto the California-based for-profit MOOC platform was
a deliberate strategy by Coursera to attract more Asian and particularly
Chinese students – a massive market for MOOC providers.
“We do have students from China as well, in places
where internet connections are more reliable,” said Sharif. But, he added,
it was striking how international the student body was.
This presents its own challenges regarding the
level at which to pitch a MOOC. “We have the whole gamut of older and
younger, experienced and less experienced students, and also academics and
probably some people who are experts in related fields,” said Sharif.
Coursera platform
HKUST developed and owns the MOOC and uploaded it
onto the Coursera platform. “Coursera’s role is to host the course. So many
large universities are part of it, that it is the go-to point for those
seeking a reputable course,” said Sharif.
For Sharif it meant producing almost 30 videos and
other materials, restructuring and rewriting parts of his ordinary course
and adapting it to the MOOC audience, which he describes as a “faceless
large mass”.
“Not knowing who my students are, I have to treat
them with the utmost respect,” he told University World News. It is more
time consuming than face-to-face teaching. “I give the time and attention a
student body deserves.”
HKUST will run anther MOOC, on the “Science of
Gastronomy” with particular reference to Chinese cooking. It is about to
start on Coursera run by King Chow, a professor of life science and
biomedical engineering, and Lam-lung Yeung, a chemistry lecturer. A Chinese
history course is also scheduled.
While HKUST’s was the first MOOC by an Asian
university, the Chinese University of Hong Kong has now joined the Coursera
platform with a MOOC scheduled for September on the international role of
China’s currency.
Japan’s Tokyo University will offer its inaugural
four-week Coursera MOOC on the evolution of the universe from September, and
on peace and conflict from October, both taught in English.
Cracking China
Language is still an issue if MOOCs are to recruit
significant numbers of Chinese students – still only the 10th largest
audience in terms of student numbers, with 35% from the US.
Coursera will launch a Chinese-language platform in
August linked to a MOOC on Chinese history from National Taiwan University
and one on Chinese opera from the Chinese University of Hong Kong.
Several Coursera MOOCs have Mandarin or Russian
subtitles, and HKUST is experimenting with a Mandarin-language voice-over
for Chinese students. - See more at: http://edf.stanford.edu/readings/asia%E2%80%99s-first-mooc-draws-students-around-world#sthash.joT1FD38.dpuf
Continued in article
Will Students Drink If You Make Waters of Knowledge Available? There's little doubt that Wikipedia is used by hundreds of millions of
people who have Internet access.
There's little doubt that Khan Academy is used by millions of people who have
Internet access.
In 1937, as she lay ill in bed, Annie Oakes
Huntington, a writer living in Maine, thought of ways to spend her
time. She confided in a letter: “The radio has been a source of unfailing
diversion this winter. I expect to enter all the courses at Harvard to be
broadcasted.” Huntington was joining in an educational experiment sweeping
the country in the 1920s and 30s: massive open on-air courses.
As educators contemplate the MOOCs of our
day—massive open online courses—they would do well to consider how
earlier generations dealt with technology-enhanced education.
We are not the first generation to believe that
technology can transcend distance and erode ignorance. Nearly a century ago,
educators were convinced that radio held that same potential. The number of
radios in the United States increased from six or seven thousand to 10
million between 1921 and 1928. Many universities explored the possibility of
broadcasting courses across the country and allowing anyone to enroll. Some
onlookers believed those courses would transform higher education and
eliminate lecture halls and seminar rooms. One observer noted, “The nation
has become the new campus,” while another celebrated the “‘University of the
Air,’ whose campus is the ether of the earth, whose audience waits for
learning, learning, learning.”
By 1922, New York University had established a
radio station, through which “virtually all the subjects of the university
[would] be sent out.” Eventually a multitude of universities, including
Columbia, Harvard, Kansas State, Ohio State, NYU, Purdue, Tufts, and the
Universities of Akron, Arkansas, California, Florida, Hawaii, Iowa,
Minnesota, Nebraska, Ohio, Wisconsin, and Utah, offered radio courses.
Subjects ranged from Browning’s poems to engineering, agriculture to
fashion.
While each institution ran its courses differently,
there were commonalities. Often, students registered by mail and received a
syllabus by return mail. Some then mailed in assignments to the faculty.
Several universities offered credit.
Hopes ran high that these courses might spread
knowledge more democratically—that they would, in the words of one
commentator, make the “’backwoods,’ and all that the word connotes … dwindle
if … not entirely disappear as an element in our civilization.” By offering
education to people from all walks of life, radio would reduce rural
populations’ isolation and mitigate class differences.
Yet gradually problems emerged, and doubts spread
that on-air courses would ever fully replace traditional colleges. First was
the issue of attrition. Like most modern-day courses taught at a distance,
completion rates were disappointing. Of those enrolled in one course, only
half took exams. There were reports that listeners’ interest in erudition
often competed with the temptations of entertainment. Listeners might tune
into a lecture occasionally, but not with the regularity or dedication
ardent advocates predicted.
Some also complained that the learning was
passive. In 1924, the journalist Bruce Bliven skeptically asked: “Is radio
to become a chief arm of education? Will the classroom be abolished, and
the child of the future be stuffed with facts as he sits at home or even as
he walks about the streets with his portable receiving-set in his pocket?”
Answering his own question, Bliven wrote, “A good mind … must be built, not
stuffed. … Radio, of course, faces squarely against this whole tide.”
Perhaps the biggest challenge was that radio did
not offer opportunities for social interaction in the way that traditional
courses did. A sociologist noted in 1927, “There are certain fundamental
things in man’s nature that tend to show us that broadcasting cannot …
supersede the theater, the concert, … or the lecture hall.” He continued,
“Broadcasting has hardly any gregarious or association appeals.”
Finally, even when students endured the isolation
and passivity of this new mode of learning, conquered the temptations of
popular radio programs, and finished a course, it wasn’t clear what that
meant. Students in Kansas State’s radio classes received certificates
verifying they had participated in “the college of the air,” but these were
not the same as real diplomas. Other colleges tried to make the classes
count for university credit: Between 1923 and 1940, 13 institutions offered
courses for credit, and nearly 10,000 students enrolled. But a mere 17
percent actually received credit, and by the 1940-41 academic year, there
was only one radio course in the United States for which a student could
earn credit—and nobody enrolled in it.
Decades later, as we contemplate MOOCs, much of
this sounds familiar. In discussions of radio courses in the 1920s and 30s,
and in the euphoria over online courses today, university administrators,
along with journalists, gush about the potential of technology to extend the
geographic reach of the university, even while acknowledging MOOCs’
experimental nature, the lack of a way to monetize them, and the need to
build in greater interaction between lecturer and audience.
Admittedly, the past is not the present, and the
“college of the air” is not a MOOC. MOOCs offer more possibilities for
interaction than radio did. Yet while participants in MOOCs report a good
deal of interaction among students, they report little to no communication
with their professors—unsurprising, given the student-faculty ratio. And
like radio, MOOCs still can’t offer the level of sociability or one-on-one
interactions that brick-and-mortar classes do. (Even regular online courses
don’t do that very well: Our cash-strapped, time-pressed students confide
that while online classes are convenient, they still prefer to take courses
in a classroom, with a professor, on our campus.)
The problem of what MOOCs add up remains. While
some universities have promised to accept them for credit, in the long term,
we may find, as proponents of radio did, that the courses play at best a
minor role in helping students earn degrees.
Finally, MOOCs, like radio courses of the 20s, face
competition from temptations less present in the traditional classroom. Many
radio listeners resolved to “attend” courses, only to have those resolutions
undermined by the distractions of easy listening. When there is no
instructor physically present, attrition and inattention abound.
Continued in article
MOOCs in Cooperation With K-12 Pilot Colleges of Higher Education
I think the users of Khan Academy will work their way into MOOCs provided MOOCS
begin to address a wider range of learning needs to the extent Khan Academy
addresses these needs. Also MOOCs should commence to work with pilot schools
worldwide. Here Khan Academy has led the way in working with pilot schools,
learning coaches, and parents---
https://www.khanacademy.org/coach-res/case-studies
MOOCs should aim at a higher level of student in higher education rather than
K-12 education targeted by Khan Academy. Firstly, this will be a learning
experience for MOOCs in trying to reach college-level students who are not
enrolled in colleges. Secondly, this enable colleges hard-pressed to afford
specialists in such fields as engineering, computer science, and business to
bring those specialties into colleges from top professors in prestigious
universities.
Bob Jensen's Threads on Pricey Online
Courses and Degrees ---
http://www.trinity.edu/rjensen/CrossBorder.htm
These do not help global low income students other than by allowing
students to learn at home and accumulate transcript credits toward
degrees. Sometimes the credits are accepted only by the college or university
providing distance education courses. Some universities like the University of
Wisconsin at Milwaukee that offer both onsite and online sections of the same
course will charge higher fees for the online sections. Distance education for
come colleges and universities are cash cows.
Bob Jensen's Threads onFree
Online Courses, Videos, Tutorials, and Course Materials ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
These help low income students by providing totally free courses and
learning materials, often from the best professors in the world at prestigious
universities. However, if students want transcript credit there will be fees to
take competency-based examinations. And those credits are not always accepted by
other colleges and universities. The free alternatives are mainly for students
who just want to learn.
Rutgers, the State University of New
Jersey - New Brunswick and Newark
Rutgers Business School
Newark, NJ
6
North Carolina State University
Poole College of Management,
Jenkins Graduate School
Raleigh, NC
7
George Washington University
George Washington University
School of Business
Washington, DC
8
University of Florida
Hough Graduate School of
Business
Gainesville, FL
9
Pennsylvania State University
Smeal College of Business
University Park, PA
10
Arizona State University
W.P. Carey School of
Business
Tempe, AZ
Jensen Comment
For some reason the above ranking leaves out the University of North Carolina
--- http://onlinemba.unc.edu/about/mba-at-unc/
Richard Sansing later pointed out that UNC comes in at Rank 11.
It may not be the superhuman robotic police officer
who patrolled the lawless streets of Detroit in the 1987 sci-fi thriller,
but corporate filers should be every bit as concerned about the Securities
and Exchange Commission’s (“SEC”) new Accounting Quality Model (“AQM”),
labeled not-so-affectionately by some in the financial industry as “RoboCop.”
Broadly speaking, the AQM is an analytical tool which trawls corporate
filings to flag high-risk activity for closer inspection by SEC enforcement
teams. Use of the AQM, in conjunction with statements by recently-confirmed
SEC Chairman Mary Jo White and the introduction of new initiatives announced
July 2, 2013, indicates a renewed commitment by the SEC to seek out
violations of financial reporting regulations. This pledge of substantial
resources means it is more important than ever for corporate filers to
understand SEC enforcement strategies, especially the AQM, in order to
decrease the likelihood that their firm will be the subject of an expensive
SEC audit.
The Crack Down on Fraud in Accounting and
Financial Reporting
In his speech nominating Mary Jo White to take over
as chairman of the SEC, President Obama issued a warning: “You don’t want to
mess with Mary Jo.” That statement now seems particularly true for
corporate filers given the direction of the SEC under her command.
Previously a hallmark of the SEC, cases of accounting and
financial-disclosure fraud made up only 11% of enforcement actions brought
by the Commission in 2012. Since taking over as chairman, Ms. White has
renewed the SEC’s commitment to the detection of fraud in accounting and
financial disclosures.
“I think financial-statement fraud, accounting
fraud has always been important to the SEC,” Ms. White said during a June
interview “It’s certainly an area that I’m interested in and you’re going to
see more targeted resources in that area going forward.” She has backed that
statement up with a substantial commitment of resources. In July, the
commission announced new initiatives which aim to crack down on financial
reporting fraud through the use of technology and analytical capacity,
including the Financial Reporting and Audit Task Force and the Center for
Risk and Quantitative Analytics (“CRQA”). These initiatives will put
financial reports under the microscope through the use of technology-based
tools, the most important of which is RoboCop.
RoboCop: Corporate Profiler
RoboCop’s objective – to identify earnings
management – is not a novel one; rather, it is the model’s proficiency that
should worry filers. Existing models on earnings management detection
generally attempt to estimate discretionary accrual amounts by regressing
total accruals on factors that proxy for non-discretionary accruals. The
remaining undefined amount then serves as an estimate of discretionary
accruals. The fatal flaw in this approach is the inevitable high amount of
“false-positives”, rendering it useless to SEC examiners.
The AQM extends this traditional approach by
including discretionary accrual factors in its regression. This additional
level of analysis further classifies the discretionary accruals as either
risk indicators or risk inducers. Risk indicators are factors that are
directly associated with earnings management while risk inducers indicate
situations where strong incentives for earnings management exist. Based on a
comparison with the filings of companies in the filer’s industry peer group,
the AQM produces a score for each filing, assessing the likelihood that
fraudulent activities are occurring.
While the SEC will be keeping their
factor-composition cards close to the chest, the “builder of RoboCop”, Craig
Lewis, Chief Economist and Director of the Division of Risk, Strategy, and
Financial Innovation (“RSFI”) at the SEC, has offered several clues about
the types of information most likely to catch RoboCop’s attention (Is it
just a coincidence that RoboCop’s movie partner was an Officer Lewis?).
“An accounting policy that could be considered a
risk indicator (and consistently measured) would be an accounting policy
that results in relatively high book earnings, even though firms
simultaneously select alternative tax treatments that minimize taxable
income,” said Mr. Lewis. “Another accounting policy risk indicator might be
a high proportion of transactions structured as ‘off-balance sheet.’”
Frequent conflicts with independent auditors,
changes in auditors, or filing delays could also be risk indicators.
Examples of risk inducers include decreasing market share or lower
profitability margins. This factor-based analysis allows for model
flexibility, meaning examiners are able to add or remove factors to
customize the analysis to their specific needs. The SEC will be able to
continually update the model to account for the moves filers are taking to
conceal their frauds.
Next Generation RoboCop
One of the perceived weaknesses of RoboCop is its
dependence on financial comparisons between filers within an industry peer
group. As Lewis points out, “most firms that are probably engaging in
earnings management or manipulation aren’t doing it in a way that allows
them to stand out from everybody else. They’re actually doing it so they
blend in better with their peer group.”
To account for this, the SEC’s current endeavor is
expanding the model’s capabilities to include a scan of the “Management
Discussion & Analysis” (“MD&A”) sections of annual reports. Through a study
of past fraudulent filings, analysts at RSFI have developed lists of words
and phrasing choices which have been common amongst fraudulent filers in the
past. These lists have been turned into factors and incorporated into the
AQM
“We’re effectively going in and we’re saying: what
are the word choices that filers make that maximize our ability to
differentiate between fraudsters in the past and firms that haven’t had
fraud action brought against them yet?” Mr. Lewis explained during a June
conference in Ireland.
“So what we’re doing is taking the MDNA section,
we’re comparing them to other firms in the same industry group, and we’re
finding that in the past, fraudsters have tended to talk a lot about things
that really don’t matter much and they under-report all the risks that all
the other firms that aren’t having these same issues talk quite a bit
about.”
Firms engaged in fraudulent activity have tended to
overuse particular words and phrasing choices which are associated with
relatively benign activities. They have also tended to under-disclose risks
which are prevalent among a peer group. When a filer has engaged in similar
behavior, RoboCop will flag these types of unusual choices for examiner
review.
How the SEC Uses RoboCop
Although the SEC has cautioned that the AQM is not
the “robot police coming out and busting the fraudsters,” filers would be
wise to understand the power of this tool. RoboCop is a fully automated
system. Within 24 hours from the time a filing is posted to EDGAR, it is
processed by the AQM and the results are stored in a database. The AQM
outputs a risk score which informs SEC auditors of the likelihood that a
filing is fraudulent. The SEC then uses this score to prioritize its
investigations and concentrate review efforts on portions of the report most
likely to contain fraudulent information.
The results of RoboCop’s analysis will likely
become the basis for enforcement scheduling and direction of resources in
the near future. A filing’s risk score will determine whether a filing is
given a quick, unsuspecting review, or whether it is thoroughly dissected by
an SEC exam team, possibly leading to an expensive audit. The SEC has also
said it plans to use the risk scores as a means of corroborating (or
invalidating) the approximately 30,000 tips, complaints, and referrals
submissions it estimates will be received each year through its Electronic
Data Collection Systems or completed forms TCR.
Warning: The author (Zillow) of the article below likes to sell books
and advice. However, this article (and its links) makes some good points.
Jensen Comment
I think the five-year rent versus buy threshold is too short for new assistant
professors facing a seven-year tenure probationary period. My advice is not to
buy until being tenured with plans to stay in place for at least another five
year period after being granted tenure.
Always look at the resale market.
For example, condos and townhouses are usually harder to sell than dwellings on
large lots. High prices are less discouraging in neighborhoods where houses are
in great demand. For example, what seems like an absurd price for a home within
walking distance to a college campus, hospital, or K-12 school may be better
deal than cheaper housing that entails a long commute for yourself, your spouse,
or your kids.
In cities like San Antonio it's no longer a good idea to buy a home unless it
is in a gated community. Houses outside gated communities do not sell very well
in San Antonio and other cities unless there are offsetting attractions such as
being within walking distance of a college campus where you work. Note that I
recommend a gated community not only because it is somewhat safer, but I
recommend it simply because I think houses are easier to sell if they are in
gated communities. Up here in the White Mountains, people tend to think of a
gated community as one that fences in livestock. It's hopeless to try to fence
out moose, deer, and bears.
I don't know of any gated communities up here that try to fence out bad guys.
Gated communities in urban areas have an entirely different meaning.
If you are confused by tax considerations, get advice from tax and valuation
experts such as those experts who subscribe to the AECM listserv.
Keep in mind that if you pay more than the tax assessment value for a home,
the tax assessment will probably go up to what you pay for the home. For
example, my taxes nearly doubled relative to what the seller paid in taxes here
in the White Mountains. In California you taxes may soar relative to what the
seller was paying under Proposition 13 protection.
If you get a bargain purchase for less than the tax assessment your taxes
will not necessarily go down. Our minister bought a foreclosure house from a
bank at less than half the tax assessment valuation. When his tax assessment did
not go down afterwards, he took his case all the way to Superior Court --- where
he lost. Bargain purchases will not necessarily bring you bargain property
taxes.
Times change.
I owned what I considered five beautiful homes plus an ocean-shore cottage in my
lifetime. Times were such that for my first three homes and the 12-acre ocean
property I sold the them at sizeable gains the first day I put them on the
market. My home in San Antonio was on the market for nearly a year when I got
the one and only offer received (for a fair price that was still a slight
capital loss after ownership for 24 years). Now I live our retirement acreage up
here in the White Mountains. I would, however, lose a lot of money if I were
forced to sell this place. If I own this acreage for another 20 years I am not
expecting to make a lot of money on it in terms of price-level adjusted dollars.
All of northern New England in New Hampshire, Vermont, and Maine is long-term
depressed in terms of real estate values.
Forty years ago I advised people to buy a home even if they planned to move
in 2-3 years. These days I tend to advise people to rent unless they plan to
stay put for at least ten years. Home ownership is an inflation hedge and forces
owners to save money during the equity build up of house payments. And there are
tax advantages in the USA and home owners tend to improve their homes. But
the risk of losing money in our cooled-off real estate markets these days are
real bummers. Like I said, I lost money on my big San Antonio home after
owning it 24 years. Times have changed.
If you are a renter and pondering whether it’s time
buy a home, one thing that might be on your mind is a rent vs. own analysis.
As you can imagine, this analysis will help you determine the financial
benefits of owning a home vs. staying a renter.
Many online rent vs. own analysis tools are available,
but a little caution is needed, as some of these tools are very biased and
skewed. Some always find that it typically makes sense to buy, while others
show that you should rarely buy. Most of them look at the difference between
the monthly rental and mortgage payments and take into account tax benefits,
equity earned, sales prices and other variables associated with home
ownership.
The biggest problem with most of these tools is
that they are way too complex for the average person to understand. And
because this is the biggest financial decision you will ever make, it isn’t
a smart idea to just trust, while not understanding, what’s behind the
analysis.
But there is a simple way to do a rent vs. own
analysis that will return the correct decision the vast majority of the time
for the average home buyer. And it’s completely unbiased.
Long-term ownership
Ask yourself: Am I very confident that I will own
the home at least five years?
If the answer is yes, it probably makes sense to
buy because it will improve your net wealth.
If the answer is no, you should stay a renter
because owning will most likely diminish your net wealth.
That’s it, the math is just that simple!
Why it works
When you sell a property, you pay about 10 to 15
percent of the sales price in costs. These costs are 5 to 6 percent in sales
commission, 2 to 3 percent in escrow, title, closing and other costs, plus
most likely a few percentage points in credits to the buyer, overlapping
occupancy costs if you’ve already moved, plus extra costs of moving. It
really does add up quickly, and your overall costs are always higher than
you anticipate.
For example, if you bought a house for $200,000 and
its value increased 3 percent per year, it would be worth about $232,000 at
the end of year five. If you sold it for $232,000 and subtracted out 15
percent in sales costs ($34,800) you would net a little less than $200,000
on the sale.
Notice that $200,000 is the exact amount you paid
for the property five years earlier. Now some people will think: Well if it
cost less monthly to own than to rent, then it still made sense because you
saved money along the way. But figuring the true monthly cost to own is more
complicated than a simple comparison of your monthly housing expenses vs.
what it would cost to rent. And a true analysis usually finds that it costs
more to own than to rent, even with the purported “tax benefits of home
ownership.”
The end result is that owning a home is much more
expensive than people anticipate, plus the sale of a home is also much more
expensive that most people realize.
And that’s why five years is about the breakeven
period, in the vast majority of cases. If you don’t plan to keep a home for
a long, long time, you’re better off financially by renting someone else’s
property until you do find a place you plan to own for the long haul.
Jensen Comment
This database must be viewed in the context of the usual warnings. The most
serious limitation lies in supplemental income variations between different
universities. For example, some medical schools pay huge bonuses for services
to university hospitals.
Universities vary regarding how much private money (gifts) is devoted to
supporting summer salaries for research by newer faculty and by high-performing
faculty.
Universities vary regarding the amount of research expense funding given to
faculty. For example, a top researcher might get a $30,000 expense fund that,
among other things, supports taking her or his family to Europe while gathering
data.
There are also tremendous living cost differences. For example, a horse farm
outside Vermillion, South Dakota valued at $500,000 might be valued at $40
million west of the Stanford University campus. Property taxes and other living
costs in Manhattan are enormous relative to property taxes and living costs in
Vermillion. Also in Vermillion the public schools are relatively great. Forget
the public school system in NYC and most other large USA cities.
My point is that a $140,000 in Vermillion may go a lot further than a
$400,000 salary in a large USA city even if subsidized housing is available from
the employer. Without subsidized housing universities in large USA cities do not
pay enough to live close to the university. In come cases, faculty must commute
over an hour a day each way in order to live in remote suburbia.
What seem like high salaries to some faculty are only a drop in the bucket
relative to their total family income due to spousal income, book royalties,
solid gold consulting, etc. Stanford, NYU, Columbia, and UCLA must pay those
high salaries to persuade top faculty to even bother with teaching and remaining
on the faculty. Sometimes those high salaries are paid to motivate wealthy
faculty to stay on board until retirement in hopes of receiving they gifts of
millions of dollars later on. For example, a number of highly paid faculty at
Stanford University have given that University's Foundation tens of millions of
dollars later in life. Their earlier stellar salaries may actually turn out
to be good investments
"The Overworked College Administrator," by Barbara Mainwaring,
Inside Higher Ed, August 10, 2007 ---
http://www.insidehighered.com/views/2007/08/10/mainwaring How can teachers/researchers gain collegiate administrative skills? Many professors worry that colleges these days prefer a
professional class of administrators to promoting faculty members. In turn, many
administrators complain that faculty members — however good at their teaching
and research — may lack key skills for more responsibility. A new program at
Simmons College —
one of six master’s institutions receiving grants
Tuesday to promote “faculty career flexibility” — aims to provide professors
with a path to pick up administrative skills, without just adding on to their
workloads. The grants are being awarded by the Alfred P. Sloan Foundation, which
last year
awarded similar grantsto research universities.
Scott Jaschik, "Promoting Career Flexibility," Inside Higher Ed, January
30, 2008 ---
http://www.insidehighered.com/news/2008/01/30/sloan
The Almanac of Higher Education
The new Almanac of Higher Education features national and state-by-state data on
colleges and universities, and their students, finances, and faculty and staff
members, as well as regional profiles of the issues facing academe across the
country. Chronicle of Higher Education ---
http://chronicle.com/article/Almanac-2010-The-Profession/123918/
2011-12 Edition ---
http://chronicle.texterity.com/chronicle/20110826a?sub_id=yf6H2Es7OzfJ
Jensen Comment
There's a ton of financial information here, including salary juxtaposed against
cost of living in different regions.
Law School Faculty Salary Links from Paul Carone on the TaxProf Blog
on June 11, 2013
Following up on my recent post,
Law Faculty Salaries, 2012-13: Above the Law has blogged individual law
faculty salaries at these Top 20 public schools:
Jensen Comment
This is a better way to compare faculty salaries in top schools. Large surveys
like those of the AAUP, Chronicle of Higher Education, and the AACSB are
too skewed by small and low paying colleges.
Keep in mind that salary comparison in general can be like comparisons of
apples and kangaroos. Things to consider are the many aspects of "compensation"
contracts such as summer income assurances (research or teaching), expense
budgets (that in prestigious schools may be near $20,000 allowances for travel,
etc.), and most importantly access to additional consulting revenues. For
example, faculty at the Harvard Business School may make more consulting with
and teaching CPE credits in HBS alumni companies than they make from their
Harvard salaries.
Just being on the faculty of a prestigious university also opens doors to
lucrative expert witness offers, consulting offers, and textbook publishing
deals where prestigious faculty are offered deals to publish with lesser known
writers who write most of the books.
Some schools like Stanford, NYU, and Columbia offer faculty great housing
deals such as relatively low rents or 100-year lot leases for a dollar a year.
Excel guru David Ringstrom is back with another
informative article about how to streamline the process of accessing recent
spreadsheets. He explains the process not for just one version of Excel, but
for Excel 2003, 2007, 2010, and 2013. Also in today's news is coverage of
the 2013 Family Office Exchange's recent survey – Benchmarking: Technology
in the Family Office. Single and multifamily offices were surveyed on their
technology practices, including their software selections, security,
budgeting, staffing, and use of Cloud computing.
The prominent British philosopher, who was
considered a star hire by the University of Miami several years ago, is
sitting on the deck of his penthouse condo as waves crash onto the shore 43
floors below.
To an outsider, it looks like paradise. Mr.
McGinn's home is in one of the most sought-after high-rises on Miami Beach's
"Millionaire's Row"; his cabana, where he stores paddleboards and surfing
gear, is larger than some city apartments.
But on the inside, he says, he's living in a state
of "total ruin."
It has been six months since Mr. McGinn informed
the university that he would resign at the end of the calendar year. His
decision followed allegations that he had engaged in an inappropriate
relationship (not sexual intercourse) with a graduate student. The student
told the university that she felt uncomfortable after receiving a number of
sexually explicit e-mail and text messages from Mr. McGinn. He denies any
wrongdoing.
The ignominious conclusion to Mr. McGinn's career
at Miami has fueled a continuing conversation about sexual harassment in
philosophy departments. Stories of harassment of women have long plagued the
discipline, in which fewer than one in five full-time professors are female.
That imbalance, many say, has created a sense of isolation for women who
have struggled to combat the sometimes clubby culture they say they have
encountered.
. . .
The polarization of perceptions about whether the
field of philosophy has a problem, and if so how big, are one reason an
individual case like Mr. McGinn's may not lead to much change, some
philosophers say.
Shay Welch, an assistant professor of philosophy at
Spelman College, says the gap between Mr. McGinn's supporters and those who
have spoken out against him is representative of a broader divide in
philosophy.
Ultimately, Ms. Welch says, that divide—along with
the current climate in philosophy—will not change until the numbers do. More
than 80 percent of full-time faculty members in philosophy are male,
according to 2003 data from the U.S. Education Department, the latest
available. That compares with 60 percent for the professoriate as a whole.
The 16.6 percent of full-time faculty in philosophy who are female
constitutes the lowest proportion of women in any of the humanities.
Others, however, remain optimistic about the
potentially precedent-setting effects of Mr. McGinn's resignation. Jennifer
M. Saul, head of the philosophy department at the University of Sheffield,
in England, says she has already heard from women in the field who, after
learning of Mr. McGinn's case, are considering coming forward to report
incidents of sexual harassment. She hopes that trend will continue. Ms. Saul
started a blog in 2010 called What Is It Like to Be a Woman in Philosophy?,
which has become a place where women in the field have gone to submit
anonymous accounts of sexual harassment.
Mr. McGinn's high-profile status in the discipline,
some believe, is part of what gives his case broader implications. "It goes
to show that even a very powerful philosopher like Colin McGinn is not
exempt from adverse professional effects," says Linda Martín Alcoff, a
professor of philosophy at Hunter College and the City University of New
York Graduate Center. She is president of the American Philosophical
Association's Eastern Division.
Ned Markosian, a professor of philosophy at Western
Washington University, says he would not be surprised if Mr. McGinn's
resignation emboldened administrators across the country to take a harder
line on sexual-harassment allegations, even when those allegations involve
prominent faculty members.
"This has the potential to be a real turning point
for the profession," he says, "and already I think it's a sign that things
are changing for the better."
Mr. McGinn though, is worried that his own future
in philosophy may be changing for the worse. "I don't know if I'll get
another job offer," he says. "I think the answer may be no."
For the self-proclaimed most enlightened person in
the world, that much appears clear.
Jensen Comment
I'm really outside the loop when it comes to knowledge of "scandals" in college
accounting departments these days. But younger people are probably outside the
loop when it comes to "scandals" that arose decades ago where accounting
professors divorced their spouses to marry graduate students, including at least
four widely-known instances that I recall although I was not a faculty member in
those universities. I later worked with some of those professors on AAA
assignments and became friends with them.
There are other instances where unmarried
accounting faculty eventually married graduate students. I don't know that any
of these fell under what most of us considered "scandals" at the time. I also
don't know there there were always pressures brought by the universities to
force terminations, although I think in most instances that I'm aware of the
faculty member voluntarily left the university with a new spouse. There were
probably instances where faculty members remained in the same university,
although I know of only one such case. We have a daughter who, after taking a
graduate class from her microbiology professor, was eventually courted by that
professor. Neither of them had been married previously, and they're still
happily married after nearly 20 years. Her husband remained in the same
university after all those years.
Unlike Colin McGinn's fears mentioned above, I don't think any professor
departing accounting with a new graduate student spouse had troubles finding new
faculty positions in top universities. Times may have changed these days in this
regard. In Professor McGinn's recent ase the problem may have be that the
graduate student did not consent to some of his somewhat unusual advances.
My point is that I think times have changed over
the past few decades regarding what constitutes "sexual harassment." One
constant in all of this is that grades for sexual favors and thesis supervision
under similar circumstances were then and still are unethical violation of the
policies in virtually all colleges. One variable that perhaps changed over time
is greater administrative obsession these days with romance between faculty and
consensual adult students. Non-adult students of course were and still are out
of bounds in all instances.
Links from the Tax Prof Blog on "The Last Days of Big Law"
Tracy DeLorey was only three months away from
graduation in January when she learned, via Facebook, that her college,
American Career Institute, had closed. The news, she said, "was a kick in
the face."
"I wasted a year and a half," said Ms. DeLorey, a
single mother of three who works at the commissary at Hanscom Air Force
Base, in Massachusetts. More than 2,200 students and 200 employees in
Massachusetts and Maryland were displaced by ACI's closure.
Seven months later, many former students are still
awaiting refunds on loans they took out to pay for their programs. Others
have transferred to nearby colleges but find themselves spending more, or
taking longer to complete their programs.
The abrupt closure of ACI, a for-profit institution
that offered certificate programs in medical and dental fields, information
technology, and digital media, came just over a week after Academic
Enterprises Inc., the parent company of Sawyer Schools and Butler Business
School, announced that it was shutting down campuses in Connecticut and
Rhode Island that served more than 650 students.
In both cases, regulators and accreditors were as
surprised as the students. They said they hadn't received any complaints
from students about the colleges, and saw no red flags in their annual
audits.
"This just dropped on us like a bomb," said Michael
F. Trainor, special assistant to the commissioner for Rhode Island's Office
of Higher Education, who learned of the Sawyer and Butler closings when a
television reporter called him at home.
Maryland regulators said that ACI, which blamed its
closure on a loss of credit, had just upgraded the equipment on one of its
Maryland campuses and was operating at a profit.
The closures have gotten the attention of that
state's senators, who wrote to the U.S. Department of Education to ask why
oversight agencies missed the problems that led to the colleges' closures
and how the "triad" of state and federal regulators and accrediting agencies
could be improved to prevent future closures.
"One would expect that information indicating
imminent closure would be easily identifiable, and we believe that
situations like ACI's are absolutely preventable," wrote Sens. Barbara A.
Mikulski and Benjamin L. Cardin, both Democrats.
In a response, James W. Runcie, chief operating
officer of the department's Office of Federal Student Aid, argued that the
triad "routinely" uncovers problems, but said the department would work to
"improve the results of the triad's monitoring and oversight activities."
So why didn't anyone see these closures coming? In
large part, it has to do with what the oversight bodies are looking at, and
when. A Lagging Indicator
State regulators and accreditors monitor colleges'
financial stability largely through annual financial audits. If a college
shows signs of financial distress, its regulator or accreditor may require
it to post a larger bond, file more frequent financial statements, or
provide an improvement plan. If the situation looks dire, an accreditor may
place the institution on "show cause" status, compelling it to submit a plan
for students to continue their education at other institutions.
The U.S. Education Department uses audits to assign
colleges "financial responsibility scores." Colleges that score poorly are
subject to tighter monitoring for their federal student-aid funds and can be
required to post costly letters of credit to remain eligible for
financial-aid programs. Colleges that consistently fail the test can lose
the right to issue federal aid to their students, though that rarely
happens.
Yet colleges typically have several months after
the close of their fiscal year to submit their audits, and some colleges
conduct their audits before the end of the year. By the time regulators and
accreditors receive an audit, it is often several months out of date. The
Education Department just released the fiscal-responsibility scores for
2011, more than two years after the end of that fiscal year.
Both ACI and the Academic Enterprises schools
received clean audits and passing financial-responsibility scores in their
most recent reviews.
In the case of the Butler and Sawyer schools,
enrollment abruptly fell by more than 50 percent, according to the states'
regulators and senators. While the company's owners haven't explained their
reasons for closing (and didn't respond to a request for comment),
regulators say the college relied heavily on students without high-school
diplomas or GEDs. Until recently, such students could qualify for federal
aid by passing a test demonstrating their "ability to benefit" from higher
education. Congress withdrew their eligibility as of July 1, 2012.
The
New York State attorney general’s office filed a
civil lawsuit on Saturday accusing Trump University,
Donald J. Trump’s
for-profit investment school, of engaging in illegal business practices.
The lawsuit, which seeks restitution of at least $40
million, accused Mr. Trump, the Trump Organization and others involved with
the school of running it as an unlicensed educational institution from 2005
to 2011 and making false claims about its classes in what was described as
“an elaborate bait-and-switch.”
In a statement,
Eric T. Schneiderman, the attorney general, said
Mr. Trump appeared in advertisements for the school making “false promises”
to persuade more than 5,000 people around the country — including 600 New
Yorkers — “to spend tens of thousands of dollars they couldn’t afford for
lessons they never got.”
The advertisements claimed, for instance, that Mr.
Trump had handpicked instructors to teach students “a systematic method for
investing in real estate.” But according to the lawsuit, Mr. Trump had not
chosen even a single instructor at the school and had not created the
curriculums for any of its courses.
“No one, no matter how rich or famous they are, has a
right to scam hardworking New Yorkers,” Mr. Schneiderman said in the
statement. “Anyone who does should expect to be held accountable.”
The inquiry into Trump University came to light
in May 2011 after dozens of people had complained
to the authorities in New York, Texas, Florida and Illinois about the
institution, which attracted prospective students with the promise of a free
90-minute seminar about real estate investing that, according to the
lawsuit, “served as a sales pitch for a three-day seminar costing $1,495.”
This three-day seminar was itself “an upsell,” the lawsuit said, for
increasingly costly “Trump Elite” packages that included so-called personal
mentorship programs at $35,000 a course.
On Saturday evening, Michael Cohen, a lawyer for Mr.
Trump, denied the accusations in the lawsuit and said the school had
received 11,000 evaluations, 98 percent of which rated students as
“extremely satisfied.”
George Sorial, another lawyer for Mr. Trump, called
the lawsuit politically motivated. He said that Mr. Schneiderman had asked
Mr. Trump and his family for campaign contributions and grew angry when
denied.
Five years after Donald
Trump
opened an online university --
called Trump University,
of course -- New York State's Education
Department is taking a dim view of the tycoon's
venture into higher education,
The Daily News
reported today. The university, which promises
to teach would-be plutocrats how to make
themselves rich if they will only make Mr. Trump
a bit richer first, is not a university at all,
say state officials. In a letter obtained by the
News, one official demanded that Mr.
Trump drop "University" from the unaccredited,
non-degree-granting institution's name. "Use of
the word 'university' by your corporation is
misleading and violates New York Education Law
and the Rules of the Board of Regents," the
letter says. Michael Sexton, president of Trump
U., told the News that, if necessary,
"we will change our name to Trump Education."
Steve Zeff at Rice University is one of the best-known accounting historians
alive today. He's also the current Book Review Editor of The Accounting
Review. This explains, in part, why the July 2013 listing of book reviews
four scholarly reference books on accounting history. I say reference books,
because none of the four history books is light reading to pass the time on
airplanes.
SEBASTIAN BOTZEM, The Politics of Accounting Regulation:
Organizing Transnational Standard Setting in Financial Reporting
(Cheltenham, U.K.: Edward Elgar Publishing, 2012, ISBN 978-1-84980-177-5,
pp. x, 223).
Reviewer Scholar: STUART McLEAY
WOLFGANG BURR and ALFRED WAGENHOFER (coordinating editors), Der
Verband der Hoschschullehrer für Betriebswirtschaft: Geschichte des VHB und
Geschichten zum VHB (History of the VHB and Tales of the VHB)
(Wiesbaden, Germany: Gabler Verlag, 2012, ISBN 978-3-8349-2939-6, pp. xxi,
338).
Reviewer Scholar: LISA EVANS
MAHMOUD EZZAMEL, Accounting and Order (New York, NY: Routledge,
2012, ISBN 978-0-415-48261-5, pp. xx, 482).
Reviewer Scholar: SUDIPTA BASU
GARY PREVITS, PETER WALTON, and PETER WOLNIZER (editors), A Global
History of Accounting, Financial Reporting and Public Policy: Eurasia, the
Middle East and Africa (Bingley, U.K.: Emerald Group Publishing Limited,
2012, ISBN 978-0-85724-815-2, pp. xi, 249).
Reviewer Scholar: TIMOTHY S. DOUPNIK
Capsule Commentary on The Future of IFRS (London, U.K.:
Financial Reporting Faculty of the Institute of Chartered Accountants in
England and Wales, 2012, ISBN 978-0-85760-652-5, pp. 25). Downloadable at
www.icaew.com.
Reviewer Commentator: STEPHEN A. ZEFF
The accounting history classic in the set is A Global History of
Accounting, Financial Reporting and Public Policyin four volumes, the
fourth volume of which is reviewed in the above listing. The entire set is
devoted to global development of accounting, financial reporting, and public
policy in several key sovereign states. I don't think any scholarly library on
accounting history would be complete without the entire set, although accounting
professors may not invest in this set unless they are doing research in
accounting history. This is not light reading. The reviewer, Tim Doupnik notes,
that is not a book aimed at teh textbook market. Rather is "intended to be a
historical source book."
The Accounting for Order (in ancient Egypt) book by Mahmoud Ezzamel
provides more than you probably ever wanted to know about "Egyptian inscriptions
to document the role that accounting played in numerous spheres and theorizing
about how accounting helps to create and sustain order within these spheres." It
is a book that should be in every accounting history library, although
professors who buy the book are probably historians interested in ancient Egypt
society, culture, and economics. Sadipta Basu nearly always does scholarly work,
and his review of this book is well worth the read.
Most of us cannot read the Wolfgang Burr and Alfred Wagenhofer book since it
is written in German. Lisa Evans is obviously a scholar in accounting as
well as the German language and writes the following in her review:
This book is written in German and, it seems, for
an audience primarily comprising VHB members, or at least those familiar
with the discipline of Betriebswirtschaft (BWL) and with the organization of
German academe. Therefore, an explicit account of what distinguishes BWL
from related disciplines in other cultures may not have been felt necessary.
However, one of the difficulties in reviewing this book for an
English-speaking readership is the need to translate German concepts for
which there are no English language equivalents. The very terms
Betriebswirtschaft and Betriebswirtschaftslehre (the science of
Betriebswirtschaft) can be translated as, inter alia, business
administration, business management, business economics, or business
studies.
The lack of an equivalent translation is an
indication of the different histories of related disciplines in different
academic and business traditions. The different possible translations are
also a clue to the breadth of the subject matter and to difficulties in its
demarcation from related disciplines during its history. This relationship
with other disciplines is explored throughout this book.
In essence, the VHB represents interests
considerably wider than accounting and finance, and many of the famous names
(Schmalenbach, Schmidt, Mahlberg, etc.) associated with the history of BWL
were not, or not only, professors of accounting in a narrow sense. The VHB's
membership represents 16 subject areas or sub-disciplines: banking and
finance; business taxation; academic management; international management;
logistics; marketing; sustainability management; public business
administration; operations research; organization; human resources
management; production management; accounting; technology, innovation and
entrepreneurship; business information systems; and economic science (VHB
website; see also Chapter 1). The subject group for accounting was formally
constituted in 1977 and includes financial reporting, managerial accounting,
controlling, and auditing (VHB website).
Continued in the book review
The author of The Politics of Accounting Regulation: Organizing
Transnational Standard Setting in Financial Reporting, Sebastian Botzem,
is a political scientist who focuses his particular research skills to the
study of the politics of the International Accounting Standards Board. The
reviewer, stuart Mcleay, writes as follows:
. . .
n its attempt to understand the contested and
political nature of accounting standard setting, this interdisciplinary book
focuses on the structures and the procedures that enable transnational
rule-setting. The author starts with an outline of the social theory that
may explain transnational accounting standardization, noting that the shared
beliefs of professions have long been able to facilitate the social closure
that is important to self-regulation, but that professional bodies no longer
form the main loci of expertise in accounting standard setting. This is
followed by a condensed account of the IASB's emergence as the pre-eminent
international accounting standard setter. Botzem claims that, in getting to
this position, the IASB has out-competed a number of other endeavors to draw
up international accounting rules. This is a questionable interpretation, as
the two supposed competitors to the IASB (the European Community and the
United Nations) have not been greatly concerned with financial reporting
standards per se, but, respectively, with the harmonization of company law
across the member states of the European Union and the wider accountability
of multinational companies. Rather than rival initiatives, these are
components of a complex nexus of overlapping demands by social actors aimed
at constraining the behavior of firms.
The book also attempts to set the scene by drawing
links between global capitalism and the content of international accounting
standards, emphasizing the capital-market orientation embodied in fair value
accounting. This too is overly simplistic, in my view—we do not have to look
far for a counter-example in the potential usefulness of pension accounting
of employee superannuation funds.
The book continues with a reconstruction of the
organizational development of the IASB, arguing that, while the privately
run standard setter has established the necessary procedures to consult with
interested parties, it has done so without handing over too much influence.
In this respect, the author claims that the IASB has subordinated democratic
accountability to the effectiveness of expertise-based standardization. This
is a well-worn debate among accounting researchers, practitioners, and
standard setters, not only the IASB. It is particularly instructive that the
revised conceptual framework issued jointly by the IASB and FASB now limits
the range of addressees of general purpose financial reporting to investors,
lenders and other creditors, explicitly to assist them in making decisions
about providing resources to the entity. Needless to say, political
scientists should be aware that various social actors have sought to foist
their own public policy objectives onto the regulation of financial
statements, in an attempt to extend the remit of standard setting beyond
that of financial reporting. Our understanding of the IASB requires in turn
a greater appreciation of international consensus over the public policy
objectives financial statements.
Finally, the book reports on the author's own
empirical research on organizational structures and processes, by providing
an analysis of the dominant individuals and the most influential
organizations within the IASB's wider network.
Throughout the book, the IASB is portrayed as “a
successful, private, transnational, regulatory body,” whose efforts to be
outside of politics are nevertheless fundamentally political in nature.
While the IASB is often referred to as a “regulator” in this way (both in
this book and elsewhere), the broader perspective is that law-makers,
together with the financial regulators and delegated agencies that produce
“soft law,” contribute jointly to the complex framework of requirements that
are placed on the regulated. At the same time, the multinational operations
of regulated firms readily introduce legal and regulatory
extraterritorialities that muddle institutional boundaries. While Botzem
grapples with some of these complexities, and introduces the reader to
useful universal notions such as “boundary spanning” when generalizing the
diffusion of transnational standards over different social domains, a fuller
understanding of the particularities of the IASB as a regulatory body
requires a more developed appreciation of the way in which the various
institutions of corporate regulation interact in influencing financial
reporting. For instance, not only is the black letter of corporate law
transposed readily from one jurisdiction to another, so too are the formal
and informal rules and processes of accounting (as they have been since the
Middle Ages). The level of statist interaction, or emulation, was already
high before the advent of the IASB. I suspect that cultural specificity in
accounting is marginal, and that other factors, such as differences in
industrial structure, may explain not only international accounting practice
differentiation (Jaafar and McLeay 2007) but also the within-country
alliances that influence statist regulatory differentiation.
In the latter part of the book, the analysis of the
Board membership is based to a great extent on the CVs of the individuals
involved. In contrast, the analysis of the other IASB bodies that are
investigated (the Standards Advisory Council, SAC; the International
Financial Reporting Interpretations Committee, IFRIC; and the trustees)
depends greatly on the assumption that each member of these bodies is a
“representative” of their employer. While the modeling is detailed, it
builds on shaky ground in this respect. For example, a small number of
universities are listed as employing organizations (Genoa, Northwestern, São
Paulo, Tama, Unitec NZ, Waseda, and Wellington). It is difficult to believe
that these organizations are “represented” in any way on IASB committees,
and there is no obvious reason to expect that the individuals involved
necessarily act as representatives of the wider academic community.
Likewise, it is not necessarily the case that an employee of the General
Electric Company is a “representative” of GE, who is just as likely to have
been voted in by dint of other alliances or even on the basis of individual
competences. Although it may be reasonable to infer that an employee of the
Korean Accounting Standards Board is a “representative” of the KASB, or even
of standard setters in general, it is still plausible that individual
factors are as important as institutional representation in motivating
involvement with the IASB, including membership of other networks. We
require a deeper understanding of these interacting alliances formed by
individual members. Moreover, the analysis would benefit from including the
membership of the IASB's Monitoring Board, which consists of capital market
regulators.
Other aspects of the analysis in this book are
similarly underdeveloped. Speaking of one current Board member, who has
worked in India, Europe, and the United States, it is noted that “[h]e is a
member of both the Institute of Chartered Accountants of India and the
American Institute of CPAs and therefore can be considered to be the ninth
‘Anglo-American' representative on the Board” (pp. 132–133). It does seem,
here, as though an awkward fact is not allowed to get in the way of a good
story. Unfortunately, the research places too much weight on the cliché of
“Anglo-American domination.” It would be equally valid to interpret previous
employment and early training with large audit firms as direct experience of
international accounting, in transnational firms that command a global
market in accounting and audit services. For instance, at the time of
writing, just one of these firms has offices in 771 cities across 158
countries, with its employees distributed throughout Europe (34%), North
America (25%), Asia (21%) and elsewhere (20%)—see PwC's Global Annual Review
2012.
The author stretches the same point in other ways:
“in their daily work the Board members draw on a foundation of experience
rooted in an Anglo-American philosophy marked by an appreciation for private
sector self-regulation and skepticism toward state intervention” (p. 133).
Yet the 18 extracts from author interviews with IASB members (Tweedie is
quoted nine times and Whittington four times) and others (Cairns is quoted
twice, Mackintosh twice, and Mau once) provide little evidence of such
attitudes, and the hypothesis therefore remains untested. Indeed, given that
one of the main conclusions is that the IASB mode of expert-based
self-regulation is under-representative of the users of accounting
information, one might conclude that this is a very limited set of
interviewees.
Continued in article
Jensen Comment
I might add that accounting history is monumentally neglected in our North
American accountancy doctoral programs and in our academic accountancy
departments and in our top accounting research journals. Academic researchers
prefer to take the easy way out by beating purchased database pinatas with
sticks until findings, mostly uninteresting findings, fall into research
journals that are largely ignored by the profession and accounting teachers ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays
The Sebastian Botzem book should probably be required reading in a course
(probably an economics course) on the history and politics of regulation. Such a
course would not be common in accounting departments. Great credit should be
given to the great success that the IASB has had to date in bringing over 100
nations into the subset of nations that require IFRS totally or almost totally
as the main set of financial reporting standards for auditors and investors.
Although I'm doubtful that IFRS should replace current U.S. GAAP in the USA, my
hat is off to the great success of relentless efforts by dedicated global
accountants to succeed in the politics of IFRS. The USA is a special case, and
nobody ever thought it would be easy to bring convergence of USA and IASB
accounting standards.
The USA is a special case because of its long history of raising business
funding from equity markets that are almost non-existent in most of the 100+
nations who raise a greater share of capital from central banks and government
taxation.
The USA is a special case because of boots-on-the ground wars it has
participated in since World War II. It's not possible to enter into so many
fighting wars without polarizing the rest of the world into nations that respect
the USA's effort to bring world peace versus those that despise the USA's
political alignments and economic dominance, particularly alignments with Israel
that inflame other parts of the world.
The USA will carry a lot of political baggage to the IASB if the IASB
standards are to be deployed in the USA. Our enemies rise up against us with
both terror and with every political tool at their disposal, including the
politics of the UN that will probably be carried over into the future politics
of the IASB. This of course is Bob Jensen speaking and not repeating the more
optimistic views of Sebastian Botzem. However, it's probably inevitable that
the USA will join the IASB fold one day down the road.
Steve Zeff in this edition of TAR has a capsule commentary with a scholarly
forecast of The Future of IFRS that is much more optimistic Capsule Commentary on The Future of IFRS (London, U.K.: Financial
Reporting Faculty of the Institute of Chartered Accountants in England and
Wales, 2012, ISBN 978-0-85760-652-5, pp. 25). Downloadable at
www.icaew.com.
Reviewer Commentator: STEPHEN A. ZEFF
While many investors may think corporate
communication is unclear, some companies are far more candid than others. In
fact, According to corporate communications consulting firm Rittenhouse
Rankings, clear and transparent language in investor letters is indicative
of reliable performance. Generally, investors assess a company's performance
by studying key financial metrics. But another useful strategy is to study
the language rather, than just looking at the numbers. By reviewing the
language in the letters to shareholders, Rittenhouse Rankings evaluates how
transparent a company is with the public. Some companies, including Cigna
and Hewlett-Packard, release letters that are confusing and lack details
that would allow shareholders to better understand the company. These are
the 10 least candid companie
One of the moral hazards of being a relatively low paid government regulator
is the opportunity to turn your acquired knowledge and internal contacts into
comparative advantages that make the companies you regulate flock to you like
bees to sweet nectar.
It is almost rare when top regulators do not leave for high compensation from
companies they used to regulate --- FAA regulators leave to work for airlines,
FPC regulators leave leave to work for airlines, FDA regulators leave to work
for drug companies and agribusiness, DOJ regulators and judges leave to work for
law firms, IRS regulators leave to work for law and accounting firms, etc.
When I lived in Bexar County, Texas I had a real estate appraisal firm on
retainer to fight to lower my property taxes. The firm I hired was very popular
since it mostly hired away former appraisers in the Bexar County Appraisal
District's office.
Teaching Case on Moral Hazards of Regulation and Audit Firm Independence
From The Wall Street Journal Accounting Weekly Review on August 23, 2013
SUMMARY: "A top Delaware finance official sent out 125 audit
notices this year to companies incorporated in the First State. Three weeks
ago, he retired and joined the auditing firm expected to do the lion's share
of those audits in exchange for millions of dollars in fees...the second
holder of that office in a row to leave it for a job at Kelmar Associates,
which typically does between 70% and 80% of the auditors ordered by
the...office."
CLASSROOM APPLICATION: The article may be used in an auditing,
general ethics, or governmental accounting course.
QUESTIONS:
1. (Introductory) What is the office of the state escheator in
Delaware?
2. (Advanced) For what purpose did the Delaware state escheator
send out audit notices? Describe your understanding of the audits that must
be conducted. The related article can help in answering this question.
3. (Advanced) Ignoring specific rules described in the article,
define the conflict of interest which is evident when an individual leaves
the role of state escheator for the firm conducting the audits demanded by
that officer.
4. (Advanced) Does the fact that the state of Delaware has no rule
against Mr. Udinski's actions mean that a conflict of interest does not
exist? Explain your answer.
5. (Advanced) Does following the rule precluding Mr. Udinski from
working on audits ordered by him during his former state role for two years
eliminate the conflict of interest? Explain your answer.
Reviewed By: Judy Beckman, University of Rhode Island
A top Delaware finance official sent out 125 audit
notices this year to companies incorporated in the First State. Three weeks
ago, he retired and joined the auditing firm expected to do the lion’s share
of those audits in exchange for millions of dollars in fees.
As state escheator, Mark Udinski’s job was to
collect unclaimed property, such as dormant bank accounts, uncashed checks
and gift certificates and life-insurance benefits, and then try to locate
and reimburse the rightful owner. This month he became the second holder of
that office in a row to leave it for a job at Kelmar Associates, which
typically does between 70% and 80% of the audits ordered by the escheator’s
office.
Mr. Udinski’s move to the privately held auditing
firm doesn’t violate any state rules. The state requires only that he
refrain from working on Delaware-related cases for two years. But some
critics say the job switch creates the appearance of a conflict of interest.
Among them is Doug Lindholm, president of the
Council on State Taxation, which lobbies state governments on tax issues and
whose nearly 600 member companies include Coca-Cola Co., AT&T Inc. and
Pfizer Inc., which are incorporated in Delaware. Mr. Udinski’s new job
“looks like a reward for years of directing business to Kelmar,” he said.
Attempts to contact Mr. Udinski were unsuccessful.
Mark McQuillen, a principal at Wakefield,
Mass.-based Kelmar, said that Mr. Udinski was the right person for the job.
“He’s a smart, competent guy,” Mr. McQuillen said of the former state
official. “There aren’t enough people out there who do that sort of work.”
Mr. McQuillen added that he didn’t sense any
conflict in Mr. Udinski’s new role. But, he said, “The state would determine
what’s a conflict.”
Mr. Udinski’s predecessor, Patrick Hurley, who also
left for Kelmar and works in the firm’s legal department, couldn’t be
reached for comment.
Tom Cook, Delaware’s secretary of finance and Mr.
Udinski’s former boss, dismissed any suggestion of conflict. “No one has
made any allegation at all that Mark has done something improperly,” Mr.
Cook said. “If there are people that are criticizing the integrity of the
department of finance, Mark Udinski or myself, I suggest they come to me,
and they better have proof.”
Some critics aren’t convinced. “It shows the cozy
relationship between Kelmar and Delaware, and calls into question the
decisions [Mr. Udinski] has made,” said Jennifer Borden, general counsel for
Unclaimed Property Recovery & Reporting, which advises companies being
audited by the state.
Over half of the nation’s publicly traded companies
are incorporated in Delaware. That obliges them to turn over unclaimed
property to the state if they can’t locate the owner. If the state sees an
inconsistent pattern in the company’s unclaimed-property reports, it will
order an audit.
Once in state hands, the money sits in the general
fund, unless or until the owner is traced, accounting for a sizable chunk of
state revenue—14% in the most recent fiscal year ended June 30, according to
state data.
Under Mr. Udinski, a former pro football player who
became escheator in 2009, Delaware developed a reputation for aggressively
pursuing companies for unclaimed property. During his tenure, the state
collected $2.2 billion of such property.
Mr. Udinski “was a big reason for Delaware’s
success in the area,” said Chris Hopkins, a partner at accounting firm Crowe
Horwath LLP, which has advised several companies involved in
unclaimed-property audits.
The state confirmed that the bulk of the 125 audits
it ordered this year will be done by Kelmar, which has earned more than $90
million in fees from Delaware over the past three years.
Kelmar’s Mr. McQuillen said it was only natural
that Kelmar, one of the largest audit firms specializing in unclaimed
property, would get the bulk of the state’s business in that area. “We got
those jobs because of our capacity and the quality of the work we do,
nothing more. If not us, who?” he said in an email.
Over the years, companies including CA Technologies
Inc. and Staples Inc. have paid millions to the state to settle
unclaimed-property audits. This year, Select Medical Corp. filed a lawsuit
alleging Delaware officials were improperly claiming $300,000 in
unclaimed-property fees and called their tactics “unconstitutional and
illegal,” according to the complaint.
The U.S. government's auditing-industry regulator
on Tuesday said it found numerous deficiencies in the audits of KPMG LLP and
PricewaterhouseCoopers LLP it studied in 2012 as part of its annual
inspection of the Big Four accounting firms' work.
The Public Company Accounting Oversight Board
examined 50 audits and partial audits at KPMG in 2012 and found that 34%
were deficient, up from 23% in the previous year. KPMG failed to get
sufficient audit evidence to support its final opinion on financial
statements of the effectiveness of internal controls at companies, the
report said.
A spokesman for KPMG said the board's report plays
an "important role" and that the firm is "mindful of our responsibility to
the capital markets, and we are committed to continually improving our firm
and to working constructively with the PCAOB to improve audit quality."
Of the 54 audits and partial audits from
PricewaterhouseCoopers the PCAOB studied, the regulator found 39% to be
deficient, down from 41% a year earlier. The board found that like KPMG, PwC
failed to get enough evidence to support its audit opinion on financial
statements.
A spokeswoman for PwC said audit quality is the
firm's "top priority" and the company continues to invest in audit quality.
"Our investments together with the efforts of our
partners and staff, have successfully enhanced audit quality overall at
PwC," she said.
The latest reports from the board bring the total
deficiency rate for the Big Four accounting firms to 37%, up from 36% last
year. Earlier the PCAOB reported that 48% of Ernst & Young's 2012 audits
were deficient, while 25% were deficient at Deloitte & Touche LLP.
Huber, W.D., (2013) Audit Fees, PCAOB Sanctions, Sanction Risk, Sanction
Risk Premiums, and Public Policy: Theoretical Framework and a Call for Research.
Journal of Accounting, Ethics & Public Policy, 14(3), 647-663
Abstract: The Sarbanes-Oxley
Act of 2002 (SOX) was enacted to “protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws…” The Public Company Accounting Oversight Board (PCAOB) was
created as part of SOX and given a duty to impose monetary sanctions on PCAOB registered accounting firms for intentional, knowing, or reckless
conduct that results in violation of the statutory, regulatory, or
professional standards of auditing, or for repeated instances of negligent
conduct. This creates a new risk for both individual auditors and auditing
firms separate and distinct from business, audit, and litigation
risk—sanction risk. This paper establishes the legal and economic bases of
sanction risk and proposes that research be conducted to determine whether
sanction-risk premiums are being incorporated into audit fees and passed on
to clients by registered accounting firms thereby subverting the intended
purpose of the sanctions.
With all of the accounting and auditing problems
bombarding us today, we should focus on the common denominator: most
accounting errors and audit failures have their roots in the failure of a
company’s internal controls. Consequently, management should be held
responsible for this crisis in investor confidence, not the accountants. And
it sure seems like internal controls are central to earning this confidence.
If not, we are left with the old idiom: garbage in, garbage out!
Jensen Comment
Of course internal controls are the responsibility of management. But
accountants are not entirely off the hook. SOX requires auditors to dig deeper
into internal control quality controls. And management relies heavily upon its
own accountants to design, implement, operate, and review the internal control
systems. Hence, the accounting profession cannot duck its responsibility for
internal control failures as well as successes.
One problem with internal controls and auditing in general is that it's
almost impossible to assess the extent to which they deter fraud. They often get
blamed when they don't deter fraud events, but we fraud preventions are
nonevents.
And there is a bit of circular reasoning when managers like Andy Fastow and
Bernie Madoff bent on committing fraud. They have incentives to design flaws
into the internal control system. For example, the last thing Bernie Madoff
wanted was a competent and honest auditor. So he hired a sham auditor. So much
for Madoff's responsibility for internal control.
If you are interested in the new PCAOB proposal on
the auditor’s report, and most accounting educators should be, you can get a
good summary of what’s in the proposal and what are some of the contentious
issues by reading the statements of the Board members at the public meeting
when the release was unanimously approved. You can see from those statements
that most of the Board members were less than thrilled with at least certain
aspects of the proposal so it is far from a done deal. See:
http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx
Teaching Case from The Wall Street Journal
Accounting Weekly Review on August 16, 2013
SUMMARY: The article reports on proposed changes to the standard
form of audit report to discuss "Critical Audit Matters" [CAMS] and other
disclosures. "The moves are aimed at making the audit report more useful for
investors, as opposed to the current boilerplate letter that critics say
tells investors little of substance about a company's true condition." The
Public Company Accounting Oversight Board (PCAOB) issued the proposal and is
accepting public comments until
December 11, may hold a public roundtable
early in 2014, and plans for required implementation by early 2017.
CLASSROOM APPLICATION: The article may be used in an auditing class
when discussing forms of the audit report and the scope of responsibility
for reviewing items related to audited financial statements.
QUESTIONS:
1. (Advanced) What are the components of the standard, unqualified
form of an audit report on an entity's financial statements?
2. (Advanced) Under current audit practice, what departures from
the standard, unqualified report may be required? Under what circumstances
are these report changes required?
3. (Introductory) What are the proposed changes to the standard
form auditor's report as described in the article?
4. (Introductory) What entity is proposing these report changes?
Why are the changes being proposed?
5. (Advanced) According to the article, what expanded
responsibilities are being proposed for auditors? Compare the proposed
expansion to an auditor's responsibility under current standards to review
items related to audited financial statements.
Reviewed By: Judy Beckman, University of Rhode Island
Auditors would have to tell investors more about
the tough decisions they had to make in evaluating a company's finances
under a new proposal from the government's audit-industry regulator.
The proposal, issued Tuesday by the Public Company
Accounting Oversight Board, also would require auditors to evaluate whether
the assertions a company makes in its annual report are accurate—a move
which would take the auditors beyond their traditional rule of verifying a
company's numbers.
Both changes are part of a plan by the PCAOB to
overhaul and expand the audit report— the letter in every annual report in
which an auditor avers that the company's financial statements are "fairly
presented." The moves are aimed at making the audit report more useful for
investors, as opposed to the current boilerplate letter that critics say
tells investors little of substance about a company's true condition.
The PCAOB's proposal also would add some
disclosures to the audit report, notably information about how long the
auditor has worked for the company. Many companies have used the same audit
firms for decades, and some critics think that can lead to coziness that can
jeopardize an auditor's professional skepticism and ability to conduct a
tough audit.
"I think we've got a better mousetrap," said PCAOB
Chairman James Doty. He called the proposal "a watershed moment for
auditing."
Change won't come soon, though.
If the PCAOB's proposal is enacted in its current
form, the first audit reports with the new information wouldn't be required
until early 2017. The board is accepting public comments through Dec. 11 and
may hold a public roundtable early next year to discuss the proposal.
nvestor advocates and accounting-industry leaders
were both guardedly positive about the proposal. The Council of
Institutional Investors, which represents pension funds and other large
investors, called it "a positive step forward to considering improvements to
the usefulness of the standard form auditor's report."
PricewaterhouseCoopers LLP, one of the Big Four
accounting firms, "strongly supports any enhancements to the auditor's
report that will address the needs of today's users," said Vin Colman, PwC's
U.S. assurance leader.
Cindy Fornelli, executive director of the
industry's Center for Audit Quality, said her group is "committed to
embracing calls for responsible change to the auditor's report."
The proposed new report would retain the current
pass-fail judgment by the auditor on a company's numbers.
In addition, however, auditors would have to
discuss any "critical audit matters," or "CAMs," as PCAOB members and staff
are already calling them—parts of the audit in which the auditor had to make
its toughest or most complex decisions, or which gave it the most difficulty
in forming its audit opinion.
For instance, the PCAOB said, an auditor might have
a "critical audit matter" when it tries to determine whether a company has
assigned a reasonable valuation to a large portfolio of thinly traded,
hard-to-value securities.
"It's telling investors what kept the auditors
awake at night," said PCAOB member Jay Hanson.
Auditors also would have to evaluate other
information in a company's annual report beyond the financial statements—the
company's assertions in its Management's Discussion and Analysis section,
for example—to see if they have any errors or misstatements and to make sure
they don't conflict with the numbers the company is reporting.
Not everyone was on board with the PCAOB's
proposal. PCAOB member Steven Harris said he voted to issue the proposal to
start a discussion, but that he still thought it was "not strong enough to
meet the concerns of investors."
Continued in article
August 19, 2013 reply from Steve Kachelmeier
Thanks Bob. This makes for excellent
case-discussion material -- I used it last spring in my intro-audit class
based on the IAASB's proposal. Two major themes of discussion emerged.
First, to the extent that an auditor reveals specifics related to audit
strategy, this can make (future?) audits more predicable, potentially
leaving the auditor vulnerable. Second, will users really understand what it
means when an auditor identifies a certain area as high risk? Presumably,
the auditor would have undertaken additional tests commensurate with the
risks identified, but there is a possibility that users could interpret
"high risk" accounts as simply being less reliable.
Overall -- I strongly support using this proposal
as a case exercise. It does not need to follow the specific format outlined
in the post -- just get students to think about and evaluate the
second-order, potentially unintended consequences of such an initiative.
Steve
August 19, 2013 reply from Denny Beresford
The three examples of critical audit matters (CAMs)
that would be included in the new auditor's report that the PCAOB gives in
the proposal are particularly interesting. First, each of these could be
read, in my opinion, by a reasonable person as a "condition" or
qualification as to the overall fair presentation of the report - a sort of
quasi "subject to." See if you agree when you read them. Second, for most
companies, there would almost certainly be several (4-7?) of these CAMs that
would have to be included and judging from the examples given they would
expand the typical report to perhaps five pages or more. Thus, the retained
"pass-fail" objective, which the PCAOB states is still quite important,
would be buried in a sea of words and would require bold face type or some
other form of highlighting to bring to investors' attention.
Is this real progress?
Your basic example is pretty much the same as
Hypothetical Auditing Scenario #3 - Fair Value of Fixed Maturity Securities
Held as Investments That are Not Actively Traded, starting on page A5-74 of
the PCAOB exposure draft. What makes the situation even more problematic
than what you describe is that, after explaining all of the reasons why this
was determined to be a critical audit matter, the PCAOB illustration does
not say anything about the auditor having reached reasonable assurance about
this matter. The reader is simply left to reach his own conclusion about the
implication of all of the special audit work. Presumably, the PCAOB believes
that by a later overall clean opinion the reader will understand that the
individual critical audit matters were just there to help him understand the
financial reporting better - but is that so?
A few other observations.
The draft says that the disclosures only need to
describe the critical audit matters and not necessarily describe what
procedures the auditor has applied to address them. But all three
illustrations given in the draft include the latter. In practice, I'm not
sure which direction auditors would go if they had a choice. Adding the
description of the procedures makes them much more problematic, in my view.
Otherwise, they might be nothing more than a roadmap to the company's
financial statements.
With respect to my observation about no position
being taken on the reasonable assurance about the specific CAMs, while this
seems to be an obvious omission, on the other hand auditor's reports are on
the financial statements taken as a whole and I can see where they may have
major reservations about adding comments about particular aspects of the
financial statements.
The exposure draft notes that in the normal
situation the Board expects that there would be at least a few CAMs included
in all but the simplest company reporting situations. Throughout the draft
there is language that would seem to drive auditors to err on the side of
more rather than fewer of these being reported, else bad consequences
through the inspection process. This will not be well received by company
management and counsel.
SUMMARY: Greece's austerity measures seem to paying off as "budget
data released Monday...showed the country turning last
year's steep deficit into a surplus, potentially bolstering its case for
further debt relief from international creditors....Euro-zone officials have
promised to help Greece reduce its debt pile if it lives up to its vows for
tighter budgets, improved tax collections and a restructuring of its broken
economy. But the German government...again rejected the prospect of any
additional debt relief for Athens...."
CLASSROOM APPLICATION: The article may be used in a governmental
accounting class to add an international perspective to students' knowledge
base.
QUESTIONS:
1. (Advanced) Define the terms budget surplus and budget deficit.
2. (Advanced) Based on the description given in the article, in
what fund did the Greek government report a budget surplus? Explain your
choice.
3. (Introductory) Why are the Greek budget results of interest to
other European country governments and to the Euro-zone?
4. (Introductory) What are the impacts of the budget austerity on
the overall Greek economy?
5. (Advanced) In addition to cutting costs, how has the Greek
government increased its revenues in order to achieve this budget surplus?
Reviewed By: Judy Beckman, University of Rhode Island
Greece's fiscal discipline efforts appear to be
paying off, according to budget data released Monday that showed the country
turning last year's steep deficit into a surplus, potentially bolstering its
case for further debt relief from international creditors.
But other data highlighted how much the steep
spending cuts have cost the country. The Greek economy contracted by 4.6% in
the second quarter, dragging out a painful recession that began six years
ago, government figures showed.
Although the shrinkage was slower than in previous
quarters, it added to doubts as to whether Greece will be able to return to
growth in 2014 as forecast, and start lowering record unemployment rates.
Euro-zone officials have promised to help Greece
reduce its debt pile if it lives up to its vows for tighter budgets,
improved tax collection and a restructuring of its broken economy. But the
German government—with elections less than six weeks away—again rejected the
prospect of any additional debt relief for Athens, despite the new data.
The Greek Finance Ministry reported a primary
surplus—which excludes interest payments on debt as well as local government
and social security spending—for the first seven months of the year.
The surplus reached €2.6 billion ($3.5 billion)
against a deficit of €3.1 billion a year earlier.
The data make "the achievement of a primary budget
surplus at the end of the year for the general government all the more
feasible," said Deputy Finance Minister Christos Staikouras. It would be
thecountry's first surplus in more than a decade.
Budget spending fell to €32.7 billion from €40.8
billion in the first seven months of 2013. Income rose 11.4% to €30.8
billion.
Diego Iscaro, a senior economist at IHS Global
Insight, described the figures as being positive. "Reaching a primary
surplus will be key to unblock further support from its euro-zone peers," he
said. "On this regard, we expect a decision during the second quarter of
2014."
The country also managedMonday to seal its first
significant asset sale in its long-delayed privatization program.
After months of uncertainty, the government signed
a deal selling a 33% stake in its gambling monopoly OPAP SA to the Czech-led
private equity consortium Emma Delta for €652 million, the agency overseeing
the privatization program said. But Greece is still likely to fall behind an
original target of raising €2.6 billion from privatizations this year.
Germany's finance ministry stuck with its steadfast
rejection of further debt relief for Greece, following a weekend report in
the news magazine Der Spiegel that said the German central bank expects a
new Greek aid package would be necessary by the beginning of next year, at
the latest. The Bundesbank declined to comment on the report.
With nationwide elections in Germany next month, a
spokesman for the German finance ministry told reporters "a second haircut
[on debt] is out of the question."
Greece is still mired in deep recession, making it
more likely that it will need more loans or further debt relief next year
despite an improving fiscal outlook.
Germany's refusal to talk of a debt reduction for
Greece has put it at odds with the International Monetary Fund, which was a
partner in Greece's €173 billion bailout, along with the European Union.
Without additional euro-zone financing, the IMF argues that Greece might not
be able to pay back its loans to the fund.
Meanwhile, the austerity behind Greece's improving
fiscal performance has seriously hurt the economy.
The statistical agency Elstat showed a contraction
of gross domestic product to be slowing in the April-to-June period, versus
a drop of 5.6% in the first quarter and a 5.7% drop in the last quarter of
2012.
The second-quarter contraction rate is the softest
since the third quarter of 2011 but the momentum from the downturn could
keep the economy in the red for another year.
Greece expects the economy to shrink by 4.2% this
year, though government officials have indicated that a
stronger-than-expected tourism season this summer could provide some relief.
The country's jobless rate hit 27.6% in May.
"There's a hope that a good tourist season can have
a positive impact on the third quarter, although GDP is seen contracting at
least until the end of next year," said Mr. Iscaro.
JPMorgan
Chase’s “London Whale” appears likely to swim away from trouble
while two former colleagues face criminal charges.
The striking
thing about the fraud charges unsealed today against a pair of
former
JPMorgan (JPM) bankers is not that their alleged
effort to conceal billions in trading losses produced a criminal
case in the U.S. Instead, what’s striking is that Bruno Iksil,
the French ex-banker dubbed the London Whale and originally
depicted as being at the center of the scandal, now seems
unlikely to face charges.
Iksil has
been talking to the FBI and U.S. prosecutors for months as part
of a deal thought likely to win him immunity from criminal
liability,
Bloomberg News and
other media outfits are reporting.
More specifically, it appears as if Iksil, who earned the whale
moniker because of the heft of his trading book, has helped
implicate his former colleagues. All three of them were fired by
JPMorgan after the largest U.S. bank revealed losses last year,
ultimately exceeding $6 billion, on wrong-way derivatives bets.
One lesson from
the case, then, is that when the Feds start to investigate, it
can pay to be the first one to cooperate and tell your version
of what went down.
Here are the
basics from Bloomberg News:
Javier
Martin-Artajo, a former executive who oversaw the trading
strategy at the bank’s chief investment office in London,
and Julien Grout, a trader who worked for him, were charged
with conspiracy, wire fraud and making false filings in
complaints unsealed today in Manhattan
federal court. The two men engaged in a scheme to falsify
securities filings between March 2012 and May 2012,
according to the government.
JPMorgan Chief Executive Officer Jamie
Dimon characterized the $6.2
billion loss as “the stupidest and most-embarrassing
situation I have ever been a part of.” First disclosed in
May 2012, the bad bets led to an earnings restatement, a
U.S. Senate subcommittee hearing and probes by the
Securities and Exchange Commission and U.K. Financial
Conduct Authority. Dimon, 57, whose own pay was cut in half,
pushed out senior executives including former Chief
Investment Officer Ina Drew, who oversaw the London unit
where the loss took place. The bank said it clawed back more
than $100 million in pay from employees who were involved
with, or oversaw, the trade.
In the wake of
the charges, lawyers for the accused men either declined to
comment or didn’t immediately respond to a request for comment,
Bloomberg News reported. The next question in the case will be
whether the defendants, who are both said to be in Europe, will
surrender to U.S. authorities, or whether prosecutors in New
York will seek to have them extradited. The whale, meanwhile,
reportedly continues to cooperate with the Feds.
"Conflicts of Interest Raise Questions about Governor Kasich’s JobsOhio
Program," by Steven Mintz, Ethics Sage, August 15, 2013 ---
http://www.ethicssage.typepad.com/
The JobsOhio program is under investigation once
again. I have previously blogged about independence questions raised with
respect to the audit of the program by KPMG.
As the state’s lead economic-development agency,
Jobs-Ohio is charged with recommending financial incentives for companies
seeking to locate in the state.
Last fall, charges were leveled at KPMG for its
lack of independence in the JobsOhio audit. As KPMG was auditing JobsOhio’s
books last fall, the global auditing and consulting firm also was seeking $1
million in taxpayer money from JobsOhio for an unnamed client.
JobsOhio, the state’s privatized development
agency, says that the grant request was handled separately from and without
the knowledge of the firm’s auditing division. But the timing raises ethical
questions.
The situation also exposes weaknesses in the laws
creating Governor John Kasich’s JobsOhio, because recipients of state aid
are kept secret until the project is approved.
Laura Jones, a spokeswoman for JobsOhio, said KPMG
LLP’s Columbus office conducted the audit, but the grant was sought by an
out-of-state office.
“The fact that KPMG serves JobsOhio and countless
other businesses ... from the same office here in Columbus is not a conflict
in our minds,” she said, adding that the state also monitors and ultimately
approves taxpayer-funded incentives to companies.
KPMG was chosen by JobsOhio to conduct an audit
required by law. On November 5, 2012, about the time the audit was being
conducted, KPMG also was listed on a sheet of eight pending grant
commitments from the state for fiscal year 2013, according to a document
obtained by the Columbus Dispatch through a public-records request.
JobsOhio officials said the record is confidential
and the state released it by mistake.
Officials from the Kasich administration, JobsOhio,
and KPMG indicated that the grant was not for KPMG itself, but for an
anonymous KPMG business client. A KPMG spokesman said only that “we’re
confident we acted properly at all times. It would be inappropriate for us
to comment further due to client confidentiality.”
All the excuses and explanations do not mask the
fact that KPMG lacked independence in appearance if not in fact raising
ethical questions about the JobsOhio program. KPMG’s behavior in this matter
fails to meet the independence and objectivity ‘smell test.’
Now, another matter has arisen bringing into
question whether the JobsOhio program should be shut down. On August 5th of
this year, two Cincinnati lawmakers called for an ethics investigation into
possible conflicts of interest among board members of JobsOhio.
The lawmakers said Governor Kasich’s job-creation
organization may be cutting secret deals that benefit big business and
donors who support him and other Republicans.
Their complaints are based on a Dayton Daily News
report last month that found six of nine members of the JobsOhio board of
directors have financial ties to companies that got tax credits through the
agency and the state.
“This looks terrible,” said state Representative
Connie Pillich, D-Montgomery, who joined state Representative. Denise
Driehaus, D-Clifton Heights, in calling for an investigation into JobsOhio
by the state ethics commission.
“It’s a symptom of a larger problem,” Pillich said.
“It reeks of secrecy, self-dealing and everything bad government can be.”
Kasich said Thursday the call for an ethics
investigation is “a bunch of political carping.” JobsOhio doesn’t need to be
more open about its work, the governor said. “There’s tremendous
transparency,” Kasich said. “This is all politics.”
A spokeswoman for Kasich, Connie Wehrkamp, said
board members do not have conflicts of interest and that most of the deals
cited by Democrats were in place before JobsOhio began work. She also said
board members do not vote on or personally approve tax breaks to companies.
Continued in article
Brazil is Using Derivatives for Speculating
Rather Than Hedging Purposes
From the CFO Journal's Morning Ledger on
August 29, 2013
Brazil’s raises interest rate to 9% Brazil’s central bank raised its benchmark interest rate to 9% in
an effort to prevent a declining real from pushing up inflation,
Bloomberg reports.
Meanwhile, Brazil’s recent decision to offer up to $40 billion in currency
swaps by year-end has put a lid on the real’s sharp depreciation without
burning a single dollar of the country’s foreign reserves,
Reuters’s Macroscope notes.
The move addresses the demand for corporate insurance,
as companies rushed to futures markets to hedge their dollar-denominated
debt. But what if they are not hedging but speculating?
A paper shows that
many companies were speculating in 2002, when the central bank used a
similar strategy, providing strong evidence that the liquidity offered by
official interventions could be used for risky bets.
From the CFO Journal's Morning Ledger on
August 27, 2013
The
Morning Ledger: Stock Options Face Extinction The
Morning Ledger from CFO Journal cues up the most important news in corporate
finance every weekday morning. Get The Morning Ledger emailed to you each
weekday morning by clicking
here. Follow us on Twitter @CFOJournal.
Once a popular form of pay, stock options are
disappearing as companies gravitate toward restricted stock awards. The
trend is a result of shareholder demands, tax-law changes and the financial
crisis, which has left many employees holding worthless options,
Emily Chasan writes in CFOJ.
In 1999, stock options accounted on average for about
78% of long-term incentive packages. That figure fell to 31% last year and
is expected to shrink to 25% in the next two years, according to consulting
firm James F. Reda & Associates.
As social media and social business expand, internal
audit (IA) is an important, but often overlooked, resource organizations
have to help assess, monitor and reduce associated risks. With their
training, experience and broad view of the organization, internal auditors
can play a vital role in an organization's social business initiative. Learn
areas where IA can help develop processes and implement controls to address
reputational, governance and third-party risks.
From the CFO Journal's Morning Ledger on
August 14, 2013
The Justice Department is flexing its antitrust
muscles.
The DOJ’s surprise move to
block the merger of American Airlines parent
AMR and
US Airways
puts the brakes on the industry’s rush to consolidate—and it could dash
AMR’s hopes of exiting bankruptcy anytime soon, the WSJ reports. If the
merger plan falls, it would extend AMR’s stay in Chapter 11, possibly until
late 2014. The company would have to come up with a new reorganization plan,
revise its financial projections and renegotiate with bondholders, unions
and other creditors—all of which would take time. The DOJ action also
underscores the newly aggressive approach of the
antitrust division, the NYT says. In 2011,
it blocked the merger of
AT&T and T-Mobile,
and this year it forced
Anheuser-Busch InBev to alter the terms of its takeover of Corona
before approving it. The lawsuit they filed yesterday said the American-US
Airways deal would go too far and hurt competition because it would leave
four airlines controlling more than 80% of the U.S. market, the Journal
notes.
Experts in antitrust law tell Reuters that
the Justice Department lawsuit
signals a sincere intention to block the deal, not just a negotiating ploy
to get concessions before possible approval. Jonathan Lewis, an antitrust
lawyer in Washington, called the suit “very powerful” because it quotes
company documents and executives anticipating higher prices through
consolidation. “If there were going to be a settlement, it probably would
have happened already.”
As the WSJ points out, the Justice Department built
its lawsuit largely
on company executives’ own past comments.
The 56-page court submission is full of remarks company officials allegedly
made in settings from industry conferences to internal publications, the
Journal says. The lawsuit quotes US Airways President Scott Kirby as saying
that industry consolidation has allowed airlines to increase fares and
charge fees for services like checked baggage. And the department said a US
Airways presentation last summer observed that fewer airline competitors had
allowed the industry to “reap the benefits.”
Jensen Comment
A commentator on CBS News last night disagrees that the DOJ really wants to
block the airline merger. He thought the main intent was to gain concessions
such as giving up blocks of gates at major airports and retaining flights into
some smaller airports. For example, cancelling service that is not especially
profitable due to competition from Southwest Airlines is not no conducive to
customer convenience and cost. For example, If US Airways service from
Manchester NH to NY Kennedy would be terribly inconvenient for passengers bound
for outside the USA since Southwest does not have flights to major international
airports like NY Kennedy.
American and US Airways now control nearly 60%
of the gates at Washington National. Not giving up some of these gates to the
competition will upset our politicians in the Nation's Capitol.
Personally I hope the DOJ wins this lawsuit. Oligopoly without pricing and
service regulation is not good for consumers.
From CFO Journal's Morning Ledger on
August 9, 2013
Did we waste the recession?
To demonstrate how difficult it is to get a bead on the health of the
financial industry five years after the economic crisis, Adam
Davidson of the New York Times Magazine invited
two finance professors to dig into Citgroup’s most recent SEC report. Within
the “300-page tome,” the experts found three widely varying numbers
representing the bank’s capital-adequacy ratio—a finding similar to a doctor
providing a patient with three temperatures. If finance professors can’t
determine a bank’s health, “how are the rest of us supposed to make any
sense of this?” Davidson talks to banking experts across the political
spectrum who favor strong and simple bank rules that define capital narrowly
and debt broadly. The resulting ratio makes reviewing the soundness of a
bank “as simple as checking the letter grade of a restaurant in New York
City.” Davidson admits that bankers and some economists say simplified rules
would make lending more burdensome. “In finance, though, complexity often
means profit,” he writes. “Simplicity might be good for economics, but it’s
lousy for Wall Street bonuses.”
Frank Partnoy and Lynn Turner contend that bank accounting is an exercise in
writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 --- http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the great video!
From the CFO Journal's Morning Ledger on
July 30, 2013
Big data and analytics are becoming a competitive
necessity, as is the ability to work effectively with “quants.” Thomas H.
Davenport, President's Distinguished Professor of Information Technology and
Management at Babson College and director of research at the International
Institute for Analytics, offers a primer in this excerpt from his article
“Keep Up with Your Quants,” in the July/August issue of Harvard Business
Review.
Last week one of the network TV news shows showed surveillance video of a man
using a mysterious tool that allegedly can open any locked car door.
Purportedly, experts who have never seen this tool haven't the slightest idea
how it works.
Under the proposal, footnote disclosure would be
required if a company determines it is either 1) more likely than not that
it will be unable to meet its obligations within 12 months of the financial
statement date or 2) known or probable that the entity will be unable to
meet its obligations within 24 months after the financial statement date
without taking actions outside the ordinary course of business.
SEC filers would be required to evaluate whether
there is substantial doubt about the entity’s ability to continue as a going
concern and, if so, express that conclusion in the footnotes using the term
"substantial doubt" and specific phrases that use the term "going concern."
Currently, U.S. GAAP and the SEC’s rules on MD&A
require companies to disclose all matters that are material. However, there
is no financial statement disclosure requirement in the United States
specific to going concern. The proposal provides guidance on management’s
responsibilities for evaluating and disclosing going concern uncertainties.
Jensen Question
When over a thousand banks and mortgage companies failed in 2007, why were
virtually all of them given clean audit opinions without any questions of going
concern exceptions shortly before they went belly up? They obviously were not
going concerns ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Jensen Comment
What especially caught my eye is the course on writing Wikipedia articles. In
some ways it makes sense since good Wikipedia articles are viewed by millions of
people and, in most cases, they are only lightly reviewed or not reviewed at
all. Of course most Wikipedia articles can also be edited and changed by others
unless they are in the topic-controlled subset of mostly controversial modules
subject to vicious and falsifying editing. This is what gives Wikipedia its
scholarly strength and weakness.
Jensen Comment
There are hundreds of thousands of small companies that are probably worse
employers to a point where employees are praying to work for Wal-Mart where low
wages are higher and there are benefits such as health care and free online
degrees. Many small businesses are dropping benefits or opportunities to earn
benefits like health care. They never had education benefits. Job security is
becoming nill in strip malls that are now half empty.
Somewhat telling is the comment that “Radioshack constantly changes their focus
because they are a struggling company.” Companies struggling to survive are not
likely to be good places to work --- for a number of reasons. One of these
reasons that those co-workers and supervisors who have not already abandoned
ship are like to be the bottom of the barrel of remaining employees who have
fewer choices to relocate. Such a working environment is probably not pleasant.
Struggling companies operating at or near a loss each year are resource
challenged to make life pleasant for employees. Remaining employees may be asked
to take pay cuts and/or be forced to work fewer hours each week. Travel budgets
may make it possible to only stay in roach motels.
The only hope when working for a struggling company is that possible light at
the end of the tunnel. For many struggling companies like the USA Postal Service
there is no light at the end of the tunnel. Our Franconia Post Office has been
reduced to 1.5 employees sorting mail and manning the long-lined counter 5.5
days per week. Return to the good days when there were 3.5 employees probably
will never happen. What used to be one of the most secure careers in the USA is
now one of the worst careers in the USA.
Digital texbooks are gaining ground in education,
as shown by a
study released by the Book Industry Study Group
earlier this year: Students' preference for print text over digital dropped
from 72 percent in November 2011 to 60 percent in late 2012.
And a recent EDUCAUSE study finds that students and
faculty value lower-cost textbooks -- though they aren't sure that the
current digital textbook model will drive prices down.
Both students and faculty cited cost as the No. 1
factor they considered when looking at digital textbooks, followed by
availability and portability. Some of the biggest barriers to adoption
included the funding model and fee structure.
While the students in this pilot didn't have to pay
for their e-textbooks, they would pay a mandatory fee per class for
e-textbooks outside of the pilot. The mandatory fee guarantees that all the
students at a university would purchase a digital textbook and thus give the
publisher a larger number of customers. In turn, the publisher would charge
the university less for buying in volume.
But in written comments, students said they wanted
to be able to opt out of fees and find other ways to get the content. And
it's up in the air whether they would take classes with a fee: one-third
responding that yes they would, nearly a quarter said no, and 43 percent
chose maybe.
Faculty also supported students' desire for less
expensive options and choices. And traditional publishing models -- even
revised for digital publishing -- may not cut it.
They noted that students look for study materials
in many places, which is why it's important to consider other types of
course materials besides e-textbooks. And since this is an ever-changing
field, education leaders would be wise to consider many business models, as
well as the needs of different groups of students and faculty.
One of the keys in making decisions about digital
content is "to understand what students and faculty need from these course
materials and keep that front and center," said Susan Grajek, vice president
of data, research and analytics for EDUCAUSE.
In the
ECAR 2012 Study of Undergraduate Students and Technology,
57 percent of students said they wished their
instructors used open educational resources more, compared to 47 percent who
wanted more e-textbooks. In the previous year, nearly a third of students
wanted more e-textbooks, and 19 percent of students wanted open educational
resources.
In this pilot, some students and faculty really
liked the e-textbooks, and some hated them so much that they bought a print
textbook, Grajek said.
Faculty members can be change agents when it comes
to different technology, but they need support. In this pilot, faculty
members said one of their biggest barriers was limited access to the
e-textbooks.
They only had the e-textbooks during the course, so
more than half of them didn't make annotations and other notes because they
would disappear once the course was over. Interestingly enough, students in
96 percent of the courses used highlights, sticky notes, annotations or
bookmarks in their e-textbook.
Continued in article
Jensen Comment
If e-Textbooks were available 50 years ago they would definitely be cheaper
because savings in terms of hard copy printing, inventory, and distribution
costs.
But the costs of hard copy printing, inventory, and distribution costs have
changed dramatically over those 50 years such that e-Textbooks are no longer
"definitely" cheaper.
Consider for example the way that Amazon saves on inventory costs of used
books. Amazon eliminated itself as a middleman in the buying, warehousing, and
redistributing used books. It is now simply provides a guarantee that the buyer
of a used book will receive that book directly from households who are willing
to ship the book directly to the used book buyers. In the grand scheme of things
inventory costs are cheaper in aggregate. The marginal cost of storing one book
in each of 100,000 households is virtually zero. But the marginal cost of
storing 100,000 books in a single warehouse is huge. Thus, Amazon has a way of
saving a lot of inventory cost by having each current owner store the book at
home.
And computers have greatly changed the production functions of printing
books. Five decades ago, the marginal cost of each book was reduced by having
enormous printing press runs due to economies of scale. This unfortunately led
to huge inventory costs. Distribution costs were also relatively high since the
printing houses were centrally located and had to ship to warehouses around the
world.
Today, computerized print runs can be much smaller and even reduced to a
point where a hard copy order is received before the book is printed. And the
book can be printed at computer sites all over the world.
Hard copy has less sharing risk than electronic versions. Students and other
book thieves have talents for staying a step ahead of electronic book
publishers, including sharing of passwords and downloading of electronic books
to criminal servers. Sometimes enemies of the United States make a business out
of selling purloined software and electronic literature.
Shipping costs still exist for hard copy books, but electronic book
distribution is not free given the costs of hardware and technician labor that
goes into keeping books available in the clouds.
In terms of textbooks, many of the huge costs do not go away with a shift
from hard copy to electronic versions. Authors must still be paid and sometimes
the authors demand more if they must put in more labor keeping books up to date
year-to-year rather than every five years. Frequent updating is probably the
major advantage of electronic books in the clouds relative to hard copy.
Textbook publishers must still pay representatives to work each college
campus trying to entice professors to adopt particular textbooks. Electronic
marketing has not yet taken the place of face-to-face communications between
sellers and instructors.
Textbook publishers must still pay to participate in expensive trade shows
such as when setting up booths at academic conferences. Sales personnel must now
be trained better to answer questions regarding such things as technology
supplements that accompany textbooks.
In the final analysis I think cost savings will not be the key competitive
advantage of electronic textbooks over hard copy. The key competitive advantages
will be such things as the following:
Ease of continuously updating electronic textbooks, especially those
that are in the clouds.
Multimedia features such as video clips and interactive spreadsheets
that can be included in electronic textbooks.
Reader conveniences in electronic books such as word search and
cut-and-paste quotation conveniences.
Possible cost savings by cutting out the publishing companies when
authors distribute their electronic books directly to customers or by
marketing their books via Amazon rather than McGraw Hill.
Warning: I did not make the link live because the Newser link for me
set off all sorts of pop up windows.
If McDonald's Doubled Wages, Big Macs Rise ... 68 Cents, July 30, 2013
Newser | 07/30/2013 |
By John Johnson
Fast-food workers want to make a "living wage" of
$15 an hour. Chains say they'd have to jack up prices if that ever happened.
But just how high? Turns out, not as high as you might think, at least
according to a University of Kansas researcher. He found that if McDonald's
immediately doubled the wages of all its workers (including the $9 million
CEO), it would have to raise the price of a Big Mac 68 cents, from $3.99 to
$4.67, reports the Huffington Post. Items on the Dollar Menu technically
wouldn't qualify anymore, but that hike...
Jensen Comment
Most accountants know better than to make these naive conclusions and overly
simplified implications in this article. To do a proper analysis an analyst has
to do what is called a full CPV analysis and product mix analysis that may also
entail doing a complex simulation in which many factors interact such as product
demand as a function of alternative prices for other food items on the menu and
nonlinear relationships between product mix/sales and customer demand
elasticity.
Yes McDonalds might make the same profit before and after raising prices on
all its menu choices to double wages, but it is not likely without knowing just
how elastic customer demand is with pricing and sales mix. It may well be that
prices would have to triple in order to make the same profit on greatly reduced
customer demand. Perhaps prices could be decreased when wages are increased if
robots take over the cooking and packaging. In cost accounting this is called
changing the "operating leverage." Much depends on demand elasticity and
changes in operating leverage.
At a minimum, McDonalds should test market a sampling of stores by changing
prices and sales mixes. This is difficult, however, since McDonalds would not be
alone in raising prices if the legal minimum wage was doubled. In that case all
the other restaurants from fast food to five-star restaurants would have to
raise prices. And grocery stores would have to raise prices and make cooking at
home much more expensive.
Nobody really knows what the direct and higher order societal effects of
raising the minimum wage. For example, how many full-time and part-time jobs
would be lost? At some point in the cost function, it does become more
profitable to add more operating leverage with robots. Just ask the automobile
manufacturing companies that have adopted robots big time. We don't usually
think of Hal as cooking our Big Macs, but Hal can probably cook Big Macs better
than most of the cooks in the McDonalds chain.
I should add that my message has zero to do with whether doubling the minimum
wage is a fair and equitable thing to do at this point in time.
But the case should not be made on top of naive (phony) analyses that mislead
the public. Deceptive studies weaken rather than strengthen the case for
doubling the minimum wage.
Physicists stole all the easy problems. They usually do not have to
predict human interactive behavior.
Jensen Comment
One word of caution --- "Better teacher" does not necessarily mean being a "more
popular" teacher, although steps take to be a better teacher may make you more
popular. For example, devoting more time to office hours can make you both a
better teacher and a more popular teacher. Making Camtasia videos of the most
difficult learning tasks in your syllabus (e.g., deriving bond yields or valuing
interest rate swaps) might make you a better teacher, but don't expect students
to flock to your courses just because you are teaching the the toughest things
in your course better.
August 11, 2013 message from Joe Hoyle
Hi Bob,
Thanks so
much for asking. I had two presentations and I thought they both went
well. I always believe (at these AAA meetings) that there is a relatively
large group of professors who really like having a deeper conversation about
teaching.
Here’s an
overview of my two presentations --- probably a lot more information than
you wanted. I'm waiting for the last season of Breaking Bad to get started
later this evening so this gives me a few minutes until then.
I was on
a panel to discuss the speeches given at the
Wednesday morning plenary sessions. The topic was “The
Future of Teaching and Learning.” When my turn on the panel came to speak,
I issued three warnings. Anytime you look into the future, I think there
ought to be warnings.
I told
the group that the first warning was “pro technology” and the last two
warnings were “technology challenges.”
1 – I
talked about Dan Brown’s new book “Inferno” and his dire warnings that the
world was soon going to be destroyed through over population. I mentioned
that the world had numerous serious problems such as clean drinking water,
poverty, disease, energy, pollution, religious intolerance, racism, sexism,
etc. and that the only way I saw that we were going to solve these problems
was to educate a much higher percentage of the world’s population. What
percentage of the 7.103 billion people on this planet are well educated?
The answer has to be abysmally low. No wonder we have problems. And, the
only way to start educating a sufficient number of people is through
technology. Whether we like technology or not, it may be the only way the
planet survives so we should all think about how we can improve that
technology and get more people around the world educated. I can criticize
technology all day (I often do) but I do think its importance to education
cannot be overstated.
2 – I
talked about the words of Ken Bain (author of “What the Best College
Teachers Do?”) who gave a presentation on our campus a few years ago.
Someone asked him how to become a great teacher and Dr. Bain replied that
that was easy – just get the students to care about what you are teaching.
I warned that I was afraid we might be overlooking that component of
education as we rushed to technology. If we let people self-select MOOCs,
we might be getting biased results because the students already care about
what is being taught. I said that I wanted to see a MOOC succeed when the
students did not start out the course caring about the subject. I think
that will be a truly revolutionary moment. Education has to be about more
than learning what a person wants to learn “Can technology create caring?”
seems like the title of a Philip K. Dick novel.
3 – I
have long argued that we have not spent enough time identifying the problem
with education (including accounting education). We tend to focus in on
the symptoms and not the problems. I think the major problem (which I have
told you before) is that we focus on memorization and not the development of
critical thinking skills. Therefore, my final challenge was that
technology had to get beyond memorization and into something deeper. If
not, then in 5-10 years, we will have another commission trying to figure
out why accounting education was not working. Colleges cannot continue to
exist unless we can push students beyond memorization.
My other
presentation was in the dreaded
Wednesday afternoon slot. I had 90 minutes to talk about my
teaching blog because it had won the accounting innovation of the year
award. However, I was delighted that we had about 35-45 folks present and
no one went running from the room screaming. And, I don’t think anyone
fell asleep.
In fact,
I got the nicest compliment that I think I’ve ever received. One gentleman
told me that he had been coming to the AAA meetings for 40 years and that
this was the best presentation he had seen. Can it possibly get better
than that? Heck, he was probably just being kind but I was touched.
Since
this presentation was supposed to be about my blog, I decided to discuss 14
questions (I think I actually only got through 11 or 12 before time ran out)
about teaching. I gave the question, I gave my answer, and then I listed
the date on which I had written about that answer in my blog. That seemed
to me to be a good way to introduce folks to what I try to do on the blog.
Plus, if they wrote down the dates they could get more information on
something that interested them.
Here are
a few of the questions that I went over with the group:
--What’s
the best fatherly advice that I can give to a new teacher? (9/28/11)
--Why is
good teaching even important? (7/15/13)
--Why
should a person consider writing a blog about teaching? (4/11/12)
--Why
should people want to become better teachers? (11/3/12)
--What is
your “fly-on-the-wall goal” as a teacher? (2/28/10)
--What’s
the most popular advice that I ever gave on my blog? (5/1/11)
Anyway,
you kind of get the sense of what took place.
It was a
nice conference. My wife and I made it to both Getty Museums which were
spectacular but did not make it to Disneyland. Van Gogh beat out Mickey
Mouse. However, we did have a great Italian dinner in Downtown Disney.
Hope you come to the meeting next year – I always need plenty of people to
talk with.
Abstract
When explaining others' behaviors, achievements, and failures, it is common
for people to attribute too much influence to disposition and too little
influence to structural and situational factors. We examine whether this
tendency leads even experienced professionals to make systematic mistakes in
their selection decisions, favoring alumni from academic institutions with
high grade distributions and employees from forgiving business environments.
We find that candidates benefiting from favorable situations are more likely
to be admitted and promoted than their equivalently skilled peers. The
results suggest that decision-makers take high nominal performance as
evidence of high ability and do not discount it by the ease with which it
was achieved. These results clarify our understanding of the correspondence
bias using evidence from both archival studies and experiments with
experienced professionals. We discuss implications for both admissions and
personnel selection practices.
. . .
General Discussion
Many studies in the social psychology and
organizational behavior literatures have found that people tend to attribute
too much influence to disposition and too little influence to situational
factors impinging on the actor when explaining others' behaviors,
achievements, and failures. This common tendency, labeled the correspondence
bias or the fundamental attribution error, has been shown to be robust
across a variety of contexts and situations. Yet, to date, most of the
evidence about this bias comes from laboratory experiments with college
students as participants, and its implications for field settings and
organizational outcomes are seldom examined. Using data from both the
experimental laboratory and the field, we extend prior research by
investigating whether this tendency leads experienced professionals to make
systematic mistakes in their selection decisions, favoring alumni from
academic institutions with higher grade distributions and employees working
in favorable business climates. Our results indicate that candidates who
have demonstrated high performance thanks to favorable situations are more
likely to be rated highly and selected. Across all our studies, the results
suggest that experts take high performance as evidence of high ability and
do not sufficiently discount it by the ease with which that performance was
achieved. High grades are easier to achieve in an environment where the
average is high and so are less indicative of high performance than are the
same grades that were earned from an institution with lower grades on
average. Sky-high on-time percentages should be less impressive at an
airport that was running well before the manager got there. Although we
focused on two selection scenarios, we believe the results speak to other
selection and evaluation problems.
Indeed, we see consistent evidence of situation
neglect in contexts where political and business leaders are credited with
performance that derives directly from stochastic economic factors. Voters
face a Lewinian dilemma when they evaluate the performance of incumbent
politicians running for re-election. They should reward politicians who
create positive change for their constituencies while considering what
portion of those changes were due to lucky or exogenous factors. Wolfers
[41] finds that
voters, like our admissions professionals and executives, favor politicians
that had the good luck to work under favorable conditions. Voters are more
likely to reelect incumbents after terms marked by positive national
economic trends or (in the case of oil-rich states) high oil prices. CEOs
also benefit from fortuitous economic conditions for which they are not
responsible. Bertrand and Mullainathan
[42] present evidence
that CEO compensation is driven to equal degrees by their management and the
uncontrollable economic conditions in which they managed. Stakeholders in
these cases have strong incentives to reward leaders who add value above the
vagaries of the economy, but they seem blind to the difference.
It is often the case that structural and
situational factors are the most powerful influences on behavior. Within
organizations, for example, it is easier to succeed in some jobs than in
others
[43]. Sometimes
people will achieve positive outcomes simply because of a beneficent
environment. It is easier to achieve success as a manager when your team is
strong than when your team is weak. Likewise, it is easier to obtain a
strong education in an excellent private school than in an under-funded
public school. And it is easier to achieve high grades at schools where
higher grades are the norm. So it would be a mistake to neglect situational
effects on performance, but that is what our data suggest that even experts
and professionals tend to do.
Are we always doomed to make erroneous
correspondent inferences? Evidence suggests not; the bias is subject to a
number of moderating factors. These are useful to consider both because they
provide clues about the psychological mechanisms at work and because they
suggest potential debiasing treatments. For instance, when people are
stressed, distracted, or busy, they are more likely to fall victim to the
correspondence bias
[44]. Those with
greater capacity for reflective thought, as measured by need for cognition,
are less likely to show the bias
[45]. When people
feel accountable to others, they are less likely to show the bias
[46]. When people are
in good moods, they appear more likely show the bias
[47]. And some
collectivistic cultures may be less vulnerable to the correspondence bias
than individualistic ones
[48],
[49].
Organizations often adopt practices because they
are legitimate, popular, or easy to justify
[50],
[51]. That may help
explain why we observed such consistency in admissions policies in
neglecting to consider differences in grade distributions between
institutions. This sort of consistency in organizational “best” practices
can create incentives for individuals to play along, despite their
imperfections. Indeed, it is even conceivable that cultural or linguistic
norms can make it easier for individuals to follow decision norms that are
more easily understood by or explained to others. On the other hand, it is
reasonable to assume that finding a better system to evaluate applicants
would improve admissions decisions, allowing the schools that do it to
identify strong candidates that other schools neglect. The Oakland Athletics
baseball team did just this when it pioneered a new statistical approach to
identifying promising baseball players to recruit
[52]. Their success
has since been emulated by other teams, changing the way baseball's talent
scouts pick players. However, the problem for admissions departments may be
more complicated because explicitly tarring some institutions as
lenient-grading is likely to elicit energetic protests if they ever find out
about it
[53].
It is common in organizations for the abilities of
an individual, a department, or a division to be shrouded in complicating or
confounding influences that make them difficult to detect or measure
[54]. Indeed, as much
as ratings systems like grades and performance metrics like on-time
percentages can help clarify standards for evaluation, they can also be used
to obscure performance
[55]. Variation in
grading standards between institutions obscures the value of using grades to
measure student performance. It is probably in the interest of
lenient-grading institutions to hide the degree of their leniency.
Consistent with this motive, recent years have seen changes in the
disclosure that institutions are willing to make
[56]. Fewer academic
institutions are willing to disclose average grading data or class rankings
for their students or alumni. When we contacted institutions to inquire
regarding average grades elite, expensive, private institutions – those with
the highest average grades – were most likely to decline to disclose the
information.
Organizational Image, Legitimacy, and Stakeholder
Appraisals
The strategic use of scoring and assessment metrics
has implications at the organization level because of the way that
institutions compete. Scott and Lane
[57] advanced a
theory of organizational image in which stakeholders (both members as well
as outside audiences) play a key role in shaping the organization's image by
making legitimacy appraisals that can counterbalance the organization's
attempts at image management. This model is built on the dual premises that
organizations and their members derive personal and economic benefits from
promoting a positive image
[58],
[59], but that
salient audiences have a role in validating that image
[60],
[61]. These forces
form an equilibrium that balances the organization's incentives for an
unbounded positive spin with the utility gained by stakeholders from an
image grounded in reality. Scott and Lane
[57] term the
specific mechanism by which this equilibrium is reached reflected
stakeholder appraisals. In the present paper we have investigated a
setting in which stakeholders may have difficulty judging the
appropriateness of image-relevant information which could then threaten the
stability of the reflected stakeholder appraisal equilibrium.
In the context of higher education, graduating
students are among the primary interfaces through which employers, graduate
schools, and communities interact with undergraduate institutions. Their
reputation in the form of grades contributes to the reputation
[62] of the
organization. As such, undergraduate institutions have an incentive to
promote an image of intelligence and achievement to these outside audiences
by maintaining a relatively high grade distribution. Given the tremendous
value of being able to place alumni in better graduate schools and in better
jobs, universities cannot be expected to go too far in seeking to curtail
grade inflation. For example, universities are unlikely to implement
meaningful institutional changes such as replacing grades with percentile
rankings. Instead, we should expect academic institutions to pay lip service
to the importance of high academic standards while at the same time avoiding
publicizing average grade distributions and avoiding reporting class rank
data on their students.
Do we see unchecked escalation of grade
distributions by a market full of organizations unconstrained by the
critical feedback from shareholders? Of course, there are multiple
mechanisms supporting a moderate equilibrium even without functioning
shareholder criticism of the type we have described, but some data suggest
grade inflation is a prolonged and significant trend in U.S. Education
[6]. More troubling
are anecdotal reports of institutions manipulating their grade distribution
with the publicly expressed intent of influencing the selection decisions of
hiring firms
[63]. Clearly, these
institutions are anticipating that employers will not sufficiently discount
the grades of their alumni to eliminate the advantage their inflated grades
will confer.
Limitations and Directions for Future Research
Our studies are subject to several important
limitations. First, the sample used in our first study was relatively small
due to the size of the admissions department that participated, even though
the results were highly significant. In addition, the first and second
studies employed hypothetical decisions, which may have limited validity as
a model of fully consequential and incentivized decision making. Future
research could benefit from a more qualitative research approach to
investigate how admissions and promotion decisions are made by various
organizations. As for Study 3, there are many variables (such as variations
in average GPA by discipline within a school) for which we did lacked
information and thus could not control in our analyses. These variables may
have important influences on admission decisions that are not captured in
the present research. Although these are important limitations, it is also
worth noting that the limitations differ across studies and yet the findings
are robust.
The conclusions implied by our results as well as
the limitations of our research bring forth some fruitful and interesting
possible avenues for future research. One interesting question is whether
other academic selection contexts would show the same patterns as business
school admissions decisions. Law schools, for instance, use the Law School
Admissions Council, an organization that (among other things) processes
applications for law schools and provides a service that gives schools a
sense of where a given applicant's GPA falls relative to other applicants
that the LSAC has seen from that same institution. The Graduate Management
Admissions Council does not process business school applications and so does
not provide an equivalent service for business schools. Does the LSAC's
assistance help law schools make better admissions decisions?
Similarly, future research could explore the
implications of the correspondence bias for promotions of business
professionals. Just as educational institutions vary with respect to the
ease of achieving high grades, so do companies, industries, and time periods
differ with respect to the ease of achieving profitability. There are some
industries (such as airlines) that are perennially plagued by losses and
whose firms have trouble maintaining profitability. There are other
industries (such as pharmaceuticals) that have seen more stable
profitability over time. And clearly there are changes over time in industry
conditions that drive profitability; for example, global oil prices drive
profitability among oil companies.
We believe an important avenue for further
investigation lies in continuing the study of the correspondence bias in
empirical settings with organizationally-relevant outcomes. A more thorough
understanding of the implications of this common bias for organizations
could be achieved by further investigating business decisions such as
promotions. There are also a multitude of other business decisions in which
a latent variable of interest is seen in the context of varying situational
pressures. Investment returns, sports achievements, and political success
are all domains in which judgments are vulnerable to the tendency to
insufficiently discount the influence of the situation. We expect that the
correspondence bias affects outcomes in these domains.
Our theory holds that a firm's good fortune (in the
form of greater profits) will be mistaken as evidence for the abilities of
its managers. If this is so, then we should more often see employees of
lucky firms being promoted than of unlucky firms
[64]. We would
expect, for instance, that pharmaceutical executives are more likely to be
hired away to head other firms than are airline executives. However, this
finding might be vulnerable to the critique that pharmaceutical executives
actually are more capable than are airline executives–after all, their firms
are more consistently profitable. Therefore, a better way to test this
prediction would be using an industry (such as oil) in which fortunes
fluctuate over time due to circumstances outside the control of any firm's
managers. Our prediction, then, would be that oil executives are more likely
to be hired away to head other firms when the oil industry is lucky (i.e.,
oil prices are high) than when the industry is unlucky (i.e., oil prices are
low).
Theoretical Contributions
Our results contribute to the literature on the
psychological process at work in comparative judgment, a literature that
stretches across psychology
[65], economics
[66], and
organizational behavior
[67]. In this paper,
we extend previous research by examining judgmental contexts in which expert
decision-makers are comparing outcomes that vary with respect to both
nominal performances and their ease. We should also point out that these
results are, in a number of ways, more dramatic than the results of previous
research showing biases in comparative judgment. Previous results have been
strongest when participants themselves are the focus of judgment
[65],
[68]. Biases in
comparative judgment shrink when people are comparing others, and shrink
still further when they have excellent information about performance by
those they are comparing
[69]. Biases
disappear when comparisons are made on a forced ranking scale
[70]. In this paper,
we have shown comparative judgments to be powerfully biased even when people
are evaluating others about whom they have complete information (as modeled
in Study 1), and even when the assessments (e.g., admission decisions) are
made on a forced distribution that prevent them from rating everyone as
better than everyone else.
We are holding a
reception at the AAA annual meeting to
celebrate the launch of a new journal,
China Journal of Accounting Studies.
If you attend the AAA annual
meeting, wehope that you will be
free to drop by to meet key members of
the editorial team and enjoy a glass of
wine. The venue and time are as follows:
DATE & TIME
Monday, August 5, 2013
LOCATION
Palisades Room in the Hilton Hotel
For details about how to
access the journal, please see the
attached invitation card. We look
forward to meeting you at the reception.
Also, Bob,
We hope more people will attend our
reception. Would it be OK if I send
the invitation to everyone to the AECM
list?
The American Historical Association has published a
new policy statement that "strongly encourages"
graduate programs and university libraries to allow new Ph.D.'s to extend
embargoes on their dissertations in digital form for as many as six years.
The association says its stance seeks to balance
the competing ideals of the profession: timely dissemination of new
historical knowledge and the ability of young historians to choose when to
release their research without jeopardizing a future publishing contract or
tenure.
The statement, which was released last week, says
that because many university libraries no longer store hard copies of
dissertations, more and more institutions are requiring graduate students to
file their theses and dissertations electronically. The institutions then
often post those documents online so that they are free and accessible to
anyone who wants to read them.
History-association officials say they drafted the
statement in response to complaints by new Ph.D.'s and assertions by
university-press editors who say they are reluctant to offer publishing
contracts to young scholars whose dissertations are already widely available
online.
Graduate students who've successfully defended
their dissertations are commonly allowed to embargo them from one to three
years. Once that initial term is up, scholars can request to extend the
embargo for a limited amount of time.
"History has been and remains a book-based
discipline," the statement says, "and the requirement that dissertations be
published online poses a tangible threat to the interests and careers of
junior scholars in particular."
Squeamish
Publishers
Association officials say they are acting to
protect the interests of new Ph.D.'s and to make sure that book publishers
still have a stake in historical scholarship.
"Our concern is that students have choices," says
James R. Grossman, executive director of the association and a senior
research associate in the history department at the University of Chicago.
"We are aware that some university presses are getting squeamish about
publishing dissertations that are available widely and freely across the
Internet and even if they are substantially revised."
Jacqueline Jones, vice president of the
association's professional division and a professor of history at the
University of Texas at Austin, says that extending an embargo can be
beneficial because it gives new Ph.D.'s more time to revise a dissertation
into a publishable monograph. Students can fine-tune their work by excising
some material, incorporating new archival findings, and further developing
their arguments in a style and tone that can resonate with a wider audience.
Supporters of the association's statement say that
new Ph.D.'s are operating in a world where the market for scholarly books,
which are often specialized and expensive, is shrinking and so, too, are
library budgets. The option for extra embargo time, the supporters say, will
help young scholars protect their work from predatory publishers and from
being scooped by other researchers as they navigate a tough job market for
tenure-track positions.
Critics of the statement note that the movement for
open access to scholarly material has picked up steam in the past few years,
and they suggest that the association's new policy reflects how it feels
threatened by that movement. The bid to extend the embargo length, the
critics say, is a maneuver to delay a movement that is not going away.
The critics also argue that, by putting the printed
book on a pedestal at a time when research is taking many other forms, the
association is marginalizing historical research. Meanwhile, there's a
standoff between the competing priorities of university presses, libraries,
and hiring, tenure, and promotion committees. Graduate students are caught
in the middle or are being used as proxies in debates over scholarly
publishing, they say.
'Anecdotes,
Ghost Stories, and Fear'
The association's statement has sparked much debate
on social media and academic blogs.
"Surprise, surprise, open-access advocates
everywhere have started sniveling," Adam Crymble, a doctoral student in
history at King's College London, wrote in a
blog post titled "Students Should Be Empowered,
Not Bullied Into Open Access."
"No! they cry," Mr. Crymble continued: "We
shouldn't support a resolution passed in good faith to protect the career
progression of new scholars against scholarly presses that are allegedly
refusing to accept manuscripts based on openly available dissertations. We
should be burning books and the organizations that publish them. Down with
books, up with free information on the Internet! Lovely, but you can't eat
free information."
But some critics of the association's suggested
policy, including Dorothea R. Salo, a faculty associate at the University of
Wisconsin at Madison's School of Library and Information Studies, say the
statement is couched in paternalistic language.
Continued in article
Jensen Question
How many accounting doctoral dissertations have been published as commercial
books?
John Canning's 1929 Princeton thesis (published by Ronald Press) does not
count as an accounting dissertation even though it became one of the most cited
works in the history of accountancy in the 20th Century. Canning was an
economics doctoral student at Princeton. Canning is one of Tom Selling's heroes.
For a number of years in the 1960s Prentice-Hall published its
"award-winning" doctoral theses in accounting and other business administration
fields. However, these were never intended to commercial books in the same sense
as other Prentice-Hall Books. This was more of a public relations service by
Prentice-Hall. I still have most of these books on my shelves. Many were
Carnegie-Mellon doctoral dissertations. Carnegie was unique in those days by
forcing doctoral students to commence a dissertation in the first year of their
doctoral studies. In subsequent years doctoral students conducted the thesis
research and added chapters as they took courses related to their research
topic. Many of the chapters were term papers in those courses. An example is the
water-bottle budgeting research conducted by Andy Stedry at Carnegie.
For decades USA doctoral dissertations in virtually all disciplines have have
been available from a service commenced by the University of Michigan in Ann
Arbor. This is not a free service, but getting copies of dissertations in this
manner discourages publishing houses from publishing dissertations at prices
higher than the Ann Arbor service.
From the CPA Newsletter on July 23, 2013
IASB declines to adjust discount rate for
pension accounting
The International Accounting Standards Board has rejected a request to
increase the discount rate used to calculate the current value of a
pension's liabilities under International Financial Reporting Standards.
Jensen Comment
And the IASB claims that it avoids bright lines in favor of principles-base
standards.
Commodities trading,
Adam Smith wrote in 1776, was a boon to
efficiency and a foe to famine. It was also extremely unpopular,
especially in years when harvests were poor (he was writing specifically
of trading in corn).
The popular odium ...
which attends it in years of scarcity, the only years in which it
can be very profitable, renders people of character and fortune
averse to enter into it; and millers, bakers, mealmen, and meal
factors, together with a number of wretched hucksters, are almost
the only middle people that ... come between the grower and the
consumer.
Since then,
trading in corn and other commodities has gained in respectability —
thanks in part to arguments and evidence mustered by economists
following in Smith's footsteps. But the suspicion that commodities
trading is dominated by wretched hucksters or worse (I don't know what "mealmen"
are, but they sure sound bad) has never gone away, with
David Kocieniewski's epic examination in Sunday's New York Times
of an aluminum storage business owned by Goldman
Sachs offering the latest bit of evidence. Kocieniewski describes
forklift drivers moving aluminum from warehouse to warehouse in Detroit
to profit from rules set by an overseas metals exchange, while delivery
times to actual users of aluminum have stretched to 16 months and
aluminum prices have been pushed up by the equivalent of a tenth of a
U.S. cent per aluminum can.
The article is less
clear about what brought this on. Is it bad rules set by the London
Metal Exchange? The involvement of banks such as Goldman and J.P. Morgan
in the metals trade? Or is the problem simply that speculators have
taken over the market for a crucial commodity?
It is certainly true
that investors, dismayed at the prospect of low returns for stocks and
bonds for years to come, have poured money into commodities over the
past decade. Markets that existed mainly for the convenience of industry
have become dominated by exchange-traded funds, hedge funds, and
investment banks.
By Adam Smith's
reasoning, this shouldn't be a bad thing — people of character, or at
least fortune, are getting into the trade. And the consensus among
economists has for decades been that commodity speculation clearly
serves a useful purpose — so more of it can't hurt, right?
The evidence on
this is, frustratingly, not nearly as conclusive as one might hope. The
most famous studies have had to do with trading in onion futures,
which the Chicago Mercantile Exchange launched in
the 1940s and Congress banned in 1958 after a precipitous boom and bust.
Agricultural economist Holbrook Working proposed at the time that this
presented the opportunity for a natural experiment: if onion prices were
more volatile in the absence of futures trading, then the trading
probably served a useful economic purpose. If not, then maybe it didn't.
The
first post-ban study, published in 1963, did
indeed find such an effect, and has since been cited widely by
economists and
editorialists. A
1973 followup,
however, was inconclusive.
When economist
David S. Jacks of Simon Fraser University reviewed this evidence a few
years ago along with before-and-after data from when futures trading in
various commodities started, he
still concluded that "futures markets are
systematically associated with lower levels of commodity price
volatility." So, on balance, having a futures market appears better than
not having a futures market.
What this doesn't tell
us, however, is whether certain kinds of commodity futures and spot
markets are better than others, or certain kinds of traders are better
than others. There's at least some evidence from the great commodities
boom of the past decade that the new dominance of financial investors
has made a difference, and not necessarily for the better.
Three recent research findings:
Marco J. Lombardi
of the European Central Bank and Ine van Robays of Ghent University
found that "financial investors did cause
oil prices to significantly diverge from the level justified by oil
supply and demand at specific points in time."
Lucia Juvenal
and Ivan Petrella of the St. Louis Fed
found that speculative forces began to
drive oil prices in 2004, "which is when significant investment
started to flow into commodity markets."
Ke Tang of
Renmin University of China and Wei Xiong of Princeton University
found that prices in non-energy
commodities have begun to move in tandem with oil prices, and have
become more volatile.
None of these
studies blamed speculation for causing all or even most of the price
movements. It seems pretty clear that the
big rise in oil prices
since 2003
has been driven by fundamental forces of supply and demand.
But the new commodities market participants may
have made things worse, as Kocieniewski's aluminum findings seem to
show.
So what's the
solution? I'm guessing it has something to do with adjusting the rules
of the game. Commodities-trading rules and customs that date back to the
pre-financial era may not fit the more aggressive tactics of hedge funds
and investment banks. The London Metals Exchange is
already in the midst of changing its warehousing rules,
with hard-to-foresee consequences. The Commodity
Futures Trading Commission has
started using new powers granted it under the Dodd-Frank Act to
go after traders whose behavior it deems abusive. And in general, we're
in the early stages of a long struggle to put the financial sector back
in the position of servant of the economy rather than its master.
Speculation is, on
balance, a good thing. But more of it isn't necessarily always better —
and it's too important to leave entirely in the hands of the wretched
hucksters.
Question
Have we overblown the importance of social media to business?
Only 36% of the surveyed professionals view
social business as important. It’s double the percentage from 2011, but it’s
still much too low.
Based on MIT Sloan Management Review, in collaboration with Deloitte,
survey of 2,545 business professionals in 99 countries on the subject of social
business ---
http://blog.hootsuite.com/importance-of-social-business/
Jensen Comment
The term "important" might not have been consistently interpreted by
respondents, especially respondents from different industries.
The term "important" might mean a small but necessary factor in performance.
For example, having Internet access is a necessary condition to downloading a
new eBook, but it is only a small part of understanding that book.
The term "important" might mean an unnecessary condition that in some
circumstances might be a convenience or improve performance. For example, having
a cell phone is not a necessary condition for most of us, but it can certainly
be a convenience and probably improves efficiency when trying to make personal
contacts with customers such as when a Sears service driver needs instructions
on how to find my home in the boondocks. Also having an annual car towing
service (such has carrying an AAA Tow Service Card with an 800 phone number) is
not a necessary condition to getting a tow when needed. But along with a cell
phone it is a convenience relative to having to search for towing services when
you have two flat tires away from home in downtown Detroit.
Also subscribing to LinkedIn is not a necessary condition to finding a new
job, but for many subscribers to this social media service it has been a God
send.
The term "important" by be connected with the lower end of a learning curve
where the respondent views social media as not being so important at this point
in time but having potential of becoming vital to performance in future years.
In our Academy publishing articles in refereed journals is currently the most
popular way of communicating research discoveries. But each year the the
advantages of communicating research discoveries in the social media are
becoming increasingly evident. These advantages include timeliness (journal
publishing will one day be viewed as horse and buggy) and size of the "audience"
such as having audiences of thousands or millions of people, some of which will
more critically review the research far better than two burdened journal
referees, and the spirit of open-source in general. Knowledge wants to be set
free!
Also the respondents in this MIT Sloan Management Review survey
probably are unaware of the degree to which social media has been a blessing and
a curse at all times and in all circumstances of their companies. The CEO of
General Electric really does not know all the instances the R&D staff discovered
innovative ideas because of their social media subscriptions. The CEO of
General Electric really does not know of all instances where employees are
wasting time in personal conversations in the social media during working hours.
I’m a historian who is spending a month in the
company of sociologists,
studying religious congregations and social change.
In crossing these disciplinary boundaries, I’ve been fortunate to read a
great deal of sociological works that I would otherwise not encounter. Among
these is Randall Collins’s theoretical work,
Interaction Ritual Chains (2004).
Collins’s describes his work as a “radical
microsociology,” meaning that he theorizes about the rituals by which people
interact with others, from large groups, to person-to-person relationships,
to the imaginary conversations that a person engages in his or her mind. I’m
ambivalent about parts of the theory, but I’m intrigued by his central
claims: “occasions that combine a high degree of mutual focus of attention …
together with a high degree of emotional entrainment … result in feelings of
membership that are attached to cognitive symbols; and result also in the
emotional energy of individual participants, giving them feelings of
confidence, enthusiasm, and desire for action in what they consider a
morally proper path” (42). In other words, when people interact their shared
attention trains each other to be in a group with a shared purpose.
Though that theory is dense, I find it powerful for
explaining many things, not least of which is the way parts of the academy
work. If part of the mission of ProfHacker is to make plain the hidden (even
unconscious)
rules of the
academy, then Collins’s explanations of the
sociology of academic networks and of academic writing can be helpful.
I’ll take up Collins’s ideas of academic writing in
a later post, but first let’s look at his ideas about academic networks.
Collins says that thinking is a social process.
(Hint: sociologists think that everything is social.) He observes
that important thinkers tend to be the students of important thinkers and to
have important thinkers as students themselves. He also notes that the best
scholars have personal contacts with the other best thinkers, whether allies
or enemies. These groups are “not merely the clubbing together of the
already famous, but groups of would-be thinkers who have not yet done the
work that will make them famous.” This is not to say that only “important”
scholars move on the work of scholarship, but that the social structure
focuses on such eminent individuals, who “work extremely long hours,
seemingly obsessed with their work.” Perhaps most important, Collins insists
on the importance of direct interaction between scholars, especially
face-to-face interaction. He writes, “What one picks up from an eminent
teacher … is a demonstration of how to operate in the intellectual field of
oppositions. Star intellectuals are role models … but in a fashion that
cannot be picked up at a distance, and only by seeing them in action.”
Collins’s sociology goes a long way towards
explaining the unpleasant side of the academy, such as the emphasis on
academic celebrities and the plight of scholars who are never embedded in
the academic social network. But it also offers ways of thinking about the
academy that can help you hack your own career:
Get a mentor. This is hardly a unique
observation, but it bears repeating. Good mentors don’t just teach you
what you need to know to be a scholar, they teach you how to be a
scholar.
Participate in
small groups—meeting face to face—to refine
your work. Eighteenth- and nineteenth-century debating clubs might be
out of style, but writing groups aren’t. Small, frequent gatherings can
provide the kinds of social thinking that produces great scholarship. If
possible, reach outside your own institution when forming your group.
And participating in an intensive, collaborative group, such as the
month-long seminar that I’m engaged in now, will help you generate ideas
that a month of reading and writing alone never could.
Making a place for yourself at
academic conferences. As universities become
increasingly budget-conscious, there is more and more skepticism that
face-to-face conferences are worth the money. But it is at conferences
where you can discern the social shape of your discipline.
Reach out to scholars whose work you admire.
On the whole, senior scholars have been overwhelmingly generous whenever
I’ve contacted them or introduced myself to them. (Forget the few
exceptions.)
Be the
collegial colleague yourself. This point might
not be as susceptible to
empirical proof as the others. But if
scholarship is essentially social, then you owe it to your fellow
scholars to behave with courtesy and generosity, which will help your
work as it helps others.
Jensen Comment
The AECM listserve is my main Academic network.
My threads on listservs, social networks, blogs, Twitter, and Facebook (See the
Table of Contents above)
Academic networks do not replace refereed journals for communication of
research. Rather they enhance refereed journals in many ways, especially in
expanding those journals like The Accounting Review that for all
practical purposes do not publish replications or even commentaries on research
articles they publish.
Academic networks are also important sources of research ideas where a
networked message can inspire professors and even students to undertake research
projects as well has deepen their scholarship.
How do you think "earnings" should be defined in the conceptual framework?
What I want to see is a better conceptual framework definition of "earnings."
For me "earnings" is the most important concept in an accounting (and
finance) conceptual framework since earnings and ratio derivations from earnings
(eps, P/E ratio, etc.) are arguably the most important indices affecting
portfolio investment decisions, compensation of employees (e.g., bonuses), and
performance of a business.
The IASB and FASB, in my viewpoint, have misplaced their primacy rankings in
conceptual frameworks.
Whereas most of us think in terms of the four basic alternative models for
asset accounting --- price-level adjusted historical cost, replacement cost
(entry value), disposal value (exit value), and economic value (discounted cash
flow). Edwards and Bell created various hybrid models combining features of
these four basic models in varying degree.
Although the book deals with such concepts as "subjective goodwill," most of
the models proposed by Edwards and Bell are for simplistic portfolios of assets
and liabilities.
I taught from this book over a number of years. I don't see how any of the
Edwards and Bell definitions of income are easily adapted in any 21st Century
conceptual framework of accounting intended to serve as a foundation for new
accounting standards like the pending revenue recognition and leasing standards
along with revisions to accounting for derivative financial instruments and
hedging activities.
If I were to develop a zero-based conceptual framework with "Earnings
Primacy," however, I might use the Edwards and Bell book as a starting point.
But the chances of the IASB and FASB changing horses from an Asset-Liability
Primacy are smaller than the diameter of a single atom compared to the diameter
of the earth.
The IMA's Conceptual Framework devotes virtually zero to the terms "income"
or "earnings."
John Brozovsky wrote the following:
An elephant in the room for this definition is inflation. We assume that we
have a stable unit of measure which we do not. Is inflation a change in
owner’s equity that counts as income or not? (Of course we have a devil of
a time separately out what is caused by inflation if we can decide how to
treat it.) It certainly did not result from a transaction with the owners in
their capacity as owners. Then I also agree with Elliot’s comment which
brings into question another of our basic assumptions—that we can break
everything up into periods and appropriately assign to the proper period. We could throw in the other two assumptions and we have a mix where we will
never be able to ‘accurately’ measure income. All we can do is approximate
it and as soon as that comes into play everyone has their own ideas as to
what constitutes the best approximation.
John
Most investors track earnings as an index for making decisions as to whether
to buy or sell the stock or bond of Company XYZ for their portfolios. This begs
the question of how earnings (or eps or P/E ratios) scores are being used by
investors.
I think of an earnings number much like I think of a golf score. The PGA
scores golf for 18 hole combinations much like accounting standard setters score
audited income/earnings numbers for one-year periods. Each 18-hole
qualifying score before a golf tournament becomes like the annual earnings
performance of a firm before its securities are in an investor's portfolio.
The purpose of golf qualifying scores is to predict how well each player will
perform in a tournament. It's arbitrary whether qualifying scores are based on
18, 36, 54 or 72 hole performances before the tournament. Similarly, investors
look at a sequence of annual earnings scores as possibly the most important
qualifying scores for admitting company shares or bonds into a portfolio.
The analogy here, however, only goes so far. The PGA only looks at total
qualifying scores and not trends during the qualification process. Investors,
however, are also interested in trends over time and in variations. Golf scores
of 76, 67, and 62 in any permutation may qualify a player for a PGA tournament.
Earnings per share numbers 3.46, 2.47, and 2.23 may not qualify a stock for a
portfolio whereas 2.23, 2.47, and 3.46 may make an investor salivate.
In golf and in investing, it's not so much how a competing unit performs in
absolutes as it is how a competing unit performs in comparison with the
competition. A golf score of 68 may put a player in first place or 20th place
depending on the competition. An eps change of 12% may put a company in first
place or 20th place depending on the competition.
In golf, how the game is scored affects the strategy. For example, in medal
competition each player is looking for the lowest possible sequence of 18-hole
scores. One or two bad holes with high scores can ruin the player's chances in
the entire tournament. Hence, in medal competition players are less likely to
take risks such as shooting over ponds and clusters of trees. They often aim
short of two bunkers rather than an narrow strip between two bunkers.
In match play the players tend to take more risks because a bad score on a
few holes has almost no impact on winning or losing a tournament. The objective
is to win the most holes in each round.
Companies seeking to smooth earnings with accounting creativity have a
medal-play strategy. They are also more likely to hedge like airlines hedge fuel
prices way into the future. They may put less investment in R&D. Companies
seeking speculators are more like match-tournament players. They may speculate
in derivatives markets rather require only hedging in derivatives.
So what is the main point I'm trying to make?
My main point is that if we adopted a zero-based conceptual framework from
scratch that has earnings primacy (rather than asset-liability primacy) we would
probably have two or more concepts of earnings for different types of "play" by
investors. Similarly, we have at least two types of scoring in golf
tournaments. Or we might, as Bob Herz once suggested, present accounting data in
disaggregated form and let investors perform aggregations to suit their own
conceptualizations of earnings.
As it stands, the asset-liability primacy that evolved in the FASB's
conceptual framework and the pending IASB's conceptual framework is a primacy
that totally destroyed the ability to form a concept of net earnings that is
tied to investor strategies. The good news is that investors are now receiving
better information regarding values and risks that are also important in their
portfolio decisions. The bad news is that investors are now receiving earnings
numbers and earnings ratios like eps and P/E ratios /.
After defining assets, the statement moves to
liabilities (obligations to transfer assets or perform services), and
from there to equity (assets minus liabilities). It then defines
investments and distributions to owners, so that it can create a
definition of comprehensive income. From the ‘highlights’ page:
Comprehensive income is the change in
equity (net assets) of an entity during a period from transactions
and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
Now, here is what I find interesting: after
defining revenues, expenses, gains and losses, the statement stops
short of defining earnings. Again from the highlights:
The Statement does not define the term
earnings, which is reserved for possible use to designate a
significant intermediate measure or component that is part of
comprehensive income.
Here is where I think we academics tend to get
confused. We assume that because earnings are not even yet defined at
this point in the CF, the FASB doesn’t care about them. But the
political perspective yields a different conclusion: the FASB couldn’t
defend a definition of earnings without further conceptual grounding.
Continued in article
Marc Depree stated the following:
Begin Quotation If we choose to take a political route, accountants/auditors might align
themselves with and apply a principle of advancing big business
managers/CEOs' interests. They/we could apply contradiction as a basis of
reasoning to advance management/CEO interests. For example, accounting for a
stock portfolio, recognize unrealized gains and ignore unrealized losses. We
can easily specify reasons for our accounting. And advocating manager/CEO
interests would have the support of wealth that would assure our success and
the success of other stakeholders.
End Quotation
Jensen Comment
Actually, before FAS 115 and operating under the Principle (Concept) of
Conservatism combined with the Lower-of-Cost-or-Market Principle (LCM) we did
just the opposite where we recognized marketable portfolio losses but not gains
to the extent that those investments adjusted for gains exceeded original
purchase costs. FAS 115 altered that for Trading and AFS securities by marking
gains and losses to market (fair value), although in the case of AFS securities
the gains were posted to OCI rather than current earnings. HTM securities only
recognized losses and not gains making it crucial how auditors and their clients
partitioned investments into AFS versus HTM versus Trading (were all gains and
losses went to current earnings).
Later on the IASB changed the rules to include recognizing fair-value gains
and losses to consistently apply to all securities, thereby doing away with the
HTM classifications. The Principle of Conservatism was abandoned in this
instance --- but only for marketable securities. Later on, under heavy EU
political pressure. the IASB rescinded the earlier ruling to the extent that the
HTM classification of marketable securities was restored due to a rebellion of
European Union banks.
It would seem that the LCM Principle is now being inconsistently applied in
some areas of marketable HTM versus AFS and Trading Securities. (Actually, I
applaud this inconsistency, but I doubt that Pat Walters and Tom Selling are
clapping their hands).
LCM and Conservatism Principles (Concepts) are also not being inconsistently
applied to product inventories. LCM does not apply to precious metal
inventories, but it does apply under IFRS and US GAAP to most other metal
inventories as well as most commodity inventories and other inventories like an
inventory of unsold vehicles or speculation homes.
Actually, big businesses would probably rather do away with LCM and
Conservatism Principles (Concepts) entirely
They would like to recognize profits on vehicle inventories and speculation
homes before they've found customers to purchase those inventories. For
long-term construction contracts companies are allowed to realize profits at
various stages of constructions but only when they have sales contracts in hand.
Contractors would like to do so even if they don't have sales contracts in hand.
My point is that it's very easy to finger-point all the inconsistencies in
standards to the big bad corporations that allegedly control accounting standard
setters like the IASB, FASB, and SEC. In reality, the big bad corporations would
like to eliminate inconsistencies in such standards as the how the concepts of
LCM and Conservatism Principles are applied in those standards. But the
standard setters have not yet cave in to big business wishes in these areas.
In truth, many of those accounting standards inconsistencies exist to
avoid abuses by big bad businesses in reality
The reality is that house builders would probably over-estimate values of unsold
speculation homes (where valuation is a very soft science) and mislead investors
about unrealized profits. Tradition, therefore, dictates that most
inventories are still maintained under LCM and Conservatism Principles
(Concepts).
Tradition dictates reporting some operating fixed assets at depreciated or
amortized costs even though exit values may be much lower. For example, a
printing press costing $2 million dollars installed may only be worth half that
after the first batch is printed. Accounting standards, however, still use the
Matching Concept for depreciation even though standard setters hate to admit
using the Matching Concept. I
If the first batch printed bore a $1 million depreciation charge it would
greatly defy the tradition of matching costs with revenues generated.
Thereafter, the profits of all batches would be grossly overstated by not
matching enough depreciation to those jobs. Standard setters generally avoid the
big-bath theory of accounting that allows companies to take a big bath in
earnings one period and then overstate profits every period thereafter.
If exit value was fully adopted for a new manufacturing line, the marginal
cost of that first unit produced might exceed revenues by a million percent. The
big bath exit value theory consistently applied would require showing a
monumental loss on that first product produced on the line and create an
enormous distortion in the ROI of every produced thereafter. In instances where
variable costs are negligible, the ROI of every product produced thereafter
might be close to infinity. Big bad businesses would jump for joy.
My point here, Marc, is that we can't assert big bad corporations are
totally dictating our accounting standards.
Standard setters really do try to make it harder for companies to mislead
investors and my clinging to conservative accounting traditions that are still
built into standards bear this out.
The fundamental problem of deriving a set of standards that are consistent
with a set of concepts, axioms, and postulates is that doing so sometimes
results in standards that will be abused by business firms and mislead the
investing public such as when recognizing inventories in advance of finding
customers is likely to be abused even though maintaining inventories at LCM is
inconsistent with the way firms carry Trading and AFS securities.
Respectfully,
Bob Jensen
Estates Are Particularly Difficult to Value
From the CPA Newsletter on July 30, 2013
Minnesota Twins heirs fight IRS over team
valuation ---
http://www.accountingweb.com/article/minnesota-twins-heirs-go-bat-against-irs-tax-court/222153
Minnesota Twins owner Carl Pohlad's heirs -- sons
Robert, James and William -- are battling the Internal Revenue Service in
U.S. Tax Court over estate taxes. The argument centers on the valuation of
the major league baseball team. The IRS says the stake was grossly
undervalued and is adding a $48 million penalty on the taxes it says the
heirs still owe.
Jensen Comment
This is an example of where a balance sheet prepared in accordance with GAAP is
useless for valuation. The bulk of the value resides in unbooked intangibles,
especially human resources and reputation for future television deals.
Some Thoughts on Fair Value Accounting
Our recent AECM regarding why accounting standard setters require
mark-to-market (fair value) adjustments of marketable securities (except for HTM
securities) and do not generally allow mark-to-market adjustments to inventories
(except for precious metals and LCM downward adjustments for permanent
impairments).
Fungible ---
http://en.wikipedia.org/wiki/Fungible
I think this "inconsistency" in the accounting standards hinges on the concept
of fungible. Marketable securities are generally fungible. A General Motors
share of stock NYC is identical to other GM shares in Bavaria versus Hong Kong
versus Sugar Hill, New Hampshire. One advantage of fair value accounting for
marketable securities is that these securities are fungible until they become
unique such as when companies go bankrupt.
The classic example for fungible inventories that I always used in class is
the difference between new cars in a dealer's lot and used cars in that same lot
is that new cars are fungible (there are thousands or tens of thousands in the
world exactly like that new car) and used cars are not fungible. There is no
other car in the world exactly like any of the used cars in a dealer's parking
lot. We have Blue Book pricing of used cars of every make and model, but these
are only suggested prices before serious negotiations between buyers and a
seller of used models with varying mileage, accident histories, flooding
histories such as being trapped while being parked in flood waters, new parts
installed such as a new engine or new transmission, etc.
My point here is that it's almost impossible to accurately value a used car
until a buyer and seller have negotiated a purchase price. And the variation
from Blue Book suggested prices can be quite material in amount. Thus we can
value General Motors common shares before we have a buyer, but we can't value
any used car before we have a buyer.
I used to naively claim that this was not the case of new cars because they
were fungible like General Motors common shares. But on second thought I was
wrong. New cars are not fungible items. Consider the case of a particular BMW
selling for $48,963 in Munich. The same car will sell for varying prices in NYC
versus Hong Kong versus Sugar Hill, NH. This variation is due largely to
delivery cost differentials.
Now consider the Car A and Car B BMW models that are exactly alike (including
color) in a Chicago dealership lot. After three months, a buyer and the dealer
agree on a $67.585 price for Car A. Car B sits in the lot for over 11 months
before a buyer and the dealer agree on a price of $58,276. This discount is
prompted mostly by the fact that the new models are out making Car B seem like
its a year old even though it odometer has less than two miles.
My point here is that until a dealer finds a buyer for either a new car or a
used car, we really don't know what the inventory fair value is for those
non-fungible items. Similarly the same grade and quality of corn in Minneapolis
has a different price than identical corn in Chicago. Corn and other commodities
like oil are not really fungible for inventory valuation purposes.
There are numerous examples of where inventory product values really can't be
known until a sales transaction takes place. We can fairly accurately estimate
the replacement costs of some of the new items for sale although FAS 33 found
that the cost of generally doing so accurately for inventory valuation purposes
probably exceeds the value of such replacement cost adjustments at each
financial reporting date.
There's great moral hazards in allowing owners of non-fungible inventories to
estimate fair values before sales transactions actually take place. Creative
accounting would be increasingly serious if accounting standards allowed fair
value accounting for non-fungible items that vary in value depending upon the
buyer and the time and place of sales negotiations.
Thus we can explain to our students that the reason we report marketable
securities at fair value and inventories at transaction or production historical
costs is that marketable securities are fungibles and most inventories are not
fungible. The main reason is that estimating the value of truly fungible
marketable securities is feasible before we have a sales transaction whereas the
value of so many non-fungible (unique) items is not known until we have a sales
transaction at a unique time and place.
Jensen Comment
Before I retired I tended to accept almost all invitations to speak at other
universities as long as they reimbursed my travel expenses. The size of the
honorarium really didn't matter if I was invited to speak at a college campus
---
http://www.trinity.edu/rjensen/Resume.htm#Presentations
There may be some useful considerations in the article below, but I think the
author stretches the point. When building and sustaining a reputation I would
instead say accept invitations as long as they don't seriously interfere with
your day job, e.g., your responsibilities to your own students. I
accepted mostly because I enjoyed these opportunities to learn and well as
speak. Speakers learn a great deal from both their audiences and their hosts.
The good news about asbestos legal fraud is that
there's a straightforward way to expose it. The bad news is that the
judiciary too often remains the roadblock to transparency.
That's what has been happening in federal
bankruptcy court in North Carolina in the case of Garlock Sealing
Technologies. The gasket manufacturer never had more than peripheral
involvement in the asbestos business, yet it was forced into bankruptcy in
2010 by a flood of frivolous claims.
Plaintiffs attorneys are now pushing federal Judge
George Hodges to force Garlock to put some $1.3 billion into a bankruptcy
trust for future asbestos claims. Garlock estimates its liability is closer
to $125 million, but the trust gambit is a plaintiffs bar favorite to
guarantee a perpetual payday. Garlock also says it has evidence that
plaintiffs are "double-dipping"—filing claims with multiple bankruptcy
trusts that blame non-Garlock products for their diseases, even as they
pursue Garlock in court.
The tort bar is desperate to continue this scam by
keeping trust claims hidden from the public. The plaintiffs attorneys argued
to Judge Hodges that the information Garlock rooted out about their claims
ought to remain "confidential." Judge Hodges agreed, dismissing Garlock's
information as not "particularly sexy" or of "interest" to the public. He
has repeatedly closed his courtroom when Garlock presented evidence and
expert testimony.
The judge's airy dismissal of a public interest is
astonishing. A handful of other judges have in recent years exposed
egregious cases of double-dipping, inspiring states like Ohio and Oklahoma
to pass laws to force trust disclosure. The House Judiciary Committee in May
passed the Furthering Asbestos Claim Transparency (FACT) Act, which would
require the nation's 60 asbestos trust funds—yes, there are 60—to file
quarterly reports that detail claimant names and the basis for their
payouts.
Garlock's evidence could be especially revealing
given that lawyers from the firms suing it are on public record denying any
double-dipping even as they have led the campaign against transparency.
Elihu Inselbuch of Caplin & Drysdale testified in Congress in March against
the FACT Act: "The bill also ignores the fact that despite trying to find
instances of widespread fraud and abuse, there is none. Defendants have no
evidence to support their assertion of fraud by plaintiffs." If Mr.
Inselbuch is so confident there's no fraud, why does he object to
transparency?
Jensen Comment
If you're tenured and want to quit, don't send such a letter unconditionally.
Agree to send a resignation letter only if tenure buyout terms are negotiated.
Of course, some tenured professors who desperately want out will sell out for a
dime.
In the space of only seven days, the Securities and
Exchange Commission charged Steven Cohen, owner of hedge fund S.A.C. Capital
Advisors, with “failing to supervise two senior employees and prevent them
from insider trading under his watch,” and the Department of Justice charged
Cohen’s firm with “criminal responsibility for insider trading offenses.”
Which global audit firm serves S.A.C. Capital
Advisors, an investment advisor registered with the SEC that gave S.A.C. a
clean opinion on its most recent report?
PricewaterhouseCoopers LLP.
Last week’s announcements add to prior SEC charges
against S.A.C. portfolio managers Matthew Martoma and Michael Steinberg, who
allegedly obtained material non-public information about publicly traded
companies in 2008, and traded on that information. The SEC
charged Martoma and his tipper
with insider trading in an enforcement action last year, andcharged
Steinberg with insider trading in a
complaint filed earlier this year. CR Intrinsic, an affiliate of S.A.C.
Capital Advisors, also
agreed to pay more than $600 million related to
those charges, in the largest-ever insider trading settlement. Another Cohen
affiliate, Sigma Capital,
agreed to pay nearly $14 million to settle more
insider trading charges.
Also last year, Diamondback Capital Management LLC,
a hedge fund started by alumni of S.A.C, agreed to pay more than $9 million
to settle
SEC’s insider-trading charges related to some of
the same investments named in the latest S.A.C. complaints.
PricewaterhouseCoopers LLP. also audited Diamondback, which closed up shop
at the end of 2012.
The SEC alleges that S.A.C. owner Steven Cohen
ignored “red flags” after receiving “highly suspicious” information from
Martoma and Steinberg that should have caused any reasonable hedge fund
manager to investigate the source. Instead of setting a proper
“tone at the top” and scrutinizing his employees’
conduct, Cohen praised them and rewarded Martoma with a $9 million bonus for
the tip. According to
the SEC complaint, Cohen’s funds earned profits
and avoided losses of more than $275 million as a result of the illegal
trades.
“Hedge fund managers are responsible for
exercising appropriate supervision over their employees to ensure that
their firms comply with the securities laws,” said Andrew J. Ceresney,
Co-Director of the SEC’s Division of Enforcement. “After learning about
red flags indicating potential insider trading by his employees, Steven
Cohen allegedly failed to follow up to prevent violations of the law. In addition to the more than $615 million his firm has already agreed to
pay for the alleged insider trading, the Enforcement Division is seeking
to bar Cohen from overseeing investor funds.”
The Department of Justice, in its
criminal complaint
against S.A.C. the firm, says numerous employees, over more than a decade,
allegedly traded in the securities of more than 20 publicly-traded companies
based on inside information. The DOJ says so many illegal acts were possible
because of the “institutional practices that encouraged the widespread
solicitation and use of material, non-public information”.
In particular, S.A.C and its affiliates were
subject to “limited” compliance policies and procedures that would have
detected or prevented insider trading by S.A.C. staff. Compliance staff
failed to routinely monitor employee e-mails for indications of insider
trading until late 2009, a common industry practice. To his credit, it seems
S.A.C.’s head of compliance had recommended such monitoring to management
four years earlier.
Given what we know now about tons of cases of
insider trading at S.A.C. – there were guilty pleas by six former S.A.C.
Portfolio Managers and Research Analysts for repeated insider trading over
long periods of time – it’s incredible that S.A.C.’s compliance department
only identified one instance of suspected insider trading by its employees.
In that one case, according to the SEC, those employees did not lose their
jobs and S.A.C. did not report the conduct to regulators or law enforcement.
U.S. Attorney for the Southern District of New York
Preet Bharara:
“A company reaps what it sows, and as alleged,
S.A.C. seeded itself with corrupt traders, empowered to engage in
criminal acts by a culture that looked the other way despite red flags
all around…To all those who run companies and value their enterprises,
but pay attention only to the money their employees make and not how
they make it, today’s indictment hopefully gets your attention.”
To that statement I would add “To all those who
audit companies but pay attention only to the fees paid by the
clients…”
Investment advisors are not required to have an
independent audit of their financial statements. S.A.C. Capital Advisors
paid for a big-time audit by PwC because its investors probably demanded it.
According to S.A.C. Capital Advisors most recent SEC Form ADV, the hedge
fund provided investment advisory services for thirty-one clients, 84% of
which are non-US residents, and had $50.9 billion under discretionary
management.
Why does the SEC require disclosure of the auditor
on Form ADV?
Perhaps two cases, in addition to Madoff’s
strip-mall auditor that lied to its state board about auditing anyone at
all, may help explain the rationale. In SEC v. Grant Ivan Grieve, et
al., a hedge fund adviser was alleged to have fabricated and
disseminated false financial information for the fund that was “certified”
by a sham independent back-office administrator and phony accounting firm.
In the Matter of John Hunting Whittier the SECsettled an
action against a hedge fund manager for, among other things, misrepresenting
to fund investors that a particular auditor audited certain hedge funds,
when in fact it did not.
Koss Corp. receives $8.5M in settlement with former
auditor Koss Corporation announced it has settled the claims between Koss
and its former auditor, Grant Thornton, in the lawsuit pending in the
Circuit Court of Cook County, Illinois. As part of the settlement, the
parties provided mutual releases that resolved all claims involved in the
litigation between Koss and its directors against Grant Thornton. Pursuant
to the settlement, Koss received gross proceeds of $8.5M on July 3.
Jensen Comment
Grant Thornton failed to detect former Koss Corp. executive's $34 million
embezzlement. Normally external auditors rested easy when such frauds did not
materially affect the financial statements or they had strong cases that they
were deceived by the client in a way that they were not responsible to detect
such fraud in a financial statement audit.
Both the SEC and the PCAOB are beginning to make waves about having audit
firms more responsible for detecting major frauds like the SAC fraud. If one of
the Big Four had been the auditor of the Madoff Fund I think the audit firm
probably would not have gotten off with zero liability for negligence. Times are
changing since Andy Fastow pilfered around $60 million from his employer
(Enron).
I think it also depends on operating costs. The
rent is a whole lot higher in the La Guardia Airport or a Dallas Galleria than
in some small town in Nowhere, Iowa.
Rutgers, the State University of New
Jersey - New Brunswick and Newark
Rutgers Business School
Newark, NJ
6
North Carolina State University
Poole College of Management,
Jenkins Graduate School
Raleigh, NC
7
George Washington University
George Washington University
School of Business
Washington, DC
8
University of Florida
Hough Graduate School of
Business
Gainesville, FL
9
Pennsylvania State University
Smeal College of Business
University Park, PA
10
Arizona State University
W.P. Carey School of
Business
Tempe, AZ
Jensen Comment
For some reason the above ranking leaves out the University of North Carolina
--- http://onlinemba.unc.edu/about/mba-at-unc/
Richard Sansing later pointed out that UNC comes in at Rank 11.
Thunderbird School of Global Management ---
http://en.wikipedia.org/wiki/Thunderbird_School_of_Global_Management
A decade or so ago, Thunderbird shed (with negotiated buyouts) some of its
expensive tenured faculty, including senior accounting faculty members. But it
retained even more expensive faculty on the payroll that are problematic as
global MBA enrollments dropped from over 1,500 in the 1990s to 140 in Fall of in 2012 and an operating deficit of $4 million in fiscal 2013. The placement
record in 2013 for MBA graduates is among the worst in the nation according to
the Forbes' article quoted below.
The highest paid professor at the Thunderbird
School of Global Management makes more than the dean of the Harvard Business
School. Or his boss. Or, for that matter, President Obama.
Yet, he is little known outside his Glendale,
Arizona-based school, not widely quoted in the media, nor broadly recognized
as an expert in his field. He doesn’t even make the list of the top 50
business thinkers in the world.
Still, global strategy professor Kannan Ramaswarmy
(photo above) was paid total compensation, with benefits, of $700,096 in
fiscal 2011, according to government records filed by Thunderbird. That’s
more than the $662,054 in total compensation made by Harvard Business School
Dean Nitin Nohria or then-Thunderbird President Angel Cabrera who pulled
down $584,749 in 2011. And it’s more than the estimated $550,000 in pay,
benefits and perks that President Obama makes.
How in the world can a struggling school which has
been in decline for many years afford to pay Ramaswamy so much? For one
thing, he teaches in several of the school’s executive education programs
which are among its more lucrative ventures. For another, he has tenure and
the school can’t cross him off its employment roster even if it wanted.
Yet, he’s hardly alone in getting big pay at
Thunderbird. In fact, the highest paid ten professors alone in fiscal 2011
were paid some $4.3 million, more than the $4 million deficit reported by
the school, red ink that forced it into a highly controversial partnership
with for-profit educational provider Laureate Education. Not surprisingly,
perhaps, all of the most highly paid profs are men.
Andrew Inkpen, another global strategy professor,
was paid $565,457 with benefits in the same year. Graeme Rankine, an
associate professor of accounting, was paid $492,908. The compensation for
three other faculty members—Robert Hisrich, a professor of global
entrepreneurship; William Youngdahl, associate professor of operations
management, and Mansour Javidan, dean of research—all easily topped $400,000
a year.
Among the other top ten most highly compensated
faculty at the school are John Mathis, a professor of global finance, who
made $302,191; David Bowen, a human resources professor, who made $307,582;
Dale Davison, a professor of accounting, who pulled down $261,789, and
Humberto Valencia, a professor of global marketing, who made $260,109.
For just about all of these professors, of course,
this is only the compensation paid to them by Thunderbird. Many faculty
members also have lucrative consulting contracts with clients that can equal
or vastly exceed their income from the school.
Some observers say the deal is evidence of waning
interest in the MBA degree. In fact, many of the institution's troubles have
been long lasting and self-inflicted, making it a quintessential case study
in organizational decline. The new partnership reflects years of
deterioration due to increased competition from rivals, lackluster
fundraising, insufficient resources devoted to getting jobs for students,
and overly generous compensation for some of its faculty.
The school's endowment, which in recent years has
been below $20 million, is meager compared to many of its business school
competitors. It didn't help that a $60 million naming gift, at the time in
2004 the largest pledge ever made to a business school, never fully
materialized.
Yet, even though the school lacks a significant
endowment, several of its professors have been paid extraordinarily well.
Kannan Ramaswamy, a global strategy professor who teaches in Thunderbird's
executive education programs, had a total compensation package with benefits
of $700,096 in fiscal 2011. That is munificent pay for an academic who is
not known as a superstar outside his school in Glendale, Arizona. It even
exceeded the total pay of then-Thunderbird President Angel Cabrera whose
compensation totaled $584,749.
While Ramaswany is the highest paid employee at
Thunderbird, according to the school's government filings, he is hardly
alone. Andrew Inkpen, another global strategy professor, was paid $565,457
with benefits the same year. Graeme Rankine, an associate professor of
accounting, was paid $492,908. The compensation for three other faculty
members -- Robert Hisrich, a professor of global entrepreneurship; William
Youngdahl, associate professor of operations management, and Mansour Javidan,
dean of research -- all topped $400,000 a year.
It's not unusual for world class faculty to be paid
so generously, but the highest paid business school professors tend to be
widely known and publicly visible figures at universities that can afford
them, not at a troubled school that has been in a long-term fight for
survival.
A B-school in perpetual decline
The school's full-time MBA enrollment has been
steadily declining for years, falling to just 380 from more than 1,500 in
1990. Last fall, its entering class totaled only 140 students.
The placement stats for last year's graduating class,
meantime, were among the worst reported by any business school in the U.S.
Some 76% of Thunderbird's class of 2012 were without jobs at commencement.
Indeed, Penley sees the agreement with Laureate as
a way to fix the school's lagging placement record. "One of the reasons for
the alliance has to do with their very successful employment record for
graduates," he said. "Laureate has an employment network that is global. It
gives us the opportunity to tap into that employee network and improve our
placement record."
First Question
If Thunderbird is experiencing such a rapid decline in both enrollments and
placements of graduates, what is going to be the impact on admission
standards?
Second Question
If some of those faculty receiving outlier salaries leave Thunderbird what
kind of compensation deals can they negotiate from Harvard, Stanford,
Chicago, Wharton, UCLA, Berkeley, Northwestern, etc.? Would they be hired by
a top MBA program at any price? My guess is that they may not get any offers
of full professorships from the truly top MBA programs.
Under the agreement, JPMVEC will pay a civil
penalty of $285 million to the U.S. Treasury and disgorge $125 million in
unjust profits. The first $124 million of the disgorged profits will go to
ratepayers in the California Independent System Operator (California ISO),
which operates the California electricity market. The other $1 million will
go to ratepayers in the Midcontinent Independent System Operator (MISO).
Jensen Comment
I thought some traders at Enron went to prison for doing the same thing in
California. Where are the handcuffs?
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
Jensen Comment
The University of Wisconsin at Stevens Point is featured in the article.
Hasselback's Accounting Faculty Directory lists three PhD faculty in
accounting, two of whom earned Ph.D. degrees from the University of Arkansas in
the early 1990s. It would seem that this university is not likely to be
competitive in terms of salary for newly graduated accounting Ph.D. students.
A problem faced by a egalitarian salary constraint that does not recognize
supply and demand differences between academic disciplines is that disciplines
like accounting and finance and computer science where demand for Ph.D. faculty
greatly exceeds supply is that those unionized universities find it difficult to
compete in highly competitive markets for Ph.D. faculty. This is one of the
reasons why large R1 research universities do not have unions for faculty. The
want competitive salaries in all disciplines, especially in the professions like
medicine, nursing, computer science, engineering, finance, and accountancy.
President Obama has only a few months to pick a
candidate to replace Ben Bernanke as chairman of the Federal Reserve, and
while the betting website
Paddy Power has Fed Vice Chair Janet Yellen
leading the pack at 1:4 odds, Larry Summers remains a strong contender at
11:2.
Despite an impressive resume that includes stints
as Treasury Secretary and chief economist of the World Bank, there is a very
good reason Summers shouldn't be in charge of monetary policy: He seems to
have trouble with interest rates.
During the financial crisis, Harvard lost nearly $1
billion because of some unusual and ill-judged interest rate swaps that
Summers implemented in the early 2000s during his troubled tenure as the
university's president.
Interest rate swaps
allow borrowers to lock in a fixed interest rate
on floating-rate debt, which can be good to hedge against short-term
uncertainty. The problem with Harvard was that Summers wanted to lock in
interest rates for money that the university
hadn't actually borrowed and wasn't planning on
borrowing for a very long time.
There aren't a lot of ways to interpret this exotic
instrument except as a bet that the future level of interest rates would be
higher than the market pricing implied at the time. That bet was wrong, and
Harvard lost a billion dollars. Anonymous finance blogger Epicurean
Dealmaker
puts it well:
"I have rarely encountered a corporate client who
feels confident enough about both their absolute funding needs and
current and impending market conditions to enter into a forward swap
starting more than nine months into the future. Entering into a forward
start swap for debt you do not intend to issue up to 20 years in the
future sounds like either rank hubris or free money for Wall Street swap
desks."
Why, back in 2004, did Summers feel so confident
that interest rates were going to be much higher than they actually were?
Reuters blogger Felix Salmon
found one clue in a
speech Summers gave in October of that year. Among
other he things, Summers warned of the dangers created by the U.S. current
account deficit and highlighted the seemingly absurd fact that short-term
borrowing costs were lower than the rate of inflation. Perhaps Summers's
experience with foreign-exchange crises in Asia
and Latin America convinced him that something similar could happen in a
country that borrowed in its own currency.
Not only was Summers wrong in 2004 about where
interest rates would be -- he was willing to bet a lot of other people's
money that he knew better than everyone else. The damage at Harvard was bad
enough. Imagine what that sort of thing could do to the U.S. economy.
From the CFO Journal's Morning Ledger on August 20, 2013
PCAOB finds problems with broker-dealer audits Auditors
of broker-dealers need to improve their performance
when it comes to compliance with independence
requirements and other accounting rules, the PCAOB said. A new report
released by the board found deficiencies in an expanded review of audit
firms performing work for securities brokers and dealers. The results are
“very similar” to the PCAOB’s report released a year ago, showing auditors
have a “long way to go” to ensure compliance with audit requirements, said
Jay Hanson, a member of the group’s board. Auditors, he said, should “up
their game.”
From the CFO Journal's Morning Ledger on August 20, 2013
Is the escheator still a cheater?
A job switch by an ex-finance official in Delaware is making waves. Mark
Udinski’s job as state escheator was to collect unclaimed property and try
to locate and reimburse the rightful owner. This month he became the second
holder of that office in a row to leave it for
a job at Kelmar Associates, which conducts the bulk of
the audits ordered by the escheator’s office,
writes CFOJ’s Vipal Monga in today’s Marketplace section. Under Mr. Udinski,
Delaware developed a reputation for aggressively pursuing companies for
unclaimed property. During his tenure, the state collected $2.2 billion of
such property.
Mr. Udinski’s move to the privately held auditing firm
doesn’t violate any state rules. But some critics say it creates the
appearance of a conflict of interest. Tom Cook, Delaware’s secretary of
finance and Mr. Udinski’s former boss, dismissed any suggestion of conflict.
And Mark McQuillen, a principal at Kelmar, said that Mr. Udinski was the
right person for the job. But Jennifer Borden, general counsel for Unclaimed
Property Recovery & Reporting, which advises companies being audited by the
state, says the move “shows the cozy relationship between Kelmar and
Delaware, and calls into question the decisions [Mr. Udinski] has made.”
As Monga notes,
unclaimed property is a big revenue generator for
Delaware. Unclaimed-property fees in the
fiscal year ended June 30 totaled $566.5 million, or 14% of
total state receipts. And Kelmar has earned more than $90 million in fees
from Delaware over the past three years. Kelmar’s Mr. McQuillen said it was
only natural that Kelmar, one of the largest audit firms specializing in
unclaimed property, would get the bulk of the state’s business in that area.
“We got those jobs because of our capacity and the quality of the work we
do, nothing more. If not us, who?” he told CFOJ in an email.
From the CFO Journal's Morning Ledger on August 16, 2013
Former Vitesse CFO pleads guilty to falsifying records Two former executives of
Vitesse Semiconductor
pleaded guilty to charges of conspiring to destroy, alter or falsify records
with the intent of obstructing an SEC investigation, the Department of
Justice said.
Vitesse founder and former CEO Louis Tomasetta and
former CFO Eugene Hovanec pleaded guilty to
fabricating and altering records regarding the company’s April 2001 and
October 2001 stock-option grants, the WSJ reports. The count both men
pleaded guilty to carries a maximum sentence of five years in prison and a
maximum fine of $250,000. Jurors had twice previously failed to reach a
verdict in the case, most recently in 2012. Another former Vitesse CFO,
Yatin Mody, pleaded guilty in 2010 to charges of securities fraud. Mr. Mody
awaits sentencing.
New laws in India aim to tackle corporate fraud Sweeping
legislation in India aims to reform auditing
practices, with stiffer penalties for fraud and
more government oversight of businesses, the DealBook’s Jen Swanson reports.
The Companies Bill sets tough sanctions for embezzlement, including
mandatory jail time and hefty fines. To prevent additional cases like that
of Satyam—in which Indian auditors failed to notice discrepancies despite
auditing the company for years—the measure calls for the mandatory rotation
of auditors and their firms. Businesses say problems are rife in corporate
India. In a 2012 report by
KPMG, more than half of respondents reported that their companies
had experienced fraud or theft in the previous two years. Most of the
respondents said they consider fraud an inevitable cost of doing business in
this country, and many Indian companies were setting aside a portion of
their turnover to offset anticipated losses.
Abstract:
This is the first study to critically compare the Codes of Ethics and
Standards of Practice of forensic accounting corporations and whether
forensic accountants understand the difference between the Codes and
Standards. This study examines the extent to which forensic accountants are
knowledgeable about forensic accounting corporations Codes and Standards,
and whether they are able to differentiate the differences between them. A
survey of 182 forensic accountants found that a significant number of
forensic accountants did not investigate the Codes and Standards prior to
receiving their certifications. The results further revealed that a
significant number of forensic accountants incorrectly believe that the
Codes and Standards are substantially similar when they are significantly
different. This raises questions regarding forensic accountants’
investigative ability. It raises further questions concerning forensic
accountants’ commitment to maintaining high ethical standards and standards
of practice. The results suggest a need for reform within the forensic
certification industry, for the establishment of an independent agency to
monitor and accredit forensic accounting corporations and their
certifications, or alternatively for state or Federal regulations to enforce
minimum standards for forensic accounting corporations and the
certifications.
In early July, after the monsoon rains have washed
away the last of an oppressive heat, students and their parents arrive in
droves here at the University of Delhi to begin the academic year. It is a
busy time for the roadside markets and other businesses near the campus,
when they earn most of their annual income from sales of tea, snacks,
T-shirts, and, most important, course packs.
But this year, confusion and unease pervade the
dozens of photocopy shops that produce the packs, which include a semester's
worth of reading material from various textbooks and academic journals.
That's because one of their own, Rameshwari Photocopy Services, is at the
center of a legal fight that has gained international attention.
Three of the world's biggest academic
publishers—Cambridge University Press, Oxford University Press, and Taylor &
Francis—are suing Rameshwari and the university for producing thousands of
bound course packs a year. They claim that the course packs violate various
copyrights, hurt their bottom lines, and reduce residual payments to the
academics in India, the United States, and elsewhere whose work is being
copied.
But the publishers' move has drawn widespread
criticism among professors and students in India. They say this kind of
photocopying not only is entirely within the law, but also is essential for
education in a developing country where students can barely afford one
textbook, let alone dozens for each class.
Indeed, the opponents' portrayal of wealthy,
Western publishers trying to wring funds from poor Indian students has
helped trigger a global outcry. Last year Amartya Sen, the Harvard economist
and Nobel laureate, sent a letter asking the Oxford press, which publishes
his work, to abandon the lawsuit. In March a similar letter to all three
presses came from more than 300 academics and authors from around the
world—33 of whom the publishers name in the suit as victims of copyright
infringement.
"As authors and educators, we would like to place
on record our distress at this act of the publishers, as we recognize the
fact that in a country like India marked by sharp economic inequalities, it
is often not possible for every student to obtain a personal copy of a
book," the letter said.
Of course, legal battles over course packs and
copyrights are not new to academe. In the United States, for example, a
closely watched case brought by Cambridge, Oxford, and SAGE Publications
against Georgia State University is working its way through the U.S. court
system. The publishers assert that the university committed widespread
copyright violations when it allowed some of their content to be used,
unlicensed, in electronic reserves.
The Rameshwari Photocopy case touches on some of
the same issues but may have broader implications for the country's
universities, where photocopying has long been standard operating procedure.
It's been a student tradition in India for decades:
Look through a syllabus and head off to the copy shop to get a course pack.
Indian professors as well as students argue that the packets are integral to
university education.
"If I have to teach a subject, I design a very
elaborate teaching plan, the aim of that being that I need to expose my
students to and have them thinking critically about several key themes and
topics through a wide diversity of reading," says Shamnad Basheer, a
professor of intellectual-property law at Kolkata's National University of
Juridical Sciences. "These are not textbooks. These are short extracts of
books and several different books. They in no way affect the market of the
main books." 'It's the Law of the Land'
But the publishers claim that course packs are in
violation of India's Copyright Act of 1957, which gives copyright holders
exclusive rights over reproduction of the material. They do not intend to
deny Indian students the texts needed for their education, they insist,
arguing that universities can pay an annual licensing fee that would allow
for limited reproduction of the covered publications.
"It's the law of the land that photocopying for
commercial purposes is not desirable, because it's not fair to stakeholders
concerned," says Sudhir Malhotra, president of the Federation of Indian
Publishers, which represents the Indian branches of the three plaintiffs.
The photocopy shop, by selling course packs, is engaging in commercial
activity, he says.
"Yes, we recognize that students do need to
photocopy certain educational material, and they need to do it easily,
quickly, and as inexpensively as possible," Mr. Malhotra says. "All we are
saying is that [copy shops and universities] should take a license. It's a
question of legal compliance. If a radio station wants to broadcast music, a
song, it takes a license from the music society. That's it."
Last year the federation endorsed a plan by the
Indian Reprographic Rights Organisation, which grants literary copyright
licenses, to provide licenses to universities that want to be able to
reproduce the works of publishers that work with the rights group. This
year, some Indian universities signed up.
But many academics argue that the publishers are
overlooking the fact that Indian copyright law has a fair-use clause and an
education exemption.
Satish Deshpande, a sociology professor at Delhi,
says the publishers want the courts to essentially rewrite the law.
"I think this case is a very deliberate 'test' case
on the part of the publishers," he says. "They're not really interested in
the specifics of this particular case, but they want to use it as an
example, and, in a sense, they want to use it to reinterpret the copyright
law in a way that will suit their interests better than the letter of the
law now seems to."
Mr. Malhotra, of the publishers' federation, denies
that they have any motive other than to honor the letter of the law.
Other academics take issue with the licensing fees
that universities would have to pay if they signed an agreement with the
Indian Reprographic Rights Organization.
Mr. Basheer, the professor of intellectual-property
law, says that the fees, which vary depending on the university, may seem
low but would very likely increase over time, and that universities would
pass the expense on to students themselves.
Continued in article
Jensen Comment
Years ago I put copies of most readings in my courses, including my textbooks,
on reserve in the campus library. In those days it was more expensive for
students to photocopy a textbook than to buy it new or used. Putting the
textbook on reserve was mostly a convenience for students who wanted to study on
a particular day and had left their textbooks at home.
Technology has changed the situation today. Now textbooks are very expensive,
and students who take the trouble to use a scanner can get free electronic
copies. I don't think publishers have a copyright case against a professor
who simply puts several copies of the textbook on reserve at the library. The
professor has no control over a student's decision to scan a free copy (with a
huge amount of time and effort). The publisher could sue students for doing
this, but it would be hard to detect when a student scans in privacy.
I think a professor who puts an electronic copy on a server, such as a
Blackboard server, without permission from the copyright holder is in violation
of copyright law. The Fair Use Safe Harbor does not apply to this egregious act
---
http://www.trinity.edu/rjensen/000aaa/theworry.htm#Copyright
Also professors who give closed-book examinations and allow students to use
their computers (not connected to the Internet) must worry that those computers
contain electronic versions of textbooks.
Regulators on Tuesday charged a Texas man with
running a Ponzi scheme promising big returns on the virtual currency bitcoin,
and warned individual investors to be wary of similar frauds.
The move by the Securities and Exchange Commission
is the latest action by regulators to rein in suspicious activity associated
with virtual currencies.
"We are concerned that the rising use of virtual
currencies in the global marketplace may entice fraudsters to lure investors
into Ponzi and other schemes in which these currencies are used to
facilitate fraudulent, or simply fabricated, investments or transactions,"
the SEC said in an investor alert.
In recent months federal and state agencies have
started to clamp down on exchanges that trade bitcoin, the most popular
virtual currency, by requiring them to follow the same guidelines as
traditional money-transmission companies like Western Union Co. WU -0.40%
and MoneyGram International Inc. MGI -1.25%
Bitcoin is a decentralized currency that can be
created or "mined" by users. It also can be traded on a number of exchanges
or swapped privately among users. Most of the currency is traded on a
Tokyo-based exchange called Mt. Gox, where one bitcoin was valued Tuesday at
roughly $95.
The SEC on Tuesday charged Trendon T. Shavers, 30
years old, with raising more than $4.5 million worth of bitcoin from
investors who were "falsely" promised a weekly interest rate of 7%. Mr.
Shavers, of McKinney, Texas, was the founder and operator of a website
called Bitcoin Savings and Trust.
Mr. Shavers couldn't be reached for comment.
The civil complaint, filed in federal court in
Texas, cites comments that Mr. Shavers posted on an online bitcoin forum.
They include messages posted by Mr. Shavers under the Internet name
"pirateat40" that played down risks associated with the investment.
Mr. Shavers offered and sold the investments from
at least September 2011 to September 2012, according to the complaint. Mr.
Shavers sold the investments to at least 66 investors, including those in
Connecticut, Hawaii, Illinois, Louisiana, Massachusetts, North Carolina and
Pennsylvania, according to the complaint.
The complaint describes Bitcoin Savings and Trust
as a "sham and a Ponzi scheme" in which Mr. Shavers used bitcoin raised from
new investors to pay the returns on the outstanding investments.
The SEC also accused Mr. Shavers of using nearly
$150,000 of the proceeds for personal expenses, including "rent, car-related
expenses, utilities, retail purchases, casinos and meals."
Mr. Shavers shut down the Bitcoin Savings and Trust
website last August.
TOPICS: Accounting, Accounting Fraud, Fraud, SEC, Securities and
Exchange Commission
SUMMARY: With accounting-fraud cases at nearly a 10-year low,
complacency might be the biggest fraud risk facing chief financial officers.
Large fraud-related restatements of corporate earnings reports have fallen
sharply since the financial crisis, but that doesn't mean that companies
aren't still vulnerable to them. In a push to try to catch corporate fraud
earlier, U.S. securities regulators laid out plans to sharpen their focus on
catching improper financial reporting and accounting fraud by creating two
new task forces and a new analytics center. The Securities and Exchange
Commission's Division of Enforcement is launching a so-called "Financial
Reporting and Audit Task Force" to boost the agency's policing of accounting
and disclosure fraud. The second task force will target fraud at microcap
companies, which often do not have to make full corporate reports to
regulators.
CLASSROOM APPLICATION: This article and the related articles offer
an opportunity to discuss the enforcement of accounting and fraud law, as
well as to serve as a warning to students that they must be alert to these
issues as they progress into their careers as business professionals.
QUESTIONS:
1. (Introductory) What is the SEC? What are its areas of
enforcement?
2. (Advanced) What SEC task force is being formed? What is its
purpose? Please give examples of types of activities that would be
prosecuted under these new initiatives.
3. (Advanced) Why is the SEC concerned about these issues at this
particular time? What factors are in play now, and what factors are
consistently a risk for businesses?
4. (Advanced) What lessons have you learned from this article? What
steps should businesses take to protect themselves from accounting fraud?
Reviewed By: Linda Christiansen, Indiana University Southeast
With accounting-fraud cases at nearly a 10-year
low, complacency might be the biggest fraud risk facing chief financial
officers.
Large fraud-related restatements of corporate
earnings reports have fallen sharply since the financial crisis, but that
doesn't mean that companies aren't still vulnerable to them.
"There still is financial-reporting fraud going on
out there," said Andrew Ceresney, the new co-director of the Securities and
Exchange Commission's Division of Enforcement.
And the agency is making a concerted push to
uncover it. Last week, the SEC announced the formation of a Financial
Reporting and Audit Task Force, which it hopes will catch accounting frauds
at earlier stages.
Of course, companies have made big strides in
improving their internal controls since the Enron-era accounting scandals,
in part because of the rules imposed by the Sarbanes-Oxley law in 2002. But
accounting experts and regulatory officials say there are warning signs that
a new round of fraud could be in the offing as the recovery continues.
While big restatements are less common these days,
a growing percentage of companies are making minor revisions to their
financial results. Auditor turnover is up. And long-term interest rates are
starting to rise, potentially squeezing some business deals and raising
temptations to cook the books.
"The next fraud's going to happen, it's just a
matter of time," said James Walker, CFO of publisher Walch Education and
former chairman of the Institute of Management Accountants' ethics
committee.
The financial crisis exposed the need for better
internal safeguards, more transparency and a thicker capital cushion at some
companies. But since the crisis began in 2007, the number of companies
making fraud-related restatements has fallen by almost half, compared with
the six preceding years, according to Audit Analytics. Last year, the
research firm's data show, auditors blamed fraud for a "material weakness"
in internal controls at just five public companies, down from a peak of 19
in 2005.
That drop-off may be partly why senior executives'
perceptions of risk have been declining faster than reported incidents of
fraud, according to a survey last fall by Kroll Advisory Solutions.
If so, the SEC may have delivered a wake-up call.
"We think there's a need to focus our attention to identify accounting
fraud," said Mr. Ceresney.
The new SEC task force of about eight attorneys and
accountants will act as an "incubator" to build accounting-fraud cases and
hand them over to bigger units for full investigations, he said. They will
focus on common problem areas: revenue recognition, valuation, capitalized
versus noncapitalized expenses, reserves, acquisition accounting and other
performance benchmarks that don't follow standard accounting principles.
While the task force is small, it is counting on
some inside help. Under the Dodd-Frank financial law, which lets the SEC
offer bounties to whistleblowers, the agency collected 547 tips related to
corporate disclosures and financial results last year.
"Frauds in the accounting area are often difficult
to detect without somebody from the inside," said David Woodcock, who will
head the new task force. The SEC is investigating several accounting-fraud
cases referred by whistleblowers that it wouldn't have detected otherwise,
he said.
He also said he is troubled by the spike in the
number of companies making minor revisions in financial statements. Those
adjustments now represent nearly 65% of all restatements, the highest
percentage since regulators changed the way companies report restatements in
2004, according to Audit Analytics.
Some of the changes may reflect the growing use of
big data and automated internal controls. Last month, at the Association of
Certified Fraud Examiners' conference in Las Vegas, one of best-attended
panel discussions was on how to set up accounting ratios—such as the
relationship between shipping costs and sales—to help spot irregularities
faster.
Years ago, forensic accountants were more likely to
analyze completed balance sheets, accounting firms including Ernst & Young
say they are increasingly fielding requests for forensic work on the raw
data employees collect, an option made possible by advances in computer
technology and analytic tools.
Meanwhile, automation and cost cutting have left
many companies with smaller financial and compliance staffs. "When companies
cut back the workforce, oftentimes internal controls suffer," said James
Ratley, president of the Association of Certified Fraud Examiners.
SUMMARY: There have been 458 financial-statement revisions filed
with U.S. regulators last year. Helped by better internal controls and
automation, U.S.-listed companies are filing far fewer big financial
restatements caused by fraud and other material mistakes, but smaller
adjustments and revisions continue to proliferate. These smaller revisions,
in which companies make immaterial financial adjustments-such as a minor
change in cash flow or correcting a clerical error-climbed 8% to a total of
458 last year.
CLASSROOM APPLICATION: This current data regarding financial
statement revisions and restatements will add an interesting dimension to a
discussion of those topics. It will also help understanding of the
differences between restatements and revisions.
QUESTIONS:
1. (Introductory) What is a financial-statement revision? What is a
restatement? How do the two differ?
2. (Introductory) What are the data trends for revisions and
restatements in recent years? What are some of the reasons offered for these
trends?
3. (Advanced) The article mentions materiality. What is
materiality? How is materiality determined? How does materiality affect the
method used to correct errors in financial statements? In what other areas
of accounting is materiality used?
4. (Advanced) Should investors and regulators be concerned with
financial-statement revisions? With restatements? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
That’s the number of financial-statement revisions
filed with U.S. regulators last year.
Helped by better internal controls and automation,
U.S.-listed companies are filing far fewer big financial restatements caused
by fraud and other material mistakes, but smaller adjustments and revisions
continue to proliferate, according to Don Whalen, research director at Audit
Analytics.
These smaller revisions, in which companies make
immaterial financial adjustments—such as a minor change in cash flow or
correcting a clerical error—climbed 8% to a total of 458 last year,
according to Audit Analytics. That figure was up almost 45% from a 2009 low
of 317.
Restatements overall were down 6.3% in 2012, but
minor revisions accounted for almost 65% of the total. That’s the highest
percentage recorded for such revisions and double the level in 2005, the
first full year that companies had to file notices about them.
“From an accounting angle, we want to review all of
these more closely,” says David Woodcock, chairman of the U.S. Securities
and Exchange Commission’s new Financial Reporting and Audit Task Force.
While companies do change their financial figures
with revisions, they are considered less critical than restatements, because
they don’t substantially affect an investor’s ability to rely on the
previously reported numbers. For example, in May both Coca-Cola Bottling Co.
and EMC Corp. said they were making revisions to correct and adjust for
immaterial errors to their deferred-tax-accounting liabilities.
About half the time, revisions are issued directly
in an annual report, rather than in an amended filing, according to Audit
Analytics.
The Underfunded Pension Mess in the USA
From the CFO Journal's Morning Ledger on July 25, 2013
Companies are getting closer to bringing their pension
plans back to fully funded status this quarter,
says CFOJ’s Emily Chasan. Rising
interest rates and stock prices have narrowed the gap of underfunded pension
liabilities by 40% this year, and some companies—including
Alaska Air,
Cytec Industries
and VF Corp.— have
announced their pensions are nearly topped up. “A reduction in our pension
expense is right around the corner, which is important because most of our
competitors don’t have pension plans,” said VF Chief Financial Officer Bob
Shearer.
The vast majority of pension plans are still in the
red, but more than 208 S&P 500 companies with pension plans have improved
their funded status by over $100 million each since the end of last year.
Boeing,
Ford,
General Electric
and IBM are all
expected to improve their funding by more than $5 billion at the end of the
year.
Ford,
which reported a 19% jump in quarterly profit
yesterday, is seeing a marked improvement in its pension plan this year,
says CFO Bob Shanks. Ford chipped in $2 billion, but rising discount rates
were the big reason the company has closed its $9.7 billion funding gap by
about $4 billion this year. That would bring the funded status to about 85%,
up from 82% last year. “We’re very encouraged by the progress we’re seeing,”
Mr. Shanks said.
Jensen Comment
Government pensions, including teacher pensions, are in far worse shape. For
example, the Governor of Illinois is withholding pay of state legislators until
they come to agreement on how to my public pensions in Illinois sustainable. The
USA Postal Service cannot figure out how to meet its pension obligations ---
http://www.trinity.edu/rjensen/Theory02.htm#Pensions
Horrible (shell game) accounting rules for pension accounting Over the past three decades, we have allowed a system
of pension accounting to develop that is a shell game, misleading taxpayers and
investors about the true fiscal health of their cities and companies -- and
allowing management to make promises to workers that saddle future generations
with huge costs. The result: According to a recent estimate by Credit Suisse
First Boston, unfunded pension liabilities of companies in the S&P 500 could hit
$218 billion by the end of this year. Others estimate that public pensions --
the benefits promised by state and local governments -- could be in the red
upwards of $700 billion.
Arthur Levitt, Jr., "Pensions Unplugged," The Wall Street Journal,
November 10, 2005; Page A16 ---
http://online.wsj.com/article/SB113159015994793200.html?mod=opinion&ojcontent=otep
From the CFO Journal's Morning Ledger on July 23, 2013
Businesses Bolster
Internal Controls
Companies are bolstering their defenses against fraud. The push is part of a
big overhaul of internal-controls guidelines that many companies expect to
adopt by the end of the year,
CFOJ’s Emily Chasan writes in today’s Marketplace
section. Until now, internal controls have
been based on a 20-year-old framework that doesn’t take into account new
risks from mobile technology and cloud computing, as well as the rise of
outsourcing and shifts in corporate governance.
The overhaul comes as internal controls are getting a
tougher look from regulators. The PCAOB has increasingly rebuked auditors
for failing to properly evaluate corporate controls, Chasan notes. Companies
won’t face penalties if they don’t embrace the new guidelines, but ignoring
them could put off investors who value tight management. The new framework
recommends that internal-control processes adhere to 17 principles, such as
the independence of corporate boards from management and the need to address
risks posed by technology.
“Every company will be going through the processes
they have and asking, ‘Do I have the right controls?’” said Carolyn Saint,
vice president of internal audit for convenience-store operator 7-Eleven.
“We’re making sure the things we’ve aligned to as company controls—like
security, access, change management—are up to date, and whether there is
anything in the new standard we need to reflect,” she said.
From the CFO Journal's Morning Ledger on August 5, 2013
Companies embroiled in patent battles may have to
rethink their strategies
Over the weekend, President Obama vetoed a ruling
from the U.S. International Trade Commission banning the sale of some
Apple products,
the WSJ reports. It
was the first such veto in a quarter century.
The veto could discourage companies from taking patent
disputes to the
ITC, the Journal says. It also could reduce
some patent holders’ leverage in licensing talks, cutting the commercial
value of their patents. And
the FT says the veto
risks undermining the administration’s push for stricter
intellectual-property regimes around the world. We’ll have to keep an eye on
some other pending cases to judge the impact. InterDigital has brought
patent-infringement claims and sought product bans against several
companies, including
Samsung, Nokia,
Huawei Technologies
and ZTE. Late
last year, Samsung
and the Ericsson
filed complaints against each other at the ITC.
In a letter explaining the veto, U.S. Trade
Representative Michael Froman said the decision was based on the potential
harm the sales ban would cause to consumers and the U.S. economy. And he
suggested Samsung could still enforce its patents in the courts. That may be
little consolation to Samsung—its shares were hammered today, with more than
$1 billion in market value wiped out in early trading,
the WSJ reports.
From the CFO Journal's Morning Ledger on July 22, 2013
Tax overhaul battle divides companies Corporate battle lines are being drawn over the congressional
effort to overhaul the tax code,
the WSJ’s Damian Paletta and Kate Linbaugh write.
The top Democrat and Republican on the Senate Finance
Committee have given other lawmakers until
Friday to defend current tax breaks and
practices, while House Ways and Means Chairman David Camp (R., Mich.) could
begin advancing a plan after Congress’s August recess. Companies like
Amgen and
Microsoft that
benefit from royalty income from intellectual property are working to
preserve their ability to park this income in low-tax locales such as
Bermuda and Ireland. Both companies are fighting a draft proposal from Mr.
Camp that aims to curtail such offshore practices by imposing a 15% tax on
income from patents, trademarks or other U.S.-owned “intangibles,”
regardless of where they are held. Another group, led by
General Electric
and backed by companies including
Intel may be
willing to accept Mr. Camp’s proposal in exchange for lower tax rates, among
other things.
From the CFO Journal's Morning Ledger on July 19, 2013
How Google is spending its ‘lumpy’ capex
Google may have reported lower-than-expected second-quarter
revenue, but the company said its capital expenditures doubled,
Emily Chasan reports.
The Internet search giant reported capital spending of $1.6 billion in the
quarter, up from $774 million a year earlier and a third higher than in the
first quarter. “CapEx is just inherently lumpy,” CFO Patrick Pichette said
on the conference call. He noted the company is spending heavily on
infrastructure, construction of data centers as well as production
equipment. Google also mentioned its effective tax rate jumped back up to
24% in Q2. In the first quarter, the company’s tax rate had fallen to 8%
after Congress retroactively extended the 2012 R&D tax credit, forcing
companies to recognize the entire value of that credit in a single quarter.
From The Wall Street Journal Weekly Accounting Review on July 19. 2013
TOPICS: Income Statement, Interim Financial Statements,
Investments, Net Income, Revenue Forecast
SUMMARY: Yahoo Inc. chief executive Marissa Mayer and financial
chief Ken Goldman "took the unusual step of doing the quarterly earnings
announcement and conference call in a live-video webcast....[She] said that
Yahoo had achieved year-over-year growth in global daily average page views,
which had previously been in decline. The increase didn't include Tumblr, a
site that Yahoo recently purchased for $1.1. billion." The overall results
were mixed "showing a 46% jump in quarterly earnings...but continued revenue
declines that underscore her challenges."
CLASSROOM APPLICATION: The article covers many financial statement
metrics and the earnings guidance process, useful for introducing financial
reporting and communication methods in an MBA or other financial accounting
class. Later questions also discuss the Yahoo 23.5% ownership of Alibaba
Group Holding Ltd, suitable for more advanced discussion of accounting for
equity method investees. NOTE: INSTRUCTORS WILL WANT TO REMOVE THE FOLLOWING
STATEMENTS BEFORE DISTRIBUTING TO STUDENTS AS THEY ANSWER THE QUESTIONS
RELATED TO EQUITY METHOD INVESTEES. According to notes to the financial
statements for the 10-Q filing for March 31, 2013 (as of this writing, the
10-Q for June 30, 2013 has not yet been filed) the Alibaba and Yahoo Japan
investments are accounted for under the equity method and comprise virtually
100% of the reported amount on the balance sheet for equity method
investees. At June 30, 2013, the Form 8-K fling shows $2,874,387 for
Investments in Equity Interests, 18% of the company's total assets of
$16,226,423. Earnings in equity interests for the six months ended June 30,
2013, amount to $442,278, 61% of the consolidated net income of $725,902
(before allocation of noncontrolling interest in net income). This result
explains the fact that analysts attribute approximately ½ of Yahoo's market
capitalization to the equity interests in these Asian affiliates.
QUESTIONS:
1. (Introductory) Based on the description in the article, what is
the strategy of Yahoo's leadership team, led by Marissa Mayer, for
rejuvenating the company?
2. (Advanced) According to the article, how is Mayer's team's
strategy evident in the operating results disclosed by Ms Mayer and CFO Ken
Goldman? In your answer, clearly mention revenues and profits and explain
the difference between these two terms.
3. (Advanced) What is management guidance about earnings? What
guidance did CEO Mayer give for the year 2013 expected results?
4. (Introductory) What is significant about the way that CEO Mayer
and CFO Goldman delivered this quarterly information to Yahoo investors and
others interested in the company's financial performance?
5. (Advanced) Refer to the related article. Yahoo's stock price
surged 10% after this report of quarterly performance. Did this have
anything to do with CEO Marissa Mayer's strategies for improving the
company? Explain your answer.
6. (Introductory) According to the article, what portion of Yahoo's
total market value is attributed to its investments in Alibaba Group
Holding, Ltd., and Yahoo Japan? In your answer, define the term market value
and explain how you think this assessment is determined by analysts.
7. (Advanced) Access the filing of the second quarter 2013 results
on Form 8-K available on the SEC's web site at
http://www.sec.gov/Archives/edgar/data/1011006/000115752313003338/a50670602-ex991.htm
Scroll down to the Unaudited Condensed Consolidated Balance Sheets for the
periods ended June 30 2013 and December 31, 2012. What proportion of total
assets is represented by investments in equity investees?
8. (Advanced) Scroll further to the unaudited condensed
consolidated statements of Income for the six months ended June 30, 2013.
What portion of Yahoo's income is attributed to the equity investments in
Alibaba and Yahoo Japan?
9. (Advanced) How does the information given in answer to the last
two questions help to explain the proportion of Yahoo market value
attributed to the Asian investments by analysts following Yahoo?
Reviewed By: Judy Beckman, University of Rhode Island
Yahoo Inc. YHOO 0.00% chief Marissa Mayer delivered
another mixed report card on her yearlong turnaround effort, showing a 46%
jump in quarterly earnings for the Internet pioneer but continued revenue
declines that underscore her challenges.
Ms. Mayer's willingness to sacrifice immediate
gains as she positions the company for future growth has led to the
continued deterioration of its core business of selling online ads. Yahoo
posted a second-quarter revenue drop of 7%, though the decline was just 1%
when excluding Yahoo's payouts to its business partners.
Yahoo CEO Marissa Mayer and financial chief Ken
Goldman held the company's earnings call as a live-video webcast for the
first time. Related Video
Yahoo shares have soared more than 70% since
Marissa Mayer took over the helm at the Internet company one year ago. WSJ's
Amir Efrati looks at her achievements as Yahoo's CEO. (Photo: Getty Images)
By contrast, the U.S. online-advertising market
grew by 15% last year, according to the Interactive Advertising Bureau, a
trade group. Rivals such as Web-search giant Google Inc., GOOG -0.86% social
network Facebook Inc. FB -1.80% and messaging service Twitter Inc. have been
garnering an increasing share of marketers' budgets while Yahoo's growth has
faltered.
As has been the case recently, Yahoo's profit was
buoyed by the strong performance of China-based e-commerce giant Alibaba
Group Holding Ltd., in which Yahoo holds a 23.5% stake. Yahoo's stakes in
Alibaba and Yahoo Japan account for about half of its entire market
valuation, according to analysts. [image] Now Reporting
Track the performances of 150 companies as they
report and compare their results with analysts' estimates. Sort by date and
industry.
Yahoo's disclosures Tuesday included new
information about the financials of Alibaba, which is planning an IPO and is
on track to generate more revenue than Yahoo this year.
In the first quarter—the most recent period
available—Alibaba recorded $1.38 billion, up 71% from a year earlier. It
made $669 million in quarterly profit, more than tripling income from a year
earlier. That means its profit margin growth accelerated, rising to 48.4% in
the first quarter from 35% in the fourth quarter of last year.
"I don't think anybody was expecting that; that's a
massive acceleration," said Sameet Sinha, a stock analyst at B. Riley & Co.
He added that investors were disappointed with
Yahoo's outlook for the year. The company said it expects revenue to rise
roughly 0.7% in 2013, lower than the 1.8% hike projected in its previous
quarterly report.
The results initially caused a 2% drop in the
Sunnyvale, Calif., company's stock in after-hours trading, though the shares
later bounced back, trading up two cents to $26.90. The stock is up more
than 70% from a year ago, thanks largely to the Alibaba stake.
Ms. Mayer, who took the unusual step of doing the
quarterly earnings announcement and conference call in a live-video webcast
with financial chief Ken Goldman, said Yahoo had achieved year-over-year
growth in global daily average page views, which had previously been in
decline. The increase didn't include Tumblr, a site that Yahoo recently
purchased for $1.1 billion.
"Renewed traffic growth in the face of multiple
years of decline is, to my knowledge, unprecedented among industry players
that operate with billions of page views, and we've achieved just that," she
said.
The 38-year-old Ms. Mayer said she was focused on
facilitating a "chain reaction" that begins with hiring talent, building
"inspiring products" to attract new audiences, and "that traffic will
increase advertiser interest and ultimately translate into revenue" growth.
Yahoo has redesigned many of its services,
including its mobile apps, and increased its personalization features so
that individual visitors to Yahoo sites will see different content based on
what Yahoo knows about their interests.
She said the company has seen a surge of job
applications, and that 10% of hires in the second quarter were former Yahoo
employees who chose to come back.
Ms. Mayer also said the company now has hundreds of
engineers developing services for mobile devices, up from dozens of
engineers before her tenure.
There was a bright spot in the revenue figures.
Yahoo makes about $1 billion per year from
transaction-related fees on its auto, travel, shopping and other sites,
taking a commission from the sale of products or services. That segment of
Yahoo's business had its third quarter in a row of 10% growth after payouts
to business partners. Profit margins in e-commerce tend to be lower than
those for online ads, however.
There are major flaws in the state's new $70
million accounting system known as "S.W.I.F.T."
That is the assessment of the top auditor of
Minnesota State Government. Legislative Auditor James Nobles tells 5
EYEWITNESS NEWS that the accounting system created serious delays in getting
financial reports put together.
Nobles says Minnesota missed its deadline and
violated federal law when it did not get its final audits of all state
agencies submitted to the Federal Government on time.
Nobles says he is concerned that the accounting
system problems are persisting even though "we have had several years to
prepare for this new accounting system and spent tens of millions of dollars
and it is not working adequately."
Nobles admits it is hard to have full confidence in
the system and it is hard to know if the $16 billion the state spent in 2012
is adequately accounted for in the final report.
Nobles says this could have a negative affect on
the state's credit rating. If the the state's credit rating takes a hit,
Nobles says it will cost taxpayers more to pay off the interest on money the
state borrows.
Nobles says it could also lead to sanctions from
the federal government. Nobles says he has "great concerns the problems are
still in the accounting system" and could affect his ability to audit 2013
financial numbers.
The Minnesota Office of Management and Budget is
responsible for getting the financial statements to the Legislative Auditor
on time.
The auditing business rests on what Joshua
Ronen, a New York University accounting professor, once called "a
structural infirmity."
Auditors are paid by companies they audit,
much as rating agencies are paid by companies they rate. This gives auditors
an economic incentive to lie on their clients' behalf, even if that puts
their reputations at risk. As an old German proverb puts it: Whose bread I
eat, his song I sing.
These conflicts of interest figured in the
corporate-accounting scandals of the early 2000s and the subprime-mortgage
securitization debacle of the late 2000s. Despite attempts to lessen
conflicts, resolution has defied easy solution.
Now a band of economists, the new breed that
dabbles in experiments rather than models, thinks it has evidence that
there's a better way: Pay auditors out of a central fund, randomly
double-check their work and link pay to accuracy. In short, change the
incentives.
… [t]he lesson from Gujarat is clear: There's
a way to pay outside auditors so they have an incentive to tell the truth.
From the CFO Journal's Morning Ledger on July 12, 2013
Europe and U.S. strike deal on derivatives The European Union’s executive arm struck a last-minute deal with
the CFTC over U.S. derivatives rules,
the WSJ reports. The
CFTC is expected to vote today to phase in the rules—which affect overseas
branches of U.S. banks—over the next eight months, and to lay out a process
that could ultimately allow foreign banks to comply with their home
country’s rules, rather than the CFTC’s. The move is an about-face for CFTC
Chairman Gary Gensler, who previously insisted that U.S. rules must be
applied broadly and promptly, but ultimately found himself boxed into a
corner by his fellow commissioners, European officials and Treasury
Secretary Jacob Lew.
Lucy A. Marsh, a tenured law professor at Denver since 1982 who teaches
Civil Procedure, Property, and Trusts & Estates (CV
here), has filed an EEOC gender discrimination complaint against the
school charging that her $109,000 is the lowest
at the school and well below the $149,000 median full professor salary.
From the EEOC complaint:
Professor Marsh believes that she and
other female professors at the law school were discriminated against
with respect to compensation because of their gender and were paid less
than men performing substantially equal work under similar conditions in
the same establishment.
From the Denver Post:
"What I hope comes out of this is not
just fair compensation to professor Marsh and to fix the system, but
hopefully there will be lessons learned that other universities, law
schools and employers can look at and say, 'This is something that we
can look at, to make sure the women are not paid less for equal work,'"
said Jennifer Reisch, one of Marsh’s lawyers and legal director of Equal
Rights Advocates, a national civil rights organization.
Jensen Comment
Students should be able to explain why Professor Marsh may have a better case
than a full professor of elementary education whose salary is $101,000
(hypothetically) but not the lowest for all full professors in elementary
education at DU ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GenderSalaryDifferences
Given that she obtained tenure in the DU Law School 31 years, Professor Marsh
may have more of an age discrimination lawsuit, especially if some of the higher
paid DU law faculty are women and/or minorities. She apparently thinks gender
discrimination exists in the DI Law School. Her case is weakened if newly hired
faculty women are given compensation packages comparable to those of males.
Students should understand the pervasive problem of salary compression and
inversion in the Academy ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Salaries
My guess is that salary compression lawsuits are harder to win. Otherwise the
courts would be clogged with salary compression lawsuits for nearly every
college and university in the USA.
A federal judge at the
Southern District of
New York court has found
Apple
guilty of violating United States antitrust laws and
colluding with five book publishing companies to inflate e-book prices. The
three-week trial concluded June 20, and the judge issued the ruling July 9.
The tech giant plans to appeal.
In a civil antitrust lawsuit, the U.S. Department
of Justice claimed that in January 2010 Apple and five publishers entered an
agency-model agreement, in which publishers, not retailers, set the price of
e-books. The publishers agreed to set higher prices for bestsellers and new
releases, resulting in a price increase from $9.99 to $12.99 and $14.99. As
part of the agreement, which preceded Apple's entry into the e-book market
with the launch of the iPad in April 2010, Apple received a 30 percent
commission on each e-book sold and required publishers to match competitors'
prices if they were lower. Because market-dominating Amazon sold e-books for
$9.99, publishers began withholding some bestsellers from Amazon for a
period of time after the release date.
“Understanding that no one Publisher could risk
acting alone in an attempt to take pricing power away from Amazon, Apple
created a mechanism and environment that enabled them to act together in a
matter of weeks to eliminate all retail price competition for their
e-books,” wrote U.S. District Judge Denise Cote, in a
160-page ruling. "The evidence is overwhelming
that Apple knew of the unlawful aims of the conspiracy and joined that
conspiracy with the specific intent to help it succeed."
The Justice Department initially sued Apple and
five of the country's largest publishing companies:
Hachette,
HarperCollins,
Macmillan,
Penguin, and
Simon & Schuster.
Only Apple proceeded to trial, while the publishers
settled with the Department of Justice and agreed to pay more than $166
million combined.
The Department of Justice may now seek injunctive
relief, which could prevent Apple from using the agency business model to
sell e-books for a two-year period and impose other requirements to prevent
the company from skewing the e-book market in its favor.
Because Apple was found guilty of violating U.S.
antitrust laws, 33 state attorneys general will now take the company to
trial to recover money on behalf of consumers who paid higher prices for
e-books.
Rashia Wilson may have duped the IRS out of as much
as $20 million before her arrest on stolen identity refund fraud charges.
That's according to a court document, filed in
advance of her sentencing today, that estimates the government's loss at $7
million to $20 million.
"She used this money for nothing more than personal
greed and glorification, including jewelry, automobiles, parties and
travel," Assistant U.S. Attorney Sara Sweeney wrote in a memo.
Wilson, the self-described first lady of tax fraud,
apologized in a letter to the court. She admitted to "extremely poor
decisions."
She threw a $30,000 birthday party for her
1-year-old daughter and bought a $90,000 Audi while unemployed and living on
public assistance, Sweeney wrote.
The tone of Wilson's letter was mostly apologetic
but she took a jab at the government for targeting people like her
instead of government workers who disclose personal information and share in
fraudulent refunds.
The new (10-Month for liberal arts graduates)
Master of Management program will fill a gap between Ross’s BBA program for
undergraduates and its MBA program for more experienced applicants.
"New Ross (University of Michigan) Program Lets Undergrads Get Business Cred
(post-graduate degrees),"---
by Elizabeth Rowe, Bloomberg Businessweek, July 10, 2013 ---
http://www.businessweek.com/articles/2013-07-10/new-ross-program-lets-undergrads-get-business-cred
Jensen Comment
The $41.000 price of the program for Michigan residents and $46.000 for
non-residents makes me wonder how much this program is deemed a cash cow program
for a questionable "quickie" Masters in Management degree. Northwestern
University has a similar program at a similar price for students who lack the
experience requirement for admission to Northwestern's much more intense and
longer MBA Program with higher admission hurdles.
Graduates of these quickie programs for students who could not even spell the
word "business" the first day of class will have much less education in
accounting, finance, economics, and information systems than either
undergraduate business majors, masters of accounting majors, or MBA majors.
Presumably they will pick up these other specialties on an as-needed basis once
they land their first jobs. They may become excellent managers who still cannot
read financial statements or comprehend investment and tax strategies.
Employers often look at MBA graduates as 90-Day Wonders. The new programs at
Michigan and Northwestern add a whole new meaning to "90-Day Wonders."
From the CRO Journal's Morning Ledger on August 12, 2013
Deloitte UK head talks RBS, audit rotation It’s time to move on from what happened with RBS and the MG Rover
sale, Deloitte UK Chief Executive David Sproul
tells the Telegraph in an interview.
“An audit is a review of financial statements. It isn’t an assessment of the
business model. But there’s a question as to whether the audits of the
future should have that within them. I do think that is where regulators and
the profession are going—asking, What should it deliver for the future?” As
for the U.K. Competition Commission’s recent recommendation for mandatory
audit rotation for large companies every five years. Mr. Sproul said that
most companies “will say not just that it’s not necessary, but that the
sheer disruption and pain of doing it properly is just madness.” Instead,
Mr. Sproul points to the requirement by the Financial Reporting Council for
large corporations to rotate audit firms every 10 years, “which is starting
to have an impact.”
Few things are simple in corporate regulation.
Reforms often backfire. Changes meant to help shareholders end up enriching
executives, or lawyers, or accountants. Less regulation is often better than
more.
But here's a simple rule that I imagine holds up
pretty well. If an overwhelming bipartisan majority in the U.S. Congress
decides to delve deep into the details of a corporate regulatory process and
tell the rule-makers they can't do something, that overwhelming
bipartisan majority is up to no good.
This happened in the early 1990s, when the
Financial Accounting Standards Board first tried to assign a value other
than zero to the stock options handed out to executives and other corporate
employees as compensation.
With Joe Lieberman leading the way, the Senate
voted 88-9 to tell the FASB to give it up. And the FASB did give it up,
until the corporate scandals of the early 2000s
changed the mood in Congress, giving the
accounting standards-setters cover to
get
stock-options expensing through in 2004.
On Monday, it was the House of Representatives that
got into the act,
with a 321-62 vote in favor of
a bill, sponsored by Republican Robert Hurt of
Virginia and Democrat Gregory Meeks of New York, that would ban the
Public
Company Accounting Oversight Board from
considering any proposal to force corporations to regularly rotate auditing
firms. A couple weeks ago, this "Audit Integrity and Job Protection Act" (a
wonderfully Orwellian title, no?)
was approved by the House Financial Services Committee
by an even more lopsided 52-0 vote.
The PCAOB is a relatively recent creation of
Congress, one of the seemingly most successful products of the sprawling
Sarbanes-Oxley Act of 2002. And so far its
proposal to force companies to rotate auditors can best be described as a
trial balloon. PCAOB chairman James Doty, a veteran securities lawyer,
first floated it in a speech in 2011 a few months
after he took the job:
Considering the disturbing lack of skepticism we continue to see, and
because of the fundamental importance of independence to the performance
of quality audit work, the Board is prepared to consider all possible
methods of addressing the problem of audit quality — including whether
mandatory audit firm rotation would help address the inherent conflict
created because the auditor is paid by the client.
Doty went to acknowledge that this wasn't a new
idea — it was considered as part of Sarbanes-Oxley, and deemed to require
more study.
That study,
by the what was then still called the General
Accounting Office, concluded that the evidence was mixed on auditor rotation
and the best course of action was to wait and see how the other
Sarbanes-Oxley reforms worked out. After almost a decade of waiting and
seeing, Doty said, it was time "to explore whether there are other
approaches we could take that could more systematically insulate auditors
from the forces that pull them away from the necessary mindset."
What followed was a
"concept
release" from the PCAOB, and a bunch of public hearings
at which accounting firms and corporate executives
have been given ample opportunity to express their (mostly negative)
opinions about the idea — but a few accounting scholars and others have
raised points in favor of it. In a
speech in April, Doty pointed to "emerging
research" that "finds term limits are associated
with less earnings management, less managing to earnings targets, and more
timely loss recognition post-adoption," but acknowledged that it was far
from conclusive and that there would be costs to rotating auditors that
needed to be considered.
What this seems to be, in short, is a regulatory
agency doing its job — trying to look out for the public, being extremely
transparent about it, and relying on the best evidence available. Much of
this evidence is coming from outside the U.S., where the auditor-rotation
movement is further advanced. Italy, South Korea, and Brazil already require
auditor rotation; the Dutch parliament
voted last year to do so starting in 2016; UK
regulators are
considering it; and so is the
European Parliament.
The year is half over. So it's time to make sure
you are making your best tax moves for 2013.
"People need to be proactive," says Janet Hagy, a
certified public accountant in Austin, Texas. "By December, it may be too
late."
Income and estate taxes underwent seismic shifts in
January, rearranging the landscape for many taxpayers. Wealthy Americans in
particular are facing higher tax rates on ordinary and investment income.
That makes it all the more important to review
Uncle Sam's highest-impact tax breaks, such as donations of appreciated
assets, tax-free exchanges and capital-loss harvesting.
Unlike obvious moves, such as contributing to an
individual retirement account or a 401(k) plan, these strategies require a
higher degree of awareness and active planning. "It's easy to write a check
to charity," says Jeffrey Porter, a CPA in Huntington, W.Va., "but often
it's a better idea to give stock that has risen in value."
Some investors already have begun to take advantage
of these moves. Scott Saunders, an investment real estate specialist at
Asset Preservation in Palmer Lake, Colo., says he has seen a spike in
tax-deferred "like-kind" exchanges of residential rental and commercial real
estate in the past six months.
In one case, an investor with a $1 million property
in Brooklyn, N.Y., exchanged it for two in upstate New York and a third in
Queens, N.Y., instead of selling outright. The move deferred federal tax of
about $225,000, plus state taxes, Mr. Saunders says.
"People are surprised at how much the new taxes
will take, so they're looking for alternatives," he adds (see the Family
Value column on page B8 for a tax strategy using trusts).
Not all high-impact breaks are for the wealthy. Any
homeowner can benefit from a provision allowing taxpayers to pocket tax-free
income from renting a residence for as long as two weeks, and low-bracket
taxpayers can pay zero tax on long-term capital gains.
Other important moves can help minimize estate,
gift and inheritance taxes. This might seem like a less-urgent task now,
since Congress approved in January a generous gift-and-estate tax exemption
of $5.25 million per individual that is indexed to inflation. But there
already is a proposal to scale back the exemption to $3.5 million.
What's more, 20 states and the District of Columbia
have their own estate or inheritance taxes, according to tax publisher CCH,
a unit of Wolters Kluwer WTKWY +1.12% . Many of them have exemptions far
below the federal level: $1 million in Minnesota, Massachusetts, Maryland
and New York, for example, and $675,000 in New Jersey.
Here are some tax strategies that could deliver big
benefits.
Capital-loss harvesting. This break—beloved by the
superrich, including Mitt Romney and Michael Bloomberg—can be helpful for
all investors with taxable accounts. Losses from one investment can be used
to offset gains on another. A loss on the sale of stock can be applied
against gains on the sale of real estate, for example. Up to $3,000 a year
can also be deducted against ordinary income such as wages.
After a sale, capital losses "carry forward" until
the investor has gains to offset. Smart taxpayers sold losing assets during
the 2008 financial crisis and then bought them back, capturing the losses
for use against future gains.
Be careful, though, to avoid a "wash sale," which
occurs when you buy shares 30 days before or after selling losing shares of
the same investment. It diminishes the strategy's benefits.
Capital-gains harvesting. Although the total tax
rate on long-term investment gains rose sharply this year for top-bracket
taxpayers—to nearly 25% from 15% in 2012—the rate on gains for low-bracket
investors is still zero.
The rate is available to married couples with
taxable income below $72,500 this year ($36,200 for singles), which doesn't
include tax-free municipal-bond income. Taxpayers who qualify can sell
appreciated assets (such as shares) to "scrub" gains and lower future tax
bills.
For example, a couple with $50,000 of taxable
income could take up to $22,500 of profits on stock tax-free and then buy
back the shares immediately. (Sales at a gain aren't subject to wash-sale
rules.)
The couple still owns the stock, but future gains
will be measured from a higher starting point, or "cost basis," so future
taxes will be lower.
Like-kind exchanges. In this strategy, investors
trade one investment for another without owing federal tax. Instead, tax is
deferred until the replacement asset is sold. If the taxpayer holds the
asset until death, no tax might ever be due (see "Step-up at death" below).
The rules are more restrictive than those on
capital losses, however, and getting expert help is a good idea.
According to Mr. Saunders, most types of investment
real estate can be traded for other real estate (other than a residence),
but they can't be traded for personal property—as in a building for art.
Still, certain investment collectibles can be traded for one another, he
says.
Two-week home rentals. The income from renting a
residence for less than 15 days is tax-free, and it doesn't have to be
reported on your tax return. This is a boon for people living near the site
of the Super Bowl or another major sports event, and it also works for
owners of second homes who want to rent short-term.
The tax-free perk is often called the "Masters'
provision," because homeowners use it during the famed golf tournament in
Augusta, Ga.
"Even people with modest homes get a boost," often
earning between 15% and 25% of a year's mortgage payments, says Bill
Woodward, a CPA at the Elliott Davis firm in Augusta. Many homeowners pocket
from $6,000 to $30,000, he adds.
Home-sale benefit. As often as every two years,
taxpayers can sell a principal residence (not a second home) and the profit
will be tax-free—up to $500,000 for married couples or $250,000 for singles.
A surviving spouse gets the full $500,000 break for up to two years after a
spouse's death.
Because the profit doesn't include the purchase
price or improvements, most home sales in most areas will be tax-free. For
more information, see IRS Publication 523.
Charitable donations of appreciated assets. The tax
code offers a great boon to philanthropic Americans. Within certain limits,
taxpayers who donate appreciated assets to charities can deduct the
fair-market value of the gift and skip paying capital-gains tax on the
appreciation.
For example, say a taxpayer wants to give $1,000 to
her college. If instead of cash she gives $1,000 of stock that she bought
for $500, she won't owe tax on $500 of profit but can take a deduction for
the full $1,000.
Charitable IRA rollover. Individual retirement
account owners who are at least 70½ years old are allowed to donate as much
as $100,000 of account assets directly to one or more qualified charities
and count the gift as part of their required annual withdrawal.
While the taxpayer doesn't get a deduction for the
gift, neither does it count as income. This popular move also can help
reduce a taxpayer's adjusted gross income, which in turn can help minimize
Medicare premiums or taxes on Social Security benefits.
Solo defined-benefit pension plan. With this
strategy, taxpayers can deduct contributions of tens of thousands of dollars
or more to a tax-sheltered retirement plan—as long as they are in the
fortunate position of having their own consulting firms or other solo
business, plus a steady stream of income they don't need to tap immediately.
The rules are especially generous to older workers,
who often can set aside large sums to reach a goal quickly. But the plans,
which must be custom-designed, aren't simple. Lisa Germano, president of
Actuarial Benefits & Design in Midlothian, Va., estimates the setup cost of
a solo plan at about $3,000.
529 plans. These popular college-savings accounts
can help save on both income and estate taxes. There isn't a federal tax
deduction for money going in, but asset growth and withdrawals are tax-free
if used for qualified education costs.
Plans are sponsored by U.S. states, some of which
give a state tax deduction for contributions. Some have lower fees and
better investment options than others, so choose carefully.
Three features make 529 plans especially
attractive. First, owners can change beneficiaries, so if one child doesn't
need all the money, a relative can use it. In addition, owners can bunch up
to five years' worth of $14,000 tax-free gifts to the plans. President
Barack Obama and his wife Michelle used this break several years ago.
Finally, owners such as grandparents who don't want
to owe estate taxes but also worry they might have unexpected costs, such as
for health care, have a useful option. Although 529 contributions remove
assets from an estate, the giver can take back account assets if the money
is needed.
Annual gifts of $14,000. The law allows any
taxpayer to give anyone else—a neighbor, friend or relative, say—up to
$14,000 a year without owing federal gift tax. Above that, the gift is
subtracted from an individual's lifetime gift-and-estate tax exemption, now
$5.25 million.
The gifts remove assets from the giver's estate,
and the total can add up over time. A husband and wife with three married
children and six grandchildren, for example, could shift $336,000 a year to
family members using this benefit.
This provision can be used to move assets other
than cash, such as fractional shares of a business, but expert help is
recommended in such cases.
Gifts of tuition or medical care. Taxpayers don't
owe federal gift tax on amounts paid for tuition or medical care for another
person. Given the growth in medical and education costs, such gifts can also
remove large amounts from a taxable estate. Remember, however, that payment
must be made directly to the provider.
"Step-up" at death. Under current law, taxpayers
don't owe capital-gains tax on assets held at death. Instead, the assets are
stepped up to their current value and become part of the taxpayer's estate,
with no income tax due on the profits.
The upshot is that people planning estates should
look carefully at their gains in various assets.
The taxable profit on a $100 share of stock that
was bought for $10 will be $90 if it is sold shortly before death, but zero
if it is held till death. There might be no estate tax either, given the
current exemption of $5.25 million per individual.
As noted earlier, this benefit can be combined with
techniques such as the like-kind exchange to eliminate tax altogether.
Estate-tax exemption portability. This provision,
made permanent in January, allows a spouse's estate to transfer to the
survivor the unused portion of the lifetime gift-and-estate tax exemption.
So if a wife dies leaving an estate of $500,000,
her husband could receive her unused $4.75 million exemption and add it to
his own $5.25 million one, for a total $10 million future exemption. But to
take advantage of this provision, the executor must file an estate-tax
return.
What if the survivor has assets far below the total
exemption? File a return to preserve it anyway, says Mr. Porter, the West
Virginia CPA. "Who knows?" he says. "You might win the lottery or receive an
inheritance."
JOBS Act Skepticism Grows
From the CFO Journal's Morning Ledger on July 10, 2013
A key provision of the JOBS Act is set to move
forward today. The SEC is expected to lift a decades-old ban on soliciting
shares in hedge funds and other private placements—a move that could unleash
a wave of ads touting these investments, write the WSJ’s Andrew Ackerman and
Jessica Holzer. It also will mean big changes for companies selling
unregistered securities, which have had to tiptoe around the rules on
general-solicitation advertising.
Hedge funds and others have argued that the ad ban
makes it harder and more costly for business to raise private capital. But
the easing of the ban comes before the SEC has finalized most of the
protections that investor advocates say are critical to guarding against
fraud—like standards for advertising investment performance.
Meanwhile, there’s a growing belief among
investment bankers that the law has fallen flat. Only 14% of bankers polled
by BDO USA this week said they felt the JOBS Act is boosting the number of
IPOs, CFOJ’s Emily Chasan reports. That’s half the level who said last
winter that the law was having a positive impact, and down sharply from 55%
who said so last year. “There has clearly not been double or triple the
amount of IPOs,” said Wendy Hambleton, director of SEC services for BDO in
Chicago.
From the Global CPA Report on July 10, 2013
CFOs are optimistic overall but hesitant to hire Optimism
about the economy is on the rise, but companies continue to project low
hiring and have reduced expectations for profit and sales, according to a
quarterly Deloitte survey. North American chief financial officers cite
public policy as a top impediment to growth.
CGMA Magazine (6/28)
Sometimes it takes a long time to reach a breakeven point
From the CFO Journal's Morning Ledger on July 10, 2013
GM CFO aims to break even in Europe by mid-decade. General MotorsCFO Daniel Ammann believes
his company can break even in Europe by mid-decade, which would end a losing
streak that dates back to the last century. “We have better momentum and
progress in the business there than at any time over the last couple of
years,” Mr. Ammann
told the Detroit Free Press’s Nathan Bomey. But he acknowledged that the European auto sales outlook is “not recovering”
yet. “We haven’t seen any tangible signs of any meaningful improvement at
this point.
Jensen Comment
I do not agree with the author on what constitutes being "just as great." The
five business schools mentioned in the above article are very good business
schools and serve their constituencies admirably with outstanding faculty. But
we must be honest about what Harvard, Wharton, Yale, Dartmouth, Chicago, and
Stanford business schools have that sets them apart. Firstly is the historic
prestige of the entire university that opens doors apart from the business
schools themselves. Secondly is the close networking between influential
business school alumni and current graduates where alumni open doors to their
own kind. Thirdly, there's a difference in both average and often top GMAT
scores that arises from the academic quality of applicants to the U.S. News
Top 10 business schools. Fourthly, and somewhat related to alumni power is
the fact that corporations and elite consulting firms expect the very best
students to be graduating from the Top 10 MBA programs in the U.S. News
Top 10. Even if some other business school has a higher placement rate in a
given year, the compensation opportunities and professional growth opportunities
are going to be higher for the top placements of the U.S. News Top 10.
What can be misleading in the U.S. News Top 10 are the criteria used
by business school deans in choosing the U.S. News Top 10. These deans
are heavily influenced by reputations of faculty in terms of research. Top
researchers are often top teachers, but this is not always the case. For
example, some polls rank Indiana's and Maryland's business schools as
having the top business school teachers but not the very top researchers on
average.
One problem sometimes overlooked is that top business schools like the
Harvard Business School have enormous class sizes relative to small and
prestigious business schools such as the smaller business school at Rice
University. Students might learn more in smaller classes than students in
enormous classes taught by more well-known researchers.
And we expect certain qualities in some graduates that on average may not be
as great in the U.S. News Top 10. For example, we expect the highest ethical
standards to exist on average in BYU's business school. Although this school
probably focuses more on teaching ethics than most other business schools, the
high ethical standards of its graduates going out after their last term at BYU
are primarily due to the higher ethical standards of its students coming into
the school for their first term.
Lastly, almost no graduates of the U.S. News Top 10 MBA programs are
going to become auditors and tax accountants for CPA firms, business firms, and
the U.S. Government. Some of U.S. News Top 10 MBA graduates may be headed
for higher-paying positions in the consulting divisions of large international
accounting firms, but their careers are probably in IT, finance, and executive
management rather than accounting., auditing, and tax.
Most MBA graduates have very little technical knowledge of accounting,
auditing, and tax unless they were undergraduate accounting majors. The "5 Top
Business Schools Just As Great As Harvard and Wharton" listed by Akil Holmes are
going to place many more accounting, auditing, and tax specialists than the
U.S. News Top 10 MBA programs. In this context of technical accounting
programs, those five schools have accounting degrees beat out Harvard and
Wharton and Stanford, and the other U.S. News Top 10 "business" schools.
Perhaps the title of the article should instead be:
"What Makes Rich and Powerful Executives (Continue to)
Commit Fraud?"
Jensen Comment
Perhaps they became rich and famous because they committed fraud all along. The
question is why they continue to commit fraud after they are multi-millionaires? By all accounts most Ponzi scheme fraudsters eventually want to end their frauds
but find that it's impossible to do so without getting caught.
Frauds like inside traders that often involve partners who feed in the inside
information make it hard to shut down such frauds unless all the partners agree
to end the schemes.
I don't think that behind the facade arrogance that most fraudsters do not
daily live in tension and fear about getting caught. I think they continue to
commit fraud either because they still need the money to feed their bad habits
or that they cannot find an easy way out once they have their pot of gold.
Of course there are many successful fraudsters who get out before its too
late and live well on their stolen pot of gold
We often hear about the scores of Enron executives went to prison. But there are
also those who grabbed their pot of gold early on and were never punished. I
hesitate to call Rich Kinder a fraudster since I think he perhaps got out early
when he commenced to smell the rats at Enron. He earned his billions
legitimately after he left Enron without a pot of fraudulent gold.Some
fraudsters get out due to blind luck. Read about Lou Pai's timely divorce below.
Read about Rebecca Mack's timely firing that led to her very imely sale of her
Enron stock.
More questionable executives in Enron who departed early with their pot of
gold ahead of law enforcement include Rebecca Mack
and Lou Pai.
Lou Pai
First there's the soap opera of Lou Pai, his strip tease dancers, his Colorado
ranch bigger than Rhode Island, and the mountain he named after himself.
An obscure and incompetent trading executive
named Lou Pai is the biggest Enron stock sale winner (over $270 million) but
that was sheer luck because he was sued for divorce by his wife while Enron's
share prices were still soaring. Lou had an addiction for strippers to a point
where he brought dancers back to Enron HQ to prove that he really was a wealthy
executive.
He didn't particularly want to sell his Enron
stock at that time, but when he got a strip tease dancer pregnant Lou's wife
demanded a cash settlement in the divorce. That turned out to be the luckiest
timing in her or his life. I don't know how much the dancer got in the end, but
she did marry Lou immediately after his divorce.
Rebecca Mark-Jusbasche
has held major leadership positions with one of the world's largest
corporations. She was chairman and CEO of Azurix from 1998 to 2000. Prior to that time, she joined Enron Corp. in 1982, became executive
vice president of Enron Power Corp. in 1986, chairman and CEO of Enron
Development Corp. in 1991, chairman and CEO of Enron International in
1996 and vice chairman of Enron Corp. in 1998. She was named to
Fortune's "50 Most Powerful Women in American Business" in 1998 and 1999
and Independent Energy Executive of the Year in 1994. She serves on a
number of boards and is a member of the Young President's Organization.
If Mark had taken
a bitter pleasure in Skilling’s current woes—the congressional grilling,
the mounting lawsuits, the inevitable criminal investigation—no one
would have blamed her. And yet she was not altogether happy to be out of
the game. Sure, she had sold her stock when it was still worth $56
million, and she still owns her ski house in Taos. Her battle with
Skilling, however, had been a wild, exhilarating ride. TIME
TABLE AND THE REST OF THE STORY:
http://www.msnbc.com/news/718437.asp
Rebecca P. Mark-Jusbasche,
now listed as a director, bagged nearly $80 million for her 1.4 million
shares. Rebecca was just Rebecca P. Mark without the hyphenated flourish
in 1995, though I shouldn't say "just" because she was also Enron's CEO
at the time, busily trying to smooth huge wrinkles in the unraveling
Dabhol power project outside Bombay. That deal, projected to run to $40
billion and said to be the biggest civilian deal ever written in India,
hinged on a power purchase agreement between the Maharashtra State
Electricity Board (MSEB) and Enron's Dabhol Power Corp. (a JV led with
project manager Bechtel and generator supplier GE).
There had been a lot of
foot-dragging on the Indian side and Becky was there to light a fire. A
memorandum of understanding between Enron and the MSEB had been signed
in June '92 – only two weeks, as it happened, before the World Bank said
it couldn't back the project because it would make for hugely expensive
electricity and didn't make sense.
According to the state
chief minister's account given two years later, the phase-one $910
million 695 MW plant was to run on imported distillate oil till
liquefied natural gas became available. By the time the phase-two $1.9
billion 1320 MW plant was to be commissioned, all electricity would be
generated by burning LNG – a very sore point with World Bank and other
critics, given the availability of much cheaper coal.
In the event, by
December '93, the power purchase agreement was signed, but with an
escape clause for MSEB to jump clear of the second, much bigger plant.
State and union
governments in India came and went, and for every doubt that surfaced,
two were assuaged long enough for Indian taxpayers to sink deeper into
Enron's grip.
Soon they were bound up
in agreements to go ahead with the second phase of the project -- which
now promised electricity rates that would be twice those levied by Tata
Power and other suppliers. Unusually for this kind of project, the state
government, with Delhi acting as a back-up guarantor, backed not just
project loans but actually guaranteed paying the monthly power bill
forever -- all in U.S. dollars – in the event the electricity board,
DPC's sole customer, defaulted.
"The deal with
Enron involves payments guaranteed by MSEB, Govt. of Maharashtra and
Govt. of India, which border on the ridiculous," noted altindia.net on
its Enron Saga pages. "The Republic of India has staked all its assets
(including those abroad, save diplomatic and military) as surety for the
payments due to Enron."
http://www.asiawise.com/mainpage.asp?mainaction=50&articleid=2389
Key Lay and Rebecca Mark attempted to strong arm
President Bush and Vice President Cheney into holding back on U.S. Aid payments
to India if India defaulted on payments to India for the almost-useless power
plant built by Enron (because it was gas in coal-rich India). However, about
the same time, the Gulf War commenced. The U.S. needed all the allies it could
get, including India. Hence, the best laid political strong arm intentions of
Lay and Mark failed.
Poor Ebix…the
Company and its flamboyant,
turnaround expert CEO have had a challenging ten
months. First, on
September 28, 2012, an Atlanta U.S. district court
ruled that an investor lawsuit alleging false statements by the Company in
its financial reports could proceed (see 2012 10-K, page 15). Next, came the
revelation in November 2012 that the U.S. Securities and Exchange Commission
(SEC) was investigating the Company for its accounting practices: revenue
recognition and financial reporting internal controls. This was followed by
news on June 14, 2013 that the U.S. Attorney in Atlanta is investigating the
Company for
intentional misconduct. And this last bit of news
not only
scuttled an offer by Goldman Sachs Group, Inc. to
buy the Company for $780 million, but also wiped out almost $300 million in
market capitalization. At least for the time being, Robin Raina’s dream of
owning 29 percent in the “new” company, and silencing the short-sellers who
have been hounding the Company for the past two years, is dead. But is bad
accounting really to blame for Ebix’s recent misfortunes? Or could it be
something else?
What you ask? Well, a recent column by Jean
Eaglesham titled “Accounting
Fraud Targeted” might just offer a clue. This
article mentions the SEC’s use of new software to analyze the 10-K’s
management discussion and analysis (MD&A) section looking for signs of
possible earnings manipulation and other financial reporting fraud
behaviors. So, could “bad writing” have tripped up the Company? After all,
on the surface, the Company’s numbers seem just fine: increasing revenue,
operating income, earnings per share, and assets. As you might expect, this
grumpy old accountant just had to conduct his own “textual analysis.”
Without any
fancy fraud detection software at my disposal, I decided to arm myself with
the latest
MBA jargon
as an “enabler,” so that I
might “drill down” into Ebix’s MD&A. I was not
disappointed at all. On page two of the Company’s 2012 10-K alone, I was
rewarded with such confusing and incomprehensible phrases as “powerhouse of
backend insurance transactions; complimentary accretive acquisitions;
carrying data from one end to another seamlessly; best of breed
functionality; integrates seamlessly; best of breed solution; resources and
infrastructure are leveraged; and acquisitive growth vs. organic revenue
growth becomes rather obscure.”
Continued in article
And there's unrelated fraud in terms of the Ebix customer base
From the CFO Journal's Morning Ledger on June 21, 2013
Insurance-accounting overhaul moves toward final phase The IASB just issued its latest draft of proposed new rules for
accounting for insurance contracts,
Emily Chasan
reports. The proposal
this week revises a 2010 exposure draft to reduce the impact of artificial,
noneconomic volatility in insurance accounting and would change the way
companies present insurance-contract revenue in their financial statements.
New rules on insurance accounting are expected to make fundamental changes
to the way companies account for insurance contracts, and add more
principle-based rules to one of the most industry-specific areas of
accounting. Read
the exposure draft here (PDF).
"Insurers Inflating Books, New York Regulator Says," by Mary Williams
Walsh, The New York Times, June 11, 2013 ---
From the CFO Journal's Morning Ledger on July 22, 2013
(Congratulations Tony)
The dark side of non-GAAP metrics Over
on the Grumpy Old Accountants blog, Villanova
University Prof. Anthony Catanach takes aim at the growing use of non-GAAP
metrics—noting
a recent article by CFOJ’s Emily Chasan
highlighting the trend. Prof. Catanach argues that in
most cases, companies using nontraditional metrics actually mask real
operating performance. “I am so hot about this that I’m calling out today’s
CFOs, as well as the Securities and Exchange Commission (SEC) to stop this
nonsense once and for all. I propose scrapping the SEC’s current Regulation
G, which governs the use of non-GAAP measures. Let’s replace it with a
requirement that companies disclose real operating data and metrics, not
just financial measures,” he writes.
It’s been over
a decade, 12 years to be exact, since Isaac C. Hunt, Jr. then Commissioner
of the SEC, delivered his seminal "Accountants
as Gatekeepers" speech. Those of you with gray
hair (or no hair) will recall this speech for Hunt’s attack on managed
earnings and “pro forma” financials.” In venting his frustration with
non-GAAP metrics (today’s descriptor for bad financial metrics), he reminded
securities issuers of their responsibilities to “make full and fair
disclosure of all material information.” Hunt’s speech is particularly
noteworthy as it points out that “federal securities laws, to a significant
extent, make accountants the ‘gatekeepers’ to the public securities markets.
Recently, several articles have appeared in the
popular press highlighting “new” ways that companies are reporting
performance. In one, “New
Benchmarks Crop Up in Companies Financial Reports,”
Emily Chasan discusses how some firms are
complementing financial reports with nontraditional performance benchmarks.
What’s my beef you ask? Well, my objections this time are consistent with
my recent rants about Black Box’s
new
metrics, and Citigroup’s
new performance measurement system. Simply put,
these supposedly innovative and insightful performance measures are neither!
In fact, in most cases, they are quite the opposite, and actually mask real operating performance.
My grumpiness on this “new” disclosure business has
reached the boiling point. I am so hot about this that I’m calling out
today’s CFOs, as well as the Securities and Exchange Commission (SEC) to
stop this nonsense once and for all. I propose scrapping the SEC’s current
Regulation G, which governs the use of non-GAAP
measures. Let’s replace it with a requirement that companies disclose real
operating data and metrics, not just financial measures. But there is one
hitch: none of the operating metrics I have in mind can use, or be based in
any way on any financial statement data, or any combination of numbers that
come from the general ledger system! Let me explain further.
As Ms. Chasan reports, some companies are beginning
to disclose relevant operating data, particularly as it relates to customers
(e.g., paid membership rates, active users, cumulative customers, etc.). Unfortunately, many more CFOs continue to try to sell us the same old
“snake oil,” namely, “innovative” metrics that are nothing more than
repackaged financial statement-based illusions. You know them well,
EBITDA,
adjusted EBITDA, and the like. And this deception has continued unabated
for years…some of us even remember a wonderful piece by Jonathan Weil titled
“Companies
Pollute Earnings Reports, Leaving P/E Ratios Hard to Calculate.”
Nevertheless, the result is the same:
financially-based, non-GAAP performance measures that have less to do with
the nuts and bolts of daily operating processes, and more to do with today’s
troubled accounting “standards.”
Why do so many
CFOs promote the use of these non-GAAP metrics? They maintain that these metrics are needed because financial statements
prepared in accordance with generally accepted accounting principles (GAAP),
particularly the income statement, don’t provide a complete and accurate
picture of a company’s performance. But are CFOs really being driven to more
non-GAAP metrics so as to present a clearer picture of the future direction
of a business as
recently suggested by Professors Paul Bahnson of
Boise State and Paul Miller of UC – Colorado Springs?
Jensen Comment
A possibly very good case study might be to try to measure the importance of
teaching when most students in a particular course at San Jose State University
pass the course in a traditional classroom but not in a MOOC.
Of course differences in student performance cannot all be attributed to
teaching. Many of them may not have taken the MOOC alternative seriously
thinking that Udacity would have lower academic standards. In other words they
may not have put in the effort in the MOOC course that they would put into a
traditional classroom where, among other things, attendance might be mandatory.
In the MOOC alternative performance is based on competency-based
examinations. In a traditional course instructors generally give credit for
other things such as class attendance, class participation, evidence of effort
(e.g., in office hours), and let's face it --- brown nose credit for effort.
But almost certainly there is some causal impact of teaching differences
between the MOOC versus the traditional classroom.
Hi Steve,
Free learning alternatives in some instances have advantages over higher cost
alternatives. For example, we could hire more teachers to teach basic skills,
like mathematics, in K-12 schools. This would be great in most respects but will
not overcome the comparative advantage of integrating some of the 2,000+ Khan
Academy modules into the K-12 curriculum.
The Khan Academy modules have the comparative advantage where 24/7 any given
model can be replayed over and over and over and over again until an eager slow
learning student finally understands what a fast learning student understood the
first time it was presented in class.
And the MOOC comparative advantage even for fast learning students is that
the highly specialized MOOC courses can fill into K-12 and college curricula
where there just is not enough money or enough student demand to justify live
coverage of very specialized topics.
But there may be a few brilliant students in a high school or college that a
gifted-student's adviser would like to make available from the above 530 course
listing. Most schools cannot possibly deliver live coverage all of the 530
specialties listed at the above site. Does that mean that we must deny
alternative types of coverage of those 530 specialties listed at
http://www.openculture.com/2012/09/new_additions_to_our_list_of_530_free_online_courses_from_top_universities_.html
I've never disagreed with you, Steve, that MOOCs are almost always inferior
to live coverage when live coverage is available. But live coverage of a narrow
specialty often cannot be available even in a very wealthy school. Live coverage
of most any specialty will eventually be available in MOOC menus just as they
are now available in shorter learning modules on Wikipedia.
The ideal one day is that a motivated student will one day be able to look up
millions of topics on Wikipedia. In many of those specialized topics there will
one day be a link to a MOOC course that covers that topic in greater detail from
a renowned expert on that topic.
For example, we will one day not only get an explanation of a contango
forward contract from
http://en.wikipedia.org/wiki/Contango
We may one day be provided with a link at the above module that will point us to
one or more feww MOOC courses that cover accounting for contango forward
contracts.
My name is Loris Tissino, I am an Italian CS
teacher, involved in a
project conceived with colleagues teaching Economy and Accountancy in
the school where I teach.
In particular, I'd like to stress the fact that the
application is
internationalized, and that the charts of accounts are multilingual:
this is something we did in order to stimulate our (Italian) students
to learn accountancy terminology also in other languages.
Another thing is that it would be interesting for students to compare
the kind of exercises that they are required to make with the one made
in other countries, maybe comparing also the underlying accepted
principles, that are slightly different.
I wonder if the website can be of interest for you and your students.
I'd really love to receive hints on how to improve it and ideas for
further development (some are already written here:
http://learndoubleentry.org/site/en/ideas).
Thank you very much for your attention.
Best regards,
Loris Tissino
Jensen Comment
This sounds extremely innovative, especially from the standpoint of having
multilingual accounts. At the same time, this becomes a huge challenge when
applying this software in different nations. For example, in the USA LIFO
inventory accounting is very popular (largely because it must be used for
financial reporting if the firm takes tax deferrals based upon LIFO). In nearly
every other nation of the world LIFO inventory accounting is not allowed.
Another drawback is that accounting teachers often like to teach more than
just accounting. For example, if they teach bookkeeping with Excel they are also
trying to teach Excel. If they teach accounting with Intuit software they are
trying to also teach Intuit software. If they teach payroll accounting with
Peachtree software they are trying to teach Peachtree software.
But every innovative software has to begin sometime at someplace. Maybe this
is just the thing to begin thinking about Learn Double Entry.
SUMMARY: The author opens this article by stating that "Tesla
Motors Inc. Chief Executive Elon Musk doesn't run his Silicon Valley
electric-car maker by traditional auto industry rules, and investors are so
far rewarding him by putting a value on the company that defies easy
comparisons." The related article describes operating differences in sales
methods the company uses and was covered in another WSJ Accounting Weekly
Review. Tesla's sales are about 1% of Ford Motor Co's U.S. sales, yet the
company's share price implies a market value of about $17.15 billion, about
25% of Ford's market cap and 70% more than Fiat SpA.
CLASSROOM APPLICATION: The article may be used to cover financial
reporting or managerial accounting topics. For financial reporting, the
article covers company valuation, forward P/E ratio, and analysts' earnings
forecasts. For managerial accounting, the article discussed manufacturing
economies of scale and cost behaviors. The article covers these topics with
a product innovation focus.
QUESTIONS:
1. (Introductory) What is Tesla Motors? How is its business model
different from older companies with which it competes? (Hint: the related
articles are helpful for the latter question.)
2. (Advanced) What is unusual about Tesla Motors' market value? In
your answer, explain how a company's market value is determined.
3. (Introductory) What amount of earnings do analysts project Tesla
Motors will achieve for the year in 2013? In 2014?
4. (Advanced) Explain how to determine a price-earnings ratio based
on current earnings and then how to determine a forward P/E ratio. Why may
only one of these measures be used in considering Tesla Motors? How is this
measure used to make a comparison about the company?
5. (Introductory) Summarize how investment firms and banks, as
described in the article, determine expected future prices for each share of
Tesla Motors stock.
6. (Advanced) Refer specifically to the Deutsche Bank target price
for the firm's stock. How do economies of scale influence the bank's
forecasts? In your answer, define the terms economies of scale and fixed
costs, then explain the behavior of fixed costs considered in the forecast.
Reviewed By: Judy Beckman, University of Rhode Island
Tesla Motors Inc. TSLA +0.58% Chief Executive Elon
Musk doesn't run his Silicon Valley electric car maker by traditional auto
industry rules, and investors are so far rewarding him by putting a value on
the company that defies easy comparisons.
Tesla is scheduled to report second quarter results
on Wednesday, and most analysts are forecasting a 17-cent-a-share loss. In
an industry where strategy is driven by the quest for economies of scale,
Tesla is tiny. It delivered just 1,400 Model S electric sedans in July,
according to researcher Autodata Corp., or about 1% of Ford Motor Co.'s F
+0.19% U.S. sales for the month.
Yet Tesla's share price has more than quadrupled in
the past year, to $142.15 on Tuesday and giving it a market value of about
$17.15 billion, a quarter of Ford's, and about 70% more than Fiat SpA—majority
owner of Chrysler Group LLC.
Despite its small size, the Palo Alto, Calif.,
company has become among the auto industry's most closely followed. General
Motors Co. GM +0.07% CEO Dan Akerson recently ordered a team of GM employees
to study Tesla and the ways that it could challenge the established auto
industry business model.
Even Wall Street analysts who are enthusiastic
about Tesla's prospects have put target prices on the company's shares that
are much lower than their current market price.
A Tesla spokesman wouldn't comment on the stock
price on Tuesday ahead of disclosing June quarter results on Wednesday. But
Mr. Musk and other company officials have said in the past that they foresee
a Tesla that is building 400,000 or 500,000 cars a year, and can achieve a
market capitalization of as much as $43 billion by 2022. That is the level
at which Mr. Musk can collect a chunk of stock under a multi-step
compensation plan adopted by Tesla's board last year.
Most car companies are judged on the results they
can deliver in the near term. Tesla investors are buying on results that
probably won't exist until sometime in the next decade. And even that is
only if it can deliver flawless manufacturing execution, continued annual
growth and crack through the consumer concerns about driving range and
upfront costs that have restrained demand for all-electric vehicles so far.
Analysts are expecting the company to lose 68 cents
a share this year and earn 50 cents a share next year, according to Zacks
Investment Research. By that 2014 projection, its forward price/earnings
ratio is 289, compared with Ford's PE of just under 10 and Toyota Motor
Corp.'s 7203.TO +0.16% P/E of less than 1, both based on 2014 earnings
projections, according to Zacks.
Tesla's P/E ratio is more akin to Internet stocks
than car makers. Supporters say that is because the company's electric
vehicle sales strategy is disruptive and the auto maker possesses
groundbreaking technologies.
Deutsche Bank recently raised its target price for
the company's shares to $160. The bank estimates that Tesla will be able to
achieve operating profit margins of 20%—or about twice that of BMW AG BMW.XE
+1.33% in its most recent quarter—as it ramps up sales and spreads costs
over a larger number of vehicles.
"We expect [Tesla] to reach at least 200,000 units
by near the end of the decade, which implies about 5% of what we calculate
as the addressable market of comparable vehicles in terms of capability and
price," the bank said in a note to investors last month.
Tesla sold 8,931 vehicles this year through June,
according to Autodata. In contrast, Porsche delivered 81,565 of its big
ticket and high margin vehicles globally during the same period.
Mr. Musk has said he believes Tesla can achieve 25%
gross margins by the end of this year, meaning that Tesla's direct costs of
building cars will be just three-quarters of the revenue it collects from
sales. In the first quarter, Tesla's gross margin was 17% of sales.
Wall Street analysts assume that Tesla will sell
around 100,000 of the company's "Gen 3" models—electric sedans that are
expected to start at about $35,000 when available in late 2016. Investors
are counting on Tesla being able to deliver a car that competes against
luxury sports cars such as the BMW 3 Series and Audi A4—and not
similarly-priced electric cars.
The hurdles are many. Other manufacturers now
offering electric cars for under $40,000 have so far failed to generate much
volume. The Nissan Leaf, which starts at about $28,800, is on a pace to sell
fewer than 50,000 cars this year on a global basis.
Established luxury brands also are planning to
challenge Tesla with plug-in models of their own, such as the BMW i3 and a
Cadillac ELR plug-in hybrid coming from GM.
Many analysts say the shares currently are
overpriced based on their sales and profit projections. Adam Jonas, a Morgan
Stanley analyst, says Tesla's shares should be trading at about $109. His
estimate assumes Tesla continues to expand its business 15 years into the
future to get to his stock value—which is about 23% less than its current
price.
Mr. Jonas assumes Tesla eventually can sell more
than 200,000 vehicles a year at an average price of $50,000, with the
majority of the sales coming from the company's Gen 3 models. This year,
Tesla is expected to deliver about 20,000 Model S vehicles.
"We argue that Tesla cannot be valued on
traditional near-term multiple metrics like traditional auto companies," Mr.
Jonas said.
Goldman Sachs analyst Patrick Archambault has one
of the lower stock price estimates at $84 a share. He estimated Tesla will
be making about 150,000 vehicles a year and earning about $1.1 billion, or
$8.59 a share, in 2018.
Barclays senior analyst Brian Johnson is pegging
Tesla at $90 a share. He thinks that Tesla, at a minimum, can sell about
50,000 Model S and Model X vehicles a year around the globe, making it is
successful "niche luxury car maker." But that should only get Tesla to about
$60 a share in value.
To be worth $90 a share, Tesla has to make a
credible entry-level luxury car that he thinks will be priced at between
$42,000 and $45,000. "They are going to have to do in five years what it
took Audi decades to do—break into the volume entry-level luxury market."
Today's stock price, he said, reflects investors
who believe Mr. Musk "is the next Henry Ford."
Jensen Comment
There won't be much competition from Japan since Japanese manufacturers have
given up on battery-powered cars. The Japanese shifted their attention to the
future of fuel cells, probably hydrogen fuel cells.
But competition from luxury car manufacturers in Michigan and Germany will be
intense. Much depends upon the competitive advantage of Tesla's new patents.
What seems to me as a stupid business model is to not have Tesla
dealers (or at least repair shops) across the entire geographic market where you
sell vehicles. If I by a Tesla in the White Mountains of New Hampshire, where do
I take it in for repairs and warranty service? Forget Tesla.
What seems to me as a stupid business model is to manufacture automobiles for
a mass market in the Freemont, California where Toyota and General Moters fled.
Tesla built its California factory using $365 million in low-interest loans from
the federal government. Firstly, housing costs are higher that most
manufacturing workers can afford. Secondly, Californians of fleeing their state
in droves due to high taxes on virtually everything. It should be noted that
choosing the Freemont abandoned plants helped Tesla land the $365 million. But
that was before Tesla seriously was a contender for the mass automobile market
across North America, Europe, and Asia.
When Tesla was building experimental cars for a niche market, Freemont made
some sense because of talented tech workers in Silicon Valley. Tesla is now
aiming for a mass market. How about new manufacturing plants in downtown
Detroit and Beijing?
Tesla will probably have to partner with automobile companies having
dealerships across North America, Europe, and Asia. To date, Tesla has made a
big deal about selling cars with having dealerships. This policy is
unsustainable unless Tesla builds cars that never need service and repairs.
Teaching Case
From The Wall Street Journal Accounting Weekly Review on August 9, 2013
SUMMARY: The article describes a current dispute "..that has become
commonplace in pay TV, centering on how much more money Time Warner Cable
should pay to carry CBS on its cable lineup....[A]t the core of it, the
companies are squabbling over their share of pay-TV's spoils-money that, if
the newspaper and music industries are any guide, could disappear much
faster than anyone expects." The related video clearly describes the fees
being disputed by Jason Bellini in #TheShortAnswer.
CLASSROOM APPLICATION: The article may be used to discuss
revenue-related contracts and cost control with a focus on change, including
decline, and innovation.
QUESTIONS:
1. (Introductory) For what service does Time Warner Cable pay CBS?
2. (Introductory) What is the nature of the current dispute between
the two companies? (Hint: The related article and video both help in
answering this question.)
3. (Introductory) How have these contracts in dispute impacted
costs at cable operators?
4. (Introductory) Access the related video "The Short Answer: Why
Time Warner Cable and CBS are at War." List all alternatives available to
viewers for watching their favorite television shows.
5. (Advanced) How have changes in this sector of the entertainment
industry impacted the way each party views the value of this contract
between the cable operator and network television stations? How are these
changes comparable to the newspaper and music industries?
6. (Advanced) What do you think might happen to the primary sources
of revenue to television network stations given the changes describe in this
and the related article?
Reviewed By: Judy Beckman, University of Rhode Island
If anyone in the media world should pay attention
to the Washington Post's WPO -0.64% sale, it's Time Warner Cable Inc. TWC
+0.78% CEO Glenn Britt and CBS Corp. CBS -0.13% chief Les Moonves.
It was a mere coincidence that news of the Post
sale broke right after Mr. Britt had sent his latest missive to Mr. Moonves
in a months-long squabble over money. But the timing highlighted the essence
of what another cable executive, Jim Dolan of Cablevision Systems Corp., CVC
+0.10% was quoted saying Monday: The pay-TV industry is in a bubble. And it
remains perilously out of touch.
The dispute is one that has become commonplace in
pay TV, centering on how much more money Time Warner Cable should pay to
carry CBS on its cable lineup. CBS says it wants to be "paid fairly" for its
programming, while Time Warner Cable says it is trying to protect its
customers. But at the core of it, the companies are squabbling over their
share of pay-TV's spoils—money that, if the newspaper and music industries
are any guide, could disappear much faster than anyone expects.
As Dish Network Corp. Chairman Charlie Ergen said
on Tuesday, "all the content revenue in the industry is probably at risk,"
adding that "I don't think the industry quite understands how the Internet
works."
The Washington Post's $250 million sale perfectly
captures how digital technology has sucked most of the value out of
newspapers as advertisers defect to the Web.
Newspaper print ads fell 55% between 2007 and 2012,
according to the Newspaper Association of America.
It isn't only the Post suffering. The Boston Globe
was sold for $70 million Saturday, a fire sale for New York Times Co., which
paid $1.1 billion for it 20 years ago. That's what is called value
destruction.
Other sectors of media haven't fared much better.
In music, thanks to both piracy and the digital dismantling of the album
system, album sales fell 54% between 2000 and 2012, according to Nielsen
SoundScan. There are now just three major music companies, when six existed
in the mid-1990s.
Newsweek has its third owner in three years.
Some other companies are responding to the digital
transition. On Madison Avenue, Publicis Groupe SA's proposed merger with
Omnicom Group Inc. is an attempt to get ahead of the curve, joining forces
to better compete with Silicon Valley ad giants.
In television though, it isn't about the future.
It's about protecting the past. The players are seeking to squeeze more
money from the existing ecosystem—an ecosystem in which U.S. households pay
an average of $84 a month, according to SNL Kagan, for hundreds of channels
they don't watch.
Cable networks' share of those fees is expected to
amount to $44 billion this year, SNL Kagan says. That is separate to the $24
billion in advertising that flowed to cable networks last year, estimates
Kantar Media.
These huge flows of cash have fueled profits of big
entertainment companies in recent years. Time Warner Inc., 21st Century Fox
(the now-separate former entertainment side of News Corp, which owns The
Wall Street Journal), Walt Disney Co. and Viacom Inc. each derive the
majority of their profits from cable networks. Broadcasters, long out of
that loop, are making up for lost time by seeking bigger cash fees, which
explains CBS's current battle with Time Warner Cable.
But as Messrs. Dolan and Ergen have acknowledged,
these arrangements aren't sustainable. Younger people watch what they want
online, making the idea of cable TV less appealing. The percentage of people
age 13 to 33 subscribing to pay TV fell to 76% this June from 85% in June
2010, a new study by research firm GfK found.
"Cord cutting used to be an urban myth. It isn't
any more," said cable analyst Craig Moffett in a report Tuesday.
Yet the entertainment companies seem blissfully
unaware. Yes, most make their cable programming available online, but only
to TV subscribers who remember passwords, itself a turnoff. Some shows are
separately licensed to online outlets, like Amazon.com Inc., Hulu or Netflix
Inc., but not every outlet has all seasons.
From the CFO Journal's Morning Ledger on July 8, 2013
Thomson Reuters suspends early access to key surveys
Thomson Reuters is suspending early peeks at key economic data,
yielding to pressure from the New York attorney general,
the NYT reports.
Thomson Reuters pays the University of Michigan at
least $1 million a year to distribute its consumer-confidence data early to
its money-management customers on an exclusive basis. Legal experts have
said the tiered pricing arrangement Thomson Reuters has with its customers
does not violate federal insider-trading laws. But New York Attorney General
Eric Schneiderman’s office is exploring whether the advance look at the
consumer data is a violation of the Martin Act, a state securities-fraud law
that gives the attorney general broad powers to pursue either criminal or
civil actions against companies.
Accounting fraud cases are at a 10-year low, but that
could be lulling CFOs into complacency,
writes Emily Chasan in today’s Marketplace section.
Accounting experts and regulatory officials see
warning signs of a potential new round of fraud as the recovery continues. “The next fraud’s going to happen, it’s just a matter of time,” said James
Walker, CFO of publisher
Walch Education and former chairman of the Institute of Management
Accountants’ ethics committee. Companies are also filing fewer
financial-statement revisions, but they’re making more small adjustments and
revisions,
Chasan notes.
The SEC, meanwhile, is making a big push to uncover
fraud at the earliest possible stage. Last week it launched a Financial
Reporting and Audit Task Force of about eight attorneys and accountants who
will act as an “incubator” to build accounting-fraud cases and hand them
over to bigger units for full investigations. They’ll focus on common
problem areas: revenue recognition, valuation, capitalized versus
noncapitalized expenses, reserves, acquisition accounting and other
performance benchmarks that don’t follow standard accounting principles.
The task force
is small, so it’s counting on some inside help from whistleblowers. “Frauds
in the accounting area are often difficult to detect without somebody from
the inside,” said David Woodcock, who will head the new task force. The SEC
is investigating several accounting-fraud cases referred by whistleblowers
that it wouldn’t have detected otherwise, he said.
House passes bill to
ban auditor term limits The House of Representatives passed a bill
last night that could prevent the nation’s audit watchdog from ever forcing
public companies to periodically rotate their auditors,
Emily Chasan reports. Lawmakers
voted 321-62 in favor of the bill bill, though it may still face a tough
road in the Senate. The bill aims to amend the Sarbanes-Oxley Act of 2002 to
prevent the PCAOB from requiring companies to use specific auditors or from
requiring companies to use different auditors on a rotating basis. Its
sponsors said they also hoped the bill would send a strong message to
regulators in Europe who are considering auditor term limits, that mandatory
rotation would be unlikely in the U.S.
Teaching Case from The Wall Street Journal Weekly Accounting Review on
June 27, 2013
TOPICS: Accounting, Auditing, Auditor Independence, Auditor
Rotation, Big Four Firms, PCAOB, Sarbanes-Oxley
SUMMARY: A bill to ban the U.S. auditor watchdog agency from ever
requiring mandatory periodic rotation of corporate auditors will move to the
House of Representative. It would amend the Sarbanes-Oxley Act of 2002 to
prohibit the Public Company Accounting Oversight Board from requiring public
companies to use specific auditors, or from requiring them to use different
auditors on a rotating basis.
CLASSROOM APPLICATION: This article is appropriate for an auditing
class for the topic of auditor rotation and Sarbanes-Oxley. We can show
students that while auditor rotation could have some benefits, there are
issues and costs involved.
QUESTIONS:
1. (Introductory) What is the PCAOB? What is its area of authority?
How was it created?
2. (Advanced) What is auditor rotation? What is its stated purpose?
Why is it a good idea? What is the potential value for business, consumers,
and other parties?
3. (Advanced) What are the problems involved with mandatory auditor
rotation? Who eventually pays the additional costs?
4. (Advanced) The issue of mandatory auditor rotation has been
studies and debated for several years. Why might members of Congress become
involved at this point?
Reviewed By: Linda Christiansen, Indiana University Southeast
A bill to ban the U.S. auditor watchdog agency from
ever requiring mandatory periodic rotation of corporate auditors advanced
out of the House Financial Services Committee on Wednesday and will move
toward the House of Representatives.
At a markup
hearing on Wednesday, the committee voted 52 to
zero to report favorably to the House an amended version of the bill,
H.R. 1564, which
would amend the Sarbanes-Oxley Act of 2002 to prohibit the Public Company
Accounting Oversight Board from requiring public companies to use specific
auditors, or from requiring them to use different auditors on a rotating
basis. The vote marks the first step in advancing a bill toward a vote on
the floor of the House.
The bill would prevent the PCAOB from “imposing
rules that would cause significant disruption and financial cost to our
companies,” Rep. Gregory Meeks (D., N.Y.) who co-sponsored the bill with
Rep. Robert Hurt (R., Va.), said at the hearing. A mandatory auditor
rotation requirement is “unworkable,” Mr. Meeks said, noting that most large
companies already are
limited to considering one or two of the “Big 4” auditors with expertise in their industry.
The PCAOB issued a concept release
in 2011seeking comments from the public on whether
mandatory auditor term limits and requiring companies to periodically rotate
auditors would improve auditor independence.
The PCAOB declined to comment on Wednesday’s
committee vote.
Rep.
Maxine Waters (D., Calif.) offered an amendment to
the bill saying she didn’t want to “tie the hands” of the PCAOB, since they
have only brought up the idea so far, and not offered a formal proposal. But
the idea was slammed by hundreds of
companies, business groups, corporate directors and auditors
who said mandatory rotation would increase costs and
harm audit quality as new auditors would struggle to gain expertise with
their new clients. At a hearing last year, House Financial Services
Committee members said they were worried a mandatory auditor rotation
proposal from the PCAOB was an
overreach of its authority.
Rep. Hurt said continued uncertainty over the
status of the auditor rotation proposal at the PCAOB was having a
“detrimental” effect on business. The board has not decided yet whether to
abandon or move forward with the concept release.
Audit research experts have presented the Public
Company Accounting Oversight Board with evidence they say demonstrates
auditor rotation leads to better audit quality.
During its
Houston roundtable to discuss
whether mandatory rotation would improve audit quality,
Scott Whisenant, an associate professor of accounting
at the University of Kansas,
reviewed a variety of academic studies for the
board that suggest rotation would produce benefits the board is seeking. He
noted much of the protest around mandatory rotation has focused on costs,
but few studies have focused on possible benefits because rotation is
practiced in only a handful of countries.
The results of a 2000 study suggest, he said, that
long-term auditor client relationships significantly increase the likelihood
of an unqualified opinion, which raises questions about audit quality. The
exception, however, is the last year of the relationship, when the
likelihood of an unqualified opinion drops. “In this final year, the
auditors finally drop the hammer down on clients,” Whisenant said, knowing
they are about to surrender the job to a successor firm that will no doubt
review their work.
Whisenant said his own more recent research with
another coauthor suggests that in countries where rotation is practiced
there's evidence of less earnings management, less managing to meet earnings
targets, and more timely recognition of losses. The study concludes the
quality of audit markets improves after the enactment of rotation, he says,
and evidence suggests that concerns about any disruption or difficulty of
transition to a new audit firm are more than offset by benefits. “Depending
on the statistics we investigated, the benefit to audit quality of adopting
rotation rules appears to be larger by a factor of at least two, and in some
cases more, than the cost of audit quality erosion at the forced rotation of
audit engagements,” he said.
Stephen Zeff, accounting professor at Rice
University,
told the PCAOB auditors have become more
commercial and less professional over the past several decades, driven there
by an education process that preaches memorization of standards more than
critical thinking and an allowance for auditors to develop business
relationships with their clients. Karen Nelson, another accounting professor
from Rice,
said her review of academic research suggests
auditors working under the present model are more likely to issue a report
biased toward management than under practically any other arrangement that
would involve mandates on rotation or retention.
PCAOB Chairman James Doty praised the
“extraordinary array of views” presented by the academics. “This is where we
we wanted to get to with the concept release,” he said, where the board
could begin to digest empirical evidence that would suggest what regulatory
regime is most likely to produce objective, professional, skeptical audits.
The
webcast archive of the Houston roundtable will be
available on the PCAOB website.
Jensen Comment
A few of my AECM friends have repeatedly argued for audit firm rotation,
including Tom Selling and David Albrecht. Now it turns out that some other
professors mentioned above are coming out of the woodwork in favor of such
rotation as well.
It would seem that the PCAOB wants audit firm rotation so badly that, in
spite of the overwhelmingly negative comments received in various invitations to
comment, the Board just keeps coming back for more support in favor of
rotation..
I'm on record as being against it for various important reasons. One is cost
since there are so many costs of gearing up for a first-time audit, especially a
large multinational client with offices and factories spread about the world. I
can't imagine the cost of gearing up for a first time audit of GM, GE,
Exxon-Mobil, etc. Second, the new costs will be added to pressures on audit
firms by the PCAOB to conduct more costly audits, including much more detailed
testing ---
http://pcaobus.org/Inspections/Reports/Pages/default.aspx
It's naive to assume that clients will remain passive and simply cough up the
millions or tens of millions of dollars added in rotation-based fees billed by
their auditors. Instead, get ready for intense lobbying in Washington DC to
overturn any PCOAB audit firm rotation mandate and more intense lobbying to
overturn SarBox legislation that created the PCAOB in the first place. I think
that attention given to the audit firm rotation issue may merely be a pretense
by the PCAOB in an effort to scare audit firms and raise added concerns about
audit independence. Does the PCAOB really want to go toe-to-toe with Corporate
America as well as companies headquartered around the world who listed on the
NYSE?
Equally important in my mind is what rotation will do to the quality and
skills of auditors on the job. First there is the inevitable relocation that
will come from shifting from a huge client headquartered in one city to another
big client headquartered thousands of miles away. Even with medium-sized clients
in smaller cities there will be inevitable stresses of having to uproot families
and move. For example, after giving up an audit of USAA in San Antonio hundreds
of auditors may have to move to Dallas, Houston, NYC, Washington DC or who knows
where.
We understand and affirm the
importance of auditor independence, objectivity and scepticism for the
proper functioning of the U.S. capital market and are supportive of the
PCAOB’s desire to enhance the actual and perceived independence of auditors.
However, academic research on the topic suggests that adopting a system of
audit firm rotation will not help the U.S. economy achieve these worthy
goals. Instead, such a change may impair auditor independence, weaken audit
expertise and undermine corporate governance.
We
organize our response below in terms of impact on objectivity (especially
opinion shopping), and development of expertise. We note that many of the
views expressed in our letter are influenced by a detailed research study
conducted by Fiolleau et al. (2010) on how companies currently choose
auditors. A copy of this study is publicly available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535074.
Of course, any such study is limited in its
generalizability. In particular, Fiolleau et al. (2010) examines cases where
audit committee’s have voluntarily chosen to seek competing bids from
auditors. However, we think the studies’ observations are suggestive of what
is likely to happen on an economy-wide basis if PCAOB were to mandate
periodic rotation of audit firms. Some of our other comments are based on
other research evidence, which we cite.
Selection and
appointment of auditors by their clients is a major source of concerns about
real and perceived independence and objectivity of the auditors. Since the
PCAOB seems to be unwilling to deal with this root cause of the independence
problem at this time, other reforms are being sought. No audit can be
perfect, and the quality of audit is determined not only by independence but
also by many other factors—such as the quality of accounting standards,
accounting education, auditor expertise, audit committees, corporate
governance, auditor discipline, liability, and a host of other institutional
features of the audit environment. The focus of PCAOB should be to provide
the best audit quality, and not to fixate on any subset of such determinants
of audit quality. Our reading of existing research leads us to conclude
that, in spite of its superficial appeal, audit firm rotation is a bad
policy choice on all relevant dimensions. We explain our reasons below.
Rotation and Auditor Objectivity
|The most appealing and common sense
intuition underlying auditor rotation is that it promotes objectivity by
refreshing the personnel (or firm) who are not tied down by judgments,
compromises, and personal relationships of the past. A new auditor brings a
fresh set of eyes, and has the opportunity to raise issues that have been
overlooked or settled in the past. Research experiments show that new
auditors are better able to identify issues, alter their judgments, and
bring issues up for discussion when they are not personally committed to
prior decisions (see article by Tan on p. 113-35 in Spring 1995 issue of
Journal of Accounting Research).
Our first observation on this
rationale for firm rotation is that familiarity arises between individuals
(e.g., the audit partner and the CFO) not firms, so most of the benefit from
taking a “fresh look” can be obtained more simply by rotating the partner
and or other senior personnel on the audit team (e.g., audit manager). Since
the policy of partner rotation is already in place, audit firm rotation is
unlikely to add any significant marginal benefit, especially when the
considerable costs of firm rotation are taken into account. The GAO’s (2003)
study on mandatory audit firm rotation estimated increased initial audit
costs of more than 20% (some studies in Europe suggest 40%) and this did not
include costs incurred by the audit committee and management to conduct the
tendering process.
Our second observation from the
research study by Fiolleau et al. (2010) is that although the auditors are
supposedly appointed by the audit committee of the client company,
management plays a significant role in the process, and may even dominate it
for all practical purposes. This means that a mandate for audit firm
rotation will force the incumbent and potential auditors into a “beauty
contest” every few years. The market power of the audit firms is so much
weaker than the power of their clients that, at the time of bidding for
engagement, the former compete among themselves to convince the management /
audit committee of their potential clients of their commitment, service, and
responsiveness. Each hiring exercise becomes an opportunity for opinion
shopping by clients, lowballing of audit fees and demonstrations of loyalty
and relationship-building by the auditors. Many of the auditor behaviours
that the rotation proposal is intended to discourage get exacerbated when
the audit firm enters into a beauty contest (bidding war) to get an audit
engagement.
A third observation from the Fiolleau
et al., (2010) study is that, with only four large international firms, the
audit market is highly concentrated. Most large clients already receive one
service or another from every one of the four firms. If one of these
accounting firms audits the client, the other three often provide it a host
of advisory services in tax, valuations etc. This perpetual engagement and
pre-existing relationships of most large companies with all four audit firms
implies that there is only limited opportunity for mandatory rotation to
bring about a “fresh look.”A large corporation would have to deliberately
avoid business engagement with one Big 4 firm, to have at least one firm who
would meet current independence rules and have the expertise needed to
conduct the audit. The PCAOB proposal is likely to yield little by way of
benefits and incur the additional harm associated with increased frequency
of “beauty contests.”
Rotation and Auditor Expertise There is compelling evidence that audit
firm rotation will impair auditor expertise. PCAOB’s concept paper indicates
awareness that the auditor is most vulnerable to missing fraud in a new
engagement (see also St Pierre and Anderson on p 242-63 in Vol 59(2), 1984
issue of The Accounting Review). A variety of studies (e.g., Myers et al.,
on p 779-799 in Vol 78, July 2003 issue of The Accounting Review) show that
the quality of accounting numbers improves with increases in auditor tenure.
The most compelling force disciplining accounting accruals is auditor
industry expertise (see Craswell et al., on p 297-322 in December 1995 issue
of Journal of Accounting and Economics). While academic evidence is seldom
conclusive, the weight of evidence suggests that a policy of mandatory
auditor rotation undermines expertise formation and will impair audit
quality. The thrust of Generally Accepted Accounting Principles (GAAP) is
increasingly oriented to having management communicate to investors how they
operate the business. Auditors’ understanding of the substance of client
business would be undermined if they are rotated out every few years. The
Fiolleau et al (2010) study reveals that even the four largest audit firm’s
lack depth of expertise in serving large corporate clients across all
industries outside the main business centres such as New York, Toronto,
London, and Tokyo. For clients with headquarters located in smaller cities,
finding industry specialists in the local offices can be a significant
challenge.
Improving Audit Quality Audit quality is not just an attribute of
the auditor alone. The nature of Generally Accepted Accounting Principles (GAAP)
is also a major determinant of audit quality. Over the recent decades, the
Financial Accounting Standards Board (FASB) has set standards that
de-emphasize verifiability in favour of the mark-to-market valuation, no
matter how illiquid the market may be. It has also adopted a practice of
writing detailed standards in its attempt to close loopholes but ends up
creating new ones. Exploitation of the Repo 105 rules by financial service
firms during the recent crisis is a good example. This type of standards
place auditors in a very difficult position vis-à-vis corporate management.
The shift in GAAP towards the so-called “fair value accounting” is a major
factor undermining audit quality.
Importance of Audit Resignation as a Signal When financial press reports that company X audited by firm Y for the
past twenty years has changed its auditor, investors get a valuable and
informative warning signal that draws close scrutiny by the investment and
regulatory communities. PCAOB’s mandatory rotation proposal will eliminate
this signal by making auditor changes a matter of routine, deserving little
attention or scrutiny, and thus undermine the quality of audit.
Transfer of Audit Resources from Verification to
Marketing The PCAOB proposal, by eliminating all long-term client-auditor
relationships, will induce audit firms to devote even greater resources to
marketing themselves to potential clients. These resources can only come
from cutting back on the substantive work of verification during the course
of their audits or by raising audit fees. Individuals in the audit firm will
find their presentation and marketing skills becoming more valuable relative
to their technical accounting and auditing skills.
Confusion and Unintended Consequences from Too Many
Initiatives Auditors now face a very complex economic and social environment. There
are economic incentives to be responsive to management but these have to be
balanced with incentives emanating from audit committees, concurring review
partners, national office reviews, litigation, GAAP and industry practice,
and PCAOB reviews. In some countries two audit firms jointly conduct an
audit making it difficult for any single audit firm to have consistency in
its audits across countries as complex co-ordination is required across
audit firms. Fraud cases like Parmalat are thought to have avoided detection
due to lack of continuity of the auditor and presence of multiple audit
firms. Adding more agents and incentives into this mix serves to create a
very complex incentive structure, interpersonal friction and potential for
unintended consequences as accountability and authority get distributed
across a variety of agents. This increases moral hazard and the potential
for confusion. Adding one more firm rotation requirement on top is not just
a free good that improves the system. Too much complexity makes the audit
process more vulnerable to systemic failure.
Conclusion Audit firm rotation is a bad policy prescription especially in an
environment where auditors are appointed by board audit committees who often
are significantly influenced by management. The potential benefits of
rotation will be exceeded by the harm associated with the “beauty contest”
that takes place to appoint a new auditor. Rotation actually impairs audit
quality by promoting more frequent opinion shopping and lowballing. Rotation
also impairs audit expertise, eliminates a valuable signal of auditor
change, and shifts even more resources from substantive audit work to
marketing of audit services.
Most of the benefits of rotation can
be realized by rotating the engagement partners. Because of limited depth of
expertise, we suggest rotating engagement partners every ten years. Given
the limited independence of most audit committees from the management,
PCAOB’s goal of improving audit quality through firm rotation is beyond its
reach. Pressing the FASB/IASB to pay greater attention to verifiability of
financial reports would be a more effective avenue to improve audit quality.
Signed,
Tracey C. Ball, FCA ICD.D
Executive Vice President & CFO Canadian Western Bank Group (TSX:CWB)
Rozina
Kassam,CA
CFO, COMMERCIAL
SOLUTIONS
INC.
(TSX:CSA)
Jonathan Glover, PhD
Professor of Accounting, Carnegie Mellon University
Karim Jamal, FCA, PhD
Chartered Accountants Distinguished Chair Professor, University of Alberta
Ken Kouri FCA
Retired Partner Kouri Berezan Heinrichs, CA
D. Brad Paterson, CMA
CFO, Wave Front Technology Solutions (TSX (V): WEE)
Suresh Radhakrishnan, PhD
Professor of Accounting, University of Texas at Dallas
Shyam Sunder, PhD
James L. Frank Professor of Accounting, Economics and Finance, Yale
University
The very best prospects for becoming accounting majors may be turned off by
the gypsy-living prospects of becoming career CPA auditors. The very best
seniors and managers and even partners on a particular audit may take up other
job offers rather than uproot spouses and children to relocate as Sundowners ---
http://en.wikipedia.org/wiki/The_Sundowners
The first issue below is related to the one
addressed by Bennis and O'Toole. According to Hopwood, research in
business schools is becoming increasingly distanced from the reality of
business. The worlds of practice and research have become ever more
separated. More and more accounting and finance researchers know less and
less about accounting and finance practice. Other professions such as
medicine have avoided this problem so it is not an inevitable development.
Another issue has to do with the status of
management accounting. Hopwood tells us that the term management accountant
is no longer popular and virtually no one in the U.S. refers to themselves
as a management accountant. The body of knowledge formally associated with
the term is now linked to a variety of other concepts and job titles. In
addition, management accounting is no longer an attractive subject to
students in business schools. This is in spite of the fact that many
students will be working in positions where a knowledge of management
control and systems design issues will be needed. Unfortunately, the present
positioning and image of management accounting does not make this known.
Continued in article
June 29, 2013 reply from Zane Swanson
Hi Bob,
A key word of incentive comes up as it relates to
the practitioner motivator of the nature of accounting and financing
research. The AICPA does give an educator award at the AAA convention and so
it isn't as though the practitioners don't care about accounting
professorship activity.
Maybe, the "right"' type of incentive needs to be
designed. For example, it was not so many years ago that firms developed
stock options to align interests of management and investors. Perhaps, a
similar option oriented award could be designed to align the interests of
research professors and practitioners. Theoretically, practitioners could
vest a set of professors for research publications in a pool for a
particular year and then grant the exercise of the option several years
later with the attainment of a practitioner selected goal level (like HR
performance share awards). This approach could meet your calls to get
researchers to write "real world" papers and to have follow up replications
to prove the point.
However, there are 2 road blocks to this approach.
1 is money for the awards. 2 is determining what the practitioner
performance features would be.
You probably would have to determine what
practitioners want in terms of research or this whole line of discussion is
moot.
The point of this post is: Determining research
demand solely by professors choices does not look like it is addressing your
"real world" complaints.
Respectfully,
Zane
June 29, 2013 reply from Bob Jensen
Hi Zane,
I had a very close friend (now dead) in the Engineering Sciences
Department at Trinity University. I asked him why engineering professors
seemed to be much closer to their profession than many other departments in
the University. He said he thought it was primarily that doctoral students
chose engineering because they perhaps were more interested in being problem
solvers --- and their profession provided them with an unlimited number of
professional problems to be solved. Indeed the majority of Ph.D. graduates
in engineering do not even join our Academy. The ones that do are not a
whole lot different from the Ph.D. engineers who chose to go into industry
except that engineering professors do more teaching.
When they take up research projects, engineering professors tend to be
working with government (e.g., the EPA) and and industry (e.g., Boeing) to
help solve problems. In many instances they work on grants, but many
engineering professors are working on industry problems without grants.
In contrast, accounting faculty don't like to work with practitioners to
solve problems. In fact accounting faculty don't like to leave the campus to
explore new problems and collect data. The capital markets accounting
researchers purchase their databases and them mine the data. The behavioral
accounting researchers study their students as surrogates for real world
decision makers knowing full well that students are almost always poor
surrogates. The analytical accounting researchers simply assume the world
away. They don't set foot off campus except to go home at night. I know
because I was one of them for nearly all of my career.
Academic accounting researchers submit very little original research work
to journals that practitioners read. Even worse a hit in an accounting
practitioner journal counts very little for promotion and tenure especially
when the submission itself may be too technical to interest any of our AAA
journal editors, e.g., an editor told me that the AAA membership was just
not interested in technical articles on valuing interest rate swaps, I had
to get two very technical papers on accounting for derivative financial
instruments published in a practitioner journal (Derivatives Reports)
because I was told that these papers were just too technical for AAA journal
readers.
Our leading accountics science researchers have one goal in mind ---
getting a hit in TAR, JAR, or JAE or one of the secondary academic
accounting research journals that will publish accountics research. They
give little or no priority to finding and helping to solve problems that
practitioners want solved. They have little interest in leaving the ivory
tower to collect their own messy real-world data.
Awards and even research grants aren't the answer to making accounting
professors more like engineering, medical, and law professors. We need to
change the priorities of TAR, JAR, JAE, and other top academic accounting
research journals where referees ask hard questions about how the practice
of the profession is really helped by the research findings of virtually all
submitted articles.
In short, we need to become better problem solvers in a way like
engineering, medical, and law professors are problem solvers on the major
problems of their professions. A great start would be to change the
admissions criteria of our top accounting research journals.
Sue Haka, former AAA President, commenced a thread on the AAA Commons
entitled "Saving Management Accounting in the Academy,"
---
http://commons.aaahq.org/posts/98949b972d
A succession of comments followed.
The latest comment (from James Gong) may be of special interest to some of
you.
Ken Merchant is a former faculty member from Harvard University who form many
years now has been on the faculty at the University of Southern California.
Here are my two cents. First, on the teaching side,
the management accounting textbooks fail to cover new topics or issues. For
instance, few textbooks cover real options based capital budgeting, product
life cycle management, risk management, and revenue driver analysis. While
other disciplines invade management accounting, we need to invade their
domains too. About five or six years ago, Ken Merchant had written a few
critical comments on Garrison/Noreen textbook for its lack of breadth. Ken's
comments are still valid. Second, on the research and publication side,
management accounting researchers have disadvantage in getting data and
publishing papers compared with financial peers. Again, Ken Merchant has an
excellent discussion on this topic at an AAA annual conference.
June 30, 2013 reply from Zane Swanson
Hi Bob,
You have expressed your concerns articulately and passionately. However,
in terms of creating value to society in general, your "action plan" of
getting the "top" of the profession (editors) to take steps appears
unlikely. As you pointed out, the professors who create articles do it with
resources immediately under their control in the most expeditious fashion in
order to get tenure, promotion and annual raises. The editors take what
submissions are given. Thus, it is an endless cycle (a closed loop, a
complete circle). As you noted the engineering profession has different
culture with a "make it happen" objective real world. In comparison with
accounting, the prospect of "only" accounting editors from the top dictating
research seems questionable. Your critique suggests that the "entire"
accounting research culture needs a paradigm shift of real world action
consequences in order to do what you want. The required big data shift is
probably huge and is a reason that I suggested starting an options alignment
mechanism of interests of practitioners and researchers.
Respectfully,
Zane
June 30, 2013 reply from Bob Jensen
Hi Zane,
You may be correct that a paradigm
shift in accountics research is just not feasible given the
generations of econometrics, psychometrics. and mathematical
accountics researchers that virtually all of the North American
doctoral programs have produced.
I think Anthony Hopwood, Paul Williams, and
others agree with you that it will take a paradigm shift that just is
not going to happen in our leading journals like TAR, JAR, JAE, CAR,
etc. Paul, however, thinks we are making some traction, especially since
virtually all AAA presidents since Judy Rayburn have made appeals fro a
paradigm shift plus the strong conclusions of the Pathways Commission
Report. However, that report seems to have fallen on deaf ears as far as
accountics scientists are concerned.
Other historical scholars like Steve Zeff, Mike Granfof, Bob Kaplan, Judy
Rayburn, Sudipta Basu, and think that we can wedge these top journals to
just be a bit more open to alternative research methods like were used in
the past when practitioners took a keen interest in TAR and even submitted
papers to be published in TAR --- alternative methods like case studies,
field studies, and normative studies without equations.
"We fervently hope that the research pendulum will soon swing back from
the narrow lines of inquiry that dominate today's leading journals to a
rediscovery of the richness of what accounting research can be. For that to
occur, deans and the current generation of academic accountants must
give it a push."
Granof and Zeff ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#Appendix01
Michael H. Granof is a professor of accounting at the McCombs School of
Business at the University of Texas at Austin. Stephen A. Zeff is a
professor of accounting at the Jesse H. Jones Graduate School of Management
at Rice University.
Accounting Scholarship that Advances Professional Knowledge
and Practice
Robert S. Kaplan The Accounting Review, March 2011, Volume 86, Issue 2,
Deloitte's “Accounting Roundup: Second Quarter in
Review-2013” discusses the FASB's and IASB's issuance of revised proposals
on the accounting for insurance contracts, the SEC's issuance of a proposed
rule that would address stable value pricing of the prime institutional
money market funds and the AICPA's release of its Financial Reporting
Framework for Small- and Medium-sized Entities. It also lists significant
adoption dates and deadlines.
Jensen Comment
In the 21st Century a lot has been written about "information overload" in
financial statements that overwhelms both analysts and investors to say nothing
about FASB tags.
I agree with much of what Tom says in this post --- who could disagree with
some of the cynicism about the FASB? But he makes some sweeping statements that
I might take issue. For example, he states: "Managers
despise the clarity and transparency of reconciliations, and auditors even more
so."
I don't think that managers or auditors in general despise clarity and
transparency of reconciliations. To despise them may tend to increase cost of
capital since analysts and investors might avoid portfolio alternatives that
have opaque disclosures. Tom supplies no evidence that managers and their
auditors in general despise clarity and transparency in reconciliations.
Anecdotal evidence in this regard does not support such a sweeping
generalization.
I also don't think the FASB intends its Disclosure Framework to be an
"elaborate hoax." In fact, I think it is a well-intended effort to match
benefits with costs of disclosure. It may well fail in many respects since
disclosure is a bag of worms for standard setters who would prefer clarity in
the numbers and, instead, are often confronted with qualitative factors that
defy assignment of ordinal, cardinal, or ratio scaled numbers along slippery
slopes.
The IRS has informed Tyco International Ltd. that
it has disallowed roughly $2.86 billion in interest and deductions
recognized by the company in its U.S. tax returns for the 1997-2000 tax
years, according to a filing Monday with the Securities and Exchange
Commission.
The move stems from a finding by the IRS that
several of the Swiss fire protection and security company’s former
subsidiaries owe $883.3 million in taxes and $154 million in penalties.
Tyco noted that it has been able to resolve
substantially all of the issues raised by the IRS for periods beginning with
the 1997 tax year, but it has not been able to resolve matters related to
the treatment of intercompany debt transactions during that period.
The company said it strongly disagrees with the
IRS’ claims and intends to contest the proposed tax adjustments with the
U.S. tax court.
“We believe that we have meritorious defenses for
our tax filings, that the IRS positions with regard to these matters are
inconsistent with the applicable tax laws and existing Treasury regulations,
and that the previously reported taxes for the years in question are
appropriate,” Tyco said in the filing.
The company said it isn’t required to make any
payments until the dispute is definitively resolved, noting that could take
several years.
Even so, Tyco warned that the ultimate resolution
of the dispute is uncertain and could have a material impact on the
company’s financial condition.
For example, if the IRS’ claim prevails, it would
likely affect some $6.6 billion in interest deductions related to
intercompany debt and taken by the company in subsequent tax years.
Tyco said it shares obligations on the issue with
several companies that it spun off in recent years: Covidien PLC, TE
Connectivity, ADT and Pentair.
Tyco spun off its Covidien health care and Tyco
Electronics units in 2007 in a series of moves aimed at recovering from a
high-profile scandal that led to the convictions of its former CEO L. Dennis
Kozlowski and ex-Chief Financial Officer Mark Swartz for fraud. Tyco
Electronics subsequently changed its name to TE Connectivity Ltd.
In 2012, it again separated into three public
companies, forming The ADT Corp. and Pentair Ltd., along with Tyco
International.
The tax-sharing agreements calls for Covidien to
share 42 percent of any tax liabilities, while TE Connectivity’s share is 31
percent, Tyco said.
Under its agreement with Pentair and ADT, the
companies would also be responsible for covering a share of Tyco’s tax
liability. Pentair would share between 20 percent and 42 percent of the tax
liabilities, while ADT would be responsible for 27.5 percent to 58 percent,
Tyco added.
Pentair and ADT’s share depends upon whether Tyco’s
tax liability for 2012 exceeds $500 million or $725 million.
Tyco International moved its global headquarters to
Switzerland from Bermuda in 2009. It maintains its U.S. headquarters in
Princeton, N.J. Its stock ended regular trading up $1.45, or 4.4 percent, at
$34.40. Shares slipped 17 cents to $34.23 in extended trading.
Covidien moved its global headquarters to
Switzerland from Bermuda in 2008. Its U.S. headquarters is in Mansfield,
Mass. Covidien stock closed Monday up 25 cents at $57.41, then gained
another 13 cents after hours.
TE Connectivity is likewise Swiss-based, with its
main U.S. office in Berwyn, Pa. Its shares closed up 87 cents at $46.41.
LONDON—British fraud prosecutors on Monday filed
criminal fraud charges against two former London brokers, marking an
expansion of the investigation into manipulation of the London interbank
offered rate, or Libor.
The U.K.'s Serious Fraud Office said it charged
Terry Farr and James Gilmour, who both used to work for interdealer broker
R.P. Martin Holdings Ltd., with "conspiracy to defraud." The charges come
after the agency last month filed similar charges against former UBS AG and
Citigroup Inc. trader Tom Hayes C -0.75% . All three men were arrested in
the U.K. on the same day last December.
The Serious Fraud Office didn't detail the charges
against Messrs. Farr and Gilmour, beyond saying that Mr. Gilmour was charged
with one count of conspiracy to defraud and Mr. Farr was charged with two
counts. The men, charged at a London police station Monday morning, are due
to appear in a London court at a later date, the SFO said.
Lawyers for Mr. Farr, 41 years old, and Mr.
Gilmour, 48, couldn't immediately be reached for comment and have not
previously commented. Mr. Hayes, who hasn't entered a plea, told The Wall
Street Journal in a January text message that "this goes much much higher
than me."
The charges against the former brokers underscore
the expanding breadth of rate-rigging investigations. The probes initially
focused on the efforts of bank traders to profit by manipulating Libor and
other benchmarks, which underpin interest rates on trillions of dollars of
financial contracts around the world. More recently, authorities also have
been homing in on the alleged roles of interdealer brokers such as R.P.
Martin, which serve as middlemen between financial institutions looking to
buy or sell various products.
But the charges also highlight how the criminal
cases that U.S. and British authorities have built thus far focus narrowly
on a relatively small group of former traders and brokers. While regulators
have said that Libor-rigging was rife across the financial industry, and
that more than a dozen other institutions are under investigation, all four
people who have been charged with crimes in the U.S. or Britain allegedly
worked with each other.
When they settled Libor-rigging charges with UBS
and Royal Bank of Scotland Group RBS.LN +0.81% PLC late last year and early
this year, U.S. and British investigators alleged that traders at those
banks worked with multiple interdealer brokers to try to manipulate Libor.
UBS and RBS admitted wrongdoing.
The U.S. and British authorities didn't identify
the brokerage firms by name, but officials at R.P. Martin, ICAP IAP.LN
+1.91% PLC and Tullett Prebon TLPR.LN +0.88% PLC have said that their firms
have been contacted by regulators as part of the Libor investigation.
British prosecutors said last month that the charges against Mr. Hayes
relate to his alleged activities with the three brokerage firms, as well as
seven banks.
Employees at some brokers helped bank traders rig
Libor in multiple ways, authorities said in documents accompanying the UBS
and RBS settlement agreements. To suit the desires of UBS and RBS traders,
the brokers asked traders at other banks to move their daily Libor
submissions up or down. Brokers sometimes disseminated inaccurate financial
data in an attempt to influence banks' Libor submissions.
In return for their help, bankers sometimes
rewarded their brokers with extra commissions or with so-called "wash
trades," which are offsetting transactions designed to drum up commission
payments for the brokers who handle them, according to the UBS and RBS
settlement documents.
An R.P. Martin spokesman declined to comment and
the company hasn't previously commented. Representatives of ICAP and Tullett
Prebon weren't immediately available to comment.
Libor, the scandal-tarred benchmark owned by a British
banking organization, is being sold to
NYSE Euronext,
NYX -0.61% the
U.S. company that runs the New York Stock Exchange. The deal is the British
government's latest attempt to salvage Libor's integrity, after multiple
banks acknowledged trying to profit by rigging the rate.
While
Libor underpins trillions of dollars in financial contracts and generates
about £2 million a year in revenue, a person familiar with the deal said the
benchmark rate was sold to NYSE for a token £1—a sign of the heavy toll
inflicted by the rate-rigging scandal.
Libor:
What You Need to Know
What
it is:
Libor—the London interbank offered rate benchmark—is supposed to measure the
interest rates at which banks borrow from one another. It is based on data
reported daily by banks. Other interest rate indexes, like the Euribor (euro
interbank offered rate) and the Tibor (Tokyo interbank offered rate),
function in a similar way.
Why
it's important:
More than $800 trillion in securities and loans are linked to the Libor,
including $350 trillion in swaps and $10 trillion in loans, including auto
and home loans, according to the Commodity Futures Trading Commission. Even
small movements—or inaccuracies—in the Libor affect investment returns and
borrowing costs, for individuals, companies and professional investors.
The
deal means that the City of London will lose one of the institutions most
closely associated with its rise as a global financial hub in recent
decades. The new owner will be the institution that is most closely
associated with Wall Street.
For NYSE, the deal is part of a recent effort by
exchanges to take over benchmarks like Libor in the hopes of converting them
into new business opportunities in the derivatives markets. NYSE itself is
in the process of being acquired by
IntercontinentalExchange Inc.,
ICE -1.14% an
Atlanta-based company that is one of the world's largest operators of
derivatives exchanges. Libor and similar benchmarks are components of
interest-rate derivatives that are heavily traded on exchanges in the U.S.
and Europe.
British authorities last year started looking for a new owner for Libor,
after concluding that the British Bankers' Association shouldn't be
responsible for administering a key benchmark. After a competitive bidding
process, a government-appointed commission picked NYSE, which will formally
take over Libor early in 2014.
Sarah
Hogg, who headed the U.K. commission that ran the Libor sale process, said
Tuesday that handing the benchmark to NYSE "will play a vital role in
restoring the international credibility of Libor." While Libor's new parent
company will be American, the rate will be administered by a British
subsidiary that will be regulated by the U.K.'s Financial Conduct Authority.
The deal immediately encountered criticism. It is "far
from ideal," said
Bart Chilton, one
of the commissioners who runs U.S. regulator the Commodity Futures Trading
Commission. "Whenever there's a profit motive involved in setting [these
benchmarks], I get suspicious."
Mr.
Chilton, who added he would have preferred a "neutral third party" to take
over Libor, said it would be misleading to suggest the deal would resolve
all the problems that have bedeviled Libor. "I'm not swallowing that."
Some
British officials decried the loss of an important institution to a rival
financial center. Following the Libor sale, "the French and the Germans will
be rubbing their hands with glee at the prospect of stealing other financial
markets from the U.K.," said John Mann, a Labour Party lawmaker.
The
BBA launched Libor in the 1980s as a way for banks to set interest rates on
syndicated corporate loans. The rate is based on daily estimates by banks
about how much it would cost them to borrow from other banks. Libor
eventually morphed into a ubiquitous cog in the financial system, and today
serves as the basis for rates on everything from residential mortgages to
derivatives.
Doubts about Libor's reliability surfaced in 2008
after a series of Wall Street Journal articles highlighted apparent problems
with the rate. But governments and central banks balked at regulating Libor,
and the BBA failed to stop banks from continuing to skew the rate. Only last
summer, after Barclays BARC.LN +0.31% PLC admitted trying to rig Libor, did
British authorities launch a process to overhaul the benchmark.
Part of that process involved finding a new home
for Libor. In addition, following a U.K. regulatory panel's recommendation,
the BBA earlier this year phased out certain variations of Libor that were
especially vulnerable to manipulation. Also, the British government recently
made it a crime to rig Libor.
Martin Wheatley, head of the Financial Conduct
Authority, said he expects NYSE "to develop further the oversight and
governance of Libor." The chief executive of the NYSE Liffe derivatives
exchange, Finbarr Hutcheson, said the company would continue "the process of
restoring credibility, trust and integrity in Libor as a key global
benchmark."
At least initially, NYSE is expected to continue
the current process for calculating Libor, according to a U.K. Treasury
official. That will be supplemented by cross-checking those submissions
against market transactions, the official said.
The new owner plans to work with market
participants and regulators to "evolve how Libor is calculated" to bring it
in line with recommendations last year from another U.K. commission, the
official said.
Among other bidders for Libor were Thomson Reuters,
which currently compiles Libor every day on the BBA's behalf, and Markit, a
data provider specializing in derivatives, said people briefed on the
process.
NYSE plans to continue licensing Libor to other
parties for use in financial products, according to a person familiar with
the deal. The benchmark is expected to keep its current name.
Analysts said the deal will give NYSE bragging
rights as owner of a benchmark that is central to the market for a variety
of derivatives. Exchanges in recent years have gravitated toward derivatives
trading because the markets bring higher fees than trading in stocks.
But NYSE could face years of regulatory, legal and
political scrutiny as it tries to repair Libor's battered reputation.
The British have learned nothing from the recent
Libor scandal. One year after the news broke that banks were manipulating
this vitally important interest rate, an independent committee appointed by
the government has decided to hand over responsibility for Libor to NYSE
Euronext . This is madness.
The London interbank offered rate, which is
calculated by averaging banks' self-reported estimated cost of borrowing
funds from other banks, plays a crucial role in the world financial system.
It serves as a benchmark for some $800 trillion in transactions—everything
from complex derivatives transactions to relatively simple adjustable-rate
home mortgages.
Because so much money is riding on Libor, banks
have an incentive to alter submissions—up or down, depending on the
situation—to improve their bottom lines. Many in the financial community had
long known about Libor manipulation. As early as 2008, then-president of the
Federal Reserve Bank of New York Timothy Geithner warned the Bank of England
that Libor's credibility needed to be enhanced. E-mails between bankers that
have come to light since the scandal broke almost a year ago prove
conclusively that cheating was commonplace.
And yet, knowing of Libor's troubled past and its
potential to be tampered with, British authorities earlier this month
granted a contract to run the index to NYSE Euronext, a company that owns
the New York Stock Exchange, the London International Financial Futures and
Options Exchange, and a number of other stock, bond, and derivatives
exchanges. NYSE Euronext is scheduled to be taken over by
IntercontinentalExchange, a firm which owns even more derivatives markets.
In other words, the company that will be
responsible for making sure that Libor is set responsibly and fairly will be
in a position to profit like no one else from even the slightest movements
in Libor.
British authorities have searched for ways to
rescue Libor, perhaps in a bid to maintain London's prestige as a financial
center. Last autumn, Martin Wheatley, a British financial regulator, issued
a report suggesting a number of reforms to how Libor is set. He suggested
some sensible reforms, including reducing the number of rates and currencies
represented, and increasing the number of firms contributing to the index.
But these were the equivalent of hunting big game with a water pistol.
NYSE Euronext is, of course, confident in its
ability to clean up the mess. Its press release following the announcement
trumpeted the firm as "uniquely placed to restore the international
credibility of Libor." The company argues that it "will be able to leverage
NYSE Euronext's trusted brand, long regulatory experience and market-leading
technical ability to return confidence to the administration of Libor."
That's all well and good, but coming just five
years after the eruption of the worst crisis in the financial system since
the Great Depression, there is a much better way to fix Libor: Scrap it.
The British government should announce that, six
months from today, Libor will cease to exist. The British Bankers'
Association, which technically owns the interest-rate index, has been so
wounded by the scandal that it has been willing to follow the government's
lead and will no doubt agree.
And how will markets react? The way they always do.
They will adapt.
Financial firms will have six months to devise
alternative benchmarks for their floating rate products. Given the low
repute in which Libor—and the people responsible for it—are held, it would
be logical for one or more market-determined rates to take the place of
Libor.
A number of alternative benchmarks exist or could
be easily created. One often mentioned candidate is the GCF Repo index
published by the Depository Trust & Clearing Corp. This index is based on
actual repurchase agreement transactions, and is thus a better indicator of
the cost of funds than banks' internal estimates—even if those estimates
were unbiased. Another option might be some newly constructed index based on
credit-default swaps transactions, corporate bonds and commercial paper.
Either of these alternatives would remove the possibility of cheating by
making the benchmark dependent on observable, market-determined rates,
rather than the "estimates" of a dozen or so bankers.
For already existing contracts that rely on Libor,
the British Bankers' Association should define some market-determined rate,
in consultation with the government, as the official successor to Libor
starting six months from now.
Most people still put their faith—rightly, in my
view—in market-based economies, believing that they are more likely to
deliver a higher standard of living than any other economic system that the
world has ever known. Politicians need to be aware that the public's faith
in—and patience with—the market has its limits.
The incentive to game an benchmark rate such as
Libor is just too high to risk putting it in the hands of a single private
entity, however committed that entity may be to restoring its credibility.
Replacing Libor with a transparent, fair, market-based alternative is the
only sensible solution.
Mr. Grossman is professor of economics at Wesleyan University in
Connecticut and a visiting scholar at Harvard. His book, "WRONG: Nine
Economic Policy Disasters and What We Can Learn from Them," will be
published by Oxford University press in November.
Is Ewan McGregor, who played Nick Leeson in the
movie about the Barings bank bust, available for a sequel? He would find an
oddly similar character in Tom Hayes, the former UBS UBSN.VX -1.93% and
Citibank employee charged in this week's latest financial scandal of the
century.
Let's try to sort it out. As with Libor, or the
London interbank offered rate, a benchmark for loans world-wide, allegations
are floating that traders manipulated other widely used benchmarks. Three
big banks—Barclays, BARC.LN -2.26% UBS and Royal Bank of Scotland RBS.LN
-7.24% —have already paid $2.5 billion in fines and penalties in the Libor
caper. Now the focus has turned to suspected manipulation of fuel-market
indexes, loan-market indexes in Japan and Singapore, and indexes used in
pricing interest-rate swaps.
Said Europe's Competition Commissioner Joaquin
Almunia last month: "Huge damages for consumers and users would have been
originated by this."
Well, maybe. A basic schematic would go like this:
Some enterprising soul decides it would be useful to publish a daily price
benchmark by surveying market participants about certain transactions that
don't take place on a central exchange. Somebody else decides it would be
useful to create tradable derivatives whose price would vary based on
changes in these benchmarks—that is, would let participants bet on how a
survey of themselves in the future will come out.
Libor involved questioning bank traders about the
pricing of loans—and Libor derivatives let these same traders bet on the
answers they would give in the future. The invitation here now seems rather
obvious. Mr. Hayes, a baby-faced yen-derivatives trader in Tokyo at the
time, is charged with orchestrating attempts to rig a similar Tokyo-based
benchmark called Tibor.
All this proves one thing: Financial professionals
can't be counted on to do the right thing when self-interest beckons so we
must turn power over to government officials who always do the right thing
regardless of self-interest.
Or maybe not. The Libor scandal broke only because
London banks, in cahoots with regulators, put out transparently fake reports
about their borrowing costs during the 2008 panic. That led to the discovery
of a long history of everyday manipulation of their Libor borrowing costs.
Traders now fessing up say they learned the practice from their predecessors
who learned it from their predecessors, and so on.
As they drain this swamp, investigators like to
allege enormous damage to the public by multiplying small discrepancies by
the number of transactions in the market. Treat these claims with
skepticism. Whatever the extent of mispricing in downstream transactions, it
is a smidgeon compared to the rake-off brokers used to earn in
pre-electronic days. It is a smidgeon compared to the margins that middlemen
could extract before published surveys were available to shed light on
transactions previously invisible to most market participants.
It is also a smidgeon compared to the margins that
would have to be built into prices if not for Libor hedges and other
risk-sharing inventions.
A kick in the pants has been delivered to
publishers of price indexes. They need to make their products more
manipulation-proof. Where markets are thin and surveys are the only way to
glean market intelligence, publishers already exercise a visible hand to
expel questionable or anomalous data. A further solution might be to poll a
larger number of traders and randomly exclude most of their answers so no
trader would have any certainty of influencing the index.
To understand why such opportunities exist in the
first place is to understand something about a generic condition of our
world, in which technology has drastically reduced transaction costs and
cheap money has vastly increased leverage available even to low-ranking bank
employees, magnifying the return to small bits of illicit or licit
information, including insider information.
Anywhere except California, Illinois, New York, and New Jersey? (Vermont does
not have an NBA team) "Did Taxes Help Drive Dwight Howard to Sign With the Houston Rockets
Rather Than the L.A. Lakers?" by Paul Caron, TaxProf, Blog, July 6, 2013 ---
http://taxprof.typepad.com/
Seven-time NBA all
star
Dwight
Howard yesterday signed with the Houston Rockets
for the maximum free agent contract permitted under the NBA's "Larry Bird
Rule" -- $87.6 million over four years (4.5% annual increases over his
existing contract). He spurned a much higher offer from the L.A. Lakers --
$118.0 million over five years (7.5% annual increases). Several tax
folks have run the numbers and concluded that Howard will receive more
after-tax income by signing with the Rockets rather than the Lakers, based
on California's 13.3% top marginal income tax rate and the absence of a
state income tax in Texas, after taking into account the application of
various state and local "jock taxes."
With Mary Jo White confirmed as Chairman of the SEC,
and Paul Beswick named Chief Accountant of the SEC's Office of the Chief
Accountant, the remainder of2013 will be a period of change at the SEC.
Although little is known about their respective potential long-term agendas,
in the near term, the SEC will need to
From the CFO Journal's Morning Ledger on July 2, 2013
How much corporations really pay in taxes Taxes paid by profitable companies in the U.S. are often less than
half the statutory 35% tax rate,
Emily Chasan reports.
A new GAO report found that profitable companies with at least $10 million
in revenue had an average effective federal tax rate of just 13% on their
world-wide income in 2010. Other key findings in the report: The effective
tax rate for profitable companies has declined in the past few years and
companies appear to be paying less tax globally. Actual taxes paid on
corporate world-wide income, including federal, state local and foreign tax
expenses and withholding, declined to 16.9% in 2010 from 20.8% in 2008.
Read
the full report here (PDF).
Francine sked Mark
O’Connor, CEO and Co-founder of Monadnock
Research, to comment on the
Going Concern post
about Ernst & Young’s “Vision 2020″ announcement.
Caleb Newquist at
GoingConcern.com thinks Ernst & Young’s goals are a bit ambitious.
One of our sources at
EY thought so [too] and told us there are a few key things that
would have to happen for the firm to come even remotely close to
achieving it:
1) A rapidly expanding
advisory business
2) More acquisitions
and
3) A lot more Partners,
Principals, and Executive Directors.
Caleb also mentions the “I”
word.
As the advisory
business expands, the more potential there will be for conflicts
with the firm’s audit clients. Since EY and the rest of the Big 4
want to be known as trusted business advisors rather than simply
auditors or tax preparers, the advisory business gravy train will
continue to be a priority and circumventing independence will become
an ongoing exercise. We’ve already seen EY
cross the line in this area with the
revelation that it was lobbying on behalf of audit clients, so it
stands to reason they can make make arguments in other cases for the
sake of expanding business lines that expand their influence can
command larger fees while the audit business gets pushed into the
background.
Really, the
timing of all this is perfect for EY because all
the firms are doing it and they don’t give
a damn if people think they’re less independent. The advisory
businesses have momentum and since independence is in the eye of the
beholder, it’s easy for any firm to say, “That’s just, like, your
opinion, man.”
It’s up to renegade regulators like
Ben Lawsky and private plaintiffs to keep the
consulting side of the audit firms honest.
Here are Mark O’Connor’s comments on Ernst &
Young’s Vision 2020 strategy.
One important aspect of
Ernst & Young’s “Vision 2020” is a global
strategic initiative to reach $50 billion in revenues by 2020. That’s a
very aggressive goal, and there are a few important reasons why that
might be both out of reach and bad for global business.
Lofty goals like EY’s Vision 2020 serve a
promotional purpose to attract top talent, and create the
rationalization for promises of vast internal opportunities to keep top
performers engaged. Beyond that, it allows current “EY” partners to move
from the global advisory leadership sidelines to join principals at
other Big Four firms reaping the rewards of higher-margin consulting
work. But it is on this point that unintended consequences would likely
foreclose any real possibility that the $50 billion aspect of EY’s 2020
strategic plan could be executed as currently conceived.
Big Four firms tend move in lock-step without
huge percentage year-over-year gains relative to one another in any line
of business without large M&A transactions – buying or selling. Unless
the firm’s strategy was to lower its quality or margin expectations in
an attempt to go after the audit business of other Big Four firms and
large auditors around the world, almost all of EY’s proposed growth will
need to come from advisory. Otherwise, such dramatic growth in assurance
would come at the expense of lower margins across a sector that already
has very low margins. Anything far beyond the current Big Four average
audit growth rate of 3.4% is unlikely, so any EY scenario with $50
billion in revenues by 2020 based primarily on assurance practice growth
has a probability close to zero.”
Given this, virtually all of EY’s extraordinary
growth would need to come from advisory. EY had around $13.5 billion in
non-assurance revenues in fiscal 2012, so it would need to grow that by
around 266% to reach that goal. That would require an 11. 5% compound
annual growth rate (CAGR) coming out of our “great global recession”,
assuming that the assurance revenues independently grow at a 3.5% annual
rate. EY’s 2012 advisory non-assurance non-tax growth was close to 13%,
so in isolation an 11.5% sustained advisory CAGR might seem aggressive,
but reasonable.
Former Olympus Corp. (7733) Chairman Tsuyoshi
Kikukawa received a suspended sentence for his role in a $1.7 billion
accounting fraud that caused the Japanese camera maker’s market value to
plunge 80 percent.
Olympus itself, also the world’s largest maker of
endoscopes, was ordered to pay 700 million yen ($7 million) in fines by
Tokyo District Judge Hiroaki Saito today. Former Olympus Executive Vice
President Hisashi Mori and Hideo Yamada, a former auditing officer, also got
suspended sentences.
Judge Saito’s decision comes almost two years after
revelations that the company had falsified financial reports to conceal
losses on investments. The sentences reflect the defendants’ claims that
former Olympus presidents Masatoshi Kishimoto and Toshiro Shimoyama made the
decision to hide losses, while he inherited the aftermath.
“Kikukawa and Yamada succeeded in a negative legacy
and weren’t involved in the decision-making process to hide losses,” Saito
said in court today. “They were distressed and didn’t benefit personally
from hiding losses. Mori followed their orders.”
The camera maker still faces lawsuits by investors
including State Street Bank and Trust & Co. and Government of Singapore
Investment Corporation Pte Ltd. in a joint complaint seeking 19.1 billion
yen in damages. Suspended Years
Kikukawa and Yamada were given three years of jail
time suspended for five years, while Mori got two and a half years jail time
suspended for four years. Kishimoto and Shimoyama haven’t been charged
because the statute of limitations has expired, Kyodo News reported on April
23.
Prosecutors had asked for a five-year jail term for
Kikukawa and a 1 billion yen fine for Tokyo-based Olympus, Kyodo News
reported on March 26. Lawyers for the defendants said jailing them would be
unfair because other executives involved weren’t charged, the news service
reported.
The fraud, “destroyed the image of Japanese
companies internationally,” Kikukawa told the court in September when
pleading guilty along with the other executives.
Olympus fell 0.9 percent to 3,170 yen at the close
in Tokyo trading. The shares have more than doubled in the past 12 months,
compared with a 55 percent jump in the benchmark Nikkei 225 Stock Average.
Whistleblower Woodford
Kikukawa resigned in October 2011, weeks after the
board fired former President Michael Woodford, who uncovered the accounting
discrepancies and went public with them after the Olympus board declined to
take action. The company and three former executives eventually admitted
using fraudulent takeover deals to hide losses for 13 years starting in the
1990s.
Olympus restated five years of earnings results to
account for the bookkeeping fraud, wiping $1.3 billion off its balance sheet
and prompting speculation the company would seek a capital infusion. Reports
of the attempts to hide losses in mid-October 2011 triggered an 82 percent
drop in the company’s shares between Oct. 13 and Nov. 11, 2011.
The company said in July last year it would pay
191.8 million yen in fines to Japan’s financial regulators, while the camera
maker itself has sued 19 former executives for damages related to the cover
up of losses.
Founded in 1919 as a microscope and thermometer
maker, Olympus produced its first camera in 1936 and a predecessor to the
modern-day endoscope in 1950, according to its website. The company controls
75 percent of the global market for endoscopes, instruments doctors use to
peer inside the body to help diagnose disease.
They say that
patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss.
What's a sweetheart like you doin' in a dump like this?
Lyrics of a Bob Dylan song forwarded by Amian Gadal
[DGADAL@CI.SANTA-BARBARA.CA.US]
Japan’s Financial Services Agency is to
determine whether auditors deliberately falsified Olympus’s
financial statements in a series of hearings. Both KPMG Azsa and
Ernst & Young ShinNihon could be forced to cease their business
operations. If either company’s activities are found to be negligent
or fraudulent by the agency, they could also face private suits for
damages.
Olympus has stated in a press conference
that it is investigating the two Big4 firms’ involvement in the
false accounting scandal, although Ernst & Young insists that an
internal probe concluded that nothing was wrong with its audit. KPMG
has said that it will cooperate with the investigations but insists
that its auditing was in line with Japanese auditing standards.
Both companies are under increasing
pressure as they are due to sign off on Olympus’s latest earnings
results due next week, although neither company exposed the $1.5
billion in investment losses incurred throughout the thirteen-year
long coverup.
Although auditors from both firms had given
an unqualified opinion when producing their reports of Olympus’s
accounts, KPMG had expressed concern over the four deals that are at
the center of the scandal in 2008. The Big4 firm said that it
thought Olympus had overpaid for Gyrus Group PLC, a British medical
company, and three Japanese venture firms. In January 2009, KPMG
conducted an on-site audit and warned Olympus that a shareholder
lawsuit could result from the acquisitions. In April of that year,
KPMG then threatened to notify authorities of the discrepancies.
By the middle of May, KPMG demanded the
resignation of then Olympus president Tsuyoshi Kikukawa and two
executives and threatened to resign as auditor. On May 7, 2009, KPMG
said that it would “be difficult to continue as your auditor” if
Olympus continued to insist that the deals were appropriate,
according to the firm’s report. Olympus then agreed to write down a
large portion of the value of the purchases and convened an external
panel, who concluded that Olympus’s executives had done nothing
wrong. Satisfied, KPMG Azsa signed off. Shortly thereafter, Kikukawa
and Olympus executive Hideo Yamada cancelled their contract with
KPMG.
KPMG’s
auditors in Tokyo are under scrutiny after signing off on reports
issued by Olympus Corp. Auditors found several accounting
irregularities when they reviewed financial statements provided by
Olympus executives. The auditors were particularly concerned over
$600 million worth of takeover advisory fees and payments on
acquisitions. Despite their concerns, auditors chose to sign off on
the reports after an outside consultant approved of the findings.
Although
the consultant said the takeover costs were justified, they were
also hired from Olympus Corp. This has raised some red flags over a
possible conflict of interest in the matter.
Olympus has
now been revealed to have engaged in financial fraud for more than
two decades. Following the revelation of the accounting scandal at
Olympus, regulators are looking closely at KPMG and Ernst & Young.
Regulators feel the auditors should have seen signs of the fraud and
taking measures to stop them.
According
to allegations, KPMG was Olympus’s auditor for years. They failed to
catch the discrepancies and Ernst & Young was called in as well.
According
to Yuuki Sakurai of Fukoku Capital Management, auditors work for the
companies that pay them. Auditors are going to have a hard time
staying in business if they get a reputation for being the kind of
company that goes to the regulators without solid evidence of
malfeasance.
Although
the manner in which KPMG handled the Olympus case created some
concern for regulators, it may signify greater concern over the
corporate culture that has created a serious conflict of interest
between auditors’ responsibilities for their clients and need to
uphold the law.
TOPICS: Audit Quality, Audit Report, Auditing, Auditor Changes,
Auditor/Client Disagreements, business combinations, Business Ethics,
Fraudulent Financial Reporting
SUMMARY: The series of events leading to questions about auditing
practices at Olympus that failed to uncover a decades-long coverup of
investment losses is highlighted in this review. The company must submit its
next financial statement filing to the Tokyo Stock Exchange by December 14,
2011 for the period ended September 30, 2011 or face delisting.
CLASSROOM APPLICATION: The review focuses on auditing questions
about sufficient competent evidence, change of auditors, and ability to
provide an audit report given knowledge of the length of time this coverup
has been ongoing.
QUESTIONS:
1. (Introductory) What fraudulent accounting and reporting
practices has Olympus, the Japanese optical equipment maker, admitted to
committing?
2. (Advanced) What services is Mr. Woodford calling for to
investigate the inappropriate payments and accounting practices by Olympus?
Specifically name the type of engagement for which Mr. Woodford thinks that
Olympus should contract with outside accountants.
3. (Introductory) Refer to the related articles. What questions
have been raised about outside accountants' examinations of Olympus's
financial statements for many years?
4. (Advanced) Based only on the discussion in the article, what
evidence did Olympus's auditors rely on to resolve their questions about the
propriety of accounting for mergers and acquisitions? Again, based only on
the WSJ articles, how reliable was that audit evidence?
5. (Advanced) What happened with Olympus's engagement of KPMG AZSA
LLC as its outside auditor? What steps must be taken under U.S. requirements
when a change of auditors occurs?
6. (Introductory) What challenges will Olympus face in meeting the
deadline of December 14 to file its latest financial statements? What will
happen to the company if it cannot do so?
Reviewed By: Judy Beckman, University of Rhode Island
From The Wall Street Journal Weekly
Accounting Review on December 9, 2011
SUMMARY: This review continues coverage from last week of
the accounting scandal at Olympus Corp. The Investigation Report
into Olympus Corporation and its management, written by the "Third
Party Committee" hired by the Board of Directors on October 14,
2011, is available directly online at
http://online.wsj.com/public/resources/documents/third_party_olympus_report_english_summary.pdf
The report provides the clearest description yet of the investment
loss and accounting scandal that has brought the Japanese imaging
equipment maker to the brink of delisting from the Tokyo Stock
Exchange. As described in the opening page of the document, the
Olympus Corporation Board of Directors called for a third party
review because "the shareholders and others doubted that" payments
by Olympus to a financial advisor and acquisitions by Olympus, along
with subsequent recognition of impairment losses on those
investments, were appropriate. The findings in the report
essentially state that Olympus began incurring financial losses on
speculative investments that were originally hoped to bolster
corporate earnings when operating earnings declined due to a
strengthening yen in the late 1980s. "However, in 1990 the bubble
economy burst and the loss incurred on Olympus by the financial
assets management increased" (p. 6). Then, in 1997 to 1998, "when
the unrealized loss was ballooning," Japanese accounting standards
were changed to require fair value reporting of financial assets, as
did those in the U.S. "In that environment, Olympus led by Yamada
and Mori started seeking a measure to avoid the situation where the
substantial amount of unrealized loss would come up to the
surface..." because of this change in accounting standards. The
technique was so common in Japan that it was given a name, "tobashi."
As noted in the WSJ article, the Olympus auditors at the time, KPMG
AZSA LLC "...came across information that indicated the company was
engaged in tabshi, which recently had become illegal in Japan....[T]he
auditor pushed them...to admit to the presence of one [tobashi
scheme] and unwind it, booking a loss of 16.8 billion yen."
CLASSROOM APPLICATION: Questions relate to the accounting
environment under historical cost accounting that allows avoiding
recognition of unrealized losses and to the potential for audit
issues when management is found to have engaged in one unethical or
illegal act.
QUESTIONS:
1. (Introductory) For how long were investment losses
hidden by accounting practices at Olympus Corp?
2. (Advanced) What is the difference between realized and
unrealized investment losses? How are these two types of losses
shown in financial statements under historical cost accounting and
under fair value accounting methods for investments?
3. (Introductory) What accounting change in the late 1990s
led Olympus Corp. management to search for further ways to hide
their investment losses? In your answer, comment on the meaning of
the Japanese term "tobashi."
4. (Introductory) What happened in 1999 when KPMG AZSA
"came across information that indicated the company was engaged in
tobashi, which recently had become illegal in Japan"?
5. (Advanced) Given the result of the KPMG AZSA finding in
1999, what concerns should that raise for any auditor about overall
ability to conduct an audit engagement?
Reviewed By: Judy Beckman, University of Rhode Island
An independent panel
has determined that KPMG Azsa LLC and Ernst & Young ShinNihon LLC
did not break the law and did not violate any legal obligations when
auditing Olympus. The panel determined that both Big4 firms were not
responsible for the accounting fraud scandal in which Olympus hid
$1.7 billion in assets over a 13-year long period.
The panel’s decision
clears KPMG and Ernst & Young from culpability, meaning that no
party has grounds to file a suit against either accounting firm.
The panel also
determined that five internal auditors, some of which are still with
Olympus, were responsible for hiding the assets. The panel concluded
that those auditors were responsible for 8.4 billion yen ($109
million) in damages.
Continued in article
Jensen Comment
I have no idea why this "panel" has the power "that
no party has grounds to file a suit against either accounting firm."
If this were a lower court decision,
there are generally routes of appeal in higher courts.
How does an appointed panel decide that
shareholders and creditors have no right to sue in lower or higher
courts?
Of course in the case of Olympus the
guilty executives were purportedly tied to organized crime. Well now I'm
beginning to understand. Organized crime members have their own ways of
determining that no lawsuits will ever be filed.
Jensen Comment
There are some surprising correlations backed by interesting speculation and
conjecture in this study. The study probably attributes more power to a CEO than
that CEO actually has in terms of circumstances and serendipity in a company.
Some of the correlations may be spurious. For example, I think compensation of
employees is more heavily influenced by business operations relative to the
gender of the CEO's babies at home.
Robert Herz, CPA --- FASB chairman from 2002 through
2010. Before joining FASB, he worked 28 years in public accounting with
PwC and Coopers & Lybrand. His memoir, Accounting Changes:
Chronicles of Convergence, Crisis, and Complexity in Financial Reporting,
was published this (2013)spring. He also is co-author of The Value
Reporting Revolution: Moving Beyond the Earnings Game.
Jensen Question
I still don't understand why Bob resigned from the FASB before his term was up.
I've always viewed him as a straight shooter, although I disagree with his
advocacy of the IASB taking over standard setting in the USA. Aside from the
issue of principles-based standards replacing bright lines, however, my
objections an IASB takeover are more political than focused on IFRS themselves.
I view this as one day becoming like having the United Nations setting domestic
legal statutes for the USA. The problem for the USA might be that our global
enemies will team up to set accounting standards with the intent on destroying
the competitiveness of USA business firms ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
The "prisoner's dilemma" is a familiar concept to just
about everyone who took Econ 101.
The basic
version goes like this: Two criminals are arrested, but police can't convict
either on the primary charge, so they plan to sentence them to a year in
jail on a lesser charge. Each of the prisoners, who can't communicate with
each other, are given the option of testifying against their partner. If
they testify, and their partner remains silent, the partner gets three years
and they go free. If they both testify, both get two. If both remain silent,
they each get one.
In game theory, betraying your partner, or
"defecting" is always the dominant strategy as it always has a slightly
higher payoff in a simultaneous game. It's what's known as a "Nash
Equilibrium," after Nobel Prize winning mathematician and "A
Beautiful Mind" subject John Nash.
In sequential
games, where players know each other's previous behavior and have the
opportunity to punish each other, defection is the dominant strategy as
well.
However, on an overall basis, the best outcome for
both players is mutual cooperation.
Yet no one's ever
actually run the experiment on real prisoners before, until
two University of Hamburg economists tried it out
in a recent study comparing the behavior of inmates and students.
Surprisingly, for
the classic version of the game, prisoners were far more cooperative than
expected.
Menusch Khadjavi and Andreas Langeput
the famous game to the test for the first time
ever, putting a group of prisoners in Lower Saxony's primary women's prison,
as well as students, through both simultaneous and sequential versions of
the game.
The payoffs
obviously weren't years off sentences, but euros for students, and the
equivalent value in coffee or cigarettes for prisoners.
They expected, building off of game theory and
behavioral economic research that show humans are more cooperative than the
purely rational model that economists traditionally use, that there would be
a fair amount of first-mover cooperation, even in the simultaneous
simulation where there's no way to react to the other player's decisions.
And even in the sequential game, where you get a
higher payoff for betraying a cooperative first mover, a fair amount will
still reciprocate.
As for the difference between student and prisoner
behavior, you'd expect that a prison population might be more jaded and
distrustful, and therefore more likely to defect.
The results went exactly the other way for the
simultaneous game, only 37% of students cooperate. Inmates cooperated 56% of
the time.
On a pair basis, only 13% of student pairs managed
to get the best mutual outcome and cooperate, whereas 30% of prisoners do.
In the sequential
game, far more students (63%) cooperate, so the mutual cooperation rate
skyrockets to 39%. For prisoners, it remains about the same.
Continued in article
Jensen Comment
In real life there's a huge difference between a sentence of life without parole
and three or more years in prison where the prisoner will be set free soon
enough to extract revenge on a song bird. Thus in real life the revenge risk
must be factored into the payoff. The risk may come from the person serving the
longest sentence or from a gang waiting for song birds to be set free.
"Game Theory Versus Practice: More
companies are using game theory to aid decision-making. How well does it work in
the real world?" by Alan
Rappeport, CFO Magazine, July 15, 2008 ---
http://www.cfo.com/article.cfm/11700044?f=search
When Microsoft
announced its intention to acquire Yahoo last February, the software giant
knew the struggling search firm would not come easily into the fold. But
Microsoft had anticipated the eventual minuet of offer and counteroffer five
months before its announcement, thanks to the powers of game theory.
A mathematical
method of analyzing game-playing strategies, game theory is catching on with
corporate planners, enabling them to test their moves against the possible
responses of their competitors. Its origins trace as far back as The Art of
War, the unlikely management best-seller penned 2,500 years ago by the
Chinese general Sun Tzu. Mathematicians John von Neumann and Oskar
Morgenstern adapted the method for economics in the 1940s, and game theory
entered the academic mainstream in the 1970s, when economists like Thomas
Schelling and Robert Aumann used it to study adverse selection and problems
of asymmetric information. (Schelling and Aumann won Nobel prizes in 2005
for their work.)
Game theory can
take many forms, but most companies use a simplified version that focuses
executives on the mind-set of the competition. "The formal stuff quickly
becomes very technical and less useful," says Louis Thomas, a professor at
the Wharton School of Business who teaches game theory. "It's a matter of
peeling it back to its bare essentials." One popular way to teach the theory
hinges on a situation called the "prisoner's dilemma," where the fate of two
detainees depends on whether each snitches or stays silent about an alleged
crime (see "To Squeal or Not to Squeal?" at the end of this article).
Many companies are
reluctant to talk about the specifics of how they use game theory, or even
to admit whether they use it at all. But oil giant Chevron makes no bones
about it. "Game theory is our secret strategic weapon," says Frank Koch, a
Chevron decision analyst. Koch has publicly discussed Chevron's use of game
theory to predict how foreign governments and competitors will react when
the company embarks on international projects. "It reveals the win-win and
gives you the ability to more easily play out where things might lead," he
says.
Enter the Matrix
Microsoft's interest in game theory was piqued by the disclosure that IBM
was using the method to better understand the motivations of its competitors
— including Microsoft — when Linux, the open-source computer operating
system, began to catch on. (Consultants note that companies often bone up on
game theory when they find out that competitors are already using it.)
For its Yahoo bid,
Microsoft hired Open Options, a consultancy, to model the merger and plot a
possible course for the transaction. Yahoo's trepidation became clear from
the outset. "We knew that they would not be particularly interested in the
acquisition," says Ken Headrick, product and marketing director of
Microsoft's Canadian online division, MSN. And, indeed, they weren't; the
bid ultimately failed and a subsequent partial acquisition offer was
abandoned in June.
Open Options
wouldn't disclose specifics of its work for Microsoft, but in client
workshops it asks attendees to answer detailed questions about their goals
for a project — for example, "Should we enter this market?" "Will we need to
eat costs to establish market share?" "Will a price war ensue?" Then,
assumptions about the motives of other players, such as competitors and
government regulators, are ranked and different scenarios developed. The
goals of all players are given numerical values and charted on a matrix. The
exercise is intended to show that there are more outcomes to a situation
than most minds can comprehend, and to get managers thinking about
competition and customers differently.
"If you have four
or five players, with four actions each might or might not take, that could
lead to a million outcomes," comments Tom Mitchell, CEO of Open Options.
"And that's a simple situation." To simplify complex playing fields, Open
Options uses algorithms to model what action a company should take —
considering the likely actions of others — to attain its goals. The result
replicates the so-called Nash equilibrium, first proposed by John Forbes
Nash, the Nobel prize–winning mathematician portrayed in the movie A
Beautiful Mind. In this optimal state, the theory goes, a player no longer
has an incentive to change his position.
As a tool, game
theory can be useful in many areas of finance, particularly when decisions
require both economic and strategic considerations. "CFOs welcome this
because it takes into account financial inputs and blends them with
nonfinancial inputs," says Mitchell.
Rational to a
Fault? Some experts, however, question game theory's usefulness in the real
world. They say the theory is at odds with human nature, because it assumes
that all participants in a game will behave rationally. But as research in
behavioral finance and economics has shown, common psychological biases can
easily produce irrational decisions.
Similarly, John
Horn, a consultant at McKinsey, argues that game theory gives people too
much credit. "Game theory assumes rationally maximizing competitors, who
understand everything that you're doing and what they can do," says Horn.
"That's not how people actually behave." (Activist investor Carl Icahn said
Yahoo's board "acted irrationally" in rejecting Microsoft's bid.) McKinsey's
latest survey on competitive behavior found that companies tend to neglect
upcoming moves by competitors, relying passively on sources such as the news
and annual reports. And when they learn of new threats, they tend to react
in the most obvious way, focusing on near-term metrics such as earnings and
market share.
Fantastic
interview with game theorist Ariel Rubinstein on
Econtalk. I agree with Rubinstein that game theory has little predictive
power in the real world, despite the pretty mathematics. Experiments at RAND
(see, e.g., Mirowski's
Machine Dreams) showed early game theorists,
including Nash, that people don't conform to the idealizations in their
models. But this wasn't emphasized (Mirowski would claim it was deliberately
hushed up) until more and more experiments showed similar results. (Who
woulda thought -- people are "irrational"! :-)
Perhaps the most useful thing about game theory is that it requires you to
think carefully about decision problems. The discipline of this kind of
analysis is valuable, even if the models have limited applicability to real
situations.
Rubinstein discusses a number of topics, including raw intelligence vs
psychological insight and its importance in economics (see also
here). He has, in my opinion, a very developed and
mature view of what social scientists actually do, as opposed to what they
claim to do.
An executive at
Tiffany & Co. (TIF)allegedly
stole $1.3 million worth of jewelry from the
company. How did she do it?
Very slowly, it seems. Ingrid Lederhaas-Okun, 46,
worked as the vice president of product development at the jeweler’s Midtown
Manhattan headquarters from January 2011 to February of this year, when her
position was terminated due to downsizing. The
F.B.I. claims that between November 2012 and
her dismissal, 165 pieces of jewelry went poof, including “diamond
bracelets, platinum, or gold diamond drop and hoop earrings, platinum
diamond rings, and platinum and diamond pendants.” Lederhaas-Okun,
authorities say, would check out the jewelry for professional
reasons—marketing purposes, showing potential buyers, and so forth—and then
not return them.
“She was careful to only keep items that were
valued at under $10,000,” says Scott Selby, the co-author of Flawless:
Inside the Largest Diamond Heist in History. “Tiffany’s has a policy of
only investigating missing inventory that’s valued over $25,000. That’s what
enabled her to do this; it was slow and systematic.” Lederhaas-Okun has
since been charged by the F.B.I. with wire fraud and interstate
transportation of stolen property and she faces up to 30 years in prison if
convicted. Carson Glover, a spokesperson for Tiffany’s, says the company is
“not in a position to comment at this time.”
Authorities say
51-year-old Dennis Keaton collected money from a client, and that money was
supposed to be forwarded to the Kentucky Department of Revenue and the IRS.
Keaton is accused of using the money for his own personal use. Investigators
seized computers, documents, and other evidence associated with his
accounting business. Keaton was taken to the Daviess County Detention Center
under a $10,000 cash bond.
Another Example of White Collar Crime Leniency
If she stole $100 from a convenience store she probably would be in jail
SIOUX CITY
The owner of a Sioux City accounting firm was placed on probation Monday for
taking more than $150,000 from a client who had dementia.
Terry Lockie, 65, pleaded guilty in Woodbury County
District Court to one count of dependent adult abuse. According to the terms
of her plea agreement, a five-year prison sentence was suspended, and she
was placed on probation for two years. A charge of first-degree theft was
dismissed.
Lockie, who lives in Homer, Neb., owns Terry Lockie
& Associates, 704 Jackson St. She likely faces the loss of her certified
public accountant license, her attorney, Keith Rigg, said during court
proceedings.
There are many reasons to believe that film stars
earn too much. Brad Pitt and Angelina Jolie once hired an entire train to
travel from London to Glasgow. Tom Cruise’s daughter Suri is reputed to have
a wardrobe worth $400,000. Nicolas Cage once paid $276,000 for a dinosaur
head. He would have got it for less, but he was bidding against Leonardo
DiCaprio.
Nick Meaney has a better reason for believing that
the stars are overpaid: his algorithm tells him so. In fact, he says, with
all but one of the above actors, the studios are almost certainly wasting
their money. Because, according to his movie-analysis software, there are
only three actors who make money for a film. And there is at least one
A-list actress who is worth paying not to star in your next
picture.
The headquarters of Epagogix, Meaney’s company, do
not look like the sort of headquarters from which one would confidently
launch an attack on Hollywood royalty. A few attic rooms in a shared south
London office, they don’t even look as if they would trouble Dollywood. But
my meeting with Meaney will be cut short because of another he has, with two
film executives. And at the end, he will ask me not to print the full names
of his analysts, or his full address. He is worried that they could be
poached.
Worse though, far worse, would be if someone in
Hollywood filched his computer. It is here that the iconoclasm happens. When
Meaney is given a job by a studio, the first thing he does is quantify
thousands of factors, drawn from the script. Are there clear bad guys? How
much empathy is there with the protagonist? Is there a sidekick? The complex
interplay of these factors is then compared by the computer to their
interplay in previous films, with known box-office takings. The last
calculation is what it expects the film to make. In 83% of cases, this guess
turns out to be within $10m of the total. Meaney, to all intents and
purposes, has an algorithm that judges the value—or at least the earning
power—of art.
To explain how, he shows me a two-dimensional
representation: a grid in which each column is an input, each row a film.
"Curiously," Meaney says, "if we block this column…" With one hand, he
obliterates the input labelled "star", casually rendering everyone from
Clooney to Cruise, Damon to De Niro, an irrelevancy. "In almost every case,
it makes no difference to the money column."
"For me that’s interesting. The first time I saw
that I said to the mathematician, ‘You’ve got to change your program—this is
wrong.’ He said, ‘I couldn’t care less—it’s the numbers.’" There are four
exceptions to his rules. If you hire Will Smith, Brad Pitt or Johnny Depp,
you seem to make a return. The fourth? As far as Epagogix can tell, there is
an actress, one of the biggest names in the business, who is actually a
negative influence on a film. "It’s very sad for her," he says. But hers is
a name he cannot reveal.
F YOU TAKE the Underground north from Meaney’s
office, you will pass beneath the housing estates of south London. Thousands
of times every second, above your head, someone will search for something on
Google. It will be an algorithm that determines what they see; an algorithm
that is their gatekeeper to the internet. It will be another algorithm that
determines what adverts accompany the search—gatekeeping does not pay for
itself.
Algorithms decide what we are recommended on
Amazon, what films we are offered on Netflix. Sometimes, newspapers warn us
of their creeping, insidious influence; they are the mysterious sciencey bit
of the internet that makes us feel websites are stalking us—the software
that looks at the e-mail you receive and tells the Facebook page you look at
that, say, Pizza Hut should be the ad it shows you. Some of those newspaper
warnings themselves come from algorithms. Crude programs already trawl news
pages, summarise the results, and produce their own article, by-lined, in
the case of Forbes magazine, "By Narrative Science".
Others produce their own genuine news. On February
1st, the Los Angeles Times website ran an article that began "A shallow
magnitude 3.2 earthquake was reported Friday morning." The piece was written
at a time when quite possibly every reporter was asleep. But it was
grammatical, coherent, and did what any human reporter writing a formulaic
article about a small earthquake would do: it went to the US Geological
Survey website, put the relevant numbers in a boilerplate article, and hit
send. In this case, however, the donkey work was done by an algorithm.
But it is not all new. It is also an algorithm that
determines something as old-fashioned as the route a train takes through the
Underground network—even which train you yourself take. An algorithm, at its
most basic, is not a mysterious sciencey bit at all; it is simply a
decision-making process. It is a flow chart, a computer program that can
stretch to pages of code or is as simple as "If x is greater than y, then
choose z".
What has changed is what algorithms are doing. The
first algorithm was created in the ninth century by the Arabic scholar Al
Khwarizami—from whose name the word is a corruption. Ever since, they have
been mechanistic, rational procedures that interact with mechanistic,
rational systems. Today, though, they are beginning to interact with humans.
The advantage is obvious. Drawing in more data than any human ever could,
they spot correlations that no human would. The drawbacks are only slowly
becoming apparent.
Continue your journey into central London, and the
estates give way to terraced houses divided into flats. Every year these
streets inhale thousands of young professional singles. In the years to
come, they will be gently exhaled: gaining partners and babies and dogs,
they will migrate to the suburbs. But before that happens, they go to dinner
parties and browse dating websites in search of that spark—the indefinable
chemistry that tells them they have found The One.
And here again they run into an algorithm. The
leading dating sites use mathematical formulae and computations to sort
their users’ profiles into pairs, and let the magic take its
probabilistically predicted course.
Not long after crossing the river, your train will
pass the server farms of the Square Mile—banks of computers sited close to
the fibre-optic cables, giving tiny headstarts on trades. Within are stored
secret lines of code worth billions of pounds. A decade ago computer trading
was an oddity; today a third of all deals in the City of London are executed
automatically by algorithms, and in New York the figure is over half. Maybe,
these codes tell you, if fewer people buy bananas at the same time as more
buy gas, you should sell steel. No matter if you don’t know why; sell sell
sell. In nanoseconds a trade is made, in milliseconds the market moves. And,
when it all goes wrong, it goes wrong faster than it takes a human trader to
turn his or her head to look at the unexpectedly red numbers on the screen.
Finally, your train will reach Old Street—next door
to the City, but a very different place. This is a part of town where every
office seems to have a pool table, every corner a beanbag, every
receptionist an asymmetric haircut. In one of those offices is TechHub. With
its bare brick walls and website that insists on being your friend, this is
the epitome of what the British government insists on calling Silicon
Roundabout. After all, what America can do with valleys, surely Britain can
do with traffic-flow measures.
Inside are the headquarters of Simon Williams’s
company QuantumBlack. The world, Williams says, has changed in the past
decade—even if not everyone has noticed. “There’s a ton more data around.
There’s new ways of handling it, processing it, manipulating it,
interrogating it. The tooling has changed. The speed at which it happens has
changed. You’re shaping it, sculpting it, playing with it.”
QuantumBlack is, he says, a "data science" agency.
In the same way as, ten years ago, companies hired digital-media agencies to
make sense of e-commerce, today they need to understand data-commerce.
"There’s been an alignment of stars. We’ve hit a crossover point in terms of
the cost of storing and processing data versus ten years ago. Then,
capturing and storing data was expensive, now it is a lot less so. It’s
become economically viable to look at a shed load more data."
When he says "look at", he means analysing it with
algorithms. Some may be as simple as spotting basic correlations. Some apply
the same techniques used to spot patterns in the human genome, or to assign
behavioural patterns to individual hedge-fund managers. But there is no
doubt which of Williams’s clients is the most glamorous: Formula 1 teams.
This, it is clear, is the part of the job he loves the most.
"It’s a theatre, an opera," he says. "The fun isn’t
in the race, it’s in the strategy—the smallest margins win or lose races."
As crucial as the driver, is when that driver goes for a pit stop, and how
his car is set up. This is what QuantumBlack advises on: how much fuel you
put in, what tyres to use, how often to change those tyres. "Prior to the
race, we look at millions of scenarios. You’re constantly exploring."
There is a different galaxy beyond publicly traded,
SEC-supervised companies with their PCAOB inspected auditors.
I’m thinking about small businesses that may have 1
or 3 or a dozen owners who are involved in management, a couple of leases,
and one or maybe two bank loans.
In that little world, I don’t think lenders care
about 5 year lease disclosures, separating capital lease amortization from
depreciation expense, splitting investments between level 1, 2 & 3, the 5
year loan amortization, or how many tax years are open for inspection.
In that world of tiny companies where total
revenues and the total amount of the bank loan would be merely rounding
errors in comparison to publicly traded financials, GAAP adds to the
borrowers costs without doing anything for the user of the financials (yes,
‘user’ is often singular).
In that other galaxy, there are no off-balance
sheet financing risks or derivatives, either bifurcated or embedded.
In that galaxy, financial statements using tax
basis, modified cash basis, or FRF-SMEs would have value.
The company has lots of faceless investors out
there someone in the market? GAAP applies. The small world with inside
investors and one bank? I think that’s a different story.
What might be injected into Tom's post sis the difference between full IFRS
and IFRS for SMEs (that was an IASB project headed up by Paul Pacter) ---
http://www.pwc.com/en_GX/gx/ifrs-reporting/pdf/Sims_diffs_IFRS_SMEs.pdf
International accountants seem to have less controversy about SME accounting and
auditing (although I've not really researched this issue in depth)
Introduction
The ‘International Financial Reporting Standard for Small and
Medium-sized Entities’ (IFRS for SMEs) applies to all entities that do not
have public accountability. An entity has public accountability if it files
its financial statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instrument in a public
market, or if it holds assets in a fiduciary capacity for a broad group of
outsiders – for example, a bank, insurance entity, pension fund, securities
broker/ dealer. The definition of an SME is therefore based on the nature of
an entity rather than on its size.
The standard is applicable immediately. It is a matter for authorities in
each territory to decide which entities are permitted or even required to
apply IFRS for SMEs.
The IASB developed this standard in recognition of
the difficulty and cost to private companies of preparing fully compliant
IFRS information. It also recognised that users of private entity financial
statements have a different focus from those interested in publically listed
companies. IFRS for SMEs attempts to meet the users’ needs while balancing
the costs and benefits to preparers. It is a stand- alone standard; it does
not require preparers of private entity financial statements to cross-refer
to full IFRS.
The more modest disclosure requirements will also appeal to users and
preparers. Embedding the standard across a private group with extensive
global operations that use a variety of local reporting standards will
significantly ease the monitoring of financial information, reduce the
complexity of statutory reconciliations (thereby reducing the risk of
error), make the consolidation process more efficient and streamline
reporting procedures across group entities.
This publication is a part of the PricewaterhouseCooper’s ongoing
commitment to help companies navigate the switch from local GAAP to IFRS for
SMEs. For information on other publications in our series on IFRS for SMEs,
see the inside front cover
Hugo van den Ende
Global ACS partner (SME)
PricewaterhouseCoopers
The Netherlands
Executive Summary
This executive summary aims to demonstrate how converting to IFRS for
SMEs has implications far beyond the entity’s financial reporting function;
to highlight some of the key differences between IFRS for SMEs and IFRS; and
to encourage early consideration of what IFRS for SMEs means to the entity.
These and other issues are expanded upon in the main body of this
publication. It takes into account authoritative pronouncements issued under
IFRS for SMEs and full IFRSs published up to 9 July 2009.
Financial statements
Full IFRS:
A statement of changes in equity is required, presenting a
reconciliation of equity items between the beginning and end of the
period.
IFRS for SMEs:
Same requirement. However, if the only changes to the equity during the
period are a result of profit or loss, payment of dividends, correction
of prior-period errors or changes in accounting policy, a combined
statement of income and retained earnings can be presented instead of
both a statement of comprehensive income and a statement of changes in
equity.
Business combinations
Full IFRS:
Transaction costs are excluded under IFRS 3 (revised). Contingent
consideration is recognised regardless of the probability of payment.
IFRS for SMEs:
Transaction costs are included in the acquisition costs. Contingent
considerations are included as part of the acquisition cost if it is
probable that the amount will be paid and its fair value can be measured
reliably.
Investments in associates and joint ventures
Full IFRS:
Investments in associates are accounted for using the equity method. The
cost and fair value model are not permitted except in separate financial
statements. To account for a jointly controlled entity, either the
proportionate consolidation method or the equity method are allowed. The
cost and fair value model are not permitted.
IFRS for SMEs: An entity may account of its investments in associates or jointly
controlled entities using one of the following:
• The cost model (cost less any accumulated impairment losses).
• The equity method.
• The fair value through profit or loss model.
Expense recognition
Full IFRS:
Research costs are expensed as incurred; development costs are
capitalised and amortised, but only when specific criteria are met.
Borrowing costs are capitalised if certain criteria are met.
IFRS for SMEs:
All research and development costs and all borrowing costs are
recognised as an expense.
Financial instruments – derivatives and hedging
Full IFRS: IAS 39, ‘Financial instruments: Recognition and measurement’,
distinguishes four measurement categories of financial instruments –
that is, financial assets or liabilities at fair value through profit or
loss, held-to-maturity investments, loans and receivables and
available-for-sale financial assets.
IFRS for SMEs: There are two sections dealing with financial instruments: a section
for simple payables and receivables, and other basic financial
instruments; and a section for other, more complex financial
instruments. Most of the basic financial instruments are measured at
amortised cost; the complex instruments are generally measured at fair
value through profit or loss. Executive summary
The hedging models under IFRS and IFRS for SMEs are based on the
principles in full IFRS. However, there are a number of detailed
application differences, some of which are more restrictive under IFRS
for SMEs (for example, a limited number of risks and hedging instruments
are permitted). However, no quantitative effectiveness test required
under IFRS for SMEs.
Non-financial assets and goodwill
Full IFRS: For tangible and intangible assets, there is an
accounting policy choice between the cost model and the revaluation
model. Goodwill and other intangibles with indefinite lives are
reviewed for impairment and not amortised.
IFRS for SMEs:
The cost model is the only permitted model. All intangible assets,
including goodwill, are assumed to have finite lives and are
amortised. Full IFRS: Under IAS 38, ‘Intangible assets’, the useful
life of an intangible asset is either finite or indefinite. The
latter are not amortised and an annual impairment test is required.
IFRS for SMEs:
There is no distinction between assets with finite or infinite
lives. The amortisation approach therefore applies to all intangible
assets. These intangibles are tested for impairment only when there
is an indication. Full IFRS: IAS 40, ‘Investment property’, offers a
choice of fair value and the cost method.
IFRS for SMEs: Investment property is carried at fair value if
this fair value can be measured without undue cost or effort.
Full IFRS: IFRS 5, ‘Non-current assets held for sale and
discontinued operations’, requires non-current assets to be
classified as held for sale where the carrying amount is recovered
principally through a sale transaction rather than though continuing
use.
IFRS for SMEs:
Assets held for sale are not covered, the decision to sell an asset
is considered an impairment indicator.
Employee benefits – defined benefit plans
Full IFRS: under IAS 19, ‘Employee benefits’, actuarial gains or
losses can be recognised immediately or amortised into profit or
loss over the expected remaining working lives of participating
employees.
IFRS for SMEs: Requires immediate recognition and splits the
expense into different components.
Full IFRS:
The use of an accrued benefit valuation method (the projected unit
credit method) is required for calculating defined benefit
obligations.
IFRS for SMEs:
The circumstance-driven approach is applicable, which means that the
use of an accrued benefit valuation method (the projected unit
credit method) is required if the information that is needed to make
such a calculation is already available, or if it can be obtained
without undue cost or effort. If not, simplifications are permitted
in which future salary progression, future service or possible
mortality during an employee’s period of service are not considered.
Income taxes
Full IFRS:
A deferred tax asset is only recognised to the extent that it is
probable that there will be sufficient future taxable profit to
enable recovery of the deferred tax asset.
IFRS for SMEs:
A valuation allowance is recognised so that the net carrying amount
of the deferred tax asset equals the highest amount that is more
likely than not to be recovered. The net carrying amount of deferred
tax asset is likely to be the same between full IFRS and IFRS for
SMEs.
Full IFRS: No deferred tax is recognised upon the initial
recognition of an asset and liability in a transaction that is not a
business combination and affects neither accounting profit nor
taxable profit at the time of the transaction. IFRS for SMEs: No
such exemption.
Full IFRS: There is no specific guidance on uncertain tax
positions. In practice, management will record the liability
measured as either a single best estimate or a weighted average
probability of the possible outcomes, if the likelihood is greater
than 50%.
IFRS for SMEs: Management recognises the effect of the possible
outcomes of a review by the tax authorities. It should be measured
using the probability-weighted average amount of all the possible
outcomes. There is no probable recognition threshold.
A Very Long Historical Commentary
"Sarbanes-Oxley and Public Reporting on Internal Control: Hasty Reaction or
Delayed Action?" by Parveen P. Gupta , Thomas R. Weirich , and Lynn E.
Turner, Accounting Horizons, June 2013, pp. 371-408 ---
http://aaajournals.org/doi/full/10.2308/acch-50425
You must be a member of the AAA to access this commentary electronically
Since its passage, the Sarbanes-Oxley Act of 2002
has been criticized, and praised, by many on numerous grounds and claims.
However, no single provision of this law has come under more attack than
Section 404, which mandates public reporting of internal control
effectiveness by an issuer's management as well as its independent auditors.
Even after 10 years, the opposition to the Section 404 internal control
requirements has continued to the point where the U.S. Congress through two
separate Acts—the 2010 Dodd-Frank Wall Street Reform and Consumer Protection
Act, and the 2012 Jump Start Our Business Startups (JOBS) Act—have
permanently exempted the non-accelerated SEC filers and the “emerging
growth” issuers with revenues of $1 billion or less from Section 404(b) of
the Sarbanes-Oxley Act of 2002. Many of those who oppose the Section 404
requirements rest their claim on grounds that the U.S. Congress acted in
haste in mandating the public reporting of internal controls by U.S.-listed
companies and that the issue was not well thought out or debated. They also
contend that the U.S. Congress acted under pressure because of the public
outrage over the bankruptcy filings of Enron and WorldCom. To the contrary,
this paper shows that the debate over public reporting of internal control
by U.S. public companies is more than six decades old, dating back to the
McKesson & Robbins fraud. This paper reviews relevant legislative proposals,
bills introduced in both the House and the Senate, regulatory efforts by the
SEC, and the recommendations of many commissions set up by the private
sector to inform the reader how these efforts were the deliberative
precursors to what was eventually codified in Section 404 of the
Sarbanes-Oxley Act of 2002.
. . .
CONCLUSION
From the above historical commentary, it is
abundantly clear that public reporting on internal control both by an
issuer's management and its independent accountants has been the subject of
public debate ad nauseam for decades. Every time these issues were raised in
one form or the other, both by the legislative branch and the regulatory
agencies, they were dismissed due to pressure from groups that were
genuinely concerned about the cost/benefit of these reforms and those that
in the name of free markets were willing to maintain the status quo and
opaqueness in the nation's capital markets. Thus, with the exception of the
banking industry, the changes proposed time and time again failed to
materialize, while investor losses in trillions of dollars from poor-quality
financial reporting continued to pile on from scandal after scandal. In the
end, the Enron and the WorldCom frauds pushed the limits of Congress and the
Republican President, who saw no choice but to pass the Sarbanes-Oxley Act
of 2002 to reestablish investor confidence and to reassert that quality
financial reporting is the bedrock of our nation's capital markets. Yes,
Section 404 of SOX has been costly to implement for a variety of reasons,
yielding many benefits, but it is clearly inaccurate to describe the
enactment of the internal control requirement as “hasty.” Rather, it has
been debated for decades and in SOX it finally became the law.
Both the corporate CEO and the external auditing firm are to
explicitly sign off on the following and are subject (turns out to be a
ha, ha joke) to huge fines and jail time for egregious failure to do
so:
Assess both the design and operating
effectiveness of selected internal controls related to significant
accounts and relevant assertions, in the context of material
misstatement risks;
Understand the flow of transactions,
including IT aspects, in sufficient detail to identify points at
which a misstatement could arise;
Evaluate company-level (entity-level)
controls, which correspond to the components of the
COSO framework;
Perform a fraud risk assessment;
Evaluate controls designed to
prevent or detect fraud, including management override of
controls;
Evaluate controls over the period-end
financial
reporting process;
Scale the assessment based on the size and
complexity of the company;
Rely on management's work based on factors
such as competency, objectivity, and risk;
Conclude on the adequacy of internal
control over financial reporting.
Most importantly as far as the CPA auditing firms are concerned is
that Sarbox gave those firms both a responsibility to verify that
internal controls were effective and the authority to charge more
(possibly twice as much) for each audit. Whereas in the 1990s auditing
was becoming less and less profitable, Sarbox made the auditing industry
quite prosperous after 2002.
There's a great gap between the theory of Sarbox and its enforcement
In theory, the U.S. Justice Department (including the FBI) is to enforce
the provisions of Section 404 and subject top corporate executives and audit
firm partners to huge fines (personal fines beyond corporate fines) and jail
time for signing off on Section 404 provisions that they know to be false.
But to date, there has not been one indictment in enormous frauds where the
Justice Department knows that executives signed off on Section 404 with
intentional lies.
In theory the SEC is to also enforce Section 404, but the SEC in Frank
Partnoy's words is toothless. The SEC cannot send anybody to jail. And the
SEC has established what seems to be a policy of fining white collar
criminals less than 20% of the haul, thereby making white collar crime
profitable even if you get caught. Thus, white collar criminals willingly
pay their SEC fines and ride off into the sunset with a life of luxury
awaiting.
And thus we come to the December 4 Sixty Minutes module that features
two of the most egregious failures to enforce Section 404: The astonishing case of CitiBank
The astonishing case of Countrywide (now part of Bank of America)
The Astonishing Case of CitiBank
What makes the Sixty Minutes show most interesting are the whistle
blowing revelations by a former Citi Vice President in Charge of Fraud
Investigations
What has to make the CitiBank revelations the most embarrassing
revelations on the Sixty Minutes blockbuster emphasis that top
CItiBank executives were not only informed by a Vice President in Charge of
Fraud Investigation of huge internal control inadequacies, the outside U.S.
government top accountant, the U.S. Comptroller General, sent an official
letter to CitiBank executives notifying them of their Section 404 internal
control failures.
What the Sixty Minutes show failed to mention is that the
external auditing firm of KPMG also flipped a bird at the U.S. Comptroller
General and signed off on the adequacy of its client's internal controls.
A few months thereafter CitiBank begged for and got hundreds of billions
in bailout money from the U.S. Government to say afloat.
The implication is that CitiBank and the other Wall Street corporations
are just to0 big to prosecute by the Justice Department. The Justice
Department official interviewed on the Sixty Minutes show sounded
like hollow brass wimpy taking hands off orders from higher authorities in
the Justice Department.
The SEC worked out a settlement with CitiBank, but the fine is such a
joke that the judge in the case has to date refused to accept the
settlement. This is so typical of SEC hand slapping settlements --- and the
hand slaps are with a feather.
The astonishing case of Countrywide (now part of Bank of America)
Countrywide Financial before 2007 was the largest issuer of mortgages on
Main Streets throughout the nation and by estimates of one of its own
whistle blowing executives in charge of internal fraud investigations over
60% of those mortgages were fraudulent.
After Bank of America purchased the bankrupt Countrywide, BofA top
executives tried to buy off the Countrywide executive in charge of fraud
investigations to keep him from testifying. When he refused BofA fired him.
Whereas the Justice Department has not even attempted to indict
Countrywide executives and the Countrywide auditing firm of Grant Thornton (later replaced by KPMG) to bring indictments for Section 404 violations,
the FTC did work out an absurdly low settlement of $108 million for 450,000
borrowers paying "excessive fees" and the attorneys for those borrowers ---
http://www.nytimes.com/2011/07/21/business/countrywide-to-pay-borrowers-108-million-in-settlement.html
This had nothing to do with the massive mortgage frauds committed by
Countrywide.
Former Countrywide CEO Angelo Mozilo settled the SEC’s Largest-Ever
Financial Penalty ($22.5 million) Against a Public Company's Senior
Executive
http://sec.gov/news/press/2010/2010-197.htm
The CBS Sixty Minutes show estimated that this is less than 20% of what he
stole and leaves us with the impression that Mozilo deserves jail time but
will probably never be charged by the Justice Department.
I was disappointed in the CBS Sixty Minutes show in that it completely
ignored the complicity of the auditing firms to sign off on the Section 404
violations of the big Wall Street banks and other huge banks that failed.
Washington Mutual was the largest bank in the world to ever go bankrupt. Its
auditor, Deloitte, settled with the SEC for Washington Mutual for
$18.5 million. This isn't even a hand slap relative to the billions lost by
WaMu's investors and creditors.
No jail time is expected for any partners of the negligent auditing firms.
.KPMG settled for peanuts with Countrywide for
$24 million of negligence and New Century for
$45 million of negligence costing investors billions.
SUMMARY: This Opinion page piece clearly expresses the WSJ Editors'
attitude towards an action plan presented by the Organization for Economic
Cooperation and Development (OECD) on Friday, July 19, 2013. The plan
presents 13 proposed actions to cope with current issues in international
taxation and related treaties. The actual report is available on the web at
http://www.oecd.org/ctp/BEPSActionPlan.pdf
CLASSROOM APPLICATION: The article may be used in an international
tax class to discuss current issues in tax rates, governments attempts to
resolve the issues, and the negative attitudes towards that effort that may
well ensue.
QUESTIONS:
1. (Introductory) What report was published on Friday, July 19,
2013? What entity published this report?
2. (Advanced) Late in the article, the statement is made that
"corporations don't pay taxes anyway." How can the editors support this
argument? Include in your answer the current U.S. statutory corporate income
tax rate.
3. (Advanced) What is the U.S. approach to international tax
policy? How does this contrast with the "territorial approach" used in the
remainder of the developed world?
4. (Advanced) What attitude does this WSJ opinion piece demonstrate
towards the OECD report and its recommendations? List several words and/or
phrases that are used to convey the WSJ editors' opinions.
5. (Introductory) Consider the related graphic "Consistent
Corporate Revenues." What information is presented in the graph? Whose
"Corporate Revenue" is shown?
6. (Advanced) Why do you think corporate tax payments are shown as
a percent of gross domestic product (GDP) in this graphic? What other base
could be used?
7. (Introductory) How could the choice of GDP as a base for
presentation in the graph miss some of the concerns that the OECD would like
to address with its Action Plan?
8. (Introductory) The editors write that, "while professing that
tax policy will still be set by national governments, the OECD plan also
envisions a possible multinational treaty...." What impact could an
international agreement impose on U.S. sovereign ability to set its own tax
policy?
SMALL GROUP ASSIGNMENT:
Access the report discussed in this opinion page piece online at
http://www.oecd.org/ctp/BEPSActionPlan.pdf Scan the introductory
material in chapters 1 and 2, then assign each of 12 students to understand
the action plan items presented in chapter 3 (combining actions 8, 9, and
10). 1. Have students discuss their understanding of the proposed actions.
2. Have students discuss their views of the proposed actions relative to the
attitude clearly demonstrated by the editors in this article.
Reviewed By: Judy Beckman, University of Rhode Island
After five years of failing to spur a robust
economic recovery through spending and tax hikes, the world's richest
countries have hit upon a new idea that looks a lot like the old:
International coordination to raise taxes on business.
The Organization for Economic Cooperation and
Development on Friday presented its action plan to combat what it calls
"base erosion and profit shifting," or BEPS. This is bureaucratese for not
paying as much tax as government wishes you did. The plan bemoans the danger
of "double non-taxation," whatever that is, and even raises the specter of
"global tax chaos" if this bogeyman called BEPS isn't tamed.
Don't be fooled, because this is an attempt to
limit corporate global tax competition and take more cash out of the private
economy. In the U.S., the Obama Administration has made a five-year fetish
of attacking successful American companies that dare to keep overseas
profits overseas rather than pay America's 35% corporate rate (plus state
taxes). In the U.K., Starbucks, SBUX -1.21% Google GOOG +0.92% and Amazon
have been treated as scofflaws for not paying what politicians call their
"fair share."
This share has nothing to do with actual profits or
evading the law, but rather a sense that governments can extract more
revenue by exploiting what the OECD calls the "reputational risk" for
companies of being labeled a tax evader. The politicians create the
reputational risk for companies like Apple and then claim to want to save
the same companies from it.
Alas for the politicians, the tax data don't
support their anecdotes. U.S. corporate tax payments as a percentage of GDP
were 2.38% in 2011, slightly above their 40-year average of 2.29%. As the
nearby chart shows, corporate receipts over the last 30 years fell during
recessions but rose again during expansions. The real story is how
consistently revenues have stayed between 2% and 2.5% of GDP.
Current U.K. corporate tax receipts are slightly
below their long-term average as a share of GDP, likely reflecting a weaker
recovery. Across the OECD, corporate-tax revenue has fluctuated between 2%
and 3% of GDP and was 2.7% in 2011, the most recent year for published OECD
data.
In other words, for all the huffing and puffing,
there is no crisis of corporate tax collection. The deficits across the
developed world are the product of slow economic growth and overspending,
not tax evasion. But none of this has stopped the OECD from offering its
15-point plan to increase the cost and complexity of complying with
corporate-tax rules.
The OECD says its goal is to increase
"transparency," avoid "a race to the bottom," ensure that reported profits
are "in line with value creation," and more. To this end, the OECD wants to
"develop rules to prevent BEPS by moving intangibles among group members";
"rules to prevent BEPS by transferring risks among, or allocating excessive
capital to, group members"; and rules to "require taxpayers to disclose
their aggressive tax planning arrangements."
In other words, this will be another full
employment opportunity for lawyers and accountants.
While professing that tax policy will still be set
by national governments, the OECD plan also envisions a possible
multinational treaty to combat the fictional plague of tax avoidance. This
would merely be an opportunity for big countries with uncompetitive tax
rates (the U.S., France and Japan) to squeeze smaller countries that use low
rates to attract investment and jobs.
Here's an alternative: What if everyone moved
toward lower rates and simpler tax codes, with fewer opportunities for
gamesmanship and smaller rate disparities among countries? If everyone's
rates were lower, multinational businesses would have less incentive to
attribute taxes to Ireland (12.5% rate) rather than to the U.S.
The U.S. could also do everyone a favor by adopting
the territorial approach to taxation that the rest of the world has already
settled on. This means letting companies pay taxes where the profits are
earned. All those billions locked up overseas because companies are loath to
repatriate profits and pay 35% could return to the U.S., if that's where the
opportunities are.
Whisper it, but corporations don't pay taxes
anyway. They merely collect taxes—from customers via higher prices,
shareholders in lower returns, or employees in lower wages and benefits. The
BEPS bogeyman would vanish if corporate taxes did.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review on July 26, 2013
TOPICS: Accounting Information Systems, Auditing, Internal Controls
SUMMARY: The Committee of Sponsoring Organizations (COSO) has
updated its Internal Control:Integrated Framework (Framework). The Framework
had not been updated since 1992; the changes address inernal controls needed
in today's business environment over such activities as cloud computing and
outsourcing. The Securities and Exchange Commission has updated it vigilance
in citing companies for internal control lapses and the Public Company
Accounting Oversight Board has been finding that audit firms have failed to
obtain sufficient evidence to offer an opinion on internal controls in 15%
of its reviews.
CLASSROOM APPLICATION: The article may be used in an auditing or
information systems class.
QUESTIONS:
1. (Introductory) What is the Committee of Sponsoring Organizations
(COSO)? What document has this organization recently updated?
2. (Advanced) How long do companies have to implement the new
procedures in this document? What problems could arise for companies who do
not improve internal controls in the next year?
3. (Advanced) What steps has the U.S. Securities and Exchange
Commission (SEC) taken in recent years in relation to internal controls at
publicly-traded companies? Why do you think the SEC is interested in the
management topic of internal controls?
4. (Advanced) What is the Public Company Accounting Oversight Board
(PCAOB)? What have been its recent findings about auditors' performance in
testing internal control systems? What PCAOB procedures uncover these
testing failures?
5. (Advanced) Internal control procedures at Campbell Soup. Co. are
described at the end of the article. One procedure mentioned is reconciling
accounts. How do account reconciliations serve as internal control
procedures?
Reviewed By: Judy Beckman, University of Rhode Island
Thousands of companies world-wide are planning to
update systems and policies that act as their first line of defense against
fraud and other hidden risks, following a sweeping overhaul of the most
widely used guidelines for those safeguards.
The new guidelines, which many companies expect to
adopt by the end of next year, are for so-called internal controls, which
the government has required U.S. public companies to have in place for the
past decade, as part of an effort to protect investors.
Companies might, for example, establish procedures
to make sure that only employees responsible for certain types of inventory
can access it, or require a particular method for inputting purchase orders.
Having these systems helps companies monitor the transactions for errors,
impropriety or fraud.
Until now, internal controls have been based on a
20-year-old framework that didn't take into account the new risks posed by
mobile technology and cloud computing, as well as the rise of outsourcing
and shifts in corporate governance.
Such controls haven't always been high on the
corporate agenda. Lack of them has been blamed for past accounting scandals
at big companies like Tyco International TYC -1.59% and Satyam Computer
Services Ltd. 500376.BY +1.92%
Large companies spend upward of $1 million a year
on internal-controls systems, according to consulting firm Protiviti, but
some investors consider it money well spent.
"It's usually a lapse of internal controls that
results in a loss," said Anne Sheehan, director of corporate governance at
the California State Teachers' Retirement System, the nation's
second-largest public pension fund.
Ms. Sheehan said she has recently focused on
controls used by pharmaceutical companies in testing new drugs submitted to
regulators for marketing approval and on potential supply-chain risks at
retailers in the wake of a building collapse in Bangladesh that killed more
than 1,000 garment workers.
"We want to make sure the [company's] board is
aware of the risks and holds management to task, so that shareholder value
is not diminished through some catastrophe," she added.
The effort to develop effective internal controls
dates back decades. The updated guidelines, released in May, come from a
group of five accounting associations known as the Committee of Sponsoring
Organizations of the Treadway Commission. It is the offspring of a national
commission on fraudulent financial reporting in the 1980s led by
then-Securities and Exchange Commissioner James C. Treadway Jr.
The group published its first guidelines in 1992,
but they were little used until the Sarbanes-Oxley Act of 2002 essentially
forced most U.S. public companies to adopt them.
The new guidelines officially replace the existing
ones in December 2014. Although companies face no penalty if they don't
embrace them, ignoring them could put off investors who value tight
management.
The new framework recommends that internal-control
processes adhere to 17 principles, such as the independence of corporate
boards from management and the need to address risks posed by technology.
"Every company will be going through the processes
they have and asking, 'Do I have the right controls?'" said Carolyn Saint,
vice president of internal audit for convenience-store operator 7-Eleven
Inc.
"We're making sure the things we've aligned to as
company controls—like security, access, change management—are up to date,
and whether there is anything in the new standard we need to reflect," she
said.
The overhaul comes as internal controls are getting
a tougher look from regulators. The Public Company Accounting Oversight
Board has increasingly rebuked auditors for failing to properly evaluate
corporate controls.
In its most recent inspections, the government's
audit watchdog found auditors failed to get enough evidence to sign off on a
company's internal controls about 15% of the time.
The number of SEC enforcement actions citing
internal-controls violations is up about 40% from this time last year. The
agency also launched a task force this year that aims to focus on detecting
corporate frauds earlier.
Glasner makes a good case that Friedman was indeed more or less a
Keynesian, or maybe Hicksian — certainly that was the message everyone took
from his
Monetary Framework, which was disappointingly conventional. And Friedman’s
attempts to claim that Keynes added little that wasn’t already in a Chicago oral
tradition don’t hold up well either.
Paul Krugman, "Milton Friedman, Unperson," The New York Times, August 8,
2013 ---
http://krugman.blogs.nytimes.com/2013/08/08/milton-friedman-unperson/?_r=1&
. . .
¶Think of it
this way: Friedman was an avid free-market advocate, who insisted that the
market, left to itself, could solve almost any problem. Yet he was also a
macroeconomic realist, who recognized that the market definitely did not
solve the problem of recessions and depressions. So he tried to wall off
macroeconomics from everything else, and make it as inoffensive to
laissez-faire sensibilities as possible. Yes, he in effect admitted, we do
need stabilization policy — but we can minimize the government’s role by
relying only on monetary policy, none of that nasty fiscal stuff, and then
not even allowing the monetary authority any discretion.
¶At a
fundamental level, however, this was an inconsistent position: if markets
can go so wrong that they cause Great Depressions, how can you be a
free-market true believer on everything except macro? And as American
conservatism moved ever further right, it had no room for any kind of
interventionism, not even the sterilized, clean-room interventionism of
Friedman’s monetarism.
¶So
Friedman has vanished from the policy scene — so much so that I suspect that
a few decades from now, historians of economic thought will regard him as
little more than an extended footnote.
Cengage Learning offers textbooks, instructor supplements, digital
content, online reference databases, distance learning courses,[
test preparation materials, corporate training courses, career assessment
tools, materials for specific academic disciplines, and custom solutions.
History
Thomson Learning was created out of a restructuring of International
Thomson Publishing.
Sale to private
equity
It was announced on October 25, 2006 that Thomson Learning would be
offered for sale by the
Thomson Corporation, with an estimated value of up to US$5 billion. The
company was bought by a private equity consortium consisting of
Apax Partners and
OMERS Capital Partners for US$7.75 billion and the name was changed to
Cengage Learning on 24 July 2007.
Acquisitions
In addition to organic growth, Cengage Learning has expanded through
acquisitions within the publishing industry. Notable acquisitions include:
The company's product lines include: 4LTR Press,
Aplia, Atomic
Dog Publishing, Charles River Media,
Chilton, Chilton DIY[14]
CompuTaught, Education To Go, Milady, NetLearning, and Primary Source Media.
Based on its 2009 revenues,
Publishers Weekly ranked it at number eleven out of fifty publishers
worldwide, with a revenue of 1.958 billion dollars for that year.[4]
Cengage Learning, Inc., the second largest
publisher of higher education course materials in America, filed for Chapter
11 bankruptcy protection Tuesday. The move had been expected by financial
analysts.
The company hopes to eliminate about $4 billion of
its $5.8 billion in debt, the company said in a statement. The company's
chief financial officer, Dean Durbin,
blamed the company's woes on the move away from
traditional printed textbooks to digital offerings, cuts in government
spending since the recession, and piracy of its materials.
In a court filing, he said the company is working
on a new business plan and pointed in particular to
MindTap,
a new cloud-based platform the company has elsewhere
described as "more than an e-book and different than a learning management
system." The company expects to continue to make timely payments to its
vendors and offer the same wages and benefits to its employees, it said in a
press release.
Continued in article
Jensen Comment
It's not at all clear as to why the "move away from traditional printed
textbooks to digital offerings" could be a major cause of failure in the
business model. An accounting investigator would look for such reasons as failed
cost savings by moving away from printing presses, failed demand for digital
offerings, competition if pricing of digital offerings, etc. Particular culprits
might be the failure to save as much money as intended by not having inventory,
shipping, and handling costs of printed copy. More likely, however, it may
well be that students and faculty resisted the moves away from printed
textbooks.
One factor to consider is the way textbooks are marketed by giving free
examination copies of printed textbooks to instructors. For example, I know of
one instructor in San Antonio's largest colleges who made thousands dollars each
year selling his free examination copies. In exchange for giving a sales rep an
adoption of a hard copy textbook for over a thousand students per semester he
demanded 50 free "examination copies" that he, in turn, sold to slimy book
buyers who stalk faculty office hallways with thick packets of cash. Ostensibly
the extra copies were to be used by his teaching assistants. But he did not have
50 teaching assistants each semester. In reality this was just a cozy deal
between an unethical professor and an unethical book sales rep. My guess is that
the book rep. was buying up almost 50 examination copies from the slimy book
buyers in Texas. The publishing company may not have been involved in the fraud.
I don't think he ever figured out how to make money on 50 electronic textbook
passwords. So he encourage his students to buy newly printed textbooks with a
warning that there may be some missing material in used copies and electronic
copies.
He was an improbable Las Vegas headliner, taking
the stage before a packed convention hall of 2,500 fraud examiners.
For former Enron CFO Andy Fastow, who spent more
than five years in federal prison for his crimes, last week's appearance
before the Association of Certified Fraud Examiners was his most public step
in an uphill redemptive journey -- to explain how he became a "fraudster;"
to sound provocative warnings about today's corporate practices; and even to
offer a bit of revisionism on the company's 2001 collapse.
Fastow launched his talk with a broad mea culpa,
introduced with a grim joke. "Several of you have commented to me that your
organization has grown dramatically over the past 10 years," he said. "And
they thank me. They said no other individual has been more responsible for
the growth of your industry than me. So: You're welcome."
The crowd roared.
"It's not something I'm proud of," he added
soberly, after the laughter had died down.
Fastow was initially charged with 78 counts of
fraud, mostly connected to his central role in a web of off-balance sheet
entities that did business with Enron, disguised the company's financial
condition, and made Fastow tens of millions. He ultimately pled guilty to
two counts, forfeited $30 million, and agreed to testify against his former
bosses as a government witness.
Since leaving prison in 2011 and resuming life with
his wife Lea and two sons in Houston, where Enron was based, Fastow has kept
a low profile. Now 51, he works 9-to-5 as a document-review clerk at the law
firm that represented him in civil litigation.
Fastow has given 14 unpaid talks, mostly at
universities, usually with no press allowed. The first came at the
University of Colorado-Boulder. He volunteered to speak to students after
reading a column on ethics by the dean of the business school. Fastow has
also spoken at Tufts, Tulane, and Dartmouth and is scheduled to address a
United Nations group in the fall.
In Las Vegas, dressed in a blazer and open shirt,
Fastow stood at the podium a bit grim-faced, his speech sometimes halting.
"I'm not used to giving talk to groups this big," he explained. "I apologize
to you if I feel nervous -- if I appear nervous."
"Why am I here?" he asked. "First of all, let me
say I'm here because I'm guilty ... I caused immeasurable damage ... I can
never repair that. But I try, by doing these presentations, especially by
meeting with students or directors, to help them understand why I did the
things I did, how I went down that path, and how they might think about
things so they also don't make the mistakes I made."
"The last reason I'm here," Fastow continued, "is
because, in my opinion, the problem today is 10 times worse than when Enron
had its implosion ... The things that Enron did, and that I did, are being
done today, and in many cases they're being done in such a manner that makes
me blush -- and I was the CFO of Enron." He cited the continuing widespread
use of off-balance-sheet vehicles, as well as inflated financial assumptions
embedded in corporate pension plans.
MORE: Big companies don't have to lose their souls
Fastow said he was prosecuted "for not technically
complying with certain securities rules" -- but that wasn't "the important
reason why I'm guilty." The "most egregious reason" for his culpability, he
said, was that the transactions he spearheaded "intentionally created a
false appearance of what Enron was -- it made Enron look healthy when it
really wasn't."
"Accounting rules and regulations and securities
laws and regulation are vague," Fastow explained. "They're complex ... What
I did at Enron and what we tended to do as a company [was] to view that
complexity, that vagueness ... not as a problem, but as an opportunity." The
only question was "do the rules allow it -- or do the rules allow an
interpretation that will allow it?"
Fastow insisted he got approval for every single
deal -- from lawyers, accountants, management, and directors -- yet noted
that Enron is still considered "the largest accounting fraud in history." He
asked rhetorically, "How can it be that you get approvals ... and it's still
fraud?"
Because it was misleading, Fastow said -- and he
knew it. "I knew it was wrong," he told the crowd. "I knew that what I was
doing was misleading. But I didn't think it was illegal. I thought: That's
how the game is played. You have a complex set of rules, and the objective
is to use the rules to your advantage. And that was the mistake I made."
After speaking for about 20 minutes, Fastow took
questions. He insisted on this despite the trepidations of conference
organizers. "A lot of people are still angry," explained James Ratley, a
former Dallas police department fraud investigator and the Austin-based
group's CEO. "I was cautious that someone would create a disturbance."
The fraud group invites a "criminal speaker" to
address its convention every year. But Fastow's invitation drew unusually
acidic comments on a LinkedIn message board. "A total slap in the face to
all of the honest and respectable investigators that could be utilized as a
presenter," one person fulminated. "Just scum," was another's summary. "To
be blunt," a third person wrote, "I see him as a calculating low life, as
bad as an armed robber who would shoot up a bank to get the people's money."
But Ratley dismissed the criticism. "If you're a
fraud examiner and you don't want to deal with a fraud perpetrator, you
ought to change professions." Ratley said he had met with Fastow to screen
him "for any type of evasiveness. He has not dodged, ducked, or blinked
since I started talking with him." ACFE made a point of noting prominently
in promotional materials that Fastow was not paid to speak. (The group did
cover his travel expenses).
Among his questions, Fastow was asked about former
Enron CEO Jeff Skilling's sentence reduction last month -- from 24 to 14
years. Fastow offered considerable sympathy for his former boss, against
whom he had testified at trial. "Going to prison is terrible," Fastow said.
"You're never comfortable. All the talk about 'Club Fed' is garbage ...
You're surrounded by very violent people, very unstable people. Prisons work
hard to make you uncomfortable. But that's not what's bad about going to
prison. What's bad about going to prison is that you're separated from your
family." (Skilling's parents and youngest son all died while he was behind
bars.) Fastow added that even Skilling's reduced term is still "a
devastating sentence."
Fastow went on to insist that "Enron did not have
to go bankrupt when it went bankrupt ... Enron should not have gone
bankrupt. It could have survived. And it was decisions made in October 2001"
-- after Skilling resigned as CEO -- "that caused it go into bankruptcy"
early that December. That's a highly debatable point -- but Fastow did not
elaborate.
And then, the final question: "This is on a lot of
people's minds. Many people vilify you for what you did at Enron, and the
resulting effect on other companies, pensions, market share, people's
fortunes. How do you grapple with that? How do you react to that
condemnation?"
"Um, well, first of all," said Fastow, looking
down, "I deserve it. It's a very difficult thing to accept that about
yourself. I didn't set out to commit a crime. I certainly didn't set out to
hurt anyone. When I was working at Enron, you know, I was kind of a hero,
because I helped the company make its numbers every quarter. And I thought I
was doing a good thing. I thought I was smart. But I wasn't."
"I wake up every morning, and I take out my prison
ID card, which I have with me here today. And it makes certain that I
remember all the people. I remember that I harmed so many people in what I
did. It encourages me to try to do the little things that I can to make
amends for what I did."
"I can't repay everyone. I can't give them jobs. I
can't fix it. But I just have to try bit by bit to do that. Being here is
hopefully a little contribution to that."
It's common to glibly assume that most USA corporations follow the lead of
General Electric and pay no corporate income tax. Most corporations do not pay
35%, but many pay at least a third of that. Similarly, many of the 52% of
Americans that pay some income tax (apart from the 48% who pay no income tax) take advantage of deductions and credits to
reduce their taxes to around 10%.
The nation's largest corporations have paid a tax
rate that is about one-third of the statutory corporate rate, according to a
new government report.
The Government Accountability Office (GAO) found
that large, profitable corporations paid an effective tax rate of 12.6
percent in 2010, even though the statutory tax rate stood at 35 percent.
Even when taking into account state and local
taxes, or taxes paid to foreign nations by the companies, the effective tax
rate climbs to only 17 percent, or roughly half the statutory level required
by the U.S.
A combination of exemptions, deferrals, tax
credits, and other incentives combine to drastically trim the amount of
taxes a large corporation actually pays to the United States, the GAO found.
Read more: http://thehill.com/blogs/on-the-money/domestic-taxes/308781-gao-corporations-pay-one-third-of-statutory-rate#ixzz2Xth5T5HY
Follow us: @thehill on Twitter | TheHill on Facebook
The companies examined had $10 million or more in
assets, and the rate actually paid is slightly lower than the amount those
companies reported to the government (13.1 percent).
The study came at the request of Sens. Carl Levin
(D-Mich.) and Tom Coburn (R-Okla.), who headed the Homeland Security
subcommittee on Investigations in 2012. Levin, who still chairs the panel,
has been hotly critical of U.S. companies that rely on offshore maneuvers to
reduce their American tax burden.
He argued Monday that the report proves that
corporations are not paying "their fair share" come tax time.
"When some U.S. corporations use unjustifiable
loopholes and offshore gimmicks to avoid paying Uncle Sam, their tax burden
is shifted onto hardworking American families and small business," he said
in a statement. "Today’s GAO report quantifies just how much of the
corporate tax burden has been shifted onto other taxpayers: America’s large,
profitable corporations are now paying a lower tax rate than our teachers
and firefighters.”
Coburn too chastised "giveaways and loopholes" that
allow corporations to drastically trim their tax bill and used the report to
bolster the case for comprehensive tax reform.
Continued in article
Jensen Comment
Corporate income taxes are becoming less and less important as a revenue source
for the government. This is why I think they should be phased out in favor of a
business VAT tax that is easier to collect and not so easy to avoid with tax
deferral and avoidance strategies.
Abstract : This paper develops a new tax measure –
the Tax Attractiveness Index – reflecting the attractiveness of a country’s
tax environment and the tax planning opportunities that are offered .
Specifically , the Tax Attractiveness Index covers 16 different components
of real - world tax systems , such as the statutory tax rate, the taxation
of dividends and capital gains, withholding taxes, the existence of a group
taxation regime, loss off set provision, the double tax treaty network, thin
capitalization rules, and controlled foreign company (CFC) rules. We develop
methods to quantify each tax factor . The Tax Attractiveness Index is
constructed for 100 countries over the 2005 to 2009 period. Regional
clusters in the index as well as in the application of certain tax rules can
be observed. The evaluation of individual countries based on the index
corresponds – but is not totally identical – with the OECD’s ‘black’
respectively ‘grey’ list . By comparing the Tax Attractiveness Index with
the statutory tax rate , we reveal that even high tax countries offer
favorable tax conditions. Hence, the statutory tax rate is not a suitable
proxy for a country’s tax climate in any case since countries may set other
incentives to attract firms and investment.
Why Females Are Better at Remembering Faces
"Females Scan More Than Males A Potential Mechanism for Sex Differences in
Recognition Memory," by Jennifer J. Heisz, Molly M. Pottruff and David I. Shore,
Psychological Science, May 20, 2013 ---
http://pss.sagepub.com/content/early/2013/05/20/0956797612468281
Recognition-memory tests reveal individual
differences in episodic memory; however, by themselves, these tests provide
little information regarding the stage (or stages) in memory processing at
which differences are manifested. We used eye-tracking technology, together
with a recognition paradigm, to achieve a more detailed analysis of visual
processing during encoding and retrieval. Although this approach may be
useful for assessing differences in memory across many different
populations, we focused on sex differences in face memory. Females
outperformed males on recognition-memory tests, and this advantage was
directly related to females’ scanning behavior at encoding. Moreover,
additional exposures to the faces reduced sex differences in face
recognition, which suggests that males may be able to improve their
recognition memory by extracting more information at encoding through
increased scanning. A strategy of increased scanning at encoding may prove
to be a simple way to enhance memory performance in other populations with
memory impairment.
Jensen Comment
This does not make them necessarily better than men at remembering names among
recognized faces. There are memory tricks to remembering names that some people,
especially executives, master as part of their job skills. Accounting males and
females may be better than marketing employees at remembering shoe tops.
Yawn! Meta Analysis of MBA Program Rankings
"A Psychometric Assessment of the Businessweek, U.S. News & World Report , and
Financial Times Rankings of Business Schools’ MBA Programs," by Vanderbilt;s
Dawn Iacobucci, Journal of Marketing Education, 2013 ---
http://www.owen.vanderbilt.edu/vanderbilt/data/research/2355full.pdf
Abstract
This research investigates the reliability and validity of three major
publications’ rankings of MBA programs. Each set of rankings showed
reasonable consistency over time, both at the level of the overall rankings
and for most of the facets from which the rankings are derived. Each set of
rankings also showed some levels of convergent and discriminant validity,
but each has room for improvement, particularly Businessweek , which relies
heavily on subjective surveys of students and recruiters, and Financial
Times , whose methodology may be simplified and streamlined, ceasing to
measure facets that are empirically superfluous. Together the three
publications blanket the student process— U.S. News & World Report captures
incoming student quality clearly with GMAT scores, Businessweek captures
whether the students are happy while at their respective business schools,
and U.S. News captures salaries and Financial Times captures return on
investment, as short-term and longer term indicators of graduates’ early
career successes.
Jensen Comment
The reliance on GMAT scores in the rankings of some media sources must
complicate things for top schools like Wake Forest that have made the GMAT
optional or eliminated it entirely. How do you factor in enormous chunks of
missing data?
To cope with the rise of e-books and Amazon.com
Inc., AMZN +0.05% Barnes & Noble Inc. BKS +0.75% has started selling toys,
games, stationery and all manner of other products. To some observers, books
seem less important there.
That strategy has helped the retailer's bottom line
but holds long-term risks, potentially driving customers to Amazon. So what
is the alternative? Should Barnes & Noble double-down on books, a strategy
that could be costly in the near term? As it is, the company signaled last
week it expected a tough year in its consumer-stores business in the coming
year.
The Wall Street Journal asked a group of leading
writers, retailers, and agents on what they would do if they ran Barnes &
Noble. Edited excerpts:
Peter Olson, co-chief executive of the
Fullbridge Program and former CEO of Bertelsmann SE & Co. KGaA's Random
House, the world's largest consumer book publisher.
Barnes & Noble is in real trouble but they have
real, underleveraged strategic assets.
Let's start with people coming in to browse, which
you can't do well online yet. They can take this loyal customer base that is
willing to travel and leverage it by offering more than just the print books
on the shelves. The customer base could be looking for a lot more in terms
of rewards, such as a discount for volume shopping, bundling, and help in
ordering alternative formats if a book isn't in the store.
Say you're looking for a history book but it's not
in stock. You go to the counter and they say that if you buy the e-book now,
we'll deliver the hardcover tomorrow, plus we'll offer you a discounted
price for the two of them. Make it worth their while to come in. You have
dedicated print readers walking into your stores. Don't let Amazon serve
them.
Or say a customer is interested in a book by
somebody who has written 20 novels. Why shouldn't you work out a really
steep discount on future purchases by that loyal customer? Share the
discount with the publisher, and say to the shopper, pay us $12.99 on the
first title, but the next one will be $10.99. Or, if you want all 20 titles,
here's a special price. Or here's a special price for all and we'll throw in
the e-book versions, so you can have them while you travel and in your home.
That's how Barnes & Noble could use its one real
advantage: the traffic of loyal book browsers. Give them more aggressive
bundling and discounting, and get them coming back.
James Patterson, best-selling author and a
former senior advertising executive at J. Walter Thompson:
They need to make the stores feel like much more
exciting places to shop. Compelling, contemporary, clear signage would be
helpful.
The way a lot of smaller bookstores survive is
through continual events, some even every day. Barnes & Noble could do more
of that. They are putting an incredible effort into e-books and e-book
devices, but some of the other things aren't front and center. It seems to
me that at one time they discounted more across the board, more hardcovers
and paperbacks, and not just best sellers. And I think paperbacks should be
featured more. A lot of people consider them within their budget. They are
more likely to try authors with a paperback. It's harder to pay a hardcover
price when you haven't heard of somebody. And it needs to be part of their
windows.
For me, maybe less knickknacks. In the short run
they sell. But what do they do for the store experience?
Gerald Storch, former chief executive of
Toys R Us Inc. and vice chairman of Target Corp.:
Barnes & Noble has done a good job enabling its
customers to interact with it however they choose. But they need to create a
store environment that people who love the brand want to visit. That means
more destination activities, such as book groups, author readings.
What doesn't work is trying to change your customer
or trying to expand your product offering dramatically beyond the historical
offering of the brand. There are very few examples of successfully changing
your customer base.
Praveen Madan, president of Kepler's Books
in Menlo Park, Calif.:
If I were in their shoes, I would deepen the
commitment to a broader stock of books, to displaying and promoting books
from small presses and university presses. They should also be more involved
with local schools and libraries. They may have to run fewer, smaller
stores, but that's how to do it. There is absolutely a place for them if
they embrace the commitment to books and ideas. But if they are a profit
first, general retailer, then I don't think there is a place for them.
Simon Lipskar, president of Writers House,
a New York literary agency:
'The Heart of the Matter," the just-released report
by the American Academy of Arts and Sciences, deserves praise for affirming
the importance of the humanities and social sciences to the prosperity and
security of liberal democracy in America. Regrettably, however, the report's
failure to address the true nature of the crisis facing liberal education
may cause more harm than good.
In 2010, leading congressional Democrats and
Republicans sent letters to the American Academy of Arts and Sciences asking
that it identify actions that could be taken by "federal, state and local
governments, universities, foundations, educators, individual benefactors
and others" to "maintain national excellence in humanities and social
scientific scholarship and education."
In response, the American Academy formed the
Commission on the Humanities and Social Sciences, with Duke University
President Richard Brodhead and retired Exelon CEO John Rowe as co-chairmen.
Among the commission's 51 members are top-tier-university presidents,
scholars, lawyers, judges, and business executives, as well as prominent
figures from diplomacy, filmmaking, music and journalism.
The goals identified in the report are generally
admirable. Because representative government presupposes an informed
citizenry, the report supports full literacy; stresses the study of history
and government, particularly American history and American government; and
encourages the use of new digital technologies.
To encourage innovation and competition, the report
calls for increased investment in research, the crafting of coherent
curricula that improve students' ability to solve problems and communicate
effectively in the 21st century, increased funding for teachers and the
encouragement of scholars to bring their learning to bear on the great
challenges of the day. The report also advocates greater study of foreign
languages, international affairs and the expansion of study abroad programs.
One of the more novel ideas in the report is the
creation of a "Culture Corps" in cities and town across America to "transmit
humanistic and social scientific expertise from one generation to the next."
Unfortunately, despite 2½ years in the making, "The
Heart of the Matter" never gets to the heart of the matter: the illiberal
nature of liberal education at our leading colleges and universities.
The commission ignores that for several decades
America's colleges and universities have produced graduates who don't know
the content and character of liberal education and are thus deprived of its
benefits. Sadly, the spirit of inquiry once at home on campus has been
replaced by the use of the humanities and social sciences as vehicles for
disseminating "progressive," or left-liberal propaganda.
We know from the extensive documentation that
William F. Buckley Jr. provided in his stellar critique of American
academia, "God and Man at Yale," first published in 1951, that this
propagandizing extends back at least to the middle of the 20th century.
Today, professors routinely treat the progressive
interpretation of history and progressive public policy as the proper
subject of study while portraying conservative or classical liberal
ideas—such as free markets, self-reliance and a distrust of central
planning—as falling outside the boundaries of routine, and sometimes
legitimate, intellectual investigation.
Meanwhile, courses proliferate on highly
specialized topics—Muslims in movies, gay and lesbian gardeners, the
mathematical formalization of political decision making, for example—that
closely correspond to professors' niche research interests but contribute
little to students' grasp of the broad sweep of Western civilization and its
literary, philosophical and religious masterpieces.
Through speech codes, endless seminars and
workshops designed to teach students how to avoid "offensive" speech—and by
handling sexual harassment and sexual-assault allegations with procedures
that undermine the presumption of innocence—universities teach students to
discount free speech and due process.
The American Academy of Arts and Sciences displays
great enthusiasm for liberal education. Yet its report may well set back
reform by obscuring the depth and breadth of the challenge that Congress
asked it to illuminate.
Jensen Comment
I recall having a coffee break with a humanities professor who was active in
designing SAT examination questions. She reported that one classic piece of
literature was deemed unacceptable for the examination because it had a sentence
that reads something like: "The women brought food and water to the men in
the fields."
I think that censorship of classic literature because in modern times it has
sexism connotations is an abomination in liberal education. Times change but we
need not censor the past in art and literature.
The permanent injunction that a federal district
court issued in March 2012 enjoining Colorado from enforcing its Amazon law
requiring remote sellers to report sales in the state has been dismissed by
an appeals court. The Tenth Circuit held on Tuesday that the Tax Injunction
Act (TIA, 28 U.S.C. § 1341) precludes federal jurisdiction over the Direct
Marketing Association’s claim that Colorado’s law requiring out-of-state
retailers to report information about customers’ purchases to each customer
and to the Colorado Department of Revenue (DOR) violates the Commerce Clause
of the U.S. Constitution (Direct
Marketing Ass’n v. Brohl, No. 12-1175
(10th Cir. 8/20/13).
As a result, the Tenth Circuit remanded the case to
the district court to dismiss the Commerce Clause claims and lift the
permanent injunction the lower court had imposed prohibiting the DOR from
enforcing the law
(Direct Marketing Ass’n v. Huber,
No. 1:10-CV-01546-REB-CBS (D. Colo. 3/30/12)). Any further proceedings in
the case must begin in Colorado’s courts or administrative agencies.
Background
The Colorado law (Colo. Rev. Stat. §39-21-112(3.5))
and related regulations require any retailer that sells $100,000 or more of
products to customers in Colorado, but does not collect and remit sales
taxes on those products, to:
Notify the purchaser that the retailer does
not collect Colorado sales tax and that the purchaser is therefore
obligated to self-report and pay use tax.
Provide each customer who purchases more than
$500/year from the retailer with an annual report of the prior calendar
year’s purchases and inform the customer that the retailer is required
to file an annual purchase summary reporting the customer’s name and
total purchases to the Colorado DOR.
Provide the DOR with an annual customer
information report stating the name, billing and shipping address, and
total purchases for each of its Colorado customers.
Retailers can avoid the reporting requirements by voluntarily collecting tax
from customers in Colorado.
The Direct Marketing Association (DMA), the
plaintiff in the case, is an association of direct marketers that sell
products through catalogs, magazine and newspaper advertisements, broadcast
media, and the internet. The DMA had earlier in the litigation persuaded the
district court to issue an injunction to prevent the law from being
enforced. The district court later made the injunction permanent.
The district court found that the law violated the
“dormant Commerce Clause” (the constitutional theory that prohibits state
actions that interfere with interstate commerce) because it discriminates
against out-of-state retailers by treating them differently from in-state
retailers and was therefore invalid on its face. The court further held that
the DOR had failed to overcome this finding of facial invalidity because it
failed to prove that the law advances a legitimate local purpose that could
not be served by “reasonable nondiscriminatory alternatives.”
Tax-Injunction Act: A broad jurisdictional
barrier
The TIA states that “district courts shall not
enjoin, suspend or restrain the assessment, levy or collection of any tax
under State law where a plain, speedy and efficient remedy may be had in the
courts of such State” (Direct Marketing Ass’n v. Brohl, quoting 28
U.S.C. §1341). The Tenth Circuit characterized it as a broad jurisdictional
barrier that prevents federal courts from interfering with the important
state concern of collecting taxes.
First, the appeals court addressed the issue
whether DMA sought to enjoin, suspend, or restrain the assessment, levy, or
collection of any tax under state law. The law prohibits federal courts from
interfering with state tax collection through declaratory relief, injunctive
relief, or damage awards. The DMA argued that the TIA did not apply because
it was not a taxpayer seeking to avoid a tax and it was challenging the
notice and reporting requirements of the law, not a tax assessment.
Nonetheless, the circuit court cited precedent in which the TIA applied to
suits brought by third parties attempting to disrupt state tax collection.
The central question is whether the plaintiff is attempting to prevent a
state from exercising its sovereign taxing power.
The appeals court also concluded that the TIA
applies even though DMA was not challenging a tax assessment because the
broad language of “enjoin, suspend or restrain” encompassed the
challenge DMA was raising. The suit DMA was bringing had the potential to
restrain Colorado’s ability to collect sales and use tax, which is
sufficient to trigger the jurisdictional bar. The fact that the injunction
would restrain Colorado’s ability to collect the tax indirectly rather than
directly did not mean the TIA did not apply.
The second part of a TIA claim requires consideration of whether “a plain,
speedy and efficient remedy may be had in the courts of such State.”
According to the appeals court, this means that Colorado law must provide a
full hearing and judicial determination whether the law should apply. To
satisfy this requirement, a state must meet certain minimal procedural
criteria against illegal tax collection. It does not have to be the “best
or speediest remedy” (emphasis in the original). Apparently, the
DMA did not challenge the law using the process available to it in Colorado,
and the appeals court also noted that the state had considered Commerce
Clause challenges to tax laws before.
Continued in article
Jensen Comment
I don't think this issue of collecting sales taxes by out-of-state vendors will
be resolved until the U.S. Supreme Court once again takes up the infamous L.L
Bean Case in which the Court ruled in favor of L.L. Bean.
Jensen Comment
I always remember one of Bob Anthony's Harvard Cases (in his famous managerial
accounting textbook) where a newly-minted MBA proposes a naive application of
CVP analysis to increase operating margins. He failed to comprehend the basic
assumptions of the linear model that he superficially learned in an accounting
course. His older and wiser boss clued him in on how so much of what in learned
in college courses more often than not do not fit realities of the world of
business.
Jensen Comment
I've been tracking Joe's blog for years. It's a very passionate blog long on
personal experience and short on scholarly references. That can be both a
strength and weakness. Sometimes it may be rewarding to re-invent wheels
passionately. For one thing it frees up much more time for creativity ---
http://joehoyle-teaching.blogspot.com/
Note that the Victorian Literature experiment of Joe and Professor Gruner
differs from an AECC experiment at the University of North Texas. In that
experiment accounting students were given choices between traditional sections
of accounting courses (taught by accounting professors) and sections team taught
by accounting and humanities professors. Too many students opted for the
traditional accounting courses ---
http://aaahq.org/AECC/changegrant/chap11.htm
Read that as probably meaning that undergraduates were more concerned about
passing the CPA examination than increasing the mix of liberal studies in
accountancy studies.
Tulane University has admitted that it sent
U.S. News & WorldReport incorrect information about the test
scores and total number of applicants for its M.B.A. program.
The admission -- as 2012 closed -- made the
university the fourth college or university in that year to admit false
reporting of some admissions data used for rankings. In 2011, two law
schools and one undergraduate institution were found to have engaged in
false reporting of some admissions data.
A statement issued
by Tulane said that it discovered the problem when
preparing a new set business school data for U.S. News and found
that numbers, "including GMAT scores and the number of applications, skewed
significantly lower than the previous two years. Since the school’s
standards and admissions criteria have not changed, this raised a concern
that our data from previous years had been misreported."
Continued in article
Jensen Comment
Years ago when I was invited to speak at Tulane, the Associate Dean of the
Business School showed me a very colorful booklet of the Top Ten MBA Programs in
the USA. It showed Tulane's MBA Program as being in the Top 10, whereas US
News did not even include Tulane in the Top 50. I asked this dean about who
did the rankings for the Tulane booklet. Without even batting an eye he admitted
that Tulane did the ranking.
In 1911, Bobby Leach survived a plunge over Niagara Falls in a steel barrel.
Fourteen years later, in New Zealand , he slipped on an orange peel and died.
Most people don't know that back in 1912, Hellmann's mayonnaise was
manufactured in England. In fact, the Titanic was carrying 12,000 jars of the
condiment scheduled for delivery in Vera Cruz, Mexico, which was to be the next
port of call for the great ship after its stop in New York .
This would have been the largest single shipment of mayonnaise ever delivered
to Mexico . But as we know, the great ship did not make it to New York . The
ship hit an iceberg and sank. The people of Mexico , who were crazy about
mayonnaise, and were eagerly awaiting its delivery, were disconsolate at the
loss. Their anguish was so great, that they declared a National Day of Mourning.
The National Day of Mourning occurs each year on May 5th and is known, of
course, as -
Sinko De Mayo.
Forwarded by Gene and Joan
When I was in beautiful Rhode Island, someone asked me, "What is so great
about Iowa?" I really could not answer them at that time, except to say, "My
family is there." Then I took a trip back and remembered why Iowa is special. I
would like to take you for a visual trip through my home state Iowa has the most
beautiful skies, and wide open spaces so you can really enjoy them.
We have four seasons. Winter brings wonderful white drifts shaped like
whipped cream. The world turns into a fairy land. When we have had enough of
cold and snow, spring is just around the corner with it's fields of flowers and
warm days and cool nights
Summer arrives and treats us with a reason to go swimming or to one of the
many beautiful state parks. Fall brings the golden colors and relief from the
intense heat. And then we start all over again
There are cities and farms
The hills and plains stretch for miles.
Iowa is known as the food basket of the nation.
Iowa has little boys that try very hard to be good.
And Iowans have a sense of humor
The water tower at Adair Education is more important than sports, in Iowa.
Here you see Iowa State University and Drake University.
Just to mention a few of the interesting things that crowd your schedule in
Iowa. Iowa has rodeos, hot air balloons and the famous Bike Ride Across Iowa
A weed is only a weed if it is growing where you don't want it. Here are the
coneflowers abundant in the Loess Hills and the tulips of Pella.
Maybe you didn't know that the "Little Brown Church in the Wildwood" is in
Iowa.
Have you seen the movie or read the book "The Bridges of Madison County" Yep,
Madison County is right here in Iowa, along with the bridges.
The movie "Field of Dreams" was shot in Iowa. People come from all over the
world to see this famous field, which has been preserved for tourists. There are
some famous people who came from Iowa. How about Presidents Reagan who began his
public career in Des Moines, and Herbert Hoover, born in West Branch in 1874.
Actress Donna Reed and composer of "The Music Man", Meredith Wilson, were
born and raised here.
Jensen Comment
Mankoff missed my favorite cartoon. It shows the CEO standing in front of a
chart that shows profits crashing into negative territory. The CEO then turns to
a wimpy chief accountant and declares:
"Digbe, this company will not survive unless you
can come up with an accounting miracle."
Seems like Enron, Worldcom, and Lehman Brothers turned to their accountants
who suggest such "miracles" as SPE creative accounting (Enron accountants),
capitalizing expenses (Worldcom accountants) and repo sales gimmicks (Lehman
Bros. accountants). In these instances the miracles flopped.
The woman applying for a job in a Florida lemon grove seemed to be far too
qualified for the job. She had a liberal arts degree from the University of
Michigan and had worked as a social worker and school teacher.
The foreman frowned and said, "I have to ask you, have you had any actual
experience in picking lemons?"
"Well, as a matter of fact, I have! I've been divorced three times, owned 2
Chryslers and voted for Obama."
For virtually every product available for sale on Amazon.com, former buyers
are asked to review the product. Most reviews are published on the same page as
the product description. I seldom find glowing reviews helpful, because I'm
suspicious that vendors plant such reviews. However, the negative reviews are
often very informative and occasionally even humorous --- http://www.amazon.com/
Another Government study provides outstanding results . . .
CSIRO officials recently found about 200 dead crows on the highway between
Noonamah and Palmerston in the Northern Territory,
There was concern that they may have died from Avian Flu.
The Northern Territory Government therefore directed that the CSIRO should
contract a bird pathologist to examine the remains of all the crows.
The bird pathologist subsequently confirmed that the problem was definitely
NOT Avian Flu.
However, he did determine that 98% of the crows had been killed by impact
with trucks, and that only 2% had been killed by impact with cars.
The Territory Government then hired an Ornithological Behaviourist to
determine the disproportionate percentages for the truck versus car kills.
After 18 months of research costing $2.7 million, the Ornithological
Behaviourist determined the cause of the deaths.
When crows eat road kill, they always set-up a look-out crow in a nearby tree
to warn of impending danger.
His conclusion was that the lookout crow could only say “Cah”, he could not
say “Truck”.
Just wanted to make sure you Aussies knew where your tax money was being
spent . . .
Forwarded by Eliott
If Bud Abbott and Lou Costello were alive today, their infamous sketch,
'Who's on First?' might have turned out something like this:
COSTELLO CALLS TO BUY A COMPUTER FROM ABBOTT
ABBOTT: Super Duper computer store. Can I help you?
COSTELLO: Thanks I'm setting up an office in my den and I'm thinking
about buying a computer.
ABBOTT: Mac?
COSTELLO: No, the name's Lou.
ABBOTT: Your computer?
COSTELLO: I don't own a computer. I want to buy one.
ABBOTT: Mac?
COSTELLO: I told you, my name's Lou.
ABBOTT: What about Windows?
COSTELLO: Why? Will it get stuffy in here?
ABBOTT: Do you want a computer with Windows?
COSTELLO: I don't know. What will I see when I look at the windows?
ABBOTT: Wallpaper.
COSTELLO: Never mind the windows. I need a computer and software.
ABBOTT: Software for Windows?
COSTELLO: No. On the computer! I need something I can use to write
proposals, track expenses and run my business. What do you have?
ABBOTT: Office.
COSTELLO: Yeah, for my office. Can you recommend anything?
ABBOTT: I just did.
COSTELLO: You just did what?
ABBOTT: Recommend something.
COSTELLO: You recommended something?
ABBOTT: Yes.
COSTELLO: For my office?
ABBOTT: Yes.
COSTELLO: OK, what did you recommend for my office?
ABBOTT: Office.
COSTELLO: Yes, for my office!
ABBOTT: I recommend Office with Windows.
COSTELLO: I already have an office with windows! OK, let's just say I'm
sitting at my computer and I want to type a proposal. What do I need?
ABBOTT: Word.
COSTELLO: What word?
ABBOTT: Word in Office.
COSTELLO: The only word in office is office.
ABBOTT: The Word in Office for Windows.
COSTELLO: Which word in office for windows?
ABBOTT: The Word you get when you click the blue 'W'.
COSTELLO: I'm going to click your blue 'W' if you don't start with some
straight answers. What about financial bookkeeping? Do you have anything
I can track my money with?
ABBOTT: Money.
COSTELLO: That's right. What do you have?
ABBOTT: Money.
COSTELLO: I need money to track my money?
ABBOTT: It comes bundled with your computer.
COSTELLO: What's bundled with my computer?
ABBOTT: Money.
COSTELLO: Money comes with my computer?
ABBOTT: Yes. At no extra charge.
COSTELLO: I get a bundle of money with my computer? How much?
ABBOTT: One copy.
COSTELLO: Isn't it illegal to copy money?
ABBOTT: Microsoft gave us a license to copy Money.
COSTELLO: They can give you a license to copy money?
ABBOTT: Why not? THEY OWN IT!
(A few days later)
ABBOTT: Super Duper computer store. Can I help you?
COSTELLO: How do I turn my computer off?
ABBOTT: Click on 'START.'
Forwarded by Sid and Eileen
NO NURSING HOME FOR US!!!
No nursing home for us. We'll be checking into a Holiday Inn! With the
average cost for a nursing home care costing $188.00 per day, there is a better
way when we get old and too feeble. I've already checked on reservations at the
Holiday Inn. For a combined long term stay discount and senior discount, it's
$59.23 per night. Breakfast is included, and some have happy hours in the
afternoon. That leaves $128.77 a day for lunch and dinner in any restaurant we
want, or room service, laundry, gratuities and special TV movies. Plus, they
provide a spa, swimming pool, a workout room, a lounge and washer-dryer, etc.
Most have free toothpaste and razors, and all have free shampoo and soap.
$5-worth of tips a day and you'll have the entire staff scrambling to help you.
They treat you like a customer, not a patient. There's a city bus stop out
front, and seniors ride free. The handicap bus will also pick you up (if you
fake a decent limp). To meet other nice people, call a church bus on Sundays.
For a change of scenery, take the airport shuttle bus and eat at one of the nice
restaurants there. While you're at the airport, fly somewhere. Otherwise, the
cash keeps building up.
It takes months to get into decent nursing homes. Holiday Inn will take your
reservation today. And you're not stuck in one place forever -- you can move
from Inn to Inn, or even from city to city. Want to see Hawaii ? They have
Holiday Inn there too. TV broken? Light bulbs need changing? Need a mattress
replaced? No problem.. They fix everything, and apologize for the inconvenience.
The Inn has a night security person and daily room service. The maid checks
to see if you are ok. If not, they'll call an ambulance . .. . or the
undertaker.
If you fall and break a hip, Medicare will pay for the hip, and Holiday Inn
will upgrade you to a suite for the rest of your life.
And no worries about visits from family. They will always be glad to find
you, and probably check in for a few days mini-vacation.
The grand-kids can use the pool.
What more could I ask for?
So, when I reach that golden age, I'll face it with a grin.
AIDS WARNING!
To all of you approaching 50 or have REACHED 50 and past, this email is
especially for you......
SENIOR CITIZENS ARE THE NATION'S LEADING CARRIERS OF AIDS!
HEARING AIDS
BAND AIDS
ROLL AIDS
WALKING AIDS
MEDICAL AIDS
GOVERNMENT AIDS
MOST OF ALL,
MONETARY AID TO THEIR KIDS!
Not forgetting HIV (Hair is Vanishing)
I'm only sending this to my mature friends.
I love to see you smile.
Forwarded by Paula
Dating Ads for Seniors found in a Florida Newspaper You can say what you want
about Florida, but you never hear of anyone retiring and moving north.
These are actual ads seen in ''The Villages'' Florida newspaper. (Who says
seniors don't have a sense of humor?)
FOXY LADY: Sexy, fashion-conscious blue-haired beauty, 80's, slim, 5'4' (used to
be 5'6'), Searching for sharp-looking, sharp-dressing companion. Matching white
shoes and belt a plus.
----------------------------------------------------
LONG-TERM COMMITMENT: Recent widow who has just buried fourth husband,
Looking for someone to round out a six-unit plot. Dizziness, fainting, shortness
of breath not a problem.
----------------------------------------------------
SERENITY NOW: I am into solitude, long walks, sunrises, the ocean, yoga and
meditation. If you are the silent type, let's get together, take our hearing
aids out and enjoy quiet times.
----------------------------------------------------
WINNING SMILE: Active grandmother with original teeth seeking a dedicated
flossier to share rare steaks, corn on the cob and caramel candy.
----------------------------------------------------
BEETLES OR STONES? I still like to rock, still like to cruise in my Camaro on
Saturday nights and still like to play the guitar. If you were a groovy chick,
or are now a groovy hen, let's get together and listen to my eight-track tapes.
----------------------------------------------------
MEMORIES: I can usually remember Monday through Thursday. If you can remember
Friday, Saturday and Sunday, let's put our heads together
----------------------------------------------------
MINT CONDITION:
Male, 1932 model , high mileage, good condition, some hair, many new parts
including hip, knee, cornea, valves. Isn't in running condition, but walks well.
----------------------------------------------------
Phyllis Dillar Quotations forwarded by Dan Gheorghe Somnea
Housework can't kill you, but why take a chance? Phyllis Diller
Cleaning your house while your kids are still growing up is like shoveling the
walk before it stops snowing. Phyllis Diller A smile is a
curve that sets everything straight. Phyllis Diller
The reason women don't play football is because 11 of them would never wear the
same outfit in public. Phyllis Diller
Best way to get rid of kitchen odours: Eat out. Phyllis Diller
A bachelor is a guy who never made the same mistake once. Phyllis Diller
Never go to bed mad. Stay up and fight. Phyllis Diller
I want my children to have all the things I couldn't afford. Then I want to move
in with them. Phyllis Diller
Most children threaten at times to run away from home. This is
the only thing that keeps some parents going. Phyllis
Diller
My recipe for dealing with anger and frustration: set the
kitchen timer for twenty minutes, cry, rant, and rave, and at
the sound of the bell, simmer down and go about business as
usual. Phyllis
Diller
Aim high, and you won't shoot your foot off. Phyllis
Diller
Any time three New Yorkers get into a cab without an argument, a
bank has just been robbed. Phyllis
Diller
We spend the first twelve months of our children's lives
teaching them to walk and talk and the next twelve telling them
to sit down and shut up. Phyllis
Diller
Burt Reynolds once asked me out. I was in his room. Phyllis
Diller
If it weren't for baseball, many kids wouldn't know what a millionaire looked
like. Phyllis Diller
You know you're old if your walker has an airbag. Phyllis
Diller
I'm eighteen years behind in my ironing. Phyllis
Diller
What I don't like about office Christmas parties is looking for
a job the next day. Phyllis
Diller
The only time I ever enjoyed ironing was the day I accidentally
got gin in the steam iron. Phyllis
Diller
Whatever
you may look like, marry a man your own age - as your beauty fades, so will his
eyesight. Phyllis Diller
I've been asked to say a couple of words about my husband, Fang. How about short
and cheap? Phyllis Diller
I buried a lot of my ironing in the back yard. Phyllis Diller
Tranquilizers work only if you follow the advice on the bottle -
keep away from children. Phyllis
Diller
I asked the waiter, 'Is this milk fresh?' He said, 'Lady, three
hours ago it was grass.' Phyllis
Diller
The reason the pro tells you to keep your head down is so you
can't see him laughing. Phyllis
Diller
You know you're old if they have discontinued your blood type. Phyllis
Diller
It's a good thing that beauty is only skin deep, or I'd be
rotten to the core. Phyllis
Diller
There's a new medical crisis. Doctors are reporting that many
men are having allergic reactions to latex condoms. They say
they cause severe swelling. So what's the problem? Phyllis
Diller
His finest hour lasted a minute and a half. Phyllis Diller
Old age is when the liver spots show through your gloves. Phyllis Diller
My photographs don't do me justice - they just look like me. Phyllis Diller
There's so little money in my bank account, my scenic checks show a ghetto. Phyllis Diller
I admit, I have a tremendous sex drive. My boyfriend lives forty miles away. Phyllis Diller
My cooking is so bad my kids thought Thanksgiving was to commemorate Pearl
Harbor. Phyllis Diller
My mother-in-law had a pain beneath her left breast. Turned out to be a trick
knee. Phyllis Diller
Forwarded by Paula
Ever walk into a room with some purpose in mind, only to completely forget
what that purpose was? Turns out, doors themselves are to blame for these
strange memory lapses.
Psychologists at the University of Notre Dame have discovered that passing
through a doorway triggers what's known as an event boundary in the mind,
separating one set of thoughts and memories from the next. Your brain files away
the thoughts you had in the previous room and prepares a blank slate for the new
locale.
So it's not aging, it's the stupid door!
Thank goodness for scientific studies like this!
Forwarded by Dan
A woman stopped by unannounced at her recently married son's house. She rang
the doorbell and walked in. She was shocked to see her daughter-in-law lying on
the couch, totally naked, soft music was playing and the aroma of perfume filled
the room. "What are you doing?" she asked.
"I'm waiting for my husband to come home from work," the daughter-in-law
answered.
"But you're naked!" the mother-in-law exclaimed.
"This is my love dress," the daughter-in-law explained.
"Love dress? But you're naked!"
"My husband loves me to wear this dress," she explained. "It excites him to
no end. Every time he sees me in this dress, he instantly becomes romantic and
ravishes me for hours on end. He can't get enough of me."
The mother-in-law left. When she got home, she undressed, showered,put on her
best perfume, dimmed the lights, put on a romantic CD, and laid on the couch
waiting for her husband to arrive.
Finally her husband came home. He walked in and saw her lying there so
provocatively. "What are you doing?" he asked. "This is my love dress," she
whispered, sensually. "Needs ironing," he said. "What's for dinner?"
His funeral will be held next Thursday
Forwarded by Paula
God was missing for 6 days. Eventually, Michael, the archangel, found
him, resting on the 7th day.
He inquired, "Where have you been?"
God smiled deeply and proudly pointed downwards through theclouds,
"Look, Michael. Look what I've made."
Archangel Michael looked puzzled, and said, "What is it?"
"It's a planet," replied God, and I've put life on it.
I'm going to call it Earth and it's going to be a place to test
Balance."
"Balance?" inquired Michael, "I'm still confused."
God explained, pointing to different parts of Earth.
"For example, northern Europe will be a place of greatopportunity
and wealth, while southern Europe is going to be poor.
Over here I've placed a continent of white people, and overthere
is a continent of black people. Balance in all things."
God continued pointing to different countries.
"This one will be extremely hot, while this one will bevery
cold and covered in ice."
The Archangel , impressed by God's work, then pointed to aland
area and said, "What's that one?"
"That's Virginia , the most glorious place on earth.
There are beautiful mountains, rivers and streams, lakes, forests,
hills, and plains.
The people from Virginia are going to be handsome, modest, intelligent,
and humorous, and they are going to travel the world.
They will be extremely sociable, hardworking, high achieving, carriers
of peace, and producers of good things"
Michael gasped in wonder and admiration, but then asked,
"But what about balance, God? You said there would be balance."
God smiled, "Right next to Virginia is Washington , D.C....Wait till you
see the idiots I put there."
Old Puns Forwarded by Dr. Wolff
2. I thought I saw an eye-doctor on an
Alaskan island, but it turned out to be an optical Aleutian .
3. She was only a whisky-maker, but he loved
her still.
4. A rubber-band pistol was confiscated from
an algebra class, because it was a weapon of math disruption.
5. No matter how much you push the envelope,
it'll still be stationery.
6. A dog gave birth to puppies near the road
and was cited for littering.
7. A grenade thrown into a kitchen in France
would result in Linoleum Blownapart.
8. Two silk worms had a race. They ended up in
a tie.
9. A hole has been found in the nudist-camp
wall. The police are looking into it.
10. Time flies like an arrow. Fruit flies like
a banana.
11. Atheism is a non-prophet organization.
12.. Two hats were hanging on a hat rack in
the hallway. One hat said to the other: 'You stay here; I'll go on a head.'
13. I wondered why the baseball kept getting
bigger. Then it hit me.
14. A sign on the lawn at a drug rehab center
said: 'Keep off the Grass.'
15. The midget fortune-teller who escaped from
prison was a small medium at large.
16. The soldier who survived mustard gas and
pepper spray is now a seasoned veteran..
17. A backward poet writes inverse.
18.. In a democracy it's your vote that
counts. In feudalism it's your count that votes.
19. When cannibals ate a missionary, they got
a taste of religion.
20. If you jumped off the bridge in Paris ,
you'd be in Seine .
21. A vulture carrying two dead raccoons
boards an airplane. The stewardess looks at him and says, 'I'm sorry, sir, only
one carrion allowed per passenger.'
22. Two fish swim into a concrete wall. One
turns to the other and says, 'Dam!'
23.. Two Eskimos sitting in a kayak were
chilly, so they lit a fire in the craft. Unsurprisingly it sank, proving once
again that you can't have your kayak and heat it too.
24.. Two hydrogen atoms meet. One says, 'I've
lost my electron.' The other says, 'Are you sure?' The first replies, 'Yes, I'm
positive.'
25. Did you hear about the Buddhist who
refused Novocain during a root-canal? His goal: transcend dental medication.
26. There was the person who sent ten puns to friends, with the hope that at
least one of the puns would make them laugh. No pun in ten did.
Forwarded by Auntie Bev
Why Go to Church?
One Sunday morning, a mother went in to wake her son
and tell him it was time to get ready for church, to which he replied, "I'm not
going."
"Why not?" she asked.
I'll give you two good reasons," he said. "(1), they don't like me, and (2), I
don't like them."
His mother replied, "I'll give you two good reasons why you SHOULD go to
church:
(1) You're 49 years old, and (2) you're the pastor!"
The Picnic
A Jewish Rabbi and a Catholic Priest met at the town's annual
4th
of July picnic. Old friends, they began their usual banter.
"This baked ham is really delicious," the priest teased the rabbi. "You really
ought to try it. I know it's against your religion, but I can't understand why
such a wonderful food should be forbidden! You don't know what you're missing.
You just haven't lived until you've tried Mrs. Hall's prized Virginia Baked Ham.
Tell me, Rabbi, when are you going to break down and try it?"
The rabbi looked at the priest with a big grin, and said, "At your wedding."
The Usher
An elderly woman walked into the local country church. The friendly usher
greeted her at the door and helped her up the flight of steps.
"Where would you like to sit?" he asked politely.
"The front row, please," she answered..
"You really don't want to do that," the usher said. "The pastor is really
boring."
"Do you happen to know who I am?" the woman inquired.
"No," he said.
"I'm the pastor's mother," she replied indignantly.
"Do you know who I am?" he asked.
"No," she said.
"Good," he answered.
Show and Tell
A kindergarten teacher gave her class a "show and tell" assignment. Each
student was instructed to bring in an object that represented their religion to
share with the class.
The first student got up in front of the class and said, "My name is Benjamin
and I am Jewish and this is a Star of David."
The second student got up in front of the class and said, "My name is Mary. I'm
a Catholic and this is a Rosary."
The third student got in up front of the class and said, "My name is Tommy. I am
Methodist, and this is a casserole."
The Best Way to Pray
A priest, a minister and a guru sat discussing the best positions for prayer,
while a telephone repairman worked nearby
"Kneeling is definitely the best way to pray," the priest said.
"No," said the minister. "I get the best results standing with my hands
outstretched to Heaven."
"You're both wrong," the guru said. "The most effective prayer position is lying
down on the floor."
The repairman could contain himself no longer. "Hey, fellas," he interrupted.
"The best prayin' I ever did was when I was hangin' upside down from a telephone
pole."
The Twenty and the One
A well-worn one-dollar bill and a similarly distressed twenty-dollar bill
arrived at a Federal Reserve Bank to be retired.
As they moved along the conveyor belt to be burned, they struck up a
conversation.
The twenty-dollar bill reminisced about its travels all over the country.
"I've had a pretty good life," the twenty proclaimed... "Why I've been to Las
Vegas and Atlantic City , the finest restaurants in New York , performances on
Broadway, and even a cruise to the Caribbean ...."
"Wow!" said the one-dollar bill. "You've really had an exciting life!"
"So, tell me," says the twenty, "where have you been throughout your lifetime?"
The one dollar bill replies, "Oh, I've been to the Methodist Church , the
Presbyterian church, the Baptist Church , the Lutheran Church .."
The twenty-dollar bill interrupts, "What's a church?"
Goat for Dinner
The young couple invited their elderly pastor for
Sunday dinner. While they were in the kitchen preparing the meal,
the minister asked their son what they were having.
"Goat," the little boy replied.
"Goat?" replied the startled man of the cloth, "Are you sure about that?"
"Yep," said the youngster. "I heard Dad say to Mom, 'Today is just as good as
any to have the old goat for dinner.' "
Forwarded by Gene and Joan
The Goldberg Brothers - The Inventors of the Automobile Air Conditioner
Here's a little known fact for automotive buffs or just to dazzle your
friends.
The four Goldberg brothers, Lowell, Norman, Hiram,and Max, invented and
developed the first automobile air-conditioner.
On July 17, 1946, the temperature in�Detroit was 97 degrees.
The four brothers walked into old man Henry Ford's office and sweet-talked
his secretary into telling him that four gentlemen were there with the most
exciting innovation in the auto industry since the electric starter.
Henry was curious and invited them into his office.They refused and instead
asked that he come out to the parking lot to their car.�
They persuaded him to get into the car,
which was about 130 degrees, turned on their air conditioner, and� cooled the
car off immediately.
The old man got very excited and invited them back�to the office, where he
offered them $3 million for the patent.
The brothers refused, saying they would settle for $2 million, but they
wanted the recognition
by having a�label, 'The Goldberg Air-Conditioner,'
on the dashboard�of each car in which it was installed.
Now old man Ford was more than just a little anti-Semitic, and there was no
way
he was going to put the Goldberg's name
on two million Fords.
They haggled back and forth
for about two hours and�finally agreed on $4 million and that just their
first� names would be shown.�
And so to this day,
all Ford air conditioners show -- Lo, Norm, Hi, and Max -- on the controls.�
I can hear your groans from here.
Forwarded by Paula
This story happened a while ago near Kells, County Meath, and even though it
sounds like an Alfred Hitchcock tale, it's actually true.
John Reilly, a Cavan man studying in UCD, was on the side of the road
hitchhiking back to Dublin on a very dark night and in the midst of a big storm.
The night was rolling on and no car went by. The storm was so strong he could
hardly see a few feet ahead of him. Suddenly, he saw a car slowly coming towards
him and stopped.
John, desperate for shelter and without thinking about it, got into the car
and closed the door, only to realize there was nobody behind the wheel and the
engine wasn't on. The car started moving slowly. John looked at the road ahead
and saw a curve approaching. Scared, he started to pray, begging for his life.
Then, just before the car hit the curve, a hand appeared out of nowhere
through the window, and turned the wheel. John, paralyzed with terror, watched
as the hand came through the window, but never touched or harmed him.
Shortly thereafter, John saw the lights of a pub appear down the road, so,
gathering strength; he jumped out of the car and ran to it. Wet and out of
breath, he rushed inside and started telling everybody about the horrible
experience he had just had.
A silence enveloped the pub when everybody realized he was crying...and
wasn't drunk.
Suddenly, the door opened, and two other people walked in from the dark and
stormy night. They, like John, were also soaked and out of breath. Looking
around, and seeing John Reilly sobbing at the bar, one said to the other,
“Look, Frank, there's that fooking idiot that got in the car while we were
pushing it!”
Oldies from church bulletins forwarded by Paula
Those wonderful Church Bulletins! Thank God for the church ladies with typewriters. These sentences actually appeared in church bulletins or were announced at church services:
The Fasting & Prayer Conference includes meals.
--------------------------
Scoutsare saving aluminum cans, bottles and other items to be recycled. Proceeds will be used to cripple children.
--------------------------
The sermon this morning: 'Jesus Walks on the Water. ‘The sermon tonight: ‘Searching for Jesus.'
--------------------------
Ladies, don't forget the rummage sale. It's a chance to get rid of those things not worth keeping around the house. Bring your husbands.
--------------------------
Don't let worry kill you off - let the Church help.
--------------------------
Miss Charlene Mason sang 'I will not pass this way again,' giving obvious pleasure to the congregation.
--------------------------
For
those
of
you
who
have
children
and
don't
know
it,
we
have
a
nursery
downstairs.
--------------------------
Next
Thursday
there
will be
try-outs
for the
choir.
They
need all
the help
they can
get.
--------------------------
Irving
Benson and
Jessie
Carter were
married on
October 24
in the
church. So
ends a
friendship
that began
in their
school days.
--------------------------
A
bean supper will
be held on
Tuesday evening
in the church
hall. Music will
follow..
--------------------------
At
the evening service
tonight, the sermon
topic will be 'What
Is Hell?' Come early
and listen to our
choir practice.
--------------------------
Eight new
choir robes are
currently needed due to
the addition of several
new members and to the
deterioration of some
older ones.
--------------------------
Please place
your donation in the
envelope along with the
deceased person you want
remembered..
--------------------------
The church will
host an evening of fine dining,
super entertainment and gracious
hostility.
--------------------------
Pot-luck supper
Sunday at 5:00 PM - prayer and
medication to follow.
--------------------------
The ladies of the Church
have cast off clothing of every kind.
They may be seen in the basement
on Friday
afternoon.
--------------------------
This evening at
7 PM there
will be a hymn singing in the park across
from the Church. Bring a blanket and come
prepared to sin.
--------------------------
The pastor would appreciate it if
the ladies of the Congregation would lend him
their electric girdles for the pancake breakfast
next Sunday.
--------------------------
Low Self Esteem Support Group will
meet Thursday at 7 PM . Please use the back door.
--------------------------
The eighth-graders will be presenting
Shakespeare's Hamlet in the Church basement
Friday at 7 PM .. The
congregation is invited to attend this tragedy.
--------------------------
Weight Watchers will meet at
7 PM at the First
Presbyterian Church. Please use large double door at the
side entrance.
--------------------------
And this one just about sums them all up
The Associate Minister unveiled the church's new
campaign slogan last Sunday:
'I Upped My Pledge - Up Yours.'
Forwarded by Gene and Joan
HAVE YOU EVER BEEN GUILTY OF LOOKING AT OTHERS YOUR OWN AGE AND THINKING,
SURELY, I CAN'T LOOK THAT OLD.
MY NAME IS ALICE , AND I WAS SITTING IN THE WAITING ROOM FOR MY FIRST
APPOINTMENT WITH A NEW DENTIST.
I NOTICED HIS DDS DIPLOMA ON THE WALL, WHICH BORE HIS FULL NAME. SUDDENLY, I
REMEMBERED A TALL, HANDSOME, DARK-HAIRED BOY WITH THE SAME NAME HAD BEEN IN MY
HIGH SCHOOL CLASS SOME 40-ODD YEARS AGO.
COULD HE BE THE SAME GUY THAT I HAD A SECRET CRUSH ON, WAY BACK THEN?
UPON SEEING HIM, HOWEVER, I QUICKLY DISCARDED ANY SUCH THOUGHT.
THIS BALDING, GRAY-HAIRED MAN WITH THE DEEPLY LINED FACE WAS WAY TOO OLD TO
HAVE BEEN MY CLASSMATE.
AFTER HE EXAMINED MY TEETH, I ASKED HIM IF HE HAD ATTENDED MORGAN PARK HIGH
SCHOOL ...
YES. YES, I DID. I'M A MUSTANG,' HE GLEAMED WITH PRIDE.
WHEN DID YOU GRADUATE?' I ASKED.
HE ANSWERED, 'IN 1967, WHY DO YOU ASK?'
YOU WERE IN MY CLASS!', I EXCLAIMED.
HE LOOKED AT ME CLOSELY.
THEN, THAT UGLY,
OLD,
BALD,
WRINKLED FACED,
FAT-ASSED,
GRAY-HAIRED,
DECREPIT SON-OF-A-BITCH
ASKED,
'WHAT DID YOU TEACH?'
Blonde Joke Forwarded by Gene and Joan
A contestant on Who Wants to be a Millionaire? had reached the final plateau.
If she answered the next question correctly, she would win the million dollars.
If she answered incorrectly, she would pocket only the $32,000 milestone money.
And as she suspected it would be, the million-dollar question was no
pushover. It was, "Which of the following species of birds does not build its
own nest, but instead lays its eggs in the nests of other birds? Is it A) the
condor; B) the buzzard; C) the cuckoo; or D) the vulture?"
The woman was on the spot. She did not know the answer. And she was doubly on
the spot because she had used up her 50/50 Lifeline and her Audience Poll
Lifeline. All that remained was her Phone-a-Friend Lifeline, and the woman had
hoped against hope that she would not have to use it. Mainly because the only
friend that she knew would be home happened to be a blonde.
But the contestant had no alternative. She called her friend and gave her the
question and the four choices. The blonde responded unhesitatingly: "That's
easy. The answer is 'C' -- the cuckoo."
The contestant had to make a decision and make it fast. She considered
employing a reverse strategy and giving Regis any answer except the one that her
friend had given her. And considering that her friend was a blonde, that would
seem to be the logical thing to do.
On the other hand, the blonde had responded with such confidence, such
certitude, that the contestant could not help but be persuaded.
Time was up. "I need an answer," said Regis.
Crossing her fingers, the contestant said, "C) the cuckoo."
"Is that your final answer?" asked Regis.
"Yes, that is my final answer," she said, breaking into a sweat.
After the usual foot-dragging delay Regis said, "I regret to inform you that
that answer is ... absolutely correct. You are now a millionaire!"
Three days later, the contestant hosted a party for her family and friends,
including the blonde who had helped her win the million dollars.
"Jenny, I just do not know how to thank you," said the contestant. "Because
of your knowing the answer to that final question, I am now a millionaire. And
do you want to know something? It was the assuredness with which you answered
the question that convinced me to go with your choice."
"You're welcome!" the blonde said.
"By the way," the winner said, not being able to contain the question
anymore. "How did you happen to know the right answer?"
"Oh, come on," said the blonde. "Everybody knows that cuckoos don't build
nests. They live in clocks."
Forwarded by my friend in Romania
I was at the bar the other night and overheard three very hefty women talking
at the bar.
Their accent appeared to be Scottish, so I approached and asked, "Hello, are
you three lassies from Scotland ?"
One of them angrily screeched, "It's Wales, Wales you bloody idiot!"
So I apologized and replied, "I am so sorry. Are you three whales from
Scotland ?"
And that's the last thing I remember
Also forwarded by my friend in Romania
WARM MILK
In a convent in Ireland , the 98-year-old Mother Superior lay dying. The nuns
gathered around her bed trying to make her last journey comfortable. They tried
giving her warm milk to drink but she refused it.
One of the nuns took the glass back to the kitchen. Then, remembering a
bottle of Irish Whiskey that had been received as a gift the previous Christmas,
she opened it and poured a generous amount into the warm milk.
Back at Mother Superior's bed, they held the glass to her lips. The frail nun
drank a little, then a little more and before they knew it, she had finished the
whole glass down to the last drop.
As her eyes brightened, the nuns thought it would be a good opportunity to
have one last talk with their spiritual leader..
"Mother," the nuns asked earnestly,
"Please give us some of your wisdom before you leave us.
"She raised herself up in bed on one elbow, looked at them and said:
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down) CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access.
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA.
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation.
Concerns That Academic Accounting Research is Out of Touch With Reality
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of theshift from Gemeinschaftto
Gesellschaft.Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
Concerns
That Academic Accounting Research is Out of Touch With Reality
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the twin
dangers of fossilization and scholasticism (of three types: tedium,
high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of theshift from Gemeinschaftto
Gesellschaft.Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
