New
Bookmarks
Year 2013 Quarter 2: April 1 - June 30 Additions to
Bob Jensen's Bookmarks
Bob Jensen at
Trinity University
For
earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Tidbits Directory ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Click here to search Bob Jensen's web site if you have
key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/.
Bob Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
574 Shields
Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Choose a
Date Below for Additions to the Bookmarks File
2013
June 1-30
May 31,
2013
April 30,
2013
June 30, 2013
Bob
Jensen's New Bookmarks June 30, 2013
Bob Jensen at
Trinity University
For
earlier editions of Fraud Updates go to
http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Click here to search Bob Jensen's web site if you
have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's
Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm
All
my online pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
FASB Accounting Standards Updates ---
http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB/Page/SectionPage&cid=1176156316498
Hasselback Accounting Faculty
Directory ---
http://www.hasselback.org/
Blast from the Past With Hal
and Rosie Wyman ---
http://www.cs.trinity.edu/~rjensen/temp/Wyman2011.htm
Bob
Jensen's threads on business, finance, and accounting glossaries ---
http://www.trinity.edu/rjensen/Bookbus.htm
2012 AAA
Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view
these videos.
Bob Jensen is an obscure speaker following Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc
List of FASB Pronouncements
---
http://en.wikipedia.org/wiki/List_of_FASB_pronouncements
2013 IFRS Blue Book
(Not Free) ---
http://shop.ifrs.org/ProductCatalog/Product.aspx?ID=1717
Links to
IFRS Resources (including IFRS Cases) for Educators ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Bob
Jensen's threads on controversies in accounting standard setting ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
American
Accounting Association Past Presidents are listed at
http://www.cs.trinity.edu/~rjensen/temp/PastPresidentsAAA.htm
"2012 tax
software survey: Which products and features yielded frustration or bliss?" by
Paul Bonner, Journal of Accountancy, September 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Sep/20125667.htm
Center for Financial Services
Innovation ---
http://cfsinnovation.com/
"Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
Note this has a good explanation of how the inspection process works.
PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx
Bob
Jensen's taxation helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
Subtle Distinctions in Technical
Terminology
Machine Learning, Big Data, Deep Learning, Data Mining, Statistics, Decision &
Risk Analysis, Probability, Fuzzy Logic FAQ ---
http://wmbriggs.com/blog/?p=6465
Today’s FBI: Facts and Figures 2013-2014—which provides an in-depth look
at the FBI and its operations—is now available ---
http://www.fbi.gov/stats-services/publications/todays-fbi-facts-figures/facts-and-figures-031413.pdf/view
AICPA Fraud Resource Center ---
Click Here
http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/FRAUDPREVENTIONDETECTIONRESPONSE/Pages/fraud-prevention-detection-response.aspx
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Technical Tax Course Materials from
Lexis-Nexus
Graduate Tax Series ---
http://taxprof.typepad.com/files/graduate-tax-series-description-082911.pdf
CGMA Portfolio of Tools for Accountants
and Analysts ---
http://www.cgma.org/Resources/Tools/Pages/tools-list.aspx
Includes ethics tools and learning cases.
From the IRS
IRS Criminal Investigation Issues Fiscal 2012 Report, IR-2013-50, May 10, 2013
---
http://www.irs.gov/uac/Newsroom/IRS-Criminal-Investigation-Issues-Fiscal-2012-Report
Humor Between June 1-30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor063013
Humor Between May 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor053113
Humor Between April 1-30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor043013
Humor Between March 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor033113
Humor Between February 1-28, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor022813
Humor Between January 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor013113
Humor Between December 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor123112
Humor Between November 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor113012
Humor Between October 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor103112
Humor Between September 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor093012
Humor Between August 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor083112
Humor Between July 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor073112
Humor Between June 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor063012
Humor Between May 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor053112
Humor Between April 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor043012
Humor Between March 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor033112
Humor Between February 1-29, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor022912
Humor Between January 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor013112
In the June 2013 edition of Accounting Horizons,
Bill Beaver and Mark Wolfson authored a long tribute to their colleague Chuck
Horngren. I became somewhat closer to Chuck and Joan when we rented a house for
one year about a block from the Horngren house in the Stanford faculty ghetto.
My daughter Lisl and Kathy Horngren became close when attending the third grade
in the same nearby elementary school. My relationship with Chuck was more on a
social level. I never did work with him on projects since in those days my think
tank interests were more in multivariate statistics before quantitative methods
got a grip on the AAA. Bill Beaver and Joel Demski had only recently joined
their University mentor (Chuck Horngren) on the Stanford GSB faculty.
I pretty much wasted the first of two years in a
think tank near the Stanford campus. I did write my first AAA research monograph
entitled Phantamagoric Accounting, but that was mostly a sideline the
first year.
SAR 14 at
http://aaahq.org/market/display.cfm?catID=5
In the second year I wrote SAR 19.
My real interest in those think tank years was in
adaptive regression and non-parametrics. Twenty years later Jerome Friedman made
original contributions that eluded me in the 1970s. I was no Jerome Friedman.
Jensen Comment on Robustness
Back in the 1970s, on leave of absence for two years from the University
of Maine, I spent much of my first year in a think tank trying to "invent"
adaptive linear regression models that were robust when predictor variables
were interactive. This was in the days before personal computers and
networked computers. The think tank was, and still is, just outside the main
Stanford University campus on a cow-pasture hill overlooking Lake Laganita.
The think tank provided me with a courier service that would take my IBM
punch card decks (that i punched out) down to Stanford's main frame computer
for agonizingly slow batch processing. After months of trial and error my
"inventions" were failures largely because they were just not robust in the
sense that the importance of predictor variables varied with such things as
the order in which they were fed adaptively into my multivariate predictor
models. I other words Models A and B might end up with the same predictive
powers and the same predictor variables that were fed in adaptively. But the
relative importance of the predictor variables often varied with the order
in which they were fed into the model. My "inventions" were just not robust
enough to excite any statistician or economist.
This was nearly twenty years before Jerome Friedman in 1991introduced a
non-parametric multivariate regression splines ---
http://en.wikipedia.org/wiki/Multivariate_adaptive_regression_splines
These MARS models are designed to handle data with interactive predictor
variables.
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
"Why We Fear MOOCs," by Mary
Manjikian, Chronicle of Higher Education, June 14, 2013 ---
http://chronicle.com/blogs/conversation/2013/06/14/why-we-fear-moocs/?cid=wc&utm_source=wc&utm_medium=en
How to Sign Up for a MOOC
Although not MOOC complete courses, there
are over 2,000 free learning modules at Kahn Academy, including some
advanced-learning accounting modules:
Khan Academy Home Page ---
http://www.khanacademy.org/
This site lists the course categories but there are more courses than
fit under these categories. It's best to search for a topic of
interest.
Bob Jensen's threads on MOOCs and other shared tutorials, courses, videos,
and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
I hope Jim K will comment on how "research in business schools is becoming
increasingly distanced from the reality of business"
"In 2008 Hopwood commented on a number of issues," by Jim Martin, MAAW
Blog, June 26, 2013 ---
http://maaw.blogspot.com/2013/06/in-2008-hopwood-commented-on-number-of.html
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.
Respectfully,
Bob Jensen
Essays on the (mostly sad) State of Accounting Scholarship ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays
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
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,
Recent accounting scholarship has used
statistical analysis on asset prices, financial reports and disclosures,
laboratory experiments, and surveys of practice. The research has
studied the interface among accounting information, capital markets,
standard setters, and financial analysts and how managers make
accounting choices. But as accounting scholars have focused on
understanding how markets and users process accounting data, they have
distanced themselves from the accounting process itself. Accounting
scholarship has failed to address important measurement and valuation
issues that have arisen in the past 40 years of practice. This gap is
illustrated with missed opportunities in risk measurement and management
and the estimation of the fair value of complex financial securities.
This commentary encourages accounting scholars to devote more resources
to obtaining a fundamental understanding of contemporary and future
practice and how analytic tools and contemporary advances in accounting
and related disciplines can be deployed to improve the professional
practice of accounting. ©2010 AAA
The videos of the three plenary speakers at the 2010 Annual Meetings in San
Francisco are now linked at
http://commons.aaahq.org/hives/531d5280c3/posts?postTypeName=session+video
I think the video is only available to AAA members.
From the CFO Journal's Morning Ledger on June 26, 2013
Non-GAAP metrics are playing a bigger role in
financial reporting. Since regulators relaxed their stance on the use of
nontraditional financial reporting measures in 2010, companies have been
embracing metrics like customer churn rates and average revenue per user,
CFOJ’s Emily Chasan writes.
Driving the trend is a desire on the parts of both
investors and corporate managers to focus on measures that have less noise
and are clear indicators of the direction of the business. “There’s a
disconnect between what finance departments want to report and
financial-statement users want to receive,” Prof. Paul Bahnson of Boise
State University said an Institute of Management Accountants conference in
New Orleans this week. Corporate managers may prefer to report smoother
results with less volatility based on historical information, but investors
want to make sure they’re seeing more current information and capturing
natural volatility.
Meanwhile, Prof. Paul Miller of the University of
Colorado at Colorado Springs argues that historical cost information is
losing its relevance. He says accountants should think about historical
costs as “unverifiable” and “unreliable” since they are statistically based
on a sample size of a single transaction and can’t capture the full
market value of an asset.
Jensen Comment
Paul Miller is extremely misleading about historical cost bookings in the
ledgers. To my knowledge no historical cost advocate from AC Littleton to
Yuji Ijiri has ever claimed that historical cost financial statements even
pretend to "capture the full market value of an asset" or any part or
combination thereof except in the case of conservatism overrides when
historical cost book values significantly overstate current values. For example,
if inventory carrying values (at historical cost) are seriously in excess of
disposal value due to damage or obsolescence the Conservatism Principle dictates
a departure from historical cost.
To my knowledge AC Littleton historically is the strongest advocate of
historical cost accounting as modified by the Conservatism Principle. He
repeatedly asserted that historical cost measurements make no pretenses of being
surrogates for entry values or exit values or values-in-use under fair value
accounting. Whereas the focus of fair value accounting is on balance sheet
items, the main focus of historical cost accounting is on the income statement
under the Matching Principle ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue
Fair value advocates inappropriately wrote off the Matching Principle years ago.
To their embarrassment the Matching Principle is still with us in FASB and IASB
standards in spirit if not in name.
Paul Miller's statement that "historical costs as
'unverifiable' and iunreliable' since they are statistically based on a sample
size of a single (original) transaction"
implicitly assumes that the only purpose of historical cost book value is to be
a surrogate for some type of current market value. Since entry value accounting
requires arbitrary depreciation formulas and exit value accounting reports
assets in their worst possible uses (yard sale junk items) what Paul Miller must
mean is "value-in-use."
But to my knowledge no economist or accountant has ever figured out how to
value any nonfinancial booked asset in Exxon at its "value-in-use."
The most important statistic, in my opinion, that is tracked by investors and
financial analyst is current earnings in some form whether as Earnings-Per-Share
or Price/Earnings ratios. Like it or not historical cost is still a primary
driver of current earnings under FASB or IASB accounting standards. Paul
Miller's assertion that "historical cost information is
losing its relevance" is totally incorrect as long as earnings measure
are driven primarily by historical cost rules still drive earnings measurement
under FASB and IASB rules. This will be true until the FASB and IASB
eliminate historical cost depreciation and amortization and all the other
historical cost accruals completely from the accounting standards. I may be
ice skating and skiing in Hell before that happens.
Having said this, I've no objection to entry value or exit value columns
alongside GAAP columns prepared under FASB or IASB standards. I just do not want
all unrealized temporal changes in market values to impact on current earnings.
I vote for OCI in that department for items like marketable securities now
carried at exit values under FASB and IASB standards.
"Lie Detection 101 for Financial Analysts: How to Spot Manipulators and
Actors," by Jason Voss, CFA, Enterprise Investor, July 19, 2012 ---
http://blogs.cfainstitute.org/investor/2012/07/19/lie-detection-basics/
"How to spot a liar," by Leon Gettler, Sydney Morning Herald,
July 10, 2010 ---
http://www.smh.com.au/executive-style/management/blogs/management-line/how-to-spot-a-liar-20100905-14vot.html
Watch the Video
"The Science of Reading Faces" by Paul Eckman
http://www.youtube.com/watch?v=IA8nYZg4VnI
Watch the Video
"10 Verbal and Non-Verbal Signs to Spot a Liar at Work," Stanford
Graduate School of Business, June 2013 ---
http://stanfordbusiness.tumblr.com/post/54109702521/10-verbal-and-non-verbal-signs-to-spot-a-liar-at-work
VERBAL SIGNS:
1. Selective wording
Someone might be lying if he or she doesn’t actually answer your question.
For example, you might ask an interviewee, “Did you leave your last
workplace under good conditions?” If the person responds, “I left to pursue
things that were more in line with my skills and talents,” you should take
note that he or she skirted around your true question.
2. Quasi-denials
Listen for instances when people back out of statements before actually
saying them, like “I could be wrong but…”.
3. Qualifiers
Another possible sign of deception could be using qualifying phrases
like “To the best of my knowledge…”.
4. Softeners
When innocent people are questioned about a possible theft or crime, they
tend to use “hard” words like “steal” or “forge.” But if they are guilty,
people soften their diction using words like “borrow” or “mistake.”
5. Overly formal wording
Liars might use phrases that add distance, like formal titles Mr. or Mrs.
You might also hear them speak in full phrases like “did not” versus
informal contraction “didn’t.”
NONVERBAL SIGNS:
1. Stress signals
When people lie, their heart rate goes up, blood pressure goes up and
breathing gets shallow. Much of detecting lies is actually detecting stress.
You won’t know if people are lying just by the fact that they are playing
with their jewelry or bouncing their feet, but you’ll know that something is
up.
2. Deviation from the “truth baseline”
Before an official job interview, you might invite candidates for
coffee so you can observe their gestures and the pitch of their voices as
they answer easy questions like, “How did you hear about this job?” Look for
a baseline of truthful answer behaviors and then take note of any changes
during further questioning.
3. “Telltale Four”
Look for clusters of verbal and nonverbal signs. If you’re interviewing
someone and notice stress signs, put an asterisk by that question and return
to the subject later. If you get the stressed reactions a second time, the
person may be holding something back.
4. Eye signals
The biggest myth around deception is that liars don’t look you in the eye.
Because liars have heard this, they may overcompensate and look at you too
directly. There is, however, a correlation between lying and blink rate. As
a lie is constructed and told, the liar’s blink rate goes down. After the
lie is told, the blink rate will increase up to eight times.
5. Emotional incongruence
Sometimes you just have a gut feeling that something is off, like
catching someone with a phony smile. A liar can look incredibly fearful that
he or she will be caught, but be careful because truthful people can also
look fearful that you won’t believe them.
Jensen Comment
I don't have much faith in these cues. All too often fraudsters like Bernie
Madoff, Jeff Skilling, and Rita Grundwell lie with great skill even amidst their
own families. Chances are they repeatedly got away with telling lies and
cheating from early childhood.
"Three Lies You Learned in School," Everyday Einstein, June 27,
2013 ---
http://everydayeinstein.quickanddirtytips.com/three-lies-you-learned-in-school.aspx
Another Lie College Students May Now Be Learning in School
"Quantitative Easing Is Not 'Printing Money'," by Martin Feldstein,
Business Insider, June 27, 2013 ---
http://www.businessinsider.com/feldstein-why-inflation-is-low-2013-6
Jensen Comment
There's a bit of slight of hand in the above article. There's a difference when
the U.S. sells a treasury bond to China relative to selling a treasury bond to
itself (errrr read that the Fed). The main difference is that the USA has to pay
off the debt to China when it comes due. If QE comes to an end Uncle Sam has to
either raise the payoff from taxpayers or borrow from somewhere (e.g., Saudi
Arabia) to pay off what it owes to China.
Uncle Sam does not have to borrow from Saudi Arabia (at possibly higher
treasury rates) or raise taxes to pay off the bonds that it sold to itself.
Instead this debt is paid off with inflation which is (gasp) tantamount to
printing green backs. The QE works as long as circumstances are holding down
inflation, especially circumstances where the other national economies on earth
are in such worse shape.
If QE was the answer to deficit spending economies like Switzerland and
Sweden would see the light and use QE to fund massive deficits like the USA
funds massive deficits. But they know better!
Thus Feldstein's article is a smoke and mirrors piece that is technically
correct but couched in wording that disguises the fact that QE is really a form
of printing money.
The biggest drawback of QE in the USA political attitude that deficits don't
matter as long as you're borrowing from yourself. Economists are not so easily
misled, but the big spenders in Washington who want more of both guns and butter
will keep borrowing from themselves if for no other reason than to keep getting
re-elected year after year after year ad infinitum until they're finally pushing
up daisies.
Someday the USA will pay the piper who is not invited to make music in
Switzerland and Sweden. Quantitative Easing is not free money when you tear down
the smoke and mirrors justification. Shame on you Martin Feldstein!
The Economist Dean of the Columbia University Business School is Not a
Fan of Ben Bernanke or Paul Krugman
"Glenn Hubbard Explains The Doomsday Scenario That America Will See In 20
Years If There's No Change In Spending," by Joe Weisenthal, Business
Insider, June 24, 2013 ---
http://www.businessinsider.com/glenn-hubbards-doomsday-scenario-2013-6
We recently had Glenn Hubbard, dean of the Columbia
Graduate School of Business, into discuss his book
Balance: The Economics of Great Powers from Ancient Rome to Modern America.
Hubbard's main argument is that the US must reduce
its long-term deficit, and that if it's not addressed, then within 20 years
the US will see a "doomsday scenario" of virtually no social spending and
monstrous taxes.
Watch the video
Bob Jensen's threads on entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm
Questions
Is this math error by some of the best statisticians in the world or is it
simply the planets aligning in a way that was not given much probability of
happening?
How should this risk be accounted for in financial statements of life
insurance companies?
"Misjudged Annuity Guarantees May Cost Life Insurers Billions,"
by Lesie E. Scism, The Wall Street Journal, June 24, 2013 ---
http://online.wsj.com/article/SB10001424127887323998604578565711321338272.html?mod=WSJ_hp_LEFTWhatsNewsCollection
Life insurers in the U.S. face charges against
earnings potentially totaling billions of dollars from miscalculations about
the number of customers who would exercise lifetime-income guarantees sold
with the retirement products known as variable annuities, according to a new
report from Moody's Investors Service MCO +1.70% .
Variable annuities are a tax-advantaged way to
invest in stock and bond funds, and these particular guarantees promise
steady payouts if owners' fund accounts become depleted.
The grim outlook from the New York ratings firm
comes as some insurers are continuing to explore ways to reduce the
liability they face from the big blocks of guarantees on their books. Over
the past couple of years, many insurers have clamped down on fund choices,
raised fees, forbid additional account contributions and sought to buy back
the contracts.
In one of the latest efforts, Hartford Financial
Services Group Inc. HIG +2.32% is requiring owners of certain of its
guarantees to move at least 40% of their money into bond funds—and lose
their guarantee if they fail to transfer the money out of stock funds.
Some financial advisers say they worry that clients
they aren't able to reach will inadvertently lose the valuable guarantees,
possibly exposing the advisers to litigation.
"If you do not allocate your contract value in
accordance with the Investment Restrictions" by Oct. 4, the guarantee "WILL
BE REVOKED," according to a letter Hartford is dispatching to its customers
this month, with the words in boldface type.
Hartford says it needs customers to act because the
company's contracts don't allow the insurer to move customers' money from
one fund to another without authorization, as some other firms have done. A
Hartford spokeswoman said that the insurer plans "a series of reminder
letters to customers," as well as extensive communication to brokers and
advisers. Customers who miss the Oct. 4 deadline will be notified of an
opportunity to reinstate the guarantee, she said.
Scott Stolz, who heads an insurance unit at
brokerage firm Raymond James, is among the critics of the move. "Is it the
right thing to do to put the policyholder in a situation where, if they
don't do something, they will lose a feature they have paid for for years?"
he said. Mr. Stolz says he worries that no matter how good the outreach,
"there will be a number [of clients] we can't get hold of, and now we carry
the potential liability that a feature they bought from Hartford, through
us, no longer exists."
Historically, the biggest risk the guarantees posed
to insurers has been a steep equity-market decline, but most insurers have
learned to effectively hedge the risk of stock-market declines using
financial derivatives, according to the Moody's report.
Insurers now are plagued by "less-easily hedged and
more unpredictable policyholder behavior," with retention of the products
"much greater than expected," the report said.
Insurers including ING U.S VOYA +1.16% .'s
life-insurance units and MetLife Inc. MET +2.05% together have taken more
than $2.75 billion in charges, in part reflecting lower-than-expected
cancellation of the products.
"Lower lapse rates means that higher reserves are
required due to higher potential future guaranteed payments to a larger
remaining customer group," Moody's report says.
The report said "the industry impact could be in
the billions of dollars."
In the early to mid-2000s, insurers competed to
sell ever-more-generous guarantees to older people worried about investment
losses and outliving their savings. The market declines of the financial
crisis showed the value of the products to consumers—and the cost to
insurers, as they were required by regulators to boost reserves and capital
to back the guarantees.
Immediately after the financial crisis, insurers
yanked generous versions of the guarantees from the marketplace and launched
new ones with scaled-back benefits, higher prices and fewer choices. Some
insurers, including once-dominant-player Hartford, have stopped selling
variable annuities.
Continued in article
Bob Jensen's threads on accounting for intangibles and contingencies ---
ttp://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes
How to Lie With Statistics
Simpson's Paradox and Cross-Validation
Simpson's Paradox ---
http://en.wikipedia.org/wiki/Simpson%27s_paradox
"Simpson’s Paradox: A Cautionary Tale in Advanced Analytics," by Steve
Berman, Leandro DalleMule, Michael Greene, and John Lucker, Significance:
Statistics Making Sense, October 2012 ---
http://www.significancemagazine.org/details/webexclusive/2671151/Simpsons-Paradox-A-Cautionary-Tale-in-Advanced-Analytics.html
Analytics projects often present us with situations
in which common sense tells us one thing, while the numbers seem to tell us
something much different. Such situations are often opportunities to learn
something new by taking a deeper look at the data. Failure to perform a
sufficiently nuanced analysis, however, can lead to misunderstandings and
decision traps. To illustrate this danger, we present several instances of
Simpson’s Paradox in business and non-business environments. As we
demonstrate below, statistical tests and analysis can be confounded by a
simple misunderstanding of the data. Often taught in elementary probability
classes, Simpson’s Paradox refers to situations in which a trend or
relationship that is observed within multiple groups reverses when the
groups are combined. Our first example describes how Simpson’s Paradox
accounts for a highly surprising observation in a healthcare study. Our
second example involves an apparent violation of the law of supply and
demand: we describe a situation in which price changes seem to bear no
relationship with quantity purchased. This counterintuitive relationship,
however, disappears once we break the data into finer time periods. Our
final example illustrates how a naive analysis of marginal profit
improvements resulting from a price optimization project can potentially
mislead senior business management, leading to incorrect conclusions and
inappropriate decisions. Mathematically, Simpson’s Paradox is a fairly
simple—if counterintuitive—arithmetic phenomenon. Yet its significance for
business analytics is quite far-reaching. Simpson’s Paradox vividly
illustrates why business analytics must not be viewed as a purely technical
subject appropriate for mechanization or automation. Tacit knowledge, domain
expertise, common sense, and above all critical thinking, are necessary if
analytics projects are to reliably lead to appropriate evidence-based
decision making.
The past several years have seen decision making in
many areas of business steadily evolve from judgment-driven domains into
scientific domains in which the analysis of data and careful consideration
of evidence are more prominent than ever before. Additionally, mainstream
books, movies, alternative media and newspapers have covered many topics
describing how fact and metric driven analysis and subsequent action can
exceed results previously achieved through less rigorous methods. This trend
has been driven in part by the explosive growth of data availability
resulting from Enterprise Resource Planning (ERP) and Customer Relationship
Management (CRM) applications and the Internet and eCommerce more generally.
There are estimates that predict that more data will be created in the next
four years than in the history of the planet. For example, Wal-Mart handles
over one million customer transactions every hour, feeding databases
estimated at more than 2.5 petabytes in size - the equivalent of 167 times
the books in the United States Library of Congress.
Additionally, computing power has increased
exponentially over the past 30 years and this trend is expected to continue.
In 1969, astronauts landed on the moon with a 32-kilobyte memory computer.
Today, the average personal computer has more computing power than the
entire U.S. space program at that time. Decoding the human genome took 10
years when it was first done in 2003; now the same task can be performed in
a week or less. Finally, a large consumer credit card issuer crunched two
years of data (73 billion transactions) in 13 minutes, which not long ago
took over one month.
This explosion of data availability and the
advances in computing power and processing tools and software have paved the
way for statistical modeling to be at the front and center of decision
making not just in business, but everywhere. Statistics is the means to
interpret data and transform vast amounts of raw data into meaningful
information.
However, paradoxes and fallacies lurk behind even
elementary statistical exercises, with the important implication that
exercises in business analytics can produce deceptive results if not
performed properly. This point can be neatly illustrated by pointing to
instances of Simpson’s Paradox. The phenomenon is named after Edward
Simpson, who described it in a technical paper in the 1950s, though the
prominent statisticians Karl Pearson and Udney Yule noticed the phenomenon
over a century ago. Simpson’s Paradox, which regularly crops up in
statistical research, business analytics, and public policy, is a prime
example of why statistical analysis is useful as a corrective for the many
ways in which humans intuit false patterns in complex datasets.
Simpson’s Paradox is in a sense an arithmetic
trick: weighted averages can lead to reversals of meaningful
relationships—i.e., a trend or relationship that is observed within each of
several groups reverses when the groups are combined. Simpson’s Paradox can
arise in any number of marketing and pricing scenarios; we present here case
studies describing three such examples. These case studies serve as
cautionary tales: there is no comprehensive mechanical way to detect or
guard against instances of Simpson’s Paradox leading us astray. To be
effective, analytics projects should be informed by both a nuanced
understanding of statistical methodology as well as a pragmatic
understanding of the business being analyzed.
The first case study, from the medical field,
presents a surface indication on the effects of smoking that is at odds with
common sense. Only when the data are viewed at a more refined level of
analysis does one see the true effects of smoking on mortality. In the
second case study, decreasing prices appear to be associated with decreasing
sales and increasing prices appear to be associated with increasing sales.
On the surface, this makes no sense. A fundamental tenet of economics is
that of the demand curve: as the price of a good or service increases,
consumers demand less of it. Simpson’s Paradox is responsible for an
apparent—though illusory—violation of this fundamental law of economics. Our
final case study shows how marginal improvements in profitability in each of
the sales channels of a given manufacturer may result in an apparent
marginal reduction in the overall profitability the business. This seemingly
contradictory conclusion can also lead to serious decision traps if not
properly understood.
Case Study 1: Are those warning labels
really necessary?
We start with a simple example from the healthcare
world. This example both illustrates the phenomenon and serves as a reminder
that it can appear in any domain.
The data are taken from a 1996 follow-up study from
Appleton, French, and Vanderpump on the effects of smoking. The follow-up
catalogued women from the original study, categorizing based on the age
groups in the original study, as well as whether the women were smokers or
not. The study measured the deaths of smokers and non-smokers during the 20
year period.
Continued in article
What happened to cross-validation in
accountics science research?
Over time I've become increasingly critical of
the lack of validation in accountics science, and I've focused mainly upon lack
of replication by independent researchers and lack of commentaries published in
accountics science journals ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Another type of validation that seems to be on
the decline in accountics science are the so-called cross-validations.
Accountics scientists seem to be content with their statistical inference tests
on Z-Scores, F-Tests, and correlation significance testing. Cross-validation
seems to be less common, at least I'm having troubles finding examples of
cross-validation. Cross-validation entails comparing sample findings with
findings in holdout samples.
Cross Validation ---
http://en.wikipedia.org/wiki/Cross-validation_%28statistics%29
When reading the following paper using logit
regression to to predict audit firm changes, it struck me that this would've
been an ideal candidate for the authors to have performed cross-validation using
holdout samples.
"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J.
Skinner and Suraj Srinivasan, The Accounting Review, September 2012, Vol.
87, No. 5, pp. 1737-1765.
We study events surrounding
ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company
whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's
Japanese affiliate and one of Japan's largest audit firms. In May 2006, the
Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months
for its role in the Kanebo fraud. This unprecedented action followed a
series of events that seriously damaged ChuoAoyama's reputation. We use
these events to provide evidence on the importance of auditors' reputation
for quality in a setting where litigation plays essentially no role. Around
one quarter of ChuoAoyama's clients defected from the firm after its
suspension, consistent with the importance of reputation. Larger firms and
those with greater growth options were more likely to leave, also consistent
with the reputation argument.
Jensen Comment
Rather than just use statistical inference tests
on logit model Z-statistics, it struck me that in statistics journals the
referees might've requested cross-validation tests on holdout samples of firms
that changed auditors and firms that did not change auditors.
I do find somewhat more frequent
cross-validation studies in finance, particularly in the areas of discriminant
analysis in bankruptcy prediction modes.
Instances of cross-validation in accounting
research journals seem to have died out in the past 20 years. There are earlier
examples of cross-validation in accounting research journals. Several examples
are cited below:
"A field study examination of budgetary
participation and locus of control," by Peter Brownell, The Accounting
Review, October 1982 ---
http://www.jstor.org/discover/10.2307/247411?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203
"Information choice and utilization in an
experiment on default prediction," Abdel-Khalik and KM El-Sheshai -
Journal of Accounting Research, 1980 ---
http://www.jstor.org/discover/10.2307/2490581?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203
"Accounting ratios and the prediction of
failure: Some behavioral evidence," by Robert Libby, Journal of
Accounting Research, Spring 1975 ---
http://www.jstor.org/discover/10.2307/2490653?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203
There are other examples of cross-validation
in the 1970s and 1980s, particularly in bankruptcy prediction.
I have trouble finding illustrations of
cross-validation in the accounting research literature in more recent years. Has
the interest in cross-validating waned along with interest in validating
accountics research? Or am I just being careless in my search for illustrations?
Why India Trails China (NYT) ---
http://www.nytimes.com/2013/06/20/opinion/why-india-trails-china.html?_r=0
Jensen Comment
India performs worse on both inequality and birth control. Both nations restrain
economic growth with high levels of government corruption.
From the Stanford University Encyclopedia of Philosophy
Science and Pseudo-Science ---
http://plato.stanford.edu/entries/pseudo-science/
The demarcation between science and pseudoscience
is part of the larger task to determine which beliefs are epistemically
warranted. The entry clarifies the specific nature of pseudoscience in
relation to other forms of non-scientific doctrines and practices. The major
proposed demarcation criteria are discussed and some of their weaknesses are
pointed out. In conclusion, it is emphasized that there is much more
agreement in particular issues of demarcation than on the general criteria
that such judgments should be based upon. This is an indication that there
is still much important philosophical work to be done on the demarcation
between science and pseudoscience.
1. The purpose of demarcations
2. The “science” of pseudoscience
3. The “pseudo” of pseudoscience
3.1 Non-, un-, and pseudoscience
3.2 Non-science posing as science
3.3 The doctrinal component
3.4 A wider sense of pseudoscience
3.5 The objects of demarcation 3.6 A time-bound demarcation
4. Alternative demarcation criteria
4.1 The logical positivists
4.2 Falsificationism
4.3 The criterion of puzzle-solving
4.4 Criteria based on scientific progress
4.5 Epistemic norms 4.6 Multi-criterial approaches
5. Unity in diversity Bibliography
Bibliography of philosophically informed
literature on pseudosciences and contested doctrines
Other Internet resources Related Entries
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zwei Bedeutungen von”, pp. 82–86 in Helmut Seiffert and Gerard Radnitzky,
Handlexikon zur Wissenschaftstheorie, 2nd edition
München:Ehrenwirth GmbH Verlag.
- Radner, Daisie and Michael Radner (1982).
Science and Unreason, Belmont CA: Wadsworth.
- Reisch, George A. (1998). “Pluralism, Logical
Empiricism, and the Problem of Pseudoscience”, Philosophy of Science,
65: 333–348.
- Rothbart, Daniel (1990) “Demarcating Genuine
Science from Pseudoscience”, pp 111–122 in Patrick Grim, ed, Philosophy
of Science and the Occult, 2nd ed, Albany: State University
of New York Press.
- Ruse, Michael (1977). “Karl Popper's Philosophy of
Biology”, Philosophy of Science, 44: 638–661.
- Ruse, Michael (ed.) (1996). But is it science?
The philosophical question in the creation/evolution controversy,
Prometheus Books.
- Ruse, Michael (2000). “Is evolutionary biology a
different kind of science?”, Aquinas, 43: 251–282.
- Settle, Tom (1971). The Rationality of Science
versus the Rationality of Magic”, Philosophy of the Social Sciences,
1: 173–194.
- Siitonen, Arto (1984). “Demarcation of science
from the point of view of problems and problem-stating”, Philosophia
Naturalis, 21: 339–353.
- Thagard, Paul R. (1978). “Why Astrology Is a
Pseudoscience”, PSA, 1: 223–234.
- Thagard, Paul R. (1988). Computational
Philosophy of Science, Cambridge, MA: MIT Press.
- Vollmer, Gerhard (1993). Wissenschaftstheorie
im Einsatz, Beiträge zu einer selbstkritischen Wissenschaftsphilosophie
Stuttgart: Hirzel Verlag.
Paul Feyerabend ---
http://plato.stanford.edu/entries/feyerabend/
William Thomas Ziemba ---
http://www.williamtziemba.com/WilliamZiemba-ShortCV.pdf
Thomas M. Cover ---
http://en.wikipedia.org/wiki/Thomas_M._Cover
On June 15, 2013 David Johnstone wrote the following:
Dear all,
I worked on the logic and philosophy of hypothesis tests in the early 1980s
and discovered a very large literature critical of standard forms of
testing, a little of which was written by philosophers of science (see the
more recent book by Howson and Urbach) and much of which was written by
statisticians. At this point philosophy of science was warming up on
significance tests and much has been written since. Something I have
mentioned to a few philosophers however is how far behind the pace
philosophy of science is in regard to all the new finance and decision
theory developed in finance (e.g. options logic, mean-variance as an
expression of expected utility). I think that philosophers would get a rude
shock on just how clever and rigorous all this thinking work in “business”
fields is. There is also wonderfully insightful work on betting-like
decisions done by mathematicians, such as Ziemba and Cover, that has I think
rarely if ever surfaced in the philosophy of science (“Kelly betting” is a
good example). So although I believe modern accounting researchers should
have far more time and respect for ideas from the philosophy of science, the
argument runs both ways.
Jensen Comment
Note that in the above "cited works" there are no cited references in statistics
such as Ziemba and Cover or the better known statistical theory and statistical
science references.
This suggests somewhat the divergence of statistical theory from philosophy
theory with respect to probability and hypothesis testing. Of course probability
and hypothesis testing are part and parcel to both science and pseudo-science.
Statistical theory may accordingly be a subject that divides pseudo-science and
real science.
Etymology provides us with an obvious
starting-point for clarifying what characteristics pseudoscience has in
addition to being merely non- or un-scientific. “Pseudo-” (ψευδο-) means
false. In accordance with this, the Oxford English Dictionary (OED) defines
pseudoscience as follows:
“A pretended or spurious science; a collection of
related beliefs about the world mistakenly regarded as being based on
scientific method or as having the status that scientific truths now
have.”
June 5, 2013 reply to a long
thread by Bob Jensen
Hi Steve,
As usual, these AECM threads between you, me, and Paul Williams resolve
nothing to date. TAR still has zero articles without equations unless such
articles are forced upon editors like the Kaplan article was forced upon you
as Senior Editor. TAR still has no commentaries about the papers it
publishes and the authors make no attempt to communicate and have dialog
about their research on the AECM or the AAA Commons.
I do hope that our AECM threads will continue and lead one day to when
the top academic research journals do more to both encourage (1) validation
(usually by speedy replication), (2) alternate methodologies, (3) more
innovative research, and (4) more interactive commentaries.
I remind you that Professor Basu's essay is only one of four essays
bundled together in Accounting Horizons on the topic of how to make
accounting research, especially the so-called Accounting Sciience or
Accountics Science or Cargo Cult science, more innovative.
The four essays in this bundle are summarized and extensively quoted at
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays
- "Framing the Issue of Research Quality in a Context of Research
Diversity," by Christopher S. Chapman ---
- "Accounting Craftspeople versus Accounting Seers: Exploring the
Relevance and Innovation Gaps in Academic Accounting Research," by
William E. McCarthy ---
- "Is Accounting Research Stagnant?" by Donald V. Moser ---
- Cargo Cult Science "How Can Accounting Researchers Become More
Innovative? by Sudipta Basu ---
I will try to keep drawing attention to these important essays and spend
the rest of my professional life trying to bring accounting research closer
to the accounting profession.
I also want to dispel the myth that accountics research is harder than
making research discoveries without equations. The hardest research I can
imagine (and where I failed) is to make a discovery that has a noteworthy
impact on the accounting profession. I always look but never find such
discoveries reported in TAR.
The easiest research is to purchase a database and beat it with an
econometric stick until something falls out of the clouds. I've searched for
years and find very little that has a noteworthy impact on the accounting
profession. Quite often there is a noteworthy impact on other members of the
Cargo Cult and doctoral students seeking to beat the same data with their
sticks. But try to find a practitioner with an interest in these academic
accounting discoveries?
Our latest thread leads me to such questions as:
- Is accounting research of inferior quality relative to other
disciplines like engineering and finance?
- Are there serious innovation gaps in academic accounting research?
- Is accounting research stagnant?
- How can accounting researchers be more innovative?
- Is there an "absence of dissent" in academic accounting research?
- Is there an absence of diversity in our top academic accounting
research journals and doctoral programs?
- Is there a serious disinterest (except among the Cargo Cult) and
lack of validation in findings reported in our academic accounting
research journals, especially TAR?
- Is there a huge communications gap between academic accounting
researchers and those who toil teaching accounting and practicing
accounting?
- Why do our accountics scientists virtually ignore the AECM and the
AAA Commons and the Pathways Commission Report?
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
One fall out of this thread is that I've been privately asked to write a
paper about such matters. I hope that others will compete with me in
thinking and writing about these serious challenges to academic accounting
research that never seem to get resolved.
Thank you Steve for sometimes responding in my threads on such issues in
the AECM.
Respectfully,
Bob Jensen
June 18, 2013 reply to David Johnstone by Jagdish Gangolly
David,
Your call for a dialogue between statistics and
philosophy of science is very timely, and extremely important considering
the importance that statistics, both in its probabilistic and
non-probabilistic incarnations, has gained ever since the computational
advances of the past three decades or so. Let me share a few of my
conjectures regarding the cause of this schism between statistics and
philosophy, and consider a few areas where they can share in mutual
reflection. However, reflection in statistics, like in accounting of late
and unlike in philosophy, has been on short order for quite a while. And it
is always easier to pick the low hanging fruit. Albert Einstein once
remarked, ""I have little patience with scientists who take a board of wood,
look for the thinnest part and drill a great number of holes where drilling
is easy".
1.
Early statisticians were practitioners of the art,
most serving as consultants of sorts. Gosset worked for Guiness, GEP Box did
most of his early work for Imperial Chemical Industries (ICI), Fisher worked
at Rothamsted Experimental Station, Loeve was an actuary at University of
Lyon... As practitioners, statisticians almost always had their feet in one
of the domains in science: Fisher was a biologist, Gossett was a chemist,
Box was a chemist, ... Their research was down to earth, and while
statistics was always regarded the turf of mathematicians, their status
within mathematics was the same as that of accountants in liberal arts
colleges today, slightly above that of athletics. Of course, the individuals
with stature were expected to be mathematicians in their own right.
All that changed with the work of Kolmogorov (1933,
Moscow State, http://www.socsci.uci.edu/~bskyrms/bio/readings/kolmogorov_theory_of_probability_small.pdf),
Loeve (1960, Berkeley), Doob(1953, Illinois), and Dynkin(1963, Moscow State
and Cornell). They provided mathematical foundations for earlier work of
practitioners, and especially Kolmogorov provided axiomatic foundations for
probability theory. In the process, their work unified statistics into a
coherent mass of knowledge. (Perhaps there is a lesson here for us
accountants). A collateral effect was the schism in the field between the
theoreticians and the practitioners (of which we accountants must be wary)
that has continued to this date. We can see a parallel between accounting
and statistics here too.
2.
Early controversies in statistics had to do with
embedding statistical methods in decision theory (Fisher was against, Neyman
and Pearson were for it), and whether the foundations for statistics had to
be deductive or inductive (frequentists were for the former, Bayesians were
for the latter). These debates were not just technical, and had
underpinnings in philosophy, especially philosophy of mathematics (after
all, the early contributors to the field were mathematicians: Gauss, Fermat,
Pascal, Laplace, deMoivre, ...). For example, when the Fisher-Neyman/Pearson
debates had ranged, Neyman was invited by the philosopher Jakko Hintikka to
write a paper for the journal Synthese ( "Frequentist probability and
Frequentist statistics", 1977).
3.
Since the early statisticians were practitioners,
their orientation was usually normative: in sample theory, regression,
design of experiments,.... The mathematisation of statistics and later work
of people like Tukey, raised the prominence of descriptive (especially
axiomatic) in the field. However, the recent developments in datamining have
swung the balance again in favour of the normative.
4. Foundational issues in statistics have always
been philosophical. And treatment of probability has been profoundly
philosophical (see for example http://en.wikipedia.org/wiki/Probability_interpretations).
Regards,
Jagdish
June 18, 2018 reply from David Johnstone
Dear Jagdish, as usual your knowledge and
perspectives are great to read.
In reply to your points: (1) the early development
of statistics by Gossett and Fisher was as a means to an end, i.e. to design
and interpret experiments that helped to resolve practical issues, like
whether fertilizers were effective and different genetic strains of crops
were superior. This left results testable in the real world laboratory, by
the farmers, so the pressure to get it right rather than just publish was
on. Gossett by the way was an old fashioned English scholar who spent as
much time fishing and working in his workshop as doing mathematics. This
practical bent comes out in his work.
(2) Neman’s effort to make statistics “deductive”
was always his weak point, and he went to great lengths to evade this issue.
I wrote a paper on Neyman’s interpretations of tests, as in trying to
understand him I got frustrated by his inconsistency and evasiveness over
his many papers. In more than one place, he wrote that to “accept” the null
is to “act as if it is true”, and to reject it is to “act as if it is
false”. This is ridiculous in scientific contexts, since to act as if
something is decided 100% you would never draw another sample - your work
would be done on that hypothesis.
(3) On the issue of normative versus descriptive,
as in accounting research, Harold Jeffreys had a great line in his book, “he
said that if we observe a child add 2 and 2 to get 5, we don’t change the
laws of arithmetic”. He was very anti learning about the world by watching
people rather than doing abstract theory. BTW I own his personal copy of his
3rd edition. A few years ago I went to buy this book on Bookfinder, and
found it available in a secondhand bookshop in Cambridge. I rand them
instantly when I saw that they said whose book it was, and they told me that
Mrs Jeffreys had just died and Harold’s books had come in, and that the 1st
edition was sold the day before.
(4) I adore your line that “Foundational issues in
statistics have always been philosophical”. .... So must they be in
accounting, in relation to how to construct income and net assets measures
that are sound and meaningful. Note however that just because we accept
something needs philosophical footing doesn’t mean that we will find or
agree on that footing. I recently received a comment on a paper of mine from
an accounting referee. The comment was basically that the effect of
information on the cost of capital “could not be revealed by philosophy”
(i.e. by probability theory etc.). Rather, this is an empirical issue. Apart
from ignoring all the existing theory on this matter in accounting and
finance, the comment is symptomatic of the way that “empirical findings”
have been elevated to the top shelf, and theory, or worse, “thought pieces”,
are not really science. There is so much wrong with this extreme but common
view, including of course that every empirical finding stands on a model or
a priori view. Indeed, remember that every null hypothesis that was ever
rejected might have been rejected because the model (not the hypothesis) was
wrong. People naively believe that a bad model or bad experimental design
just reduces power (makes it harder to reject the null) but the mathematical
fact is that it can go either way, and error in the model or sample design
can make rejection of the null almost certain.
Thank you for your interesting thoughts Jagdish,
David
From Bob Jensen's threads on the Cult of Statistical Significance ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
The Cult of Statistical Significance: How Standard Error Costs Us Jobs,
Justice, and Lives ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
Page 15
The doctor who cannot distinguish statistical significance from
substantive significance, an F-statistic from a heart attach, is like an
economist who ignores opportunity cost---what statistical theorists call
the loss function. The doctors of "significance" in medicine and economy
are merely "deciding what to say rather than what to do" (Savage 1954,
159). In the 1950s Ronald Fisher published an article and a book that
intended to rid decision from the vocabulary of working
statisticians (1955, 1956). He was annoyed by the rising authority in
highbrow circles of those he called "the Neymanites."
Continued on Page 15
pp. 28-31
An example is provided regarding how Merck manipulated statistical
inference to keep its killing pain killer Vioxx from being pulled from
the market.
Page 31
Another story. The Japanese government in June 2005 increased the limit
on the number of whales that may be annually killed in the
Antarctica---from around 440 annually to over 1,000 annually. Deputy
Commissioner Akira Nakamae explained why: "We will implement JARPS-2
[the plan for the higher killing] according to the schedule, because the
sample size is determined in order to get statistically significant
results" (Black 2005). The Japanese hunt for the whales, they claim, in
order to collect scientific data on them. That and whale steaks. The
commissioner is right: increasing sample size, other things equal, does
increase the statistical significance of the result. It is, fter all, a
mathematical fact that statistical significance increases, other things
equal, as sample size increases. Thus the theoretical standard error of
JAEPA-2, s/SQROOT(440+560) [given for example the simple mean formula],
yields more sampling precision than the standard error JARPA-1,
s/SQROOT(440). In fact it raises the significance level to Fisher's
percent cutoff. So the Japanese government has found a formula for
killing more whales, annually some 560 additional victims, under the
cover of getting the conventional level of Fisherian statistical
significance for their "scientific" studies.
pp. 250-251
The textbooks are wrong. The teaching is wrong. The seminar you just
attended is wrong. The most prestigious journal in your scientific field
is wrong.
You are searching, we know, for ways to avoid
being wrong. Science, as Jeffreys said, is mainly a series of
approximations to discovering the sources of error. Science is a
systematic way of reducing wrongs or can be. Perhaps you feel frustrated
by the random epistemology of the mainstream and don't know what to do.
Perhaps you've been sedated by significance and lulled into silence.
Perhaps you sense that the power of a Roghamsted test against a
plausible Dublin alternative is statistically speaking low but you feel
oppressed by the instrumental variable one should dare not to wield.
Perhaps you feel frazzled by what Morris Altman (2004) called the
"social psychology rhetoric of fear," the deeply embedded path
dependency that keeps the abuse of significance in circulation. You want
to come out of it. But perhaps you are cowed by the prestige of
Fisherian dogma. Or, worse thought, perhaps you are cynically willing
to be corrupted if it will keep a nice job
Some Comments About Accountics Science Versus Real Science
This is the lead article in the May 2013 edition of The Accounting Review
"On Estimating Conditional Conservatism
Authors
Ray Ball (The University of Chicago)
S. P. Kothari )Massachusetts Institute of Technology)
Valeri V. Nikolaev (The University of Chicago)
The Accounting Review, Volume 88, No. 3, May 2013, pp. 755-788
The concept of conditional conservatism (asymmetric
earnings timeliness) has provided new insight into financial reporting and
stimulated considerable research since Basu (1997). Patatoukas and Thomas
(2011) report bias in firm-level cross-sectional asymmetry estimates that
they attribute to scale effects. We do not agree with their advice that
researchers should avoid conditional conservatism estimates and inferences
from research based on such estimates. Our theoretical and empirical
analyses suggest the explanation is a correlated omitted variables problem
that can be addressed in a straightforward fashion, including fixed-effects
regression. Correlation between the expected components of earnings and
returns biases estimates of how earnings incorporate the information
contained in returns. Further, the correlation varies with returns, biasing
asymmetric timeliness estimates. When firm-specific effects are taken into
account, estimates do not exhibit the bias, are statistically and
economically significant, are consistent with priors, and behave as a
predictable function of book-to-market, size, and leverage.
. . .
We build on and provide a different interpretation
of the anomalous evidence reported by PT. We begin by replicating their
[Basu (1997). Patatoukas and Thomas (2011)] results. We then provide
evidence that scale-related effects are not the explanation. We control for
scale by sorting observations into relatively narrow portfolios based on
price, such that within each portfolio approximately 99 percent of the
cross-sectional variation in scale is eliminated. If scale effects explain
the anomalous evidence, then it would disappear within these portfolios, but
the estimated asymmetric timeliness remains considerable. We conclude that
the data do not support the scale-related explanation.4 It thus becomes
necessary to look for a better explanation.
Continued in article
Jensen Comment
The good news is that the earlier findings were replicated. This is not common
in accountics science research. The bad news is that such replications took 16
years and two years respectively. And the probability that TAR will publish a
one or more commentaries on these findings is virtually zero.
How does this differ from real science?
In real science most findings are replicated before or very quickly after
publication of scientific findings. And interest is in the reproducible results
without also requiring an extension of the research for publication of the
replication outcomes.
In accountics science there is little incentive to perform exact replications
since top accountics science journals neither demand such replications nor will
they publish (even in commentaries) replication outcomes. A necessary condition
to publish replication outcomes in accountics science is the extend the research
into new frontiers.
How long will it take for somebody to replicate these May 2013 findings of
Ball, Kothari, and Nikolaev? If the past is any indicator of the future the BKN
findings will never be replicated. If they are replicated it will most likely
take years before we receive notice of such replication in an extension of the
BKN research published in 2013.
Bob Jensen's threads on replication and commentaries in accountics science
---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Question
In statistics what is a "winsorized mean?"
Answer in Wikipedia ---
http://en.wikipedia.org/wiki/Winsorized_mean
An analogy that takes me back to my early years of factor analysis is
Procreates Analysis ---
http://en.wikipedia.org/wiki/Procrustes_analysis
"The Role of Financial Reporting Quality in Mitigating the Constraining
Effect of Dividend Policy on Investment Decisions"
Authors
Santhosh Ramalingegowda (The University of Georgia
Chuan-San Wang (National Taiwan University)
Yong Yu (The University of Texas at Austin)
The Accounting Review, Vol. 88, No. 3, May 2013, pp. 1007-1040
Miller and Modigliani's (1961) dividend irrelevance
theorem predicts that in perfect capital markets dividend policy should not
affect investment decisions. Yet in imperfect markets, external funding
constraints that stem from information asymmetry can force firms to forgo
valuable investment projects in order to pay dividends. We find that
high-quality financial reporting significantly mitigates the negative effect
of dividends on investments, especially on R&D investments. Further, this
mitigating role of financial reporting quality is particularly important
among firms with a larger portion of firm value attributable to growth
options. In addition, we show that the mitigating role of high-quality
financial reporting is more pronounced among firms that have decreased
dividends than among firms that have increased dividends. These results
highlight the important role of financial reporting quality in mitigating
the conflict between firms' investment and dividend decisions and thereby
reducing the likelihood that firms forgo valuable investment projects in
order to pay dividends.
. . .
Panel A of Table 1 reports the descriptive
statistics of our main and control variables in Equation (1). To mitigate
the influence of potential outliers, we winsorize all continuous
variables at the 1 percent and 99 percent levels. The mean and median
values of Total Investment are 0.14 and 0.09 respectively. The mean and
median values of R&D Investment (Capital Investment) are 0.05 (0.06) and
0.00 (0.04), respectively. Because we multiply RQ−1 by −1 so that higher RQ−1
indicates higher reporting quality, RQ−1 has negative values with the mean
and median of −0.05 and −0.04, respectively. The above distributions are
similar to prior research (e.g., Biddle et al. 2009). The mean and median
values of Dividend are 0.01 and 0.00, respectively, consistent with many
sample firms not paying any dividends. The descriptive statistics of control
variables are similar to prior research (e.g., Biddle et al. 2009). Panels B
and C of Table 1 report the Pearson and Spearman correlations among our
variables. Consistent with dividends having a constraining effect on
investments (Brav et al. 2005; Daniel et al. 2010), we find that Total
Investment and R&D Investment are significantly negatively correlated with
Dividend.
Continued in article
Jensen Comment
With statistical inference testing on such an enormous sample size this may be
yet another accountics science illustration of misleading statistical inferences
that Deirdre McCloskey warned about (The Cult of Statistical Significance)
in a plenary session at the 2011 AAA annual meetings in 2012 ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
I had the privilege to be one of the discussants of her amazing presentation.
The basic problem of statistical inference testing on enormous samples is
that the null hypothesis is almost always rejected even when departures from the
null are infinitesimal.
2012 AAA Meeting Plenary
Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view
these videos.
Bob Jensen is an obscure speaker following the handsome Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc
My
threads on Deidre McCloskey and my own talk are at
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
How Statistics Can Mislead
"Young Households Falling Behind in Net Worth," by Barry Ritholtz,
June 15, 2013 ---
http://www.ritholtz.com/blog/2013/06/young-households-falling-behind-in-net-worth/
Those averages are deceptive, in that they are
raised by the high wealth of a relatively small number of households. A very
different picture emerges from looking at the median — the level at which
half the households are richer and half poorer. That statistic can be
calculated from the Fed’s triennial survey of consumer finances. In the
studies conducted in the 1990s, the median net wealth was about one-quarter
of the average. In the 2000s, the median fell to about one-fifth of the
average, and in 2010, it was down to about one-sixth of the average.”
Floyd Norris at the NYT
How Statistics Can Mislead
"MOOC Students Who Got Offline Help Scored Higher, Study Finds," by
Steve Kolowich, Chronicle of Higher Education, June 7, 2013 ---
http://chronicle.com/blogs/wiredcampus/mooc-students-who-got-offline-help-scored-higher-study-finds/44111
Jensen Comment
Although I like this article, it is yet another example of the many times
statistics are used to mislead readers. At the roots this is really a rehash of
the issue of causation versus correlation.
- Students who seek out offline help may simply be more intense about
learning than those who do not seek offline help. It may not be the help
itself that make them score higher. It may be their desire to learn apart
from help seeking. If we had a way to measure this desire it would possible
to get closer to the underlying causal factors for higher grades.
- Overweight people who buy a particular very expensive new diet book may
lose more than a random sample among overweight people who do not buy that
particular book. However, the cause of the weight loss may not be the
content of that particular diet book. It may just be that people who bought
this expensive book had more desire to lose weight.
- Students in a traditional intermediate accounting course who repeatedly
seek out extra help during office hours of the instructor may do better on
average than those who rarely if ever show up for office hour help. This is
not an indicator that the instructor is doing a fantastic job teaching
during office hours. It just may be that the students seeking more office
hour help also are driven to study harder in general.
This extrapolates to the granulation problem that I've previously mentioned
with respect to how often (most always) accountics science researchers really
cannot say anything about causality.
"How Non-Scientific Granulation Can Improve Scientific Accountics"
---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf
"Google HR Boss Explains Why GPA And Most Interviews Are Useless," by
Max Nisen, Business Insider, June 19, 2013 ---
http://www.businessinsider.com/how-google-hires-people-2013-6
Jensen Comment
Adam Bryant is not speaking for all industries and companies. I'm not certain
interviews are all that useless for CPA firms seeking interns and new employees.
Grades are less useful due to grade inflation where the median grades in college
courses are A- grades.
Also Adam Bryant is not speaking for other recruiters, most of whom put lots
of faith in grades and interviews.
Success in a CPA firm might be defined as success in obtaining sufficient
technical experience to get employed by clients when leaving the CPA firms
before attaining partnership. Attaining partnership is complicated in CPA firms.
It usually is more of a function of talent for obtaining and maintaining
clients. Partners in CPA firms generally have a greater willingness for working
nights and weekends at civic functions and conferences and charity events like
golf outings. It's nearly impossible to predict whether a student still in
school is truly partner material. Grades, interviews, and most any factors are
not very predictive at that stage in time. There's also a lot of serendipity
regarding being in the right places at the right times.
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
From the CFO Journal's Morning Ledger on June 20, 2013
Bill to ban PCAOB from forcing auditor rotation advances
A bill to ban the PCAOB from ever requiring mandatory periodic
rotation of corporate auditors advanced out of the House Financial Services
Committee and will move toward a vote in the full House of Representatives,
Emily Chasan reports.
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 (D., 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.
Teaching Case from The Wall Street Journal Weekly Accounting Review on
June 27, 2013
Bill to Ban PCAOB From Forcing Auditor Rotation Advances
by:
Emily Chasen
Jun 20, 2013
Click here to view the full article on WSJ.com
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
RELATED ARTICLES:
Auditor Rotation Mandate Rears Its Head Again
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Jan 14, 2013
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Auditor 'Rotation' Debate Heats Up
by Michael Rapoport
May 27, 2013
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U.S. Auditing Board to Study Accounting-Firm 'Term Limits'
by Michael Rapoport
Aug 17, 2011
Online Exclusive
"Bill to Ban PCAOB From Forcing Auditor Rotation Advances," by Emily
Chasen, The Wall Street Journal, June 20, 2013 ---
http://blogs.wsj.com/cfo/2013/06/19/bill-to-ban-pcaob-from-forcing-auditor-rotation-advances/?mod=djem_jiewr_AC_domainid
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.
Continued in article
Professors For and Against Audit Firm Rotation
A few surprises of professors coming out in favor of audit firm rotation
"PCAOB Hears Evidence Favoring Auditor Rotation," by Tammy Whitehouse,
Compliance Week, October 18, 2012 ---
http://www.complianceweek.com/pcaob-hears-evidence-favoring-auditor-rotation/article/264288/
Audit research experts have presented the Public
Company Accounting Oversight Board with evidence they say demonstrates
auditor rotation leads to better audit quality.
During its
Houston roundtable to discuss
whether mandatory rotation would improve audit quality,
Scott Whisenant, an associate professor of accounting
at the University of Kansas,
reviewed a variety of academic studies for the
board that suggest rotation would produce benefits the board is seeking. He
noted much of the protest around mandatory rotation has focused on costs,
but few studies have focused on possible benefits because rotation is
practiced in only a handful of countries.
The results of a 2000 study suggest, he said, that
long-term auditor client relationships significantly increase the likelihood
of an unqualified opinion, which raises questions about audit quality. The
exception, however, is the last year of the relationship, when the
likelihood of an unqualified opinion drops. “In this final year, the
auditors finally drop the hammer down on clients,” Whisenant said, knowing
they are about to surrender the job to a successor firm that will no doubt
review their work.
Whisenant said his own more recent research with
another coauthor suggests that in countries where rotation is practiced
there's evidence of less earnings management, less managing to meet earnings
targets, and more timely recognition of losses. The study concludes the
quality of audit markets improves after the enactment of rotation, he says,
and evidence suggests that concerns about any disruption or difficulty of
transition to a new audit firm are more than offset by benefits. “Depending
on the statistics we investigated, the benefit to audit quality of adopting
rotation rules appears to be larger by a factor of at least two, and in some
cases more, than the cost of audit quality erosion at the forced rotation of
audit engagements,” he said.
Stephen Zeff, accounting professor at Rice
University,
told the PCAOB auditors have become more
commercial and less professional over the past several decades, driven there
by an education process that preaches memorization of standards more than
critical thinking and an allowance for auditors to develop business
relationships with their clients. Karen Nelson, another accounting professor
from Rice,
said her review of academic research suggests
auditors working under the present model are more likely to issue a report
biased toward management than under practically any other arrangement that
would involve mandates on rotation or retention.
PCAOB Chairman James Doty praised the
“extraordinary array of views” presented by the academics. “This is where we
we wanted to get to with the concept release,” he said, where the board
could begin to digest empirical evidence that would suggest what regulatory
regime is most likely to produce objective, professional, skeptical audits.
The
webcast archive of the Houston roundtable will be
available on the PCAOB website.
Jensen Comment
A few of my AECM friends have repeatedly argued for audit firm rotation,
including Tom Selling and David Albrecht. Now it turns out that some other
professors mentioned above are coming out of the woodwork in favor of such
rotation as well.
It would seem that the PCAOB wants audit firm rotation so badly that, in
spite of the overwhelmingly negative comments received in various invitations to
comment, the Board just keeps coming back for more support in favor of
rotation..
I'm on record as being against it for various important reasons. One is cost
since there are so many costs of gearing up for a first-time audit, especially a
large multinational client with offices and factories spread about the world. I
can't imagine the cost of gearing up for a first time audit of GM, GE,
Exxon-Mobil, etc. Second, the new costs will be added to pressures on audit
firms by the PCAOB to conduct more costly audits, including much more detailed
testing ---
http://pcaobus.org/Inspections/Reports/Pages/default.aspx
It's naive to assume that clients will remain passive and simply cough up the
millions or tens of millions of dollars added in rotation-based fees billed by
their auditors. Instead, get ready for intense lobbying in Washington DC to
overturn any PCOAB audit firm rotation mandate and more intense lobbying to
overturn SarBox legislation that created the PCAOB in the first place. I think
that attention given to the audit firm rotation issue may merely be a pretense
by the PCAOB in an effort to scare audit firms and raise added concerns about
audit independence. Does the PCAOB really want to go toe-to-toe with Corporate
America as well as companies headquartered around the world who listed on the
NYSE?
Equally important in my mind is what rotation will do to the quality and
skills of auditors on the job. First there is the inevitable relocation that
will come from shifting from a huge client headquartered in one city to another
big client headquartered thousands of miles away. Even with medium-sized clients
in smaller cities there will be inevitable stresses of having to uproot families
and move. For example, after giving up an audit of USAA in San Antonio hundreds
of auditors may have to move to Dallas, Houston, NYC, Washington DC or who knows
where.
I'm not alone. A raft of other highly respected professors claim the
following ---
http://pcaobus.org/Rules/Rulemaking/Docket037/041_Karim_Jamal.pdf
We understand and affirm the
importance of auditor independence, objectivity and scepticism for the
proper functioning of the U.S. capital market and are supportive of the
PCAOB’s desire to enhance the actual and perceived independence of auditors.
However, academic research on the topic suggests that adopting a system of
audit firm rotation will not help the U.S. economy achieve these worthy
goals. Instead, such a change may impair auditor independence, weaken audit
expertise and undermine corporate governance.
We organize our response below in
terms of impact on objectivity (especially opinion shopping), and
development of expertise. We note that many of the views expressed in our
letter are influenced by a detailed research study conducted by Fiolleau et
al. (2010) on how companies currently choose auditors. A copy of this study
is publicly available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535074.
Of course, any such study is limited in its
generalizability. In particular, Fiolleau et al. (2010) examines cases where
audit committee’s have voluntarily chosen to seek competing bids from
auditors. However, we think the studies’ observations are suggestive of what
is likely to happen on an economy-wide basis if PCAOB were to mandate
periodic rotation of audit firms. Some of our other comments are based on
other research evidence, which we cite.
Selection
and appointment of auditors by their clients is a major source of concerns
about real and perceived independence and objectivity of the auditors. Since
the PCAOB seems to be unwilling to deal with this root cause of the
independence problem at this time, other reforms are being sought. No audit
can be perfect, and the quality of audit is determined not only by
independence but also by many other factors—such as the quality of
accounting standards, accounting education, auditor expertise, audit
committees, corporate governance, auditor discipline, liability, and a host
of other institutional features of the audit environment. The focus of PCAOB
should be to provide the best audit quality, and not to fixate on any subset
of such determinants of audit quality. Our reading of existing research
leads us to conclude that, in spite of its superficial appeal, audit firm
rotation is a bad policy choice on all relevant dimensions. We explain our
reasons below.
Rotation and Auditor Objectivity
|The most appealing and common sense
intuition underlying auditor rotation is that it promotes objectivity by
refreshing the personnel (or firm) who are not tied down by judgments,
compromises, and personal relationships of the past. A new auditor brings a
fresh set of eyes, and has the opportunity to raise issues that have been
overlooked or settled in the past. Research experiments show that new
auditors are better able to identify issues, alter their judgments, and
bring issues up for discussion when they are not personally committed to
prior decisions (see article by Tan on p. 113-35 in Spring 1995 issue of
Journal of Accounting Research).
Our first observation on this
rationale for firm rotation is that familiarity arises between individuals
(e.g., the audit partner and the CFO) not firms, so most of the benefit from
taking a “fresh look” can be obtained more simply by rotating the partner
and or other senior personnel on the audit team (e.g., audit manager). Since
the policy of partner rotation is already in place, audit firm rotation is
unlikely to add any significant marginal benefit, especially when the
considerable costs of firm rotation are taken into account. The GAO’s (2003)
study on mandatory audit firm rotation estimated increased initial audit
costs of more than 20% (some studies in Europe suggest 40%) and this did not
include costs incurred by the audit committee and management to conduct the
tendering process.
Our second observation from the
research study by Fiolleau et al. (2010) is that although the auditors are
supposedly appointed by the audit committee of the client company,
management plays a significant role in the process, and may even dominate it
for all practical purposes. This means that a mandate for audit firm
rotation will force the incumbent and potential auditors into a “beauty
contest” every few years. The market power of the audit firms is so much
weaker than the power of their clients that, at the time of bidding for
engagement, the former compete among themselves to convince the management /
audit committee of their potential clients of their commitment, service, and
responsiveness. Each hiring exercise becomes an opportunity for opinion
shopping by clients, lowballing of audit fees and demonstrations of loyalty
and relationship-building by the auditors. Many of the auditor behaviours
that the rotation proposal is intended to discourage get exacerbated when
the audit firm enters into a beauty contest (bidding war) to get an audit
engagement.
A third observation from the Fiolleau
et al., (2010) study is that, with only four large international firms, the
audit market is highly concentrated. Most large clients already receive one
service or another from every one of the four firms. If one of these
accounting firms audits the client, the other three often provide it a host
of advisory services in tax, valuations etc. This perpetual engagement and
pre-existing relationships of most large companies with all four audit firms
implies that there is only limited opportunity for mandatory rotation to
bring about a “fresh look.”A large corporation would have to deliberately
avoid business engagement with one Big 4 firm, to have at least one firm who
would meet current independence rules and have the expertise needed to
conduct the audit. The PCAOB proposal is likely to yield little by way of
benefits and incur the additional harm associated with increased frequency
of “beauty contests.”
Rotation and Auditor Expertise
There is compelling evidence that audit
firm rotation will impair auditor expertise. PCAOB’s concept paper indicates
awareness that the auditor is most vulnerable to missing fraud in a new
engagement (see also St Pierre and Anderson on p 242-63 in Vol 59(2), 1984
issue of The Accounting Review). A variety of studies (e.g., Myers et al.,
on p 779-799 in Vol 78, July 2003 issue of The Accounting Review) show that
the quality of accounting numbers improves with increases in auditor tenure.
The most compelling force disciplining accounting accruals is auditor
industry expertise (see Craswell et al., on p 297-322 in December 1995 issue
of Journal of Accounting and Economics). While academic evidence is seldom
conclusive, the weight of evidence suggests that a policy of mandatory
auditor rotation undermines expertise formation and will impair audit
quality. The thrust of Generally Accepted Accounting Principles (GAAP) is
increasingly oriented to having management communicate to investors how they
operate the business. Auditors’ understanding of the substance of client
business would be undermined if they are rotated out every few years. The
Fiolleau et al (2010) study reveals that even the four largest audit firm’s
lack depth of expertise in serving large corporate clients across all
industries outside the main business centres such as New York, Toronto,
London, and Tokyo. For clients with headquarters located in smaller cities,
finding industry specialists in the local offices can be a significant
challenge.
Improving Audit Quality
Audit quality is not just an attribute of
the auditor alone. The nature of Generally Accepted Accounting Principles
(GAAP) is also a major determinant of audit quality. Over the recent
decades, the Financial Accounting Standards Board (FASB) has set standards
that de-emphasize verifiability in favour of the
mark-to-market valuation, no matter how illiquid the market may be. It has
also adopted a practice of writing detailed standards in its attempt to
close loopholes but ends up creating new ones. Exploitation of the Repo 105
rules by financial service firms during the recent crisis is a good example.
This type of standards place auditors in a very difficult position vis-à-vis
corporate management. The shift in GAAP towards the so-called “fair value
accounting” is a major factor undermining audit quality.
Importance of Audit Resignation as a Signal
When financial press reports that company X audited by firm Y for the
past twenty years has changed its auditor, investors get a valuable and
informative warning signal that draws close scrutiny by the investment and
regulatory communities. PCAOB’s mandatory rotation proposal will eliminate
this signal by making auditor changes a matter of routine, deserving little
attention or scrutiny, and thus undermine the quality of audit.
Transfer of Audit Resources from Verification to Marketing
The PCAOB proposal, by eliminating all long-term client-auditor
relationships, will induce audit firms to devote even greater resources to
marketing themselves to potential clients. These resources can only come
from cutting back on the substantive work of verification during the course
of their audits or by raising audit fees. Individuals in the audit firm will
find their presentation and marketing skills becoming more valuable relative
to their technical accounting and auditing skills.
Confusion and Unintended Consequences from Too Many
Initiatives
Auditors now face a very complex economic and social environment. There
are economic incentives to be responsive to management but these have to be
balanced with incentives emanating from audit committees, concurring review
partners, national office reviews, litigation, GAAP and industry practice,
and PCAOB reviews. In some countries two audit firms jointly conduct an
audit making it difficult for any single audit firm to have consistency in
its audits across countries as complex co-ordination is required across
audit firms. Fraud cases like Parmalat are thought to have avoided detection
due to lack of continuity of the auditor and presence of multiple audit
firms. Adding more agents and incentives into this mix serves to create a
very complex incentive structure, interpersonal friction and potential for
unintended consequences as accountability and authority get distributed
across a variety of agents. This increases moral hazard and the potential
for confusion. Adding one more firm rotation requirement on top is not just
a free good that improves the system. Too much complexity makes the audit
process more vulnerable to systemic failure.
Conclusion
Audit firm rotation is a bad policy prescription especially in an
environment where auditors are appointed by board audit committees who often
are significantly influenced by management. The potential benefits of
rotation will be exceeded by the harm associated with the “beauty contest”
that takes place to appoint a new auditor. Rotation actually impairs audit
quality by promoting more frequent opinion shopping and lowballing. Rotation
also impairs audit expertise, eliminates a valuable signal of auditor
change, and shifts even more resources from substantive audit work to
marketing of audit services.
Most of the benefits of rotation can
be realized by rotating the engagement partners. Because of limited depth of
expertise, we suggest rotating engagement partners every ten years. Given
the limited independence of most audit committees from the management,
PCAOB’s goal of improving audit quality through firm rotation is beyond its
reach. Pressing the FASB/IASB to pay greater attention to verifiability of
financial reports would be a more effective avenue to improve audit quality.
Signed,
Tracey C. Ball, FCA ICD.D
Executive Vice President & CFO Canadian Western Bank Group (TSX:CWB)
Rozina Kassam,CA
CFO, COMMERCIAL
SOLUTIONS
INC.
(TSX:CSA)
Jonathan Glover, PhD
Professor of Accounting, Carnegie Mellon University
Karim Jamal, FCA, PhD
Chartered Accountants Distinguished Chair Professor, University of Alberta
Ken Kouri FCA
Retired Partner Kouri Berezan Heinrichs, CA
D. Brad Paterson, CMA
CFO, Wave Front Technology Solutions (TSX (V): WEE)
Suresh Radhakrishnan, PhD
Professor of Accounting, University of Texas at Dallas
Shyam Sunder, PhD
James L. Frank Professor of Accounting, Economics and Finance, Yale
University
The very best prospects for becoming accounting majors may be turned off by
the gypsy-living prospects of becoming career CPA auditors. The very best
seniors and managers and even partners on a particular audit may take up other
job offers rather than uproot spouses and children to relocate as Sundowners ---
http://en.wikipedia.org/wiki/The_Sundowners
There are many, many more very responsible concerns raised in the
overwhelmingly negative responses received by the PCAOB --
http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx
In particular read Response 35 (James L. Fuehrmeyer, Jr.) and Response 29
(Dennis R. Beresford) at
http://pcaobus.org/Rules/Rulemaking/Pages/Docket037Comments.aspx
Bob Jensen's threads on audit firm rotation are at
http://www.trinity.edu/rjensen/Fraud001c.htm#RotationIdeas
Teaching Case from The Wall Street Journal Accounting Weekly Review on
June 27, 2013
DOMA's Demise: The Tax Fallout
by:
Laura Saunders
Jun 26, 2013
Click here to view the full article on WSJ.com
TOPICS: Accounting, DOMA, Estate Tax, Gift Tax, Marriage Penalty,
Tax, Taxation
SUMMARY: The end of the Defense of Marriage Act brings good news
and bad on taxes for same-sex married couples. The current income tax code
was designed with one-earner families in mind, and has both marriage
penalties and bonuses. Experts say that many two-earner same-sex married
couples will likely see an annual federal income tax increase of hundreds or
thousands of dollars. The penalties are more likely to occur as two
partners' incomes converge, especially if they have children. A marriage
bonus is more likely if one partner earns all or nearly all the income.
CLASSROOM APPLICATION: The Supreme Court's decision to overturn the
Defense of Marriage Act once again highlights the issues surrounding the
"marriage penalty". This topic can be used to illustrate the differences
between filing statuses, as well as the differences between the taxation of
a married vs. and unmarried couple.
QUESTIONS:
1. (Introductory) What is the "marriage penalty"? Why is it in the
spotlight again as a result of the Supreme Court's decision on the Defense
of Marriage Act?
2. (Introductory) What are the tax filing statuses? Define each.
3. (Advanced) What is the reasoning behind the marriage penalty?
What is its history?
4. (Advanced) What taxpayers are penalized by marriage? What
taxpayers are benefited by marriage? Why is this tax preference given to
some, and a penalty assessed on others?
5. (Advanced) How are estate and gift taxes affected by marriage?
Is marriage a benefit or a disadvantage for estate and gift taxes? Why is
the law structured in this way?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
When It Doesn't Pay to Be Married
by Laura Saunders
Jun 10, 2013
Online Exclusive
Wedding-Bell Blues
by Laura Saunders
Jun 08, 2013
Page: B7
"DOMA's Demise: The Tax Fallout," by Laura Saunders, The Wall Street
Journal, June 26, 2013 ---
http://blogs.wsj.com/washwire/2013/06/26/domas-demise-the-tax-fallout/?mod=djem_jiewr_AC_domainid
The end of the Defense of Marriage Act brings good
news and bad on taxes for same-sex married couples.
The current income tax code was designed with
one-earner families in mind, and has both marriage penalties and bonuses.
Experts say that many two-earner same-sex married
couples will likely see an annual federal income tax increase of hundreds or
thousands of dollars. The penalties are more likely to occur as two
partners’ incomes converge, especially if they have children. A marriage
bonus is more likely if one partner earns all or nearly all the income.
or example, a married couple with two teenagers in
which each spouse earns $75,000 owes nearly $4,000 more in tax annually
compared with what they would owe as two single filers, according to
calculations made by Roberton Williams of the Tax Policy Center, a
nonpartisan group in Washington. If this couple has the same $150,000 income
but all of it is earned by one spouse, then they owe nearly $4,600 less than
what they would owe as two single filers, according to Mr. Williams.
Marriage tax penalties and bonuses can occur at any
income level, but the 2013 tax changes has increased marriage penalties for
two-earner couples with more than $250,000 of adjusted gross income. The Tax
Policy Center has a calculator for determining a couple’s bonus or penalty.
The end of DOMA is a boon to very wealthy same-sex
couples who are planning estates. The current estate and gift tax exemption
is $5.25 million per individual, so married couples qualify for more than
$10 million of exemption. In addition, a surviving spouse can use the unused
portion of the partner’s exemption to shelter assets in his or her own
estate.
Social Security retirement benefits can contain
bonuses for married couples. If there is just one earner, says Mr. Williams,
the non-earner gets an benefit equal to half of the earner’s benefit on top
of what the earner receives. Two-earner couples can also in many cases use
strategies to maximize their retirement benefits. “Married couples can never
get less Social Security retirement benefits than they would get if the
partners weren’t married,” he says. “Social Security has no marriage
penalty.”
Continued in article
He's didn't like it --- I guaranteed it!
"Fired Men's Wearhouse Founder George Zimmer Rips On Board In Open Letter,"
by Ashley Lutz, Business Insider, June 26, 2013 ---
http://www.businessinsider.com/mens-wearhouse-letter-from-zimmer-2013-6
From the CFO Journal's Morning Ledger on June 20, 2013
Men’s Wearhouse founder gets the boot
Men’s Wearhouse terminated its founder and public face, George
Zimmer, from his position as executive chairman. Mr. Zimmer said he was
being silenced after expressing concerns about the company’s direction. He
didn’t elaborate on the disagreements. But the split was a deep-seated one
that “manifests itself in several conflicts with the board,”
a person familiar with the matter tells the WSJ.
The company has warned in its securities filings that Mr. Zimmer is
important to its success and that a loss of his services could hurt its
business and stock price. The move sent the company’s shares down as much as
6.9%
Wednesday before they recovered to close at
$37.04, down 1.1%.
Jensen Comment
This is one of the most familiar voices in television commercials for men's
clothing. His most famous lines: "You're going to like it. I guarantee
it." Wal-Mart and other big box stores also "guarantee it "with their
no-questions-asked return policies. The only time I walked into a Men's
Warehouse store it was to look for a summer suit. I was told that MW only sold
wool suits. Wool, even summer wool, in the South Texas heat? I just did not want
to be a professor in sheep's clothing in that humidity. For summer I preferred
the cotton and poly blends. In retirement I don't have to wear suits except for
funerals and weddings.
"Google HR Boss Explains Why GPA And Most Interviews Are Useless," by
Max Nisen, Business Insider, June 19, 2013 ---
http://www.businessinsider.com/how-google-hires-people-2013-6
Jensen Comment
Adam Bryant is not speaking for all industries and companies. I'm not certain
interviews are all that useless for CPA firms seeking interns and new employees.
Grades are less useful due to grade inflation where the median grades in college
courses are A- grades.
Also Adam Bryant is not speaking for other recruiters, most of whom put lots
of faith in grades and interviews.
Success in a CPA firm might be defined as success in obtaining sufficient
technical experience to get employed by clients when leaving the CPA firms
before attaining partnership. Attaining partnership is complicated in CPA firms.
It usually is more of a function of talent for obtaining and maintaining
clients. Partners in CPA firms generally have a greater willingness for working
nights and weekends at civic functions and conferences and charity events like
golf outings. It's nearly impossible to predict whether a student still in
school is truly partner material. Grades, interviews, and most any factors are
not very predictive at that stage in time. There's also a lot of serendipity
regarding being in the right places at the right times.
Bob Jensen's threads on careers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
"The 50 Rip-Off Charities: Give at Your Own Risk," by Morgan Brittany,
Townhall, June 17, 2013 ---
Click Here
http://finance.townhall.com/columnists/morganbrittany/2013/06/17/the-50-ripoff-charities-give-at-your-own-risk-n1621292?utm_source=thdaily&utm_medium=email&utm_campaign=nl
The List of 50 ---
http://www.tampabay.com/americas-worst-charities/
"Canada Mayor Crisis Spreads: Montreal Mayor In Custody," by Josh
Barro, Business Insider, June 17, 2013 ---
http://www.businessinsider.com/montreal-mayor-michael-applebaum-arrest-2013-6
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
The law does not
pretend to punish everything that is dishonest. That would seriously interfere
with business.
Clarence Darrow ---
Click Here
Teaching Case from The Wall Street Journal Accounting Weekly Review on
June 27, 2013
Ex-KPMG Partner to Plead Guilty in Insider Case
by:
Michael Rapoport
Jun 21, 2013
Click here to view the full article on WSJ.com
TOPICS: Accounting
SUMMARY: Scott London, the former KPMG LLP partner who has admitted
to an insider-trading scheme, will plead guilty to fraud. Mr. London, who
had been a senior partner in charge of KPMG's Pacific Southwest audit
practice, had previously agreed to plead guilty to one count of securities
fraud. Mr. London has admitted passing confidential information about KPMG
clients to a friend, Bryan Shaw, who prosecutors say made $1.27 million in
illegal profits by trading on the information and paid Mr. London at least
$60,000 in cash and gifts. Mr. Shaw has already pleaded guilty.
CLASSROOM APPLICATION: This article would be an excellent addition
to an auditing class for part of a discussion regarding the importance of
ethics and independence when dealing with client information. The stakes are
high for those who violate rules, as illustrated in the downfall of this
KPMG partner. You can combine this article with the attached Related
Articles to serve as a case study of the case.
QUESTIONS:
1. (Introductory) Who is Scott London? What was his professional
position? What are the accusations against him?
2. (Advanced) For what reasons might Mr. London have decided to
enter a guilty plea? What would be his other options?
3. (Advanced) What is insider trading? Why is it prohibited? How
was Mr. London able to access information to use to commit this crime? What
auditing rules has Mr. London violated?
4. (Introductory) What is KPMG? What was KPMG's response to the
discovery of Mr. London's activities? How was the firm impacted?
5. (Advanced) What, if anything, could KPMG have done to prevent
this situation from happening? How should KPMG proceed going into the
future? What additional internal controls or procedures could the firm
implement?
6. (Advanced) How likely is it that similar activities occur in the
public accounting industry? How could these activities be prevented or
detected earlier?
Reviewed By: Linda Christiansen, Indiana University Southeast
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"Ex-KPMG Partner to Plead Guilty in Insider Case," by Michael Rapoport,
The Wall Street Journal, June 21, 2013 ---
http://online.wsj.com/article/SB10001424127887323393804578560160409788432.html?mod=djem_jiewr_AC_domainid
Scott London, the former KPMG LLP partner who has
admitted to an insider-trading scheme, will plead guilty to fraud on July 1,
according to a court docket and his attorney.
Mr. London, who had been a senior partner in charge
of KPMG's Pacific Southwest audit practice, had previously agreed to plead
guilty to one count of securities fraud. At his arraignment earlier this
week, a not-guilty plea was automatically entered for him, but he had been
expected to change that plea once some procedural matters were resolved.
According to an entry filed Friday on the court
docket in his case, a "change of plea" hearing has been set for July 1
before U.S. District Judge George H. Wu in Los Angeles.
"We're going to go in and plead guilty on July 1,"
Harland Braun, Mr. London's attorney, said Friday.
Mr. London has admitted passing confidential
information about KPMG clients to a friend, Bryan Shaw, who prosecutors say
made $1.27 million in illegal profits by trading on the information and paid
Mr. London at least $60,000 in cash and gifts. Mr. Shaw has already pleaded
guilty.
Continued in article
Question
Will Scott London get off Scott free under the lenient Federal Sentencing
Guidelines?
Sentencing is set for September 16, 2013
From CFO Journal's Morning Ledger on June 18, 2013
KPMG ex-partner Scott London is arraigned
Former KPMG
senior partner Scott London was arraigned in federal court, where a
not-guilty plea was entered on his behalf, although he is expected to plead
guilty once certain procedural matters are resolved,
the WSJ reports. Mr.
London is accused of securities fraud for providing confidential information
about KPMG clients to a friend as part of an insider-trading scheme. Mr.
London faces up to 20 years in prison, though he is likely to receive a
lesser sentence under federal sentencing guidelines. Mr. London told
reporters that he hopes to move past the scandal and get a new job. “I won’t
be practicing before the SEC, but it’ll be something,” he said. “I’ll wait
tables.”
Bob Jensen's threads on why white collar crime pays
bigtime even if you know you will be caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
Bob Jensen's threads on this insider trading crime committed by the KPMG
audit engagement managing partner ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search for "Scott London".
From the CFO Journal's Morning Ledger on June 19, 2013
SEC Chairman Mary Jo White: SEC seeks admissions of fault
SEC Chairman Mary Jo White said her agency intends to make
companies and individuals admit wrongdoing as a condition of settling civil
charges in certain cases, or be forced to fight the charges in court. That
would mark a watershed change to the SEC’s decades-old policy of allowing
companies and individuals to settle charges without admitting or denying
liability,
the WSJ’s Jean Eaglesham and Andrew Ackerman note.
The new policy, which came out of a review Ms. White
began when she joined the agency, will be applied in “cases where…it’s very
important to have that public acknowledgment [of wrongdoing] and
accountability.” Decisions will be made “case by case,” Ms. White said. But
she added the agency intends to target cases of egregious intentional
conduct or widespread harm to investors. Watch
a video of the interview here.
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 ---
New York State regulators are calling for a
nationwide moratorium on transactions that life insurers are using to alter
their books by billions of dollars, saying that the deals put policyholders
at risk and could lead to another taxpayer bailout.
Insurers’ use of the secretive transactions has
become widespread, nearly doubling over the last five years. The deals now
affect life insurance policies worth trillions of dollars, according to an
analysis done for The New York Times by SNL Financial, a research and data
firm.
These complex private deals allow the companies to
describe themselves as richer and stronger than they otherwise could in
their communications with regulators, stockholders, the ratings agencies and
customers, who often rely on ratings to buy insurance.
Benjamin M. Lawsky, New York’s superintendent of
financial services, said that life insurers based in New York had alone
burnished their books by $48 billion, using what he called “shadow
insurance,” according to an investigation conducted by his department. He
issued a report about the investigation late Tuesday.
The transactions are so opaque that Mr. Lawsky said
it took his team of investigators nearly a year to follow the paper trail,
even though they had the power to subpoena documents.
Insurance is regulated by the states, and Mr.
Lawsky said his investigators found that life insurers in New York were
seeking out states with looser regulations and setting up shell companies
there for the deals. They then used those states’ tight secrecy laws to
avoid scrutiny by the New York State regulators.
Insurance regulation is based squarely on the
concept of solvency — the idea that future claims can be predicted fairly
accurately and that each insurer should track them and keep enough reserves
on hand to pay all of them. The states have detailed rules for what types of
assets reserves can be invested in. Companies are also expected to keep a
little more than they really expect to need — called their surplus — as a
buffer against unexpected events. State regulators monitor the reserves and
surpluses of companies and make sure none fall short.
Mr. Lawsky said that because the transactions made
companies look richer than they otherwise would, some were diverting
reserves to other uses, like executive compensation or stockholder
dividends.
The most frequent use, he said, was to artificially
increase companies’ risk-based capital ratios, an important measurement of
solvency that was instituted after a series of life-insurance failures and
near misses in the 1980s.
Mr. Lawsky said he was struck by similarities
between what the life insurers were doing now and the issuing of structured
mortgage securities in the run-up to the financial crisis of 2008.
“Those practices were used to water down capital
buffers, as well as temporarily boost quarterly profits and stock prices,”
Mr. Lawsky said. “And ultimately, those practices left those very same
companies on the hook for hundreds of billions of dollars in losses from
risks hidden in the shadows, and led to a multitrillion-dollar taxpayer
bailout.”
The transactions at issue are modeled after
reinsurance, a business in which an insurance company pays another company,
a reinsurer, to take over some of its obligations to pay claims. Reinsurance
is widely used and is considered beneficial because it allows insurers to
spread their risks and remain stable as they grow. Conventional reinsurance
deals are negotiated at arm’s length by independent companies; both sides
understand the risk and can agree on a fair price for covering it. The
obligations drop off the original insurer’s books because the reinsurer has
picked them up.
Mr. Lawsky’s investigators found, though, that life
insurance groups, including some of the best known, were creating their own
shell companies in other states or countries — outside the regulators’ view
— and saying that these so-called captives were selling them reinsurance.
The value of policies reinsured through all affiliates, including captives,
rose to $5.46 trillion in 2012, from $2.82 trillion in 2007.
Continued in article
Also see
"World Needs More Hardheads Like Benjamin Lawsky," by Jonathan Weil,
Bloomberg News, June 13, 2013 ---
http://www.bloomberg.com/news/2013-06-13/world-needs-more-hardheads-like-benjamin-lawsky.html
Bob Jensen's threads on creative accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
Heads Up from Deloitte
"FASB Proposes Going-Concern Guidance," by Mark Crowley and Lyndsey
McAlister, Deloitte & Touche, June 27, 2013 ---
http://deloitte.wsj.com/cfo/files/2013/06/Heads-Up-%E2%80%94-FASB-Proposes-Going-Concern-Guidance.pdf
To the Point from Ernst & Young
"Management Would Have to Assess Going Concern Uncertainties," Ernst &
Young, June 28, 2013 ---
Click Here
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_BB2564_GoingConcern_28June2013/%24FILE/TothePoint_BB2564_GoingConcern_28June2013.pdf
Jensen Comment
The obvious moral hazard here is that the probability of becoming a non-going
concern and management disclosures beforehand are miles away from being
independent events.
Where were the auditors in 2013 when concern opinions were given to over
1,000 banks just before they failed?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Novate --- replace with something new, especially an old obligation by a new
one
When IASB Standards Diverge Rather Than Converge Toward FASB Standards
IASB Eases Hedge Accounting Requirements Yet Again ---
Click Here
http://www.pwc.com/us/en/cfodirect/publications/in-brief/2013-34-iasb-provides-relief-for-novation-of-derivatives.jhtml?display=/us/en/cfodirect/issues/financial-instruments&j=172912&e=rjensen@trinity.edu&l=420963_HTML&u=8776759&mid=7002454&jb=0
The IASB has published narrow-scope amendments to
IAS 39, Financial instruments: Recognition and measurement. Similar
provisions will be incorporated into the forthcoming chapter on hedge
accounting in IFRS 9, Financial instruments. The amendments provide relief
from parts of the hedge accounting requirements when a derivative is novated
to a central counterparty (CCP), such as a central clearing organization,
provided certain conditions are met.
LIBOR ---
http://en.wikipedia.org/wiki/LIBOR
From the CFO Journal's Morning Ledger on June 21, 2013
Libor case ensnares
more banks
Employees of some of the world’s largest
financial institutions conspired with a former bank trader to rig benchmark
interest rates, British prosecutors alleged, a sign authorities have their
sights on an array of banks and brokerages. The U.K.’s Serious Fraud Office
charged former UBS and Citigroup trader Tom Hayes with eight counts of
“conspiring to defraud” in an attempt to manipulate Libor,
the WSJ reports. The
charges read in court
Thursday accuse Mr. Hayes of conspiring with
employees of eight banks and interdealer brokerage firms, as well as with
former colleagues at UBS and Citigroup. Mr. Hayes, who was charged with
similar offenses by the U.S. last December, hasn’t entered a plea in either
country.
"Libor Case Ensnares More Banks U.K. Prosecutors Allege Staff From J.P.
Morgan, Deutsche Bank and Others Tried to Fix Rates," by David Enrich,
The Wall Street Journal, June 20, 2013 ---
http://online.wsj.com/article/SB10001424127887323893504578556941091595054.html?mod=djemCFO_h
Employees of some of the world's largest financial
institutions conspired with a former bank trader to rig benchmark interest
rates, British prosecutors alleged Thursday, a sign authorities have their
sights on an array of banks and brokerages.
The U.K.'s Serious Fraud Office this week charged
former UBS AG UBSN.VX +0.43% and Citigroup Inc. C -3.40% trader Tom Hayes
with eight counts of "conspiring to defraud" in an alleged attempt to
manipulate the London interbank offered rate, or Libor. Mr. Hayes appeared
in a London court Thursday, where prosecutors for the first time detailed
their allegations against him, including a list of institutions whose
employees Mr. Hayes allegedly conspired with.
Mr. Hayes, who was charged with similar offenses by
the U.S. last December, hasn't entered a plea to either country's charges.
He wrote in a January text message to The Wall Street Journal that "this
goes much much higher than me."
The charges read in court Thursday accuse Mr. Hayes
of allegedly conspiring with employees of eight banks and interdealer
brokerage firms, as well as with former colleagues at UBS and Citigroup.
Each of the eight charges accused Mr. Hayes of "dishonestly seeking to
manipulate [Libor]…with the intention that the economic interests of others
would be prejudiced and/or to make personal gain for themselves or another."
The banks include New York-based J.P. Morgan Chase
JPM -2.04% & Co.; Germany's Deutsche Bank DBK.XE +0.78% AG; British banks
HSBC Holdings HSBA.LN +1.34% PLC and Royal Bank of Scotland Group RBS.LN
-3.06% PLC; and Dutch lender Rabobank Groep NV. Prosecutors alleged Mr.
Hayes also worked with employees of ICAP IAP.LN +4.74% PLC, Tullett Prebon
TLPR.LN -0.07% PLC and R.P. Martin Holdings Ltd., which are London-based
interdealer brokers that serve as middlemen between bank traders.
An ICAP spokeswoman said the firm has provided
information to British prosecutors and continues to cooperate. A Rabobank
spokesman said the bank continues to cooperate with investigators and is
likely to eventually reach a settlement. In a statement, Tullett said it is
"cooperating fully" with prosecutors' requests for information.
Representatives for the rest of the named institutions declined to comment.
The list of banks and brokerages named at
Thursday's court hearing underscores the breadth of institutions that remain
under government scrutiny. So far, only three banks—UBS, RBS and Barclays
BARC.LN +0.30% PLC—have reached settlements with U.S. and British
authorities. Authorities hope to hammer out settlements with additional
institutions, including Rabobank, in coming months, according to a person
familiar with the investigation.
The list that prosecutors read Thursday included at
least one institution that has said it wasn't involved in the Libor scandal.
After UBS settled rate-rigging allegations last December, Tullett Prebon
spokeswoman Charlotte Kirkham said the firm didn't help UBS manipulate rates
and that no Tullett employees had been disciplined in connection with Libor.
In April, Tullett said it stood by that statement.
In a statement Thursday, Tullett disclosed for the
first time that it has been asked to provide information to various
regulators and government agencies in connection with Libor investigations.
In addition to saying it is cooperating with the requests, the firm
reiterated it hasn't been informed that it or its brokers are under
investigation in relation to Libor. A spokesman declined to comment further.
The interdealer brokers' alleged involvement in
attempts to rig Libor has rocked the industry in recent months. Two R.P.
Martin employees were arrested along with Mr. Hayes in December but not
charged. The U.S. Justice Department and the Commodity Futures Trading
Commission also are investigating brokers as part of their Libor probes,
according to people familiar with those investigations.
Mr. Hayes, a 33-year-old British citizen, was a
derivatives trader in Tokyo from 2006 through 2010, the period during which
prosecutors allege he attempted to manipulate Libor. He is the only person
the Serious Fraud Office has charged in their nearly yearlong Libor
investigation, although an agency spokesman said this week that more arrests
and charges are possible.
Mr. Hayes, wearing beige trousers and an untucked,
navy dress shirt, didn't respond to the charges at court Thursday. Standing
behind a glass partition in the courtroom, he was mostly silent aside from
telling the judge his name, address and date of birth. At one point, the
judge asked him to take his hands out of his pockets.
Continued in article
"Who's Manipulating Derivative Indexes and Why: How to think about
the Libor scandal and its astonishingly proliferating offspring," by Holman
W. Jenkins Jr., The Wall Street Journal, June 21, 2013 ---
http://online.wsj.com/article/SB10001424127887323893504578559282047415410.html?mod=djemEditorialPage_h
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.
Continued in article
Bigger than Enron and Rotten to the Core: The LIBOR Scandal
Bob Jensen's threads on the LIBOR Scandal ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Teaching Case
From The Wall Street Journal Accounting Weekly Review on June 14,
2013
CRU, After LIBOR Scandal, Audits Steel Prices Index
by:
John W. Miller
Jun 05, 2013
Click here to view the full article on WSJ.com
TOPICS: Assurance Services, Auditing, Auditing Services
SUMMARY: CRU Group compiles steel prices and issues a report every
Wednesday. "The compiler...said an auditor
will conduct on-site inspections of steel companies that provide pricing
data and will gather more information about how the prices are collected for
four major types of steel product, which go into four different indexes. The
move is believed to be a first by a commodity-price-index firm to audit
information provided to it."
CLASSROOM APPLICATION: The article may be used in an auditing or
other assurance services class to discuss non-audit services, audit planning
for a first-of-its-kind engagement, and determination of materiality in such
a setting.
QUESTIONS:
1. (Introductory) What does Commodity Research Unit Group (CRU) do?
Who uses the information that the group prepares?
2. (Advanced) What service has CRU hired KPMG LLP to conduct? Be
specific in stating a type of service to be provided and the type of report
that you think may be issued under U.S. assurance service requirements.
3. (Advanced) What is the significance for assurance work planning
of the fact that this engagement is apparently the first by a
commodity-price-index firm to audit information provided to it?
4. (Advanced) Suppose you are an audit manager planning an
engagement for KPMG to examine steel prices. What factors will you consider
in deciding on materiality of amounts to examine?
Reviewed By: Judy Beckman, University of Rhode Island
"CRU, After LIBOR Scandal, Audits Steel Prices Index," by John W. Miller,
The Wall Street Journal, June 5, 2013 ---
http://online.wsj.com/article/SB10001424127887324069104578527632400988350.html?mod=djem_jiewr_AC_domainid
A key price compiler in the global steel industry
said it will begin auditing its data providers, part of an effort to address
concerns about transparency in price indexes following the Libor rate-fixing
scandal.
The compiler, Commodity Research Ltd., said an
auditor will conduct on-site inspections of steel companies that provide
pricing data and will gather more information about how the prices are
collected for four major types of steel product, which go into four
different indexes. Much of these steel types are destined for the U.S
automotive market.
The move is believed to first by a
commodity-price-index firm to audit information provided to it. CRU, based
in London and Pittsburgh, has hired KPMG LLP to conduct the audits,
according to a person familiar with the matter. KPMG didn't respond to a
request for comment.
Glenn Cooney, London-based head of operations for
CRU Indices, which publishes price data on 75 commodities in metals, mining
and fertilizers, said it would look at auditing other data providers in
other sectors to bolster industry transparency.
Currently, CRU collects price and volume data on
spot transactions from steel producers and buyers, who submit their prices
voluntarily to a CRU website. CRU publishes an index price based on the
submissions every Wednesday.
CRU officials say they hope the move will lend it
added credibility at a time of concern about indexes. Three banks in Europe
have agreed to pay over $2 billion in settlement fees to U.S. and U.K.
regulators after they were caught manipulating the London interbank offered
rate, or Libor, the interest rate banks charge to borrow from each other.
Josh Spoores, a Pittsburgh-based steel analyst for CRU, said the company
started receiving more requests for improved transparency after the Libor
scandal.
The company also hopes it will be able to reassure
several major U.S. steel mills, which in April said they would no longer
link some contracts to CRU's steel indexes because they felt prices quoted
weren't an accurate reflection of the market. The steelmakers that stopped
using the indexes include ArcelorMittal, MT +3.34% U.S. Steel Corp. X +5.23%
and Nucor Corp. NUE +3.01%
Grant Davidson, general manager for sales at
ArcelorMittal's Dofasco mill in Canada, said big steel companies would
welcome more transparency. "We're for what's most accurately reflecting the
price in the market," he said.
Michael Steubing, vice president of global
procurement for Mauser USA LLC, which makes steel drums and barrels, said an
audited index would help guarantee that he can sell his product at a
competitive price. He sells barrels to big chemical companies that use CRU
to help determine how much they will pay for the barrels. "So we'd like that
(CRU) to be as accurate as possible," he said.
CRU, which is used by the Chicago Mercantile
Exchange and says its prices are used to settle steel contracts with an
annual global value of over $20 billion, faces more competition from Platts,
a division of McGraw Hill Financial Inc., MHFI +0.97% which two years ago
bought price compiler The Steel Index.
Joe Innace, Platts's editorial director for metals,
said Platts would continue its phone survey for its Platts industry
newsletter independently of The Steel Index and wouldn't use audits because
he said it has enough verifications, such as checking that prices match the
types and volumes of steel appropriate to the index, in place.
Steve Randall, who founded The Steel Index in 2006,
said it had no plans to audit data providers. "We run all our data through a
series of screenings," he said. He declined to provide details about the
screening procedure.
Continued in article
"Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:
The Illuminati were amateurs. The second huge financial scandal of the year
reveals the real international conspiracy: There's no price the big banks can't
fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425
Bob Jensen's LIBOR fraud threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Bob Jensen's threads on LIBOR are under the C-terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Bob Jensen's threads on LIBOR and other derivative financial instruments
frauds (timeline) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
This is so huge it's better to do a word search for LIBOR
From the CPA Letter Daily on June 25, 2013
Tax:
Proposed
repair regulations affect more than tangible property capitalization
The proposed regulations
governing tangible property (the so-called repair regulations) will require
accounting method changes by many taxpayers. As this article discusses,
those changes, in turn, will affect not just the capitalization or expensing
of tangible property costs, but the computation of several tax items,
including the Sec. 199 domestic production activities deduction, the uniform
capitalization rules, and LIFO and FIFO.
The Tax Adviser (6/2013)
"Good News For Future California CPAs Who Were Totally Going To Get Around
to That 150 Hour Thing... Eventually," by Adrienne Gonzalez, Going
Concern, June 24, 2013 ---
http://goingconcern.com/post/good-news-future-california-cpas-who-were-totally-going-get-around-150-hour-thing-eventually
Jensen Comment
This is great news for one of our sons in California.
"Gone in 90 Seconds: Tesla's Battery-Swapping Magic," by Ashley Vance,
Bloomberg Businessweek, June 21, 2013 ---
http://www.businessweek.com/articles/2013-06-21/gone-in-90-seconds-teslas-battery-swapping-magic
Jensen Comment
This is a perfect opportunity for accounting students to do a feasibility-cost
study based upon the cost parameters for purchasing a Tesla and paying $60-$80
per battery swap. One item to compare is the size of the nation. Canada, Russia,
and the USA are particularly troublesome because both nations are huge with lots
of open spaces and cold weather (batteries do not work as well in cold weather).
Battery swapping that works well in Israel might be such a good idea for the
USA, Canada, and Russia.
Also troublesome are large cities. Do you really want to have to drive for 50
traffic-jammed miles round trip to find a battery swap station in downtown
Toronto or Los Angeles or NYC?
For accounting students this is a complicated fixed cost research question in
CVP analysis where charging stations across a nation currently cost $500,000
each battery swap pit. How long will it take to recover the $500,000 fixed cost
of a recharging station pit up in Yellow Feather village located in far north
Alberta?
Unanswered questions include warranty issues.
Batteries currently have a 100,000 mile warranty. What if a battery having
97,483 miles is swapped for a new battery costing $60-$80 at a swapping station?
Or what if you swap a battery with 1,037 miles for one having 97,483 miles? I'm
not at all clear on how Tesla plans to deal with the battery warranty
complications caused by battery swapping. Is Tesla essentially giving low
cost battery replacements ($60-$80) for the life of a car that could be as long
as forever?
I recall what a disaster it was for K-Mart to give me a lifetime free battery
replacement warranty on my 1970 Plymouth station wagon. In 1998 the K-Mart
service manager just rolled his eyes when I asked for my free battery Number 10.
Under the writing in my particular warranty contract there was no prorated
depreciation for time of use. I felt like Jack Benny driving to K-Mart in a
Maxwell ---
http://www.youtube.com/watch?v=0Js93UCdzH0
(Following a very long Lucky Strike commercial)
Similarly, when the Feds bailed out Chrysler in 2007 a $1 billion reserve had
to be created for all those Chrysler vehicles that had lifetime warranties on
the power train. A car's "lifetime" apart from the power train might well be
forever.
The warranty issue is also a worry for investors in Tesla. There is zero
experience on long-term battery life in varying climates. The warranty losses
are great unknowns at this point in time --- a worry for accountants, investors,
car buyers, and the Tesla company itself. Will banks loan $400,000 on each
charging station pits having zero alternate uses.
"On “Geek” Versus “Nerd” ---
http://slackprop.wordpress.com/2013/06/03/on-geek-versus-nerd/
FINRA ---
http://en.wikipedia.org/wiki/FINRA
Something tells me Barry does not have a whole lot of respect for FINRA.
"The Latest Fuckery from FINRA," by Barry Ritholtz , June 17, 2013 ---
http://www.ritholtz.com/blog/2013/06/the-latest-fuckery-from-finra/
What kind of fuckery is this?
You made me miss the Slick Rick gig (oh Slick Rick)
You thought I didn’t love you when I did (when I did)
Can’t believe you played me out like that (Ahhh)
-Amy Winehouse, Me & Mr Jones
Pop star drug addict who committed suicide
I have throughout my career in finance, studiously
avoided having much to do with FINRA, WallStreet’s woefully corrupt
self-regulatory entity.
I never got into trouble when I was on the Sell
Side (i.e., series 7 licensed individual), so I never experienced their
crony-flavored version of justice. But I was very much aware of their role
in screwing investors — out of their legal rights to a trial (via mandatory
arbitration) and thus out of their monies. If you want a primer on this,
check out William Cohan’s series on FINRA arbitrations. It is astounding.
The latest nonsense from this wholly self
serving cesspool of corruption is detailed by Susan Antilla, in
Dealbook’s
A Rise in Requests From Brokers to Wipe the Slate Clean.
It turns out that bad brokers can have their records
of misdeeds, if not expunged, well then cleaned up quite a bit. Try doing
that with a felony or even misdemeanor if you are not a juvenile.
I cannot begin to express my disdain for this
organization, which serves the interests of wirehouses and not investors.
Indeed, I believe they have done immeasurable damage to individual investors
over the decades — through their kangeroo (non)courts, and by the way the
“Self” regulate, an inherent contradiction in terms if ever there was one.
Don’t take my word for it. Read Cohan’s series, and
do some digging into their formation and background. Just don’t have a large
meal first . . .
Bob Jensen's threads on rotten to the core brokers ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
"Why Are Some Sectors (Ahem, Finance) So Scandal-Plagued?" by Ben W.
Heineman, Jr., Harvard Business Review Blog, January 10, 2013 ---
Click Here
http://blogs.hbr.org/cs/2013/01/scandals_plague_sectors_not_ju.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
The trouble with crony capitalism isn't capitalism. It's the cronies ---
http://www.trinity.edu/rjensen/2008Bailout.htm#CronyCapitalism
Subprime: Borne of Greed, Sleaze, Bribery, and Lies (including the credit
rating agencies) ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
History of
Fraud in America ---
http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm
Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
From Vimeo on June 25, 2013---
http://vimeo.com/user4591615
Documentary Film: Crossing
the Line: Ordinary People Committing Extraordinary Crime
Features that
horse-faced horse addict from Dixon, IL who is now serving a 19-year sentence in
Club Fed
Kelly Richmond Pope, Ph.D., CPA. Managing
Principal, Loop Learning Solutions, Inc. Associate Professor, School of
Accountancy and MIS, DePaul University in Chicago, IL. Creator and Executive
Producer of the award-winning educaitonal documentary, Crossing the Line:
Ordinary People Committing Extraordinary Crimes.
Question
What is a skeuomorphism?
Answer
Economist Magazine, June 25, 2013
http://www.economist.com/blogs/economist-explains/2013/06/economist-explains-15
In my auditing days I was pretty fast when using a 10-key adding machine that
spewed out paper streams that I stapled to accounting forms in the audit work
papers.
Today I'm wondering if the original keyboard designers put 10 number keys on
the right side of the keyboard as an skeuomorphism of the old 10-key adding
machine?
Bob Jensen's threads on the sad state of doctoral programs in accountancy
---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms
Jensen Comment
The daughter of one of my close friends is now trying to write up a dissertation
proposal in a major USA university. For a time she was dubious about applying
for an accounting doctoral program because of all the math, statistics, and
econometrics. Now at the dissertation proposal she's decided to beat Compustat
data with an econometrics stick because that's easier than trying to collect an
original data set.
The irony is that the econometrics turns away many potential applicants to
accounting doctoral programs becomes their salvation when they want the easiest
kind of dissertations as they near graduation from accountancy doctoral
programs. Go figure!
Law Prof Blog Traffic Rankings
Below are the updated quarterly traffic rankings
(page views and visitors) of the Top 35 blogs edited by law professors with
publicly available SiteMeters for the most recent 12-month period (April 1, 2012
- March 31, 2013), as well as the percentage change in traffic from the
prior 12-month period:
|
|
Blog |
Page Views |
Change |
|
1 |
Althouse |
19,876,719 |
+16.6% |
|
2 |
Legal Insurrection |
14,749,820 |
+64.7% |
|
3 |
Hugh Hewitt |
6,879,670 |
+25.1% |
|
4 |
Leiter Reports: Philosophy |
5,727,403 |
+0.1% |
|
5 |
Patently-O |
3,562,246 |
-3.9% |
|
6 |
Jack Bog's Blog |
3,308,120 |
+10.8% |
|
7 |
TaxProf Blog |
3,283,047 |
-4.3% |
|
8 |
PrawfsBlawg |
1,982,377 |
+14.0% |
|
9 |
The Faculty Lounge |
1,333,904 |
+6.8% |
|
10 |
Sentencing Law & Policy |
1,275,184 |
-15.0% |
Jensen Comment
It makes no sense to me why Professor Althouse gets so many hits relative to the
others. She's more conservative than most of the other top law bloggers ---
which should be a turn off for the liberal Academy. She has a lot of personal
postings about her life and is not the best source for professional references.
Just goes to show you that there's no accounting for taste in terms ob blog
popularity. I like the TaxProf blog best.
From a Stanford University Faculty Member and the Center for Leadership
"CEOs are Terrible at Management, Study Finds," Forbes, May 23,
2013 ---
http://www.forbes.com/sites/susanadams/2013/05/23/ceos-are-terrible-at-management-study-finds/
"Record-Setting Demand Projected for Accounting Graduates: AICPA
Report Accounting Graduates and Enrollments at Historic Levels, Continuing
Upward Trend, AICPA, June 18, 2013 ---
Click Here
http://www.aicpa.org/Press/PressReleases/2013/Pages/Record-Setting-Demand-for-Accounting-Graduates-AICPA.aspx
Jensen Comment
This increases demand for the relatively-miniscule number of accounting doctoral
graduates in 2013 ---
http://www.jrhasselback.com/AtgDoctInfo.html
$53,300: The Average Starting Salary for New Accounting Grads
(in 2013) ---
http://www.naceweb.com/salary-survey-data/?referal=research&menuID=71&nodetype=4
Jensen Comment
I think such starting salary surveys are highly misleading unless they
also show cost of living adjustments. A starting salary of $53,300 will
go a lot further in San Antonio than in San Francisco, NYC, Los Angeles,
and Honolulu where people earning $53,300 should probably get food
stamps and subsidized housing.
I would go to work for $20,000 if the starting job had world class
training and exposures to clients thirsting to hire away CPAs from top
accounting firms.
It's all about windows of opportunity that trump starting salaries in
nearly every instance.
I would not opt for an MBA program were graduates have average
starting salaries of $143,800 (and a high standard deviation and
kurtosis) relative to a Masters of Accounting Program where average
starting salaries are $53,300 with a small standard deviation and
negligible kurtosis. By kurtosis I mean that a few superstar graduates
(such as those with whiz-kid computer science undergraduate degrees from
elite universities) with starting salaries over $250,000 are skewing the
average.
There are also misleading "expected" compensations contingent upon
such things as sales. For example, a marketing or finance job may look
great when told that last year's hires earned an average of $143,800
with commissions and bonuses thrown in. But what about those that came
in below average because they just had a harder time selling products
and services?
Please warn students that the most important thing about a new job is
not the anticipated salary. It's the anticipated opportunity with a few
other factors thrown in such as tension, long hours, geographic
location, and constant travel. For example, a CPA firm may pay double
for going to Moscow, but do you really want to start your career in
Moscow where it's really dangerous on the streets and housing is rather
Spartan?
Bob Jensen's threads on careers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
How to Electronically Sign Documents Without Printing and Scanning Them ---
Click Here
http://www.howtogeek.com/164668/how-to-electronically-sign-documents-without-printing-and-scanning-them/?utm_source=newsletter&utm_medium=email&utm_campaign=030613
Special Robotics (Robot) Feature Article from MIT's Technology Review ---
Click Here
"How Technology Is Destroying Jobs," by David Rotman, MIT's
Technology Review, June 12, 2013
Note the 60 comments to date
http://www.technologyreview.com/featuredstory/515926/how-technology-is-destroying-jobs/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130613
Jensen Comment
This makes me recall a science fiction movie years ago. Handsome people feeding,
frolicking, and "working" at whatever they wanted like painting landscape
pictures above ground for no pay lived very well (sort of like what Carl Marx
viewed as the ultimate communism state). The genetics of illness, including
mental illness, was cured. Everything was wonderful except for the unlucky few
now and then that were hauled off to slaughter houses to feed the ugly trolls
living in dark caverns below ground, trolls that really controlled the world.
Nine Famous Whistle-Blowers: Where Are They Now?
This includes updates on Sherron Watkins (foul mouthed whistle blower who
helped bring down Enron)
This includes updates on Cynthia Cooper (persistent internal auditor whistle
blower that helped bring down Worldcom)
9 Famous Whistle-Blowers: Where Are They Now?
http://www.businessinsider.com/9-famous-whistle-blowers-2013-6?op=1
Bob Jensen's threads on Sherron (Smith) Watkins and Cynthia Cooper are at
http://www.trinity.edu/rjensen/FraudEnron.htm
Two types of speakers are popular on the convention circuit --- former
whistle blowers and former fraudsters (after their prison years)
Both types usually write top selling books as well.
One problem with former fraudsters is that recidivism is somewhat high
"Recidivism and Risk Management: Barry Minkow Goes Back to the Slammer,"
by Jim Peterson, re:Balance, March 2011 ---
Click Here
http://www.jamesrpeterson.com/home/2011/03/recidivism-and-risk-management-barry-minkow-goes-back-to-the-slammer.html
Bob Jensen's threads on whistle blowing ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
Can Ethics Be Taught?
"Crazy Eddie Revisited: Old Lessons for Today's Accountants," by Anthony
H. Catanach Jr., Grumpy Old Accountants, June 7, 2013 ---
http://grumpyoldaccountants.com/blog/2013/6/7/crazy-eddie-revisited-old-lessons-for-todays-accountants
"Does Social Media (such as corporate financial official revelations
in Titter tweets) Promote "Selective Disclosure?" by Anthony H. Catanach
Jr., Grumpy Old Accountants, June 19, 2013 ---
http://grumpyoldaccountants.com/blog/2013/6/19/does-social-media-promote-selective-disclosure
Jensen Question
Do the newer types of social media (e.g., Twitter, Facebook, LinkedIn, etc.)
constitute "legal notice" sites in the eyes of the USA court system? I don't
know the answer, but I seriously doubt it at this point in time ---
http://en.wikipedia.org/wiki/Legal_Notice
Legal notice must be made in sources where people traditionally will look for
such notices such in classified notices in local newspapers and and court
sites (bulletin boards) at the courthouses. I suspect that the Website of a
court now is a medium for legal notice in matters regarding that particular
court.
From the Stanford Graduate School of Business
5 Attitudes of Successful Entrepreneurs, from Professor Irv Grousbeck
---
http://stanfordbusiness.tumblr.com/post/52905655004/5-attitudes-of-successful-entrepreneurs-from-professor
Jensen Comment
We must acknowledge that successful entrepreneurs, like successful CEOs of
public companies, have flaws that are generally offset by tremendous offsetting
traits. For example, I don't know of any analysts that credit Steve Jobs for
skills in managing people. Steve was a genius at managing products.
Also too little credit is given to the serendipity of "success" that comes
from being in the right place at the right time. A perfect combination of the
five "attitudes" mentioned by Professor Grousbeck are only a small part of
"success."
Accounting, Auditing, and Tax Humor Videos
Hi Linda,
Probably the best thing to do is to go to YouTube and search for "Auditing
Humor" ---
http://www.youtube.com/
When I did that on YouTube a few possibilities emerged. For example, take a
look at
The Fixed Assets Audit ---
http://www.youtube.com/watch?v=PnWDEZdrmi4
You can also try other YouTube search words like "accounting humor,"
"bookkeeper humor," "SNL Accountant," "Tax Accounting Humor," "Tax Humor,"
"Accounting Nerds" and "Bob Newhart Accountant."
You might consider the movie "Hot Millions" with Peter Ustinov, Maggie Smith,
and Karl Malden.
I never could find this on NetFlix so I bought it cheap from Amazon.
My sadly neglected threads on accounting novels, plays, and movies are at
http://www.trinity.edu/rjensen/AccountingNovels.htm
There's not much in the way of humor here.
Bob Jensen's threads on accounting and finance humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor
There's not much in the way of video humor listed here.
Professor Roselyn Morris (University of South Texas) had a nice listing of
ethics movies and some accounting movies on the Web. However, I don't think she
included humor videos. The link to her Web page on this is now broken. You might
contact her. If she has a newer URL to that page please send it to me.
Wikipedia has a page on
Hollywood Accounting ---
http://en.wikipedia.org/wiki/Hollywood_accounting
But there's nothing funny here.
Not Wanting to Waltz With Matilda
Traders Are Massively Betting Against The Australian Dollar [CHART] ---
http://www.businessinsider.com/the-market-is-massively-short-the-australian-dollar-2013-6
Australia is Not the Only Loser During the Rise in the Value of the Dollar
"Citigroup Facing $7 Billion Hit on Dollar Gain," by Donal Griffin, June
11, 2013 ---
http://www.bloomberg.com/news/2013-06-11/citigroup-facing-7-billion-currency-hit-on-dollar-peabody-says.html
Darrell Duffie: Big Risks Remain In the Financial System
A Stanford theoretician of financial risk looks at how to fix the "pipes and
valves" of modern finance
Stanford Graduate School of Business, May 2013
Click Here
http://www.gsb.stanford.edu/news/headlines/darrell-duffie-big-risks-remain-financial-system?utm_source=Stanford+Business+Re%3AThink&utm_campaign=edfd4f11fb-Stanford_Business_Re_Think_Issue_Thirteen5_17_2013&utm_medium=email&utm_term=0_0b5214e34b-edfd4f11fb-70265733&ct=t%28Stanford_Business_Re_Think_Issue_Thirteen5_17_2013%29
. . .
In March, Duffie and the Squam Lake Group proposed
a dramatic new restriction on executive pay at “systemically important”
financial institutions. Duffie argues that top bank executives still have
lopsided incentives to take excessive risks. The proposal: Force them to
defer 20 percent of their pay for five years, and to forfeit that money
entirely if the bank’s capital sinks to unspecified but worrisome levels
before the five years is up.
“On most issues,” Duffie said, “the banks would be
glad to see me go away.”
Jensen Comment
Squam Lake and its 30 islands is in the Lakes Region of New Hampshire ---
http://en.wikipedia.org/wiki/Squam_Lake
It is better known as "Golden Pond" after Jane Fonda, her father (Henry) and
Katherine Hepburn appeared in the Academy Award winning movie called "On
Golden Pond" that was filmed on Squam Lake. Professor Duffie now has some
"golden ideas" for finance reforms.
EITF Update from Ernst & Young, June 2013 ---
Click Here
http://www.ey.com/Publication/vwLUAssetsAL/EITFUpdate_BB2560_12June2013/%24FILE/EITFUpdate_BB2560_12June2013.pdf
Update on EU proposal for audit firm rotation
Just when audit firms in Europe were breathing a sigh of relief that the
proposed mandatory audit firm rotation would be 14-25 years, the Irish
presidency of the EU has presented revised a revised proposal to reduce this to
six years which, as I recall, was a number favored by USA audit firm
rotation advocate Tom Selling.
The PCAOB found that responses on audit firm rotation in the USA were
predominantly negative toward any such mandated rotation.
Bob Jensen's threads on audit firm rotation proposals ---
http://www.trinity.edu/rjensen/Fraud001c.htm#Rotation
AACSB Ethics/Sustainability Resource Center ---
http://www.aacsb.edu/resources/ethics-sustainability/default.asp
Bob Jensen's threads on ethics in accounting education are at
http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation
Possible Team Project in Cost Accounting Courses
Have students compare costs of building and owning swimming pools under
various conditions like nearby tall trees and various types of pools
I had two swimming pools in my life (in Florida and in Texas), I will never
ever buy a home in the future with a swimming pool. In Florida my main problem
was towering nearby pine trees that shed needles so heavily I could almost walk
on water at times. In Texas my main problem was towering live oak trees that
shed surface-staining acorns and leaves into my pool. Live oaks dribble acorns
and leaves all winter long.
The kids enjoyed the pools, especially son Marshall who became a championship
swimmer in his school. But as an empty-nester I would bury a swimming pool if I
had a swimming pool.
Apart from my tree debris removal troubles it seemed to cost a fortune to
maintain these pools, and I don't much enjoy swimming.
When grading the student team projects on swimming pool costs, downgrade them
for not mentioning electricity costs. I never took the trouble, but I shudder to
think about what it cost to power up two big 300-watt lights under each end of
our pools. Actually, the lights in the night were what I enjoyed most about our
pools. But when I think about it, these lights burning for hours each night are
an unnecessary use of electricity when nobody is using the pool.
When my new neighbor down the road in Florida decided to put in a new pool,
the excavating machine encountered a buried swimming pool. After moving to a
second spot in his back yard the excavating machine dug into a second swimming
pool buried underground.
"Here's The Real Cost Of Owning A Home With A Swimming Pool," Brian
O'Connell, Business Insider, June 9, 2013 ---
http://www.businessinsider.com/the-cost-of-swimming-pool-ownership-2013-6
"Another View of the Accounting Doctoral Shortage," by James Martin,
MAAW Blog, June 10, 2013 ---
http://maaw.blogspot.com/2013/06/another-view-of-accounting-doctoral.html
Jensen Comment
Note that this posting focuses on a 2008 article where some of the
recommendations have already been met.
Recommendations:
1.
2. Train Ph.D.s
from other disciplines to teach accounting.
Jensen Comment
To date the AACSB Bridging Program has trained over a hundred PhDs in other
disciplines for accountancy tenure track positions, although the R1
research universities are not inclined to give them tenure track
positions. However, to teach accounting in tenure track positions at
other colleges they must have had an accounting background that prepares
them to teach the assigned accounting courses. For example, a CPA who
also earned a history PhD can complete the AACSB briding program to
qualify herself to obtin tenure in an accounting department. A computer
science PhD who has qualified work experience in AIS may bridge to teach
AIS courses.
3. Remove
arbitrary AQ-PQ standards.
Jensen Comment
Just recently the AACSB expanded on other categories beyond the old AQ-PQ
categories. The hope is that this will open tenure alternatives to those
that previously have been denied tenure alternatives as PQ faculty.
4. Treat PQ
faculty as collaborators in both research and teaching rather than as
second-class citizens.
Jensen Comment
This varies among colleges and universities, but in top R1 accounting
research universities the only PhDs in tenure tracks are likely to
hold doctorates in accounting, finance, mathematics, statistics, social
scienc, or computer science. Humanities PhD holders need not apply for
tenure-track positions in R1 universities except in very rare
circumstances. Even then a mathematics PhD is not likely to teach
intermediate and other undergraduate and masters accounting courses
unless qualified in those subjects. For example, a mathematics PhD is
more apt to only teach in the accounting doctoral program and supervise
doctoral dissertations.
PQ faculty in R1 universities are not
likely to be on tenure tracks and, when push comes to shove, they are
second class citizens in most respects except teaching loads where they
may see more students in a year than some of the research faculty see in
a lifetime.
June 12, 2013 reply from John Brozovsky
Official numbers may be
slightly low. I have put out two in a non-official ‘bridge’ program
students in the last three years. Basically, they have their PhD in a
different disciplines (ag econ and hotel and restaurant management) and
then got a master’s degree in accounting and after went out to teach
accounting in accounting departments. We currently have an outside PhD
in our master’s program but she is not interested in teaching at all
having already done it in her prior discipline. In essence we are
getting PhDs into our master’s program because they think they can get a
better job than their other discipline provided them. They did not come
in thinking about being an accounting professor at all—they were
thinking of going out and being an accountant.
John
Employee Stock Options (ESOs) versus Restricted Stock Units (RSUs) ---
http://moneygirl.quickanddirtytips.com/what-are-employee-stock-options-rsu.aspx
Jensen Comment
Most employees still like stock options, but their employers mostly lost
enthusiasm of this type of compensation when the FASB revised FAS 123 into FAS
123R that changed the rules regarding when employers must expense these options.
The Controversy Over Employee Stock Options as Compensation ---
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
This might make a good lease versus buy case for accounting students.
Chains such as Rent-a-Wheel and Rimco are seeing
business boom. Many consumers pay double or triple the cost of buying and face
aggressive repossession policies.
"High prices are driving more motorists to rent tires," by Ken Bensinger, Los
Angeles Times, June 8, 2013 ---
http://www.latimes.com/business/autos/la-fi-rent-a-tire-20130609,0,2490443,full.story
Research by Professors from Dartmouth and Warwick
"How Home Ownership Causes (Periodic) Unemployment," by John Carney,
CNBC, June 7, 2013 ---
http://www.cnbc.com/id/100798861
Jensen Comment
What I think is lacking in this study is an in-depth look at the alternatives.
In the USA the alternative is the rental market. The rental market is
complicated. In NYC there's a huge shortage of rental housing caused in large
measure by rent controls that discourage bringing supply closer to demand. In
free markets like those in Las Vegas there's often a glut of rental housing
because of massive overbuilding in economic booms.
In China there are now many towers of condo and rental apartments where the
towers and their connecting malls are all vacant due to overbuilding by
developers. It is possible for investors who build enormous housing complexes to
make forecasting mistakes that are really devastating on the construction
economy and its employment.
There are many good things attributable to home ownership.
- Home owners generally (not always) take more pride in keeping up their
homes. They're nearly always cleaning, repairing, and upgrading their
properties. Landlords do this less often --- usually when they are seeking
new tenants.
- Home owners are forced to save if they must make mortgage payments.
Renters are more apt to consume earnings month-to-month such that when they
retire they have no home equity savings.
- Home owners are apt to maximize housing that they can afford to own such
that they may have a higher quality of home life than renters who are more
apt to not be able to afford rents on such fine housing.
- In the USA there are still tax advantages in home ownership where
renters are often forced to pay higher marginal tax rates every year.
There are also good things attributable to renting housing.
- Probably the best thing is liquidity of living. Although there may be
some penalty for breaking a rental lease, it is usually miniscule in terms
of the transactions cost and delays and tension of trying to sell a house.
- Home ownership may not be advisable (except in bubble markets) for
non-tenured faculty until attainment of tenure since the transactions costs
of buying and selling a home over a 2-7 year period can be huge, especially
in a resale market with a glut of houses and condos for sale.
- Renters find it easier to upgrade to larger houses on an as-needed basis
by renting a two bedroom apartment with no children, a three bedroom house
with one child, a four bedroom house when another child is on the way, etc.
However, a family of six or more may find it impossible to rent suitable
housing.
- CPA auditors who rent will be less impacted if auditing firms are forced
to rotate audit clients ever six years or so.
"Islamic Finance is Growing Fast but Faces
the Form-Versus-Substance Debate (Video)," by Usman Hayat, CFA,
Enterprising Investor, June 11, 2013 ---
Click Here
http://blogs.cfainstitute.org/investor/2013/06/11/islamic-finance-is-growing-fast-but-faces-the-form-versus-substance-debate-video/
Bob Jensen's threads on Islamic Accounting
---
http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting
Ernst & Young's Financial Reporting Briefs
for the Second Quarter of 2013 ---
http://www.ey.com/UL/en/AccountingLink/Accounting-Link-Home
"Potential income tax benefits for
families with special needs children," by Thomas M. Brinker Jr. and W.
Richard Sherman, Journal of Accountancy, June 2013 ---
http://www.journalofaccountancy.com/Issues/2013/Jun/20137378.htm
Bob Jensen's taxation helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
Bob Jensen's threads on education
technology for disabled students ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Handicapped
Selecting a Conferencing Solution ---
Click Here
http://www.comparebusinessproducts.com/DownloadAsset?ac=9728671429064917ac1d9a2a6725f1d0&tk=a78613e1eab94d46ba96232a945911de
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.
Nonprofit Groups Tackle Newfangled Metrics
From the CFO Journal's Morning Ledger on June 4, 2013
Standardizing the way newfangled metrics are
calculated is a big job. As companies churn out their own performance
benchmarks to satisfy investors’ demands, nonprofit groups are cropping up
to help them develop and report new metrics in a uniform way and decide
whether they should be included on balance sheets,
writes Emily Chasan in Today’s Marketplace section.
In some cases they’ve even leapfrogged the FASB.
The Sustainability Accounting Standards Board expects
next quarter to release its first draft of standards for the health-care
industry, including guidelines for reporting product recalls and fatalities
in drug clinical trials. Meanwhile, the nonprofit Marketing Accountability
Standards Board is working with companies like
GM and
Kimberly-Clark to
standardize valuation methods for corporate brands. Another group, the
International Integrated Reporting Council, is working with about 90 mostly
European companies on a project to link sustainability reports and corporate
financial statements so that both kinds of metrics appear in one place.
The FASB is likely to get into the act soon. Its
advisory council is scheduled to meet today to hash out the board’s
priorities as it wraps up a decadelong effort to harmonize U.S. and
international accounting standards. The council and accounting rule makers
will hold preliminary talks on whether companies, investors and auditors
“have the same views about areas where accounting can be improved,” says
Russell Golden, who’s set to become FASB chairman in July.
Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 6, 2013 ---
The Many Ways that Cities Cook Their Bond Books
by:
Steve Malanga
Jun 01, 2013
Click here to view the full article on WSJ.com
TOPICS: Debt, Governmental Accounting, Pension Accounting, SEC,
Securities and Exchange Commission
SUMMARY: This opinion page piece describes governmental accounting
for pensions and cities' financial report disclosures both as ways of
"cooking the books." This follows on the SEC's charge against Harrisburg, PA
which was covered in a WSJ Accounting Weekly Review on May 7, 2013. The
related article refers to the one covered at that time. "The SEC says this
is the first time the regulatory agency has 'charged a municipality for
misleading statements made outside of its securities disclosure documents.'"
CLASSROOM APPLICATION: The article highlights the critical nature
of government reports for investors in state and municipal bonds and may be
used either in a governmental accounting or financial reporting class.
QUESTIONS:
1. (Introductory) In what report has the SEC found failings by the
city of Harrisburg, PA? What is new and unusual about the SEC charges?
2. (Advanced) How big is the municipal bond market? With what
information do investors in this market make their investing decisions?
3. (Introductory) In what ways does the author accuse city
governments of "cooking the books"?
4. (Advanced) Given the discussion in the article, what comprises a
major portion of total state and municipal debt?
5. (Introductory) How much debt in total is outstanding from U.S.
state and local governments? Of what importance is that total debt to state
and municipalities' bondholders?
6. (Advanced) The author states that pension-fund accounting is of
particular concern "because states have latitude in choosing how to value
their retirement debts." How is this area of accounting subject to
management discretion? How can this be described as a "sophisticated
accounting wrinkle"?
7. (Introductory) Recently a judge has made a finding about these
debts being paid by the city of Stockton, California. What was that finding?
How does that finding bear on the notion of debt repayment to different
class of creditors to state and local governmental entities?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
City Hit by SEC Fraud Charges: Harrisburg's Public Statements Faulted
by Kris Maher and Michael Corkery
May 07, 2013
Page: A1
"The Many Ways That Cities Cook Their Bond Books: The $3 trillion
municipal debt market is rife with creative accounting," by Steve Malanga,
The Wall Street Journal, May 31, 2013 ---
http://online.wsj.com/article/SB10001424127887324659404578501241181682894.html?mod=djemEditorialPage_h
It has been a busy few weeks for the Securities and
Exchange Commission. In May, the SEC charged two cities—Harrisburg, Pa., and
South Miami, Fla.—with securities fraud for allegedly deceiving investors in
their municipal bonds.
This follows similar fraud charges against states,
New Jersey in 2010 and Illinois in March, after SEC investigators uncovered
what they called "material omissions" and "false statements" in bond
documents related to those state's pension funds.
With Harrisburg, however, the SEC has gone further
and charged the city government with "securities fraud for its misleading
public statements when its financial condition was deteriorating and
financial information available to municipal bond investors was either
incomplete or outdated." The SEC says this is the first time the regulator
has "charged a municipality for misleading statements made outside of its
securities disclosure documents."
The Harrisburg charges are part of a broader SEC
effort to scrutinize state and local government issuers in the nation's $3
trillion municipal-bond market. "Anyone who follows municipal finance knows
that budgets can sometimes be a work of fiction," says Anthony Figliola, a
vice president at Empire Government Strategies, a Long Island-based
consulting firm to local governments. "Harrisburg is the tip of the
iceberg."
And a mighty iceberg it is. The 2012 State of the
States report, released in November by Harvard's Institute of Politics, the
University of Pennsylvania's Fels Institute of Government and the American
Education Foundation, found state and local governments are carrying more
than $7 trillion in debt, an amount equal to nearly half the federal debt.
Often, the report said, "States do not account to citizens in ways that are
transparent, timely or accessible."
Consider the practices of Stockton, Calif., which
last June became the nation's biggest city to file for bankruptcy. In 2011,
Stockton's new financial managers issued a blistering critique of past
accounting practices and acknowledged that the city's previous financials
had hidden significant costs, including the real cost of employee
compensation and retirement obligations. Bob Deis, the new city manager,
declared that Stockton's financials bore "eerie similarities to a Ponzi
scheme."
If so, the city's bondholders have been taken for a
ride. In bankruptcy court earlier this year, a judge ruled that Stockton
could suspend payments on its bonds even while continuing to fund its
employee retirement system.
Similarly, when another California city, San
Bernardino, went bust last year, some city officials alleged that it had
been filing inaccurate financial records for nearly 16 years. At best,
officials said, the city's bookkeeping had been "unprofessional." The SEC
began an investigation last fall. Meanwhile, the city has defaulted on bond
payments, leaving investors in the lurch.
One area that has come under special scrutiny is
pension-fund accounting, because states have latitude in choosing how to
value their retirement debts. The SEC noted that Illinois used accounting
that funds a larger percentage of an employee's pension costs near the end
of his career, a method that increases the risks that the system could go
bust. The SEC said Illinois didn't properly reveal the risks posed by this
sophisticated accounting wrinkle.
The SEC accused New Jersey of failing to disclose
to investors that it wasn't sticking to a plan to adequately fund its
pension system. In this, the Garden State isn't alone. Many states underfund
their pension systems, even by their own accounting standards.
A June 2012 study by the Pew Center on the States
found that 29 states didn't make their annual required contribution for
pensions in 2010, the last year for which data were available. It isn't
clear how many of the more than 3,000 local government pension systems
follow the same practice, although a survey this January by Pew of 61 large
cities found nearly half didn't make their full contributions.
In the South Miami case the SEC zeroed in on a
complex bond deal that changed over time in a way that threatened the
tax-free status of the securities. The SEC essentially warned South Miami
that municipalities that employ such schemes need to fully understand the
consequences for investors. In this particular case, South Miami paid
$260,000 to the Internal Revenue Service to preserve the tax-free status of
the bonds for investors.
Municipal investors have often ignored such
questionable practices thanks to a generation of low default rates. Many
also assume that even when a local government gets into financial trouble,
bondholders are always first in line to be paid.
But officials in some troubled cities are pushing
back against the notion that investors should get the best deal among
creditors. Harrisburg City Council members have balked at a state-proposed
bailout plan because they claim it places much of the burden on taxpayers
without penalizing investors. Last year, City Councilman Brad Koplinski
called the plan's 1% increase in the state-imposed income tax on Harrisburg
residents "a bad decision for the people of Harrisburg, people who did
nothing to get our city into our fiscal crisis.''
Investors will hear more of this talk as
municipalities face growing budget pressures. Recently, former New York Lt.
Gov. Richard Ravitch warned the municipal bond industry that the promises
governments have made to repay investors may not take precedent over other
obligations. States and cities face "a unique challenge," he said, "in
trying to maintain services and meet their retirement commitments to
workers," emphasizing that this was "not necessarily a good message" for
investors.
Continued in article
Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Bob Jensen's threads on creative accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 21, 2013 ---
Behind the Big Profits: A Research Tax Break
by:
Scott Thurm
Jun 14, 2013
Click here to view the full article on WSJ.com
TOPICS: Income Taxes, Interim Financial Statements, R&D Credit
SUMMARY: "Strong first-quarter corporate profits may not be quite
as good as they look, an analysis by The Wall Street Journal shows, because
the extension of a big tax credit quietly boosted profits of dozens of
companies." The WSJ has analyzed 456 of the S&P 500 companies' first quarter
results and found taxes lower by an average of 5.6% "'The biggest reason
[was]...the extension of the research credit and other tax breaks in
January,' said Jeffrey Hoopes, a lecturer in accounting at Ohio State
University whose recent doctoral dissertation examined the issue....For some
companies the effect was dramatic. Internet giant Google Inc. reported
spending $6.8 billion on research and development in 2012...The company
[accrued] less than half as much...for first-quarter taxes as it did a year
earlier even as its pretax income increased 2% to $3.6 billion."
CLASSROOM APPLICATION: The article may be used in a tax class to
cover the 2013 renewal of the R&D credit or in a financial reporting class
covering accounting for income taxes. Quarterly impact of the tax accrual is
the issue. The related graphic "Taking Credit" provides an excellent table
to show students the use of accounting information: R&D Spending 2012, 2013
pre-tax income for Q1, effective tax rates for Q1 2012 and Q2 2013, and
estimated tax benefits of the R&D credit. Intel is the first company in the
table and their note related to income taxes for the first quarterly filing
is available on the SEC web site at
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=INTC,
filing dated 29 April 2013. Note 16: Income Taxes Provision for Taxes Our
effective income tax rate was 16.3% in the first three months of 2013
compared to 28.2% in the first three months of 2012. The effective rate was
positively impacted by the U.S. R&D credit reenacted in January 2013
retroactive to the beginning of 2012. The enactment date occurred after our
fiscal year end of December 29, 2012 so the impact of the R&D credit was not
recognized in the 2012 financial statements. The estimated full year 2012
and first quarter 2013 impact of the U.S. research and development tax
credit has been recognized in the first three months 2013 financial
statements.
QUESTIONS:
1. (Advanced) What is the Research & Development (R&D) tax credit?
2. (Advanced) What feature about this credit made it unavailable to
companies in 2012?
3. (Introductory) Why do you think that U.S. tax law allows for
this credit if it "costs the federal government more than $7 billion
annually"?
4. (Introductory) In what industries are tax credits for R&D
activities most commonly taken? By what types of entities? (Hint: Use the
graphic labeled "Taking Credit" as well as the article.)
5. (Advanced) Why does the author write that "under accounting
rules, the companies reported a year's worth of benefits from the
research-and-development tax credit in their first quarter results"? In your
answer, state how you think the change in tax law for R&D credits should be
accounted for and cite authoritative standards in your answer.
6. (Advanced) What is an effective tax rate? How did this change in
R&D tax law affect companies' effective tax rates reported in the first
quarter?
7. (Advanced) Why does an analyst at Morningstar say that "the
effective tax rate we saw in the first quarter is not representative of what
we'll see in the rest of the year"?
8. (Advanced) Several times in the article the author describes the
recording of a provision for income taxes as setting aside money for
first-quarter taxes. Does recording a provision set aside cash to pay the
tax liability? Explain your answer.
Reviewed By: Judy Beckman, University of Rhode Island
"Behind the Big Profits: A Research Tax Brea," by Scott Thurm, The Wall
Street Journal, June 14, 2013 ---
http://online.wsj.com/article/SB10001424127887324049504578543324262064306.html?mod=djem_jiewr_AC_domainid
Strong first-quarter corporate profits may not be
quite as good as they look.
An analysis by The Wall Street Journal shows that
the extension of a big tax credit quietly boosted the profits of dozens of
companies. Under accounting rules, the companies reported a year's worth of
benefits from the research-and-development tax credit in their first-quarter
results, lifting profits for many of them by more than 10%.
With first-quarter results nearly complete, 465
participants in the Standard & Poor's 500-stock index cumulatively reported
that revenue increased 2.1% from the same period a year earlier. Expenses
grew slightly faster, so pretax profit rose only 0.9%, according to the
Journal's analysis.
But the S&P-500 companies also set aside 5.6% less
money for taxes, and that helped their cumulative profits grow a robust
6.7%, the Journal found.
The biggest reason they took that action: the
extension of the research credit and other tax breaks in January, said
Jeffrey Hoopes, a lecturer in accounting at Ohio State University whose
recent doctoral dissertation examined the issue.
For some companies, the effect was dramatic.
Internet giant Google Inc. GOOG -1.77% reported spending $6.8 billion on
research and development in 2012, making it one of the nation's biggest
corporate research spenders.
The company set aside less than half as much money
for first-quarter taxes as it did a year earlier even as its pretax income
increased 2%, to $3.6 billion. Its effective tax rate fell to 7.9% from
18.5%. In a securities filing, Google said the drop was "primarily" due to
the extension of the tax credit. If Google's profit had been taxed at the
same rate as last year, the company would have had to set aside an
additional $380 million for income taxes.
"This tax credit was introduced over 25 years ago
to stimulate innovation—and that's exactly what we use it for," a Google
spokeswoman said.
The first-quarter tax rate of semiconductor maker
Intel Corp. INTC -3.37% also declined, to 16.3% from 28.2%, in the 2012
first quarter. Intel reported $10.1 billion in research spending last year,
more than any other publicly traded U.S. company. It said the "substantial
majority" of the decline stemmed from extension of the research credit. If
Intel's profits had been taxed at last year's rate, it would have set aside
an additional $290 million.
Big companies cited a variety of reasons for
reporting smaller first-quarter tax bills. In addition to the tax-credit
extension, pharmaceutical maker Merck MRK -2.74% & Co. reported a $160
million benefit from resolving an old tax dispute between the Internal
Revenue Service and Schering-Plough Corp., which Merck acquired in 2009.
Insurance company Cigna Corp. CI +0.45% said its tax rate declined because
of changes to its reinsurance and disability businesses.
But extension of the research credit weighed
heavily. The credit, which applies to increases in research spending, costs
the federal government more than $7 billion annually, according to the
Senate Finance Committee. First adopted in 1981, the credit has been
extended 15 times, but it has never been made a permanent part of the tax
code.
The previous extension expired at the end of 2011,
meaning that companies couldn't claim the credit last year. That quietly
increased tax rates—and hurt earnings—last year. Under the measure approved
in January, the research credit will again expire at the end of this year,
raising the prospect of future distortions in corporate earnings.
Research-heavy technology and pharmaceutical
companies benefit most from the credit. In 2009, the latest year for which
statistics are available, the Internal Revenue Service said that more than
half the $7.7 billion in credit was claimed by companies in three
industries: computer and electronics manufacturing, chemical and
pharmaceutical manufacturing, and transportation manufacturing.
Within those industries, said Nirupama Rao, an
economics professor at New York University, the bulk of the credits are
claimed by the largest companies. "It's big corporate America," Ms. Rao said
of the beneficiaries. "Small firms aren't profitable enough to get the
credit."
For example, aircraft-maker Boeing Co. BA -2.55%
said that extension of the credit reduced its first-quarter income-tax
provision by $145 million. Boeing's tax rate fell to 23.1% from 36.8% in the
first quarter a year earlier. Boeing reported spending $3.3 billion on
research and development in 2012.
It's unclear how well investors anticipated the
additional tax benefits. The accounting implications were known when
Congress approved the extension as part of a deal to resolve the so-called
fiscal cliff on Jan. 1. But a spot check by Thomson Reuters found that, of a
dozen big beneficiaries of the credit, analysts excluded the impact from
their earnings estimates at only one: Texas Instruments Inc. TXN -3.04%
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 21, 2013 ---
Tesla Clashes With Car Dealers
by:
Mike Ramsey and Valerie Bauerlein
Jun 18, 2013
Click here to view the full article on WSJ.com
TOPICS: Consolidated Financial Statements, Entrepreneurship,
Revenue Recognition, Subsidiaries
SUMMARY: Tesla Motors, Inc. has never had franchised dealerships
and so says that franchise laws do not apply to its operations. The company
"wants to sell [its] $70,000 Tesla electric luxury vehicles directly to
consumers, bypassing franchised automobile dealers...[Many] state franchise
laws...go back to the auto industry's earliest days....Dealers say laws
passed over the decades to prevent car makers from selling directly to
consumers are justified because without them auto makers could use their
economic clout to sell vehicles for less than their independent
franchisees...Those franchise laws have insulated car dealers from much of
the e-commerce revolution that has hammered other sectors from books to
electronics." The article expresses dealers' concern that if entities other
than auto manufacturers with already existing franchise networks are allowed
not to be covered by franchise laws, auto manufacturers may simply set up
new subsidiaries to make direct sales to customers.
CLASSROOM APPLICATION: The article may be used to introduce the
current state of change in franchising--typically covered with revenue
recognition practices-with an exciting new product and internet sales
discussion. In a class on consolidations, the reference to new subsidiaries
could be used to introduce the legal structural reasons for the existence of
subsidiaries that are consolidated.
QUESTIONS:
1. (Advanced) What is a franchise? How is a franchise established?
What are the benefits of a franchise to the selling entity and to the
purchasing entity?
2. (Introductory) Summarize the effect of state laws on franchising
in the automobile industry as they are reported in the article.
3. (Advanced) What new product does Tesla Motors, Inc. manufacture?
4. (Introductory) Why does Tesla Motors' Elon Musk argue that these
franchise laws do not apply to its car sales? How does this entrepreneur
want to sell the company's vehicles?
5. (Advanced) If some entities are given an exemption from
applicability of the franchise laws for automobile sales, how would setting
up a new subsidiary allow automobile manufacturers to circumvent their own
dealer network?
Reviewed By: Judy Beckman, University of Rhode Island
"Tesla
Clashes With Car Dealers," Mike Ramsey and Valerie Bauerlein, The Wall Street
Journal, June 18, 2013 ---
http://online.wsj.com/article/SB10001424127887324049504578541902814606098.html?mod=djem_jiewr_AC_domainid
Elon Musk made a fortune disrupting the status quo
in online shopping and renewable energy. Now he's up against his toughest
challenge yet: local car dealers.
Mr. Musk, the billionaire behind PayPal and now
Tesla Motors Inc., TSLA -4.00% wants to sell his $70,000 Tesla electric
luxury vehicles directly to consumers, bypassing franchised automobile
dealers. Dealers are flexing their considerable muscle in states including
Texas and Virginia to stop him.
The latest battleground is North Carolina, where
the Republican-controlled state Senate last month unanimously approved a
measure that would block Tesla from selling online, its only sales outlet
here. Tesla has staged whiz-bang test drives for legislators in front of the
State House and hired one of the state's most influential lobbyists to stave
off a similar vote in the House before the legislative session ends in early
July.
The focus of the power struggle between Mr. Musk
and auto dealers is a thicket of state franchise laws, many of which go back
to the auto industry's earliest days when industry pioneer Henry Ford began
turning to eager entrepreneurs to help sell his Model T.
If Tesla is successful in establishing its own
retail network, it could open the door for other new companies, such as
Chinese auto makers, to set up direct sales networks, legal experts say.
Dealers worry that existing car companies might try to create new
subsidiaries to sell vehicles directly to consumers—a tactic General Motors
Co. GM -3.38% and Ford Motor Co. F -3.26% flirted with during the late 1990s
before retreating in the face of a dealer backlash.
Franchise laws differ by state. Most prohibit
manufacturers from having both company and franchised stores. Some states,
like North Carolina and Texas, require manufacturers use independent
dealers. In some states, including North Carolina, dealers are pushing
lawmakers to strengthen prohibitions against any form of direct-to-consumer
selling by auto makers.
Dealers have "an essential monopoly on their
business and they want to maintain it," said Diarmuid O'Connell, Tesla's
chief of business development. Car dealers and alcohol distributors, he
said, are the rare businesses still vigorously fighting disruption by the
Internet.
Enlarge Image image image Stephen Voss for The Wall
Street Journal
Shoppers can study Tesla's Model S cars at
showrooms in several states but must use the Internet to buy.
Mr. O'Connell said the company has been looking at
a federal legal challenge based on limits to interstate commerce and at
pursuing new legislation in Congress. The company is committed to selling
direct, he said. Tesla doesn't break out its spending on lobbying, but its
first quarter overhead costs rose 53% to $47 million, in part because of
hiring in sales and marketing.
Thomas Tallerico, a senior lawyer at Bodman PLC in
Detroit who has represented auto makers and franchised dealers, said the
chances of overturning franchise laws are dim.
"It is difficult to understand what the legal basis
is by which Tesla could persuade a federal judge to strike down state laws
designed to protect dealers, particularly when every state in the country
has passed such laws and there is a federal law that protects dealers," he
said.
Dealers' state house allies have given them
tremendous sway. During their 2009 bankruptcies, GM and Chrysler terminated
thousands of dealers using federal court's power to void contracts, but the
pair were forced to go through binding arbitration and sometimes had to
reinstate or buy out dealers because of state rules.
Mr. Musk, a founder of PayPal, co-founder of
SolarCity Corp. and Space Exploration Technologies Corp., declined to
comment for this article. At Tesla's annual meeting this month, Mr. Musk
lashed out at dealers, calling their lobbying for laws to restrict Tesla
sales a "perversion of democracy."
"I think customers are going to lead a revolt on
this front," he said.
The clash in North Carolina illustrates the forces
at play. Patrick Vaughn, a Charlotte investment banker, bought a pearl white
Model S in January in a "simple and painless" online transaction. The car
arrived with California temporary tags on a flatbed truck.
Mr. Vaughn said he doesn't buy that dealers, which
are behind a proposal to block online car sales in the state, are trying to
protect consumers. "They are trying to protect their turf—like any company
would."
Thom Tillis, North Carolina's House speaker, said
language that bars Internet car sales is unlikely to pass in the House.
David Westcott, chairman of the National Automobile
Dealers Association who has a Buick-GMC dealership in Burlington, N.C., said
Tesla's effort to sell direct to consumers was important to all dealers and
something the national association was watching.
"The system has worked for a long time," he said.
"We only want Tesla to play by the same rules," Mr. Westcott added.
Even if Tesla wins in North Carolina, it is still
smarting from losing an effort last month to amend Texas law to allow the
company to take orders at company-owned stores. Tesla has two retail
showrooms, or "galleries," in the state, but buyers have to order the cars
online from California. Mr. Musk made a push in Austin, trying to rally
support, but the bill died without action and can't be reintroduced before
2015.
Bill Wolters, who leads the Texas Automobile
Dealers Association and helped to defeat the Tesla-led proposal, said he is
worried that GM or Ford might want to offer direct sales as well, cutting
perhaps 15% out of the dealer business and putting thousands of business
owners under.
Mr. Musk told shareholders he doesn't want to sell
cars through established dealers because he doubts they'll advocate for
electric vehicles as vigorously as Tesla would.
Many more battles remain. Tesla defeated a bill in
Minnesota that would have blocked sales. But in Virginia, the state
Department of Motor Vehicles has so far refused to issue Tesla a license to
operate a company store.
Continued in article
Yawn! News that medical providers, medical insurance companies are defrauding
Medicare is hardly newsworthy anymore
From the CFO Journal's Morning Ledger on June 12, 2013
Former Wellcare CFO found guilty of Medicaid fraud
The former CFO and former CEO of
Wellcare Health Plans
were found guilty by a federal jury in Tampa, Fla., of a scheme to defraud
the state’s Medicaid program,
the WSJ reports.
Ex-CEO Todd S. Farha and former CFO Paul L. Behrens
were both convicted of two counts of health-care fraud. Mr. Behrens was also
convicted of two counts of making false statements relating to health-care
matters. According to the Justice Department, the defendants falsely
submitted inflated information in order to reduce contractual payback
obligations for behavioral health-care services.
"Walgreen in $80 Million Settlement (with Feds) Over Painkillers," by
Timothy W. Martin, The Wall Street Journal, June 11, 2013 ---
http://online.wsj.com/article/SB10001424127887324904004578539743775320834.html?mod=djemCFO_h
"In Crackdown on Bank Consultants, Deloitte Is Fined ($10 million) and
Banned," by Ben Protess and Jessica Silver-Greenberg, The New York Times,
June 18, 2013 ---
http://dealbook.nytimes.com/2013/06/18/in-crackdown-on-bank-consultants-deloitte-is-fined-and-banned/?smid=li-share
Bob Jensen's threads on the history of Deloitte's legal and regulation
troubles ---
http://www.trinity.edu/rjensen/Fraud001.htm
"Overview Of The New 3.8% Investment Income Tax, Part 3: Gains From The
Sale Of Property," by Tony Nitti, Forbes, May 2013 ---
Click Here
http://www.forbes.com/sites/anthonynitti/2013/05/01/overview-of-the-new-3-8-investment-income-tax-part-3-gains-from-the-sale-of-property/
. . .
We’ll be back with Part 4, in which we’ll discuss
some additional considerations everyone should be aware of regarding the new
net investment income tax.
From the CPA Daily Letter on June 10, 2013
AICPA launches new framework for small-business financial reporting
The AICPA unveiled
Monday the
Financial Reporting Framework for Small- and Medium-Sized Entities (FRF
for SMEs), which is designed to help small businesses prepare streamlined,
relevant financial reports. The framework is intended for private companies
that do not need GAAP financial statements. The AICPA said the framework is
complementary to the Financial Accounting Foundation's Private Company
Council, which is considering potential GAAP exceptions and modifications
for private companies. The AICPA is hosting a
live webcast today on the framework at
12:30 to 1:45 p.m. ET.
JournalofAccountancy.com (6/10),
The New York Times (tiered subscription model)
(6/9),
The Wall Street Journal
Teaching Case
From The Wall Street Journal Accounting Weekly Review on June 14,
2013
New Accounting Rules Proposed for Small Businesses
by:
Michael Rapoport
Jun 10, 2012
Click here to view the full article on WSJ.com
TOPICS: FASB, Financial Accounting, Financial Accounting Standards
Board
SUMMARY: The American Institute of Certified Public Accountants (AICPA)
has issued new guidelines for small and medium-sized entities (SMEs) in
advance of the Private Company Council of the Financial Accounting Standards
Board, in which the AICPA participates. Acknowledged in the article is the
fact that "the new framework will be optional even for companies who might
choose to adopt it. The AICPA doesn't have any authority to compel companies
to do so." This issuance is contentious, with some "saying the AICPA should
wait for the Private Company Council to develop its modifications to GAAP to
benefit private companies instead of trying to develop a separate system."
CLASSROOM APPLICATION: The article may be used in any financial
reporting class covering authoritative accounting guidance or issues facing
SMEs.
QUESTIONS:
1. (Introductory) Who has issued new guidelines for accounting and
reporting by small to medium sized entities (SMEs)?
2. (Advanced) Is this new system authorized GAAP in the U.S.?
Explain.
3. (Advanced) What is the Private Company Council? What is its
responsibility for issuing authoritative pronouncements under U.S. GAAP?
4. (Introductory) What are some of the features of the proposed
reporting by SMEs that differ from U.S. GAAP requirements for larger,
publicly-traded companies? Why are these differences proposed?
5. (Introductory) What entities might influence whether a company
could choose to report under the new SME guidelines? Explain their influence
on the decision.
Reviewed By: Judy Beckman, University of Rhode Island
"New Accounting Rules Proposed for Small Businesses," by Michael
Rapoport, The Wall Street Journal, June 10, 2013 ---
http://online.wsj.com/article/SB10001424127887324634304578536982485919890.html?mod=djem_jiewr_AC_domainid
Millions of U.S. small businesses will be able to
use simplified, streamlined methods for measuring and presenting their
financial results under a new accounting framework announced Monday.
The new guidelines for "small and medium-size
entities" come from the American Institute of Certified Public Accountants,
the nation's main accounting trade group.
The guidelines are designed as an alternative to
generally accepted accounting principles, or GAAP, the system large
companies use in the U.S.
"It is a framework that is tailored for small
business—a very relevant, simplified framework," said Bob Durak, the AICPA's
director of private company financial reporting.
Public companies in the U.S. must use GAAP, as must
privately held companies if their lenders, bonding companies or regulators
require it. But smaller, less-complex private companies long have complained
that GAAP is overly burdensome and complicated.
The Private Company Council, a new panel created
last year with the AICPA's participation, is focused on carving out
potential modifications to GAAP to benefit privately held firms.
But even given those efforts, Mr. Durak said many
private companies that don't have to use GAAP have been "looking for another
option" that omits some of the complexities of GAAP that aren't relevant to
them.
Among the ways in which the new framework would
simplify GAAP: The new framework uses only historical cost as a basis for
valuing assets and liabilities, not current market value. It doesn't include
more-complex accounting for areas that smaller, simpler companies are
unlikely to get into, such as off-balance-sheet entities, derivatives or
hedging.
The new framework will be optional even for
companies who might choose to adopt it. The AICPA doesn't have any authority
to compel companies to do so.
Some have opposed the group's efforts, saying the
AICPA should wait for the Private Company Council to develop its
modifications to GAAP to benefit private companies instead of trying to
develop a separate system.
On Monday, the FASB endorsed the council's first
three proposals to modify GAAP for private companies, and agreed to issue
them for public comment. If ultimately approved, they would loosen the rules
on how private companies account for intangible assets like goodwill, which
is created when one company buys another for more than the value of its hard
assets. The new set of proposals would also let private companies use
simpler accounting for certain types of interest rate swaps.
"We believe efforts focused on enhancing GAAP will
be more beneficial for a broader population of private company stakeholders
than creating another non-GAAP framework," PricewaterhouseCoopers LLP, an
accountancy firm, said in a January letter sent to the AICPA.
Continued in article
Teaching Case
From The Wall Street Journal Accounting Weekly Review on June 14,
2013
CRU, After LIBOR Scandal, Audits Steel Prices Index
by:
John W. Miller
Jun 05, 2013
Click here to view the full article on WSJ.com
TOPICS: Assurance Services, Auditing, Auditing Services
SUMMARY: CRU Group compiles steel prices and issues a report every
Wednesday. "The compiler...said an auditor
will conduct on-site inspections of steel companies that provide pricing
data and will gather more information about how the prices are collected for
four major types of steel product, which go into four different indexes. The
move is believed to be a first by a commodity-price-index firm to audit
information provided to it."
CLASSROOM APPLICATION: The article may be used in an auditing or
other assurance services class to discuss non-audit services, audit planning
for a first-of-its-kind engagement, and determination of materiality in such
a setting.
QUESTIONS:
1. (Introductory) What does Commodity Research Unit Group (CRU) do?
Who uses the information that the group prepares?
2. (Advanced) What service has CRU hired KPMG LLP to conduct? Be
specific in stating a type of service to be provided and the type of report
that you think may be issued under U.S. assurance service requirements.
3. (Advanced) What is the significance for assurance work planning
of the fact that this engagement is apparently the first by a
commodity-price-index firm to audit information provided to it?
4. (Advanced) Suppose you are an audit manager planning an
engagement for KPMG to examine steel prices. What factors will you consider
in deciding on materiality of amounts to examine?
Reviewed By: Judy Beckman, University of Rhode Island
"CRU, After LIBOR Scandal, Audits Steel Prices Index," by John W. Miller,
The Wall Street Journal, June 5, 2013 ---
http://online.wsj.com/article/SB10001424127887324069104578527632400988350.html?mod=djem_jiewr_AC_domainid
A key price compiler in the global steel industry
said it will begin auditing its data providers, part of an effort to address
concerns about transparency in price indexes following the Libor rate-fixing
scandal.
The compiler, Commodity Research Ltd., said an
auditor will conduct on-site inspections of steel companies that provide
pricing data and will gather more information about how the prices are
collected for four major types of steel product, which go into four
different indexes. Much of these steel types are destined for the U.S
automotive market.
The move is believed to first by a
commodity-price-index firm to audit information provided to it. CRU, based
in London and Pittsburgh, has hired KPMG LLP to conduct the audits,
according to a person familiar with the matter. KPMG didn't respond to a
request for comment.
Glenn Cooney, London-based head of operations for
CRU Indices, which publishes price data on 75 commodities in metals, mining
and fertilizers, said it would look at auditing other data providers in
other sectors to bolster industry transparency.
Currently, CRU collects price and volume data on
spot transactions from steel producers and buyers, who submit their prices
voluntarily to a CRU website. CRU publishes an index price based on the
submissions every Wednesday.
CRU officials say they hope the move will lend it
added credibility at a time of concern about indexes. Three banks in Europe
have agreed to pay over $2 billion in settlement fees to U.S. and U.K.
regulators after they were caught manipulating the London interbank offered
rate, or Libor, the interest rate banks charge to borrow from each other.
Josh Spoores, a Pittsburgh-based steel analyst for CRU, said the company
started receiving more requests for improved transparency after the Libor
scandal.
The company also hopes it will be able to reassure
several major U.S. steel mills, which in April said they would no longer
link some contracts to CRU's steel indexes because they felt prices quoted
weren't an accurate reflection of the market. The steelmakers that stopped
using the indexes include ArcelorMittal, MT +3.34% U.S. Steel Corp. X +5.23%
and Nucor Corp. NUE +3.01%
Grant Davidson, general manager for sales at
ArcelorMittal's Dofasco mill in Canada, said big steel companies would
welcome more transparency. "We're for what's most accurately reflecting the
price in the market," he said.
Michael Steubing, vice president of global
procurement for Mauser USA LLC, which makes steel drums and barrels, said an
audited index would help guarantee that he can sell his product at a
competitive price. He sells barrels to big chemical companies that use CRU
to help determine how much they will pay for the barrels. "So we'd like that
(CRU) to be as accurate as possible," he said.
CRU, which is used by the Chicago Mercantile
Exchange and says its prices are used to settle steel contracts with an
annual global value of over $20 billion, faces more competition from Platts,
a division of McGraw Hill Financial Inc., MHFI +0.97% which two years ago
bought price compiler The Steel Index.
Joe Innace, Platts's editorial director for metals,
said Platts would continue its phone survey for its Platts industry
newsletter independently of The Steel Index and wouldn't use audits because
he said it has enough verifications, such as checking that prices match the
types and volumes of steel appropriate to the index, in place.
Steve Randall, who founded The Steel Index in 2006,
said it had no plans to audit data providers. "We run all our data through a
series of screenings," he said. He declined to provide details about the
screening procedure.
Continued in article
"Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:
The Illuminati were amateurs. The second huge financial scandal of the year
reveals the real international conspiracy: There's no price the big banks can't
fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425
Bob Jensen's LIBOR fraud threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Bob Jensen's threads on LIBOR are under the C-terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Bob Jensen's threads on LIBOR and other derivative financial instruments
frauds (timeline) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
This is so huge it's better to do a word search for LIBOR
"Do You Trust Banks? Country by County Comparison," by Mike Shedlock,
Townhall, June 15, 2013 ---
Click Here
http://finance.townhall.com/columnists/mikeshedlock/2013/06/15/do-you-trust-banks-country-by-county-comparison-n1620658?utm_source=thdaily&utm_medium=email&utm_campaign=nl
Jensen Comment
Corruption in banking is so common that the public hardly takes notice anymore.
For example, the LIBOR fraud committed by large U.K. banks was a much bigger
deal than Enron. However, the media coverage of the LIBOR fraud is miniscule
compared the the massive media coverage of the Enron fraud.
Also in the case of Enron, criminal executives eventually served prison
terms. To my knowledge, no banking executive in the LIBOR fraud even was charged
with a felony.
The biggest scandal in the history of the SEC is probably how it botched the
Bernie Madoff Ponzi scandal. But there are other areas in need of reform at the
SEC and reforms instigated by the SEC.
Teaching Case
From The Wall Street Journal Accounting Weekly Review on June 14, 2013
A Reform Beginning at the SEC
by:
WSJ Opinion Page Editors
Jun 05, 2013
Click here to view the full article on WSJ.com
TOPICS: Accounting For Investments, Banking, Cost-Basis Reporting,
Mark-to-Market, SEC, Securities and Exchange Commission
SUMMARY: Some money market mutual funds may be allowed to 'break
the buck' in their financial reports. "A unanimous commission voted to
propose floating share prices for...money-market funds catering to large
institutional investors and holding corporate debt...The idea is to
underline for investors that money-fund values can fluctuate, and a modest
decline is no reason to panic...." During the financial crisis, "after bad
bets on Lehman Brothers debt caused the underlying assets of one fund,
Reserve Primary, to slip below $1, institutional investors began fleeing
Reserve and other 'prime' funds that held corporate debt. The federal
government responded by slapping a temporary guarantee around the whole
industry. After the crisis, much of the fund industry still resisted
floating asset values." The article reports that the SEC proposal closely
tracks a plan proposed in 2012 by one who has taken a different stance from
the industry on this issue, Charles Schwab CEO Walt Bettinger.
CLASSROOM APPLICATION: The article may be used in a course on
banking or in any financial reporting class covering investments,
particularly in comparing amortized cost for bond investments instead of
fair market value. NOTE TO INSTRUCTOR: REMOVE THE FOLLOWING INFORMATION
PRIOR TO DISTRIBUTING TO STUDENTS AS IT ANSWERS SEVERAL QUESTIONS AND THE
PROPOSED GROUP ASSIGNMENT. Amortized cost is the accounting method allowed
for money market mutual funds in order to present their net asset values as
$1 per share. This presentation is labeled "accounting fiction" in the
article. Resources for the instructor from the SEC's web site: "Money Market
Mutual Fund Reform: Opening statement at the SEC Open Meeting" by Norm
Champ, Director, Division of Investment Management, U.S. SEC, 06/05/13,
available on the SEC web site at
http://www.sec.gov/news/speech/2013/spch060513nc.htm " Rule 2a-7
under the Investment Company Act allows money market mutual funds to
maintain this stable $1.00 share price by allowing them to use certain
pricing and valuation conventions. In return, the funds must adhere to
certain credit quality, maturity, liquidity, and diversification
requirements designed to reduce the likelihood of fluctuations in their
value." Rule 2a-7 excerpts, from the SEC web site at
http://www.sec.gov/rules/final/21837.txt "To maintain a stable
share price, most money funds use the amortized cost method of valuation
("amortized cost method") or the penny-rounding method of pricing
("penny-rounding method") permitted by rule 2a-7. The 1940 Act and
applicable rules generally require investment companies to calculate current
net asset value per share by valuing portfolio instruments at market value
or, if market quotations are not readily available, at fair value as
determined in good faith by, or under the direction of, the board of
directors. Rule 2a-7 exempts money funds from these provisions, but contains
conditions designed to minimize the deviation between a fund's stabilized
share price and the market value of its portfolio." NOTES: -[5]-A money fund
is required to disclose prominently on the cover page of its prospectus
that: (1) the shares of the fund are neither insured nor guaranteed by the
U.S. Government; and (2) there can be no assurance that the fund will be
able to maintain a stable net asset value of $1.00 per share. ... -[6]-Under
the amortized cost method, portfolio securities are valued by reference to
their acquisition cost as adjusted for amortization of premium or accretion
of discount. Paragraph(a)(1) of rule 2a-7, as amended. -[7]-Share price is
determined under the penny-rounding method by valuing securities at market
value, fair value or amortized cost and rounding the per share net asset
value to the nearest cent on a share value of a dollar, as opposed to the
nearest one tenth of one cent.
QUESTIONS:
1. (Advanced) What is a money market mutual fund?
2. (Advanced) How is a money market fund's net asset value
determined?
3. (Introductory) According to the article, what are investors'
perceptions of money market funds when their net asset values are presented
at a constant $1 per share?
4. (Introductory) What is the "accounting fiction" described in the
article?
5. (Advanced) How could accounting rules support presentation of $1
net asset values "even if the underlying assets of a fund were worth
slightly more or less"?
SMALL GROUP ASSIGNMENT:
Assign question 6 as an in class group activity, having the students search
the SEC web site to find the accounting requirements for money market mutual
funds. The results can then be used to lean into a comparison of amortized
cost and market value accounting methods for investments.
Reviewed By: Judy Beckman, University of Rhode Island
"A Reform Beginning at the SEC," by WSJ Opinion Page Editors, June 5, 2013
---
http://online.wsj.com/article/SB10001424127887323844804578527462489392582.html?mod=djem_jiewr_AC_domainid
Is the taxpayer safety net under American finance
finally, just possibly, starting to shrink? On Wednesday the Securities and
Exchange Commission took a step toward reform, even as it reminded taxpayers
how far it has to go to ensure that the 2008 rescue of money-market mutual
funds is never repeated.
A unanimous commission voted to propose floating
share prices for a large category of money-market funds. If commissioners
enact a final rule later this year, funds catering to large institutional
investors and holding corporate debt would be required to report accurate
prices in real time, just as in other securities markets. The idea is to
underline for investors that money-fund values can fluctuate, and a modest
decline is no reason to panic or call the Treasury Secretary for help.
For decades, SEC rules have allowed fund companies
to report fixed values of $1 per share, even if the underlying assets of a
fund were worth slightly more or less. This accounting fiction encouraged
investors to view their money funds as cash balances akin to guaranteed bank
deposits.
To further encourage the illusion of risk-free
investing, the SEC also required funds to invest only in assets rated highly
by the government-approved credit ratings agencies, including Standard &
Poor's, Moody's MCO +2.98% and Fitch. Come the financial crisis, investors
learned that the idea that money funds never "break the buck" (never lose
value) was a marketing slogan, not a federal law. After bad bets on Lehman
Brothers debt caused the underlying assets of one fund, Reserve Primary, to
slip below $1, institutional investors began fleeing Reserve and other
"prime" funds that held corporate debt. The federal government responded by
slapping a temporary guarantee around the whole industry.
After the crisis, much of the fund industry still
resisted floating asset values. But last year Charles Schwab CEO Walt
Bettinger broke with the industry by proposing in these pages to float the
prices of institutional prime funds—ground zero in the 2008 panic. This
week's SEC proposal closely tracks the Bettinger plan and is a significant
reform.
Even better would be a requirement for floating
asset values across the whole industry. It's true that funds holding
government debt, as opposed to corporate debt, often perform better in times
of market turbulence, but government debts can also cause such turbulence
(see Europe). And there is the regulatory challenge of ensuring that
institutions cannot simply split up their money-fund investments into
various accounts if the retail end of the market still promises fixed asset
values. But it's encouraging that at long last the SEC is moving toward
clarifying that money funds are investments that can lose value, and not
deposits backed by taxpayers.
More disappointing in the SEC's Wednesday proposal
is that, almost two years after a legal deadline, the agency still hasn't
removed from its money-fund rules its endorsements of credit-rating
agencies. Forcing funds and by extension their investors to buy only assets
deemed safe by the government's anointed credit judges was disastrous in
2008 and will be again if not reformed.
Continued in article
Bob Jensen's banking and related rotten to the core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
From the CFO Journal's Morning Ledger on June 14, 2013
American companies generally reaped robust profits in
Q1. But many of them would have had a less upbeat quarter had it not been
for the extension of the R&D tax credit,
the WSJ’s Scott Thurm reports.
Under accounting rules, the companies reported a
year’s worth of benefits from the credit in their first-quarter results,
lifting profits for many of them by more than 10%.
The bulk of the credits are claimed by big companies.
Google reported spending $6.8
billion on R&D in 2012, making it one of the nation’s biggest
corporate-research spenders. The company set aside less than half as much
money for first-quarter taxes as it did a year earlier even as its pretax
income increased 2%, to $3.6 billion. Its effective tax rate fell to 7.9%
from 18.5%, which it said was “primarily” due to the extension of the tax
credit. If Google’s profit had been taxed at the same rate as last year, the
company would have had to set aside an additional $380 million for income
taxes, Thurm writes. And Boeing
said the extension cut its Q1 income-tax provision by $145 million. The
company’s tax rate fell to 23.1% from 36.8%.
The extension won’t help corporate profits for the
rest of this year. Analysts expect that S&P 500 earnings will rise 2.7% in
Q2—about half the growth rate of the first quarter. “The effective tax rate
we saw in the first quarter is not representative of what we’ll see in the
rest of the year,” said Alex Morozov, head of the health-care analyst team
at Morningstar.
Marriage Penalty ---
http://en.wikipedia.org/wiki/Marriage_penalty
For more details see
http://www.lao.ca.gov/1999/121699_marriage_penalty.html
Note that words are misleading in that the intent is truly not to penalize
marriage. Rather the intent is not to subsidize marriage at a huge expense to
tax revenue collection. It is progressive with income levels of both parties
contemplating marriage.
An inconvenient truth of marriage is that it often
brings a tax increase compared with what the couple would pay as two single
people. And the problem is only getting worse: Provisions taking effect this
year will increase the "marriage penalty" for many high earners. ...
"Wedding Bell Tax Blues," by Laura Saunders, The Wall Street Journal,
June 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324069104578529521517818776.html
The current provisions
are deeply rooted in the tax code and lawmakers would find them expensive to
alter, so marriage penalties for two-earner couples will probably last
longer than many marriages. Here are strategies that can help lower the
bill.
- Reduce reported income
- Time income windfalls where possible
- Consider an IRA charitable rollover
- Consider filing separately
- Don't get married
Note that the marriage penalty is not necessarily eliminated by getting
married and filing separately.
Bob Jensen's taxation helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
"How Managers Do Love the Leasing ED: Let Me Count the Ways," by Tom
Selling, The Accounting Onion, June 9, 2013 ---
http://accountingonion.com/2013/06/how-managers-do-love-the-leasing-ed-let-me-count-the-ways.html
An excerpt from a WSJ blog:
“Outgoing FASB Chairman Leslie Seidman has had
plenty of time to tackle long-standing questions about whether
accounting principles are more desirable than specific accounting rules,
writes Emily Chasan. The debate over whether detailed rules and
bright-line exceptions are more or less useful than broad principles
that require management judgment has dominated her past 1o years on the
board. “I think it’s undeniable that we Americans like our
rules,” Ms. Seidman said … in her final
public speech as chairman of the U.S. accounting rule maker.” [emphasis
added]
I guess that settles it. Now we know for certain
why FASB standards have gone from bad worse.
Even if Ms. Seidman is correct, the FASB has come
up way short of the mark. The three super major projects she leaves for
others to complete when her second five-year term soon comes to an end are
the most direct evidence of the dysfunction: loan impairment, revenue
recognition and leases.
Focusing on lease accounting by lessees should be
enough to make the point; and I want to focus on that since I just finished
preparing my presentation on the most recent
ED for my upcoming update course in
Chicago. There may be some rules in that ED, but
all except for the requirement to recognize some modicum of a lease
liability on the balance sheet, are not near as consequential as the
smorgasbord of loopholes set out for managers to manipulate their earnings
without waking up their auditors or getting a call from an SEC investigator.
Some of these are carryovers from existing U.S.
GAAP, but If any of the rest were to make you think they were concocted in
the IASB’s central sausage factory, I wouldn’t argue with you:
The lease smoothie—For assets that meet
the definition of “property” (a judgment call all by itself),
subjective criteria will determine whether management can choose to
recognize lease expense straight-line — as opposed to a pattern
approximating the actual economics). The boards are leaving it to
management to determine if: the lease term is not for a “major” part of the
remaining “economic life” of the asset; or whether the present value of the
lease payments is not a “significant” part of the value of the asset; or
whether there is a “significant economic incentive” to exercise a purchase
option; or that land and/or building is the “primary asset” under contract.
Hide-the lease-payment trick #1—The lease
payments to be recognized as an asset and corresponding liability generally
are limited to the payments in the contract that are fixed. However,
judgment is required to determine if payments that are contingent on a
level of activity (e.g., retail sales in leased store space) are in fact
“disguised” as fixed lease payments. In other words, management is supposed
to say, “HA! I caught myself disguising fixed lease payments as variable
payments.” (Gimme a break.)
Hide-the-lease-payment trick #2—Judgment
(are we getting tired of that word yet?) is required to treat “expected”
(not defined—what a surprise) amounts to be paid under residual value
guarantees as lease payments to be capitalized.
Who said buy-borrow?—Options to purchase
the asset if they they are in-substance lease payments. (Another
“HA! I caught myself doing a bad thing.”)
Mix and match—Judgment is
required to determine if part of the cash flows are not actually lease
payments; and more judgment is required to estimate how much should
be accounted for according to some other standard. It could even get to the
point that a lessee would have to estimate the fair value—i.e., a
sales price—for services that it would never purchase separately and
arbitrarily carve them out of the cash.
My all-time favorite—When to take account
of renewal or termination options when estimating the lease term is
based on whether there is a “significant economic incentive.” For that, we
have the old IASB chestnut of “management intent” as one of the factors to
consider.
Don’t wake me from my dreams—Judgement
is required to determine that the factors originally used to account for a
lease have changed significantly enough to make reassessment appropriate.
There is still more, but that should be more than
enough to illustrate that the FASB’s latest gift to investors is far from a
compendium of “rules.” More than a decade ago, a much more attuned SEC
issued a clarion call to accounting standards setters, to finally end
operating lease treatment; for it was seen then as now as the most
pernicious form of off-balance sheet accounting. This ED is nothing more
than one last-ditch effort to take what was an extremely modest proposal for
lease capitalization off life support.
Continued in article
Jensen Comment
I'm not sure which managers love the ED. Finance executives absolutely hate the
ED.
"When Is an Asset not an Asset? A new lease accounting proposal by
regulators is still getting pummeled by finance executives." by
Kathleen Hoffelder, CFO Journal, September 14, 2012 ---
http://www3.cfo.com/article/2012/9/gaap-ifrs_lease-accounting-fasb-iasb-convergence-equipment-lease
A good example of this dissatisfaction is the May 18, 2013 reaction to the
FASB from ELFA (Equipment Leasing and Finance Association) ---
http://www.elfaonline.org/Issues/Accounting/pdfs/LeaseProjectSummaryMay2013.pdf
...
The main problem areas are treating equipment
leases differently than real estate leases for lessee accounting resulting
in few equipment leases getting straight line rent expense, commingling
capital lease and operating lease assets and liabilities, it is not
appropriate for there to be symmetry in lease classification for lessees and
lessors (rather business model, meaning financial lessor vs. operating
lessor should be the guide to classify lessor leases), the failure to treat
all guaranteed/insured residuals as a financial asset for the lessor, the
loss of leveraged lease accounting (including the loss of treating ITC as a
revenue item in a non- leveraged lease), failure to allow sale leaseback
accounting where a purchase option is included in the lease back terms and
complexity/compliance costs.
Continued in article
Note that the above criticism was published before the latest ED from the
FASB. This begs the question of whether the items that made finance executives
unhappy were corrected in the 2013 ED. In my opinion the answer is generally no
to anticipated financial executives satisfaction.
The main concern seems to be the anticipated impact on earnings (especially
for Type A leases subject to accelerated expense booking) --- which is something
fair value accountants don't care much about since they are almost entirely
focused on the balance sheet.
Bob Jensen's threads on lease accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#Leases
"U.K. Pension Fund Group Says Accounting Rules Clash With Law," by
Howard Mustoe, Bloomberg, June 19, 2013 ---
http://www.bloomberg.com/news/2013-06-19/u-k-pension-fund-group-says-accounting-rules-clash-with-law-1-.html
Britain should review how it sets accounting rules
after research found they may clash with U.K. law, the
Local Authority Pension Fund Forum said.
International Financial Reporting Standards follow
an incurred-loss model, which allow banks to wait until financial assets are
close to default before realizing a loss. This contradicts the demand under
U.K. law for “a true and fair” view of profit, the London-based LAPFF said
in a statement today.
“These are extremely significant issues, given that
they directly affect the accounting practices of systemically important
financial institutions, and in turn affect the decisions made by those
institutions,” LAPFF Chairman Kieran Quinn said in the statement.
IFRS has been the mandatory method of accounting
for publicly traded companies in the European Union since 2005 and is
drafted by the London-based International Accounting Standards Board. The
Group of 20 industrial nations created a body to examine alternatives to the
incurred-loss model following the 2008 financial crisis. Legal Opinion
George Bompas, a trial lawyer in London, provided
the legal opinion on the rules for the LAPFF, the U.K.-based Universities
Superannuation Scheme, Threadneedle Asset Management Ltd. and the U.K.
Shareholders’ Association. The LAPFF supplied the view as evidence to the
Parliamentary Commission on Banking Standards, which published its findings
today.
The House of Lords Economic Affairs Committee or
the Treasury Committee should consider how IFRS became part of EU law, the
commission’s report said.
“There is clearly widespread concern about IFRS and
the method by which it is introduced into EU law,” the commission’s report
said.
Banks should recognize losses on loans before the
assets go into default, the International Accounting Standards Board said in
March.
Continued in article
Monopoly (historic Parker Bros. game) Would Be Way More Fun If We Got Rid
Of Two Fake Rules ---
http://www.businessinsider.com/the-two-rules-of-monopoly-we-make-up-2013-6
A central idea, the idée fixe of Bankers
Anonymous, is that as a society we do a poor job of teaching about finance,
a consequently poor job as individuals of learning about finance, and
therefore we all suffer an inevitable tendency to make bad decisions, both
personal and political, about finance.
Sometime this Spring I realized why: We played Monopoly all
wrong as kids.
This explains everything that I’m trying to do with
Bankers Anonymous.
Two ‘house rules’ prevailed when I used to play,[1] and
both are absolutely terrible
1. Free Parking – We collected all
taxes – luxury tax, income tax, and taxes accumulated from Chance and
Community Chest cards – in the middle of the board. In addition, we
frequently ‘seeded’ Free Parking with an orange $500 bill. When a player
landed on Free Parking he collected all the accumulated taxes, plus the
$500, in a lottery windfall. None of this exists in the real
rules on Monopoly.
2. No Property Auctions – When we
played, the player who landed on an available property got the exclusive
option to purchase it, at the listed price only. In the real rules, if the
initial player declines to pay the listed price, any player may bid on the
property, at any price – starting if necessary at $1, with no upper limit to
the final auction price.
These house rules turn an interesting game about
capitalism into a boring monstrosity. A monstrosity responsible for
societal poverty, government debt, runaway inflation and the Crisis of 2008.
Real rules Monopoly is so much better for
society
Let me explain why real rules Monopoly is far
better.
Free Parking – Free Parking is
stupid. Growing up, my friend Brendan always, always, ALWAYS
landed on Free Parking, collecting the taxes and the $500. How did he do
that? I have no idea.
Although he may have always won the game, I can be
smug in my knowledge that Brendan learned bad lessons from Free
Parking. Free Parking never happens in real life. Nobody actually wins the
lottery. Clearly, Free Parking is a gateway drug for kids to learn about
lotteries, casinos, and all
the other terrible ways in which poor people pay taxes.
Property Auctions – This would
have been the ideal way to teach millions of children about valuable
concepts like savings, real estate, competitive auctions, distressed
investing and slum-lording. Information, in other words, we can all use.
Instead, by eliminating the auction, we learned in
Monopoly house rules that there’s just one price for property, take it or
leave it, and that chance – rather than skill – determines whether you
accumulate valuable properties. But that’s never how it works in life.
In real life, sometimes you can nab the property
nobody else wants on the cheap.[4] In
real life, sometimes you pay twice what the property is really worth and end
up mortally wounded financially.
Bidding wars can break out in real rules Monopoly,
which lead the ‘winner’ of the auction to actually be the ‘loser’ in the
long run. This is a valuable financial lesson. It explains much of the
real estate boom 2001 to 2007.
Monopoly isn’t a bad game, if played right
I was reminded of all this by a
recent feature on Business Insider showing the
odds-adjusted advantageous properties to buy.
According to the feature, to play the odds, in sum:
1. Buy the orange properties,
2. Build 3 houses per property at one time (i.e. 9
houses, for most colors) for the fastest return on investment,
3. Take into account the likely dice rolls of your
opponents. (5, 6, 7, 8, and 9s happen more frequently, build accordingly),
and
4. Note that “Jail” acts as a ‘sink,’ attracting
more than your typical proportion of landings. Other properties also have
higher probabilities as landing spots, so invest accordingly.
All sound advice.
My advice is to play by the real rules, which turns
Monopoly from an endless bore of a game to an interesting lesson in real
financial skills.
I’m not saying Monopoly will become as interesting
as The
Settlers of Catan, Dominion,
or my own nerdy group’s favorite, Cosmic
Encounter. But it’s worthwhile, especially
with kids.
Epilogue – The bad news: I played
real rules Monopoly for the first time in my life this Spring with Brendan,
as well as with my 7 year-old.
My 7 year-old, with some coaching, won. At least
Brendan didn’t win. I hate Monopoly.
The Math Behind a Game of Monopoly ---
http://www.businessinsider.com/we-swear-this-image-will-change-the-way-you-see-the-monopoly-board-forever-2013-6
Jensen Comment
Monopoly is widely used to teach accounting, economics, and other courses.
Bob Jensen's threads on the Game of Monopoly (and its variations) in college
courses ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
"'Digital Dementia': Left Brain – Right Brain – and the Effects of
Excessive Use of Smartphones," by Steven Mintz, Ethics Sage,
June 28, 2013 ---
http://www.ethicssage.com/2013/06/digital-dementia.html
"Is Following the Law the Same as Being Ethical?" by Steven Mintz,
Ethics Sage, June 12, 2013 ---
http://www.ethicssage.com/2013/06/is-following-the-law-the-same-as-being-ethical.html
Note especially Item 4 in the above link.
All this points to another
and related tension. This is the tension between the ideology view and the
concept of the rule of law, the centrepiece of a liberal legal order. At
their most basic, the terms the rule of law, due process, procedural
justice, legal formality, procedural rationality, justice as regularity, all
refer to the idea that law should meet certain procedural requirements so
that the individual is enabled to obey it. These requirements center on
the principle that the law be general, that it take the form of rules.
Law by definition should be directed to more than a particular situation or
individual; the rule of law also requires that law be relatively certain,
clearly expressed, open, prospective and adequately publicised.
Jensen Comment
The question is where do ethics codes fit in between law's rules and ideology.
Also at issue is how rule-like codes of ethics become become laws over time.
Also at issue are sanctions. With rules of law there are procedural requirements
for enforcing those rules. Ethics seems to fit more into a gray zone when rules
of laws are not broken but morality standards (ideologies) have been violated.
An interesting aspect of this thread would be
examples where laws are not broken but ethics codes are violated. For example I
don't think there are statutes dictating that a supervisor cannot date or have
sexual relations with an employee being supervised. Many business firms and
governmental agencies, however, consider this to be unethical and actually have
rules against such behavior even if it is not illegal in the statutes.
There are no statutes to my knowledge that
college instructors cannot campaign for particular political candidates in their
classrooms. However, the AAUP and most colleges consider this a breach of ethics
in the classroom. Instructors can and have been suspended for such political
activism in classrooms. But more often than not the instructor is simply advised
not to campaign in the classroom. Further actions are taken if the instructor
repeatedly and egregiously ignores the advice.
The ideology in this case is that instructors
should teach but not indoctrinate. Ethics codes become somewhat specific
regarding what constitutes indoctrination. But the sanctions are often vague.
Laws become even more specific what constitutes violation of law such as
offering bribes or making physical threats. Such laws are enforceable to a point
where the courts rather than the employer decides on the punishments. And the
sentencing guidelines can be quite specific.
Respectfully,
Bob Jensen
"McGladrey 2011 Report Follows (awful) Trend for Major Firms," by
Tammy Whitehouse, Compliance Week, June 4, 2013 ---
http://www.complianceweek.com/mcgladrey-2011-report-follows-trend-for-major-firms/article/296218/
Nearly two years after it began inspecting
McGladrey in 2011, the Public Company Accounting Oversight Board
published its report saying half of the audits it
checked were deficient.
The PCAOB inspected 16 audits at McGladrey from
August 2011 through December of that year and found problems with eight of
the audits, in some cases numerous problems in a single audit. Many of the
problems related to revenue recognition, allowances for loan losses,
accounts receivable, taxes, inventory, and internal control over financial
reporting.
In terms of the failure rate, McGladrey's 2011
report was a little worse than the
2010 report, where PCAOB inspectors checked 19
audit files and found problems with 9. In one case, follow-up based on the
PCAOB's 2011 inspection finding led to a change in a company's accounting
practices, the PCAOB said.
McGladrey said the firm has taken actions as
appropriate under auditing standards to address the deficiencies called out
by the PCAOB, including performing additional procedures and adding
documentation to its work papers. “We believe the investments we have made
and are continuing to make to audit processes and quality controls are
resulting in improved audit quality,” the firm wrote in its letter to the
PCAOB.
Audit reports across all major firms showed a
marked increase in failure rates from 2009 to 2010 and
showed no improvement for most firms from 2010 to
2011. Crowe Horwath remains the only firm in the Big 4 or second tier of
global firms whose 2011 inspection report is still unpublished.
The PCAOB recently began offering a first view into
2012 inspection reports for the largest firms with the publishing of
Deloitte's 2012 inspection results. The firm drew
inspector criticism for 13 of the 52 audits examined for a failure rate of
25 percent, an improvement over rates of 42 percent in 2011 and 45 percent
in 2010.
The PCAOB's inspection process follows a risk-based
approach, so inspectors are targeting audit files where they consider
problems to be most likely. As such, the board cautions against generalizing
failure rates to the entire collection of audit work.
Continued in article
A Really Bad Audit by
McGladrey & Pullen, LLP The U.S. With Only a Hand Slapping Fine
U.S. Commodity Futures Trading Commission (CFTC) Press Release on
September 22, 2011 ---
http://www.cftc.gov/PressRoom/PressReleases/pr6114-11
CFTC
Charges National Accounting Firm McGladrey & Pullen, LLP, and
Partner David Shane with Failure to Properly Audit One World Capital
Group, a Former Registered Futures Commission Merchant Firm to pay
$900,000 and institute remedial measures, and Shane to pay $100,000
personally to settle CFTC action.
Washington,
DC - The U.S. Commodity Futures Trading Commission (CFTC) today
filed and simultaneously settled an administrative proceeding
against McGladrey & Pullen, LLP (McGladrey), a nationwide public
accounting firm with offices in Chicago, Ill., and a McGladrey
partner, David Shane, a certified public accountant (CPA) licensed
in Illinois.
The
proceeding arises from an audit McGladrey performed in 2006 of One
World Capital Group, LLC (One World), at the time a CFTC-registered
futures commission merchant. The CFTC sued One World in 2007,
alleging that it failed to demonstrate compliance with
capitalization requirements and to maintain required books and
records (see CFTC Press Releases 5427-10, December 18, 2007, and
5786-10, March 4, 2010). One World ceased operation in 2007. Shane
served as the engagement partner for the 2006 audit of One World.
According
to the CFTC order, McGladrey issued an unqualified opinion that One
World’s 2006 financial statements were free from material
misstatements, and a report stating that it had not identified any
deficiencies in One World’s internal controls that it considered to
be material inadequacies. The CFTC order finds that, to the
contrary, the 2006 financial statements were, in fact, materially
misstated and there were material inadequacies in One World’s
internal controls, as well. The order also finds that McGladrey did
not conduct its audit of One World’s financial statements in
accordance with generally accepted auditing standards (GAAS) as
required by the CFTC’s regulations.
In
particular, the order finds that One World’s 2006 financial
statements were materially misstated in various ways including: (1)
the 2006 Statement of Financial Condition states that liabilities
payable to all customers were over $6.9 million, when in fact
information available in One World’s records showed that it may have
owed at least $15 million just to forex customers alone, for whom
One World served as the counterparty; and (2) the 2006 financial
statements materially misstated the nature of One World’s business
by failing to reflect that One World served as the counter party to
its forex customers for over 90 percent of its business, according
to the order.
In
addition, McGladrey failed to report material inadequacies in One
World’s accounting system and internal accounting controls,
including the lack of a customer ledger, and an accounting system
that did not properly identify the number of forex customers or the
amount of customer liabilities, according to the order. These
material inadequacies reasonably could, and did, lead to material
misstatements in One World’s 2006 financial statements, the order
finds.
CFTC
Division of Enforcement Director David Meister stated: “Auditors of
Commission registrants perform a critical gatekeeper role in
protecting the financial integrity of the futures markets and the
investing public. Auditors must understand the business operations
of their clients, and conduct financial audits in accordance with
GAAS. As demonstrated by today's action, the Commission will not
hesitate to impose significant sanctions on auditing firms and hold
individuals personally responsible when they fail to adhere to their
professional obligations as regrettably happened here.”
The CFTC’s
order requires McGladrey to pay a $250,000 civil monetary penalty
and orders Shane to pay a $100,000 civil monetary penalty, for which
he may not be indemnified by the firm. The CFTC’s order also
requires McGladrey to pay $650,000 in restitution to customers of
One World who suffered losses as a result of One World’s fraud. The
order also requires McGladrey and Shane to cease and desist from the
violations found in the order.
Continued in article
Bob Jensen's threads on McGladrey are at
http://www.trinity.edu/rjensen/Fraud001.htm#McGladrey
"An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations:
1998–2010"
Mark S. Beasley North Carolina State University
Joseph V. Carcello University of Tennessee Dana R. Hermanson Kennesaw State
University
Terry L. Neal University of Tennessee
Center for Audit Quality, May 2013
http://www.thecaq.org/resources/pdfs/CAQ_deficienciesMay2013.pdf
"United Technologies Violates its own Ethical Standards," by Steven
Mintz, Ethics Sage, June 24, 2013 ---
http://www.ethicssage.com/2013/06/united-technologies-violates-its-own-ethical-standards.html
From the CFO Journal's Morning Ledger on June 4, 2013
Ex-Porsche CFO convicted of credit fraud
Former Porsche
CFO Holger Härter was convicted by a German court of credit fraud in a case
over the refinancing of a €10 billion loan during the 2009 failed
Volkswagen
takeover bid,
Bloomberg reports.
Mr. Härter downplayed the company’s liquidity needs
and failed to disclose the correct number of put options on VW shares
Porsche held when negotiating with BNP Paribas about the lender’s €500
million share of the syndicated loan, presiding Judge Roderich Martis said
when delivering the verdict. Mr. Härter, who doesn’t face jail, will be
fined, the judge said.
Bob Jensen's timeline on derivative financial instruments frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bitcoin ---
http://en.wikipedia.org/wiki/Bitcoin
From the CFO Journal's Morning Ledger on June 26, 2013
States put heat on bitcoin
State regulators are warning virtual-currency exchanges and other
companies that deal with bitcoin that they could be shut down if their
activities run afoul of state money-transmission laws,
the WSJ’s Robin Sidel and Andrew R. Johnson report.
Banking regulators in California, New York and
Virginia have issued letters telling the companies that they need to follow
the state rules or prove that the rules don’t apply to them. The warnings
fall short of formal “cease and desist” orders, but they show that state
regulators have moved beyond just scrutinizing virtual currencies and are
taking steps to prevent companies from using them for illegal activities.
"The CIA, the FCPA and the double standard on policing corruption," by
Alison Frankel, Thompson Reuters, May 8, 2013 ---
http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=76925&terms=%40ReutersTopicCodes+CONTAINS+ANV
Thank you Dennis Huber for the heads up.
It's been a busy couple of weeks for the Foreign
Corrupt Practices Act, the Justice Department's versatile and hard-working
anti-bribery law. On April 22, Ralph Lauren paid an $882,000 penalty in
a non-prosecution agreement that resolved FCPA
allegations of bribing a customs official in Argentina to permit the import
of Ralph Lauren products. On May 7, prosecutors in Manhattan
unsealed a criminal complaint accusing two Florida
brokers of paying kickbacks to a Venezuelan state bank official who directed
the bank's financial trading business to them. The FCPA
has taken some recent lumps from judges, and last
year prosecutions fell off slightly from their blistering pace in 2009, 2010
and 2011. But as Gibson, Dunn & Crutcher noted in its
January report on FCPA enforcement, bribery
prosecution has become routine. "This is a marathon, not a sprint," the
report said, warning businesses not to let down their guard.
In between the reports of new Justice Department
FCPA actions, The New York Times had a corker of a story about "ghost money"
payments by the Central Intelligence Agency to Afghan president Hamid
Kharzai. The Times reported that the CIA has passed tens of millions of
dollars to Kharzai over the course of a decade, in cash packed into
suitcases and shopping bags and dropped off at his office. The Afghan
president subsequently
confirmed the payments (though he called them
"small amounts") and, according to the Times, said he
expected the CIA to continue providing him with ready cash that
he could, in turn, use to bribe warlords in the political elite.
Do you see a double standard here? The CIA and
other government entities are not, of course, subject to the FCPA, which
targets corruption with a commercial motive. The CIA declined to comment to
The New York Times, but it would surely contend that any support for Kharzai
is in the interest of the security of the United States and Americans in
Afghanistan. But in a
provocative post at his blog, The FCPA Professor,
Michael Koehler of the Southern Illinois University School
of Law argues that it's troubling to see the CIA sanctioning enormous cash
payments to foreign officials while the Justice Department prosecutes
businesses for similar behavior on a much smaller scale. The U.S. presents
itself as the world's most vigorous enforcer of anti-corruption laws,
Koehler said, but such proclamations seem hollow when the government
sanctions bribery.
"During this era of FCPA enforcement, enforcement
actions frequently include allegations of corporate payments to 'foreign
officials' for such items as wine, watches, cameras, kitchen appliances,
business suits, television sets, laptops, tea sets and office furniture," he
wrote. "This conduct pales in relation to the conduct described in the NY
Times article and is made even more egregious given that FCPA enforcement
actions invariably involve use of private shareholder/owner funds, whereas
the campaign of bribery in Afghan is using public funds."
Similarly, Richard Cassin of The
FCPA Blog told me in an email that if the payments to Kharzai were sheer
graft, "then everyone who's subject to the FCPA has a legitimate complaint."
(If the payments are properly categorized as foreign aid, Cassin said, then
there should have been a public accounting of how they were spent.)
"Afghanistan is one of the world's most corrupt countries," Cassin said in
the email. "By delivering cash to the president's office for ten years, the
U.S. government certainly did nothing to end the corruption. And it probably
did plenty to reinforce the corrupt culture among the country's leaders. If
Afghanistan's leaders are taught to expect bribes from outsiders, that makes
it harder for anyone to do legitimate business there."
In a phone interview, Koehler said prosecutors
would probably laugh in the face of a defense lawyer who tried to argue that
her client shouldn't face FCPA charges because the CIA is permitted to pass
shopping bags full of cash to Hamid Kharzai. And almost all companies facing
FCPA charges end their defense at the Justice Department, because they'd
rather pay fines and receive non- or deferred-prosecution deals than face
trial. As a result, Koehler said, the government's "black-and-white" view of
corporate payments to foreign officials goes unchallenged.
But judges passing sentence on convicted FCPA
defendants are more inclined to sense hypocrisy in the government's double
standard, according to Koehler. He wrote about two different sentencing
hearings in 2010 in which judges referred to the relative impunity of
intelligence agents when they went easy on FCPA defendants. In one instance,
U.S. District Judge William Pauley of Manhattan
sentenced James Giffen to no jail time and said
charges shouldn't have been brought after Giffen asserted that the CIA knew
about and encouraged his contacts with Kazakh officials. In the other, U.S.
District Judge Jackson Kiser of West Virginia
cited the CIA's routine bribes to Afghan warlords
and questioned the "morality" of prosecuting Bobby Jay Elkin for paying a
bribe to a public official in Kyrgyzstan after being threatened with firing.
Continued in article
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
June 3, 2013 message from Dennis
Huber
The former president of the Beth El Synagogue
pleaded guilty
on Friday to mail fraud in the embezzlement
of more than $500,000 in synagogue funds, according to a statement from the
U.S. Attorney.
http://www.courant.com/community/southbury/hc-southbury-synagogue-embezzlement-0601-20130531,0,4628524.story
FASB Post-Implementation Review of FAS 141 on Business Combinations, May 30,
2013 --- Click
Here
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176162713156
FAS 141 ---
Click Here
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1175802017611
Jensen Comment
The history of some accounting standards is that they are not neutral in the
economy. Exhibit A is FAS 123R that virtually ended employee stock options as a
means of compensation. Exhibit B is comprised of FAS 141, 142, and 147 that
virtually ended the synthetic leasing industry ---
http://en.wikipedia.org/wiki/Synthetic_lease
Synthetic Lease
= a financing structured to be treated as a lease for accounting purposes
and a loan for tax purposes. The structure is used by corporations that are
seeking OBSF reporting of their asset based financing, and that can
efficiently use the tax benefits of owning the financed asset ---
www.trinity.edu/rjensen//theory/00overview/speOverview.htm
-
A common
approach is for the sponsor to sell the asset to the SPE and then
lease it back from the SPE via what is known as synthetic leasing.
A synthetic lease is structured under FAS 140 rules such that a
sale/leaseback transaction takes place where the fair value of the
assets "sold" can be reported by the sponsor as "revenue" for
financial reporting. In a synthetic lease, this "revenue" does not
have to be reported up-front for tax purposes even though it is
reported up-front for financial reporting purposes.
-
Proceeds from
the sale to an SPE in this instance are generally long-term
receivables rather than cash (which is the primary reason the sale
revenues are not taxed up-front).
-
The synthetic
leaseback terms are generally such that the sponsor does not have to
book the leased asset or the lease liability under FAS 13 as a
capital lease (i.e., some clause in the lease contract allows the
asset to be kept off balance sheet as an operating lease). Hence
the financing of the lease asset remains off balance sheet. This is
one ploy used by airlines and oil companies to keep assets and
"debt" off the balance sheet as well as deferring taxes.
-
If the SPE
actually manages the transferred assets (e.g., a pipeline or a
refinery), then throughput or take-or-pay contracts may take the
place of leasing.
Teaching Case from The Wall Street Journal Accounting Weekly Review on
May 31, 2013
Accounting Fraud Targeted
by:
Jean Eaglesham
May 28, 2013
Click here to view the full article on WSJ.com
TOPICS: Accounting Fraud, Auditor Changes, Auditor/Client
Disagreements, Disclosure, Ethics, SEC, Securities and Exchange Commission
SUMMARY: "As the volume of [financial] crisis-related cases ebbs,
top SEC officials are expected to announce soon a broad shuffling of
resources in the agency's enforcement division that will include an
increased focus on accounting fraud...[T]he SEC already is developing a
computer program to sift language in financial reports for clues that
executives might be misstating results, agency officials say."
CLASSROOM APPLICATION: The article may be used in a financial
accounting or auditing class given that the enforcement-related topics fall
into each of these areas. It also could be used in an ethics class.
QUESTIONS:
1. (Advanced) Define fraudulent financial reporting. Cite your
source for this information but write the description in your own words.
2. (Introductory) What proportion of SEC enforcement actions in the
year ended September 30, 2012 related to accounting fraud? How does that
rate compare to past history?
3. (Introductory) What reason could be behind reduced numbers of
accounting fraud occurrences in more recent years as compared to the early
2000s?
4. (Advanced) According to the article, what types of factors may
associate with fraudulent financial reporting? In your answer, identify
which of these factors relate to numerical reporting and which relate to
discussion and descriptive components of financial reports.
5. (Advanced) How does the SEC expect to become "more proactive in
looking for" accounting fraud?
Reviewed By: Judy Beckman, University of Rhode Island
"Accounting Fraud Targeted," by Jean Eaglesham, The Wall Street Journal,
May 28, 2013 ---
https://mail.google.com/mail/u/0/?shva=1#inbox/13ef8dbd829b353e
U.S. securities regulators are turning back toward
Main Street, renewing their focus on accounting fraud and other
financial-disclosure failings.
Such cases were long a staple of the Securities and
Exchange Commission's enforcement efforts, leading to more than 25% of
civil-enforcement actions filed by the agency in its 2003 to 2005 financial
years. The financial crisis shifted attention and money elsewhere. In the
year ended last September, accounting fraud and financial-disclosure
problems made up just 11% of SEC enforcement actions.
But as the volume of crisis-related cases ebbs, top
SEC officials are expected to announce soon a broad shuffling of resources
in the agency's enforcement division that will include an increased focus on
accounting fraud, according to people close to the agency.
The decision to hunt for wrongdoing by Main Street,
as well as Wall Street, puts America's corporations in the SEC's cross
hairs.
The move is led by SEC Chairman Mary Jo White and
co-enforcement chiefs George Canellos and Andrew Ceresney, said the people
close to the agency. It isn't clear how much money or manpower will be
devoted to the effort, though the SEC already is developing a computer
program to sift language in financial reports for clues that executives
might be misstating results, agency officials say.
Mr. Ceresney, a former federal prosecutor who
joined the SEC in April, and Mr. Canellos have told employees there are no
plans to get rid of five specialized enforcement units started in 2009 that
are devoted to market abuse, asset management, foreign corrupt practices,
municipal securities and structured products. People close to the SEC expect
changes to some of the units, though, which they say could give the agency
more leeway to make accounting fraud a top priority.
"We have to be more proactive in looking for it,"
Scott Friestad, a senior SEC enforcement official, told a legal conference
last month. "There's a feeling internally that the issue hasn't gone away."
During and after the financial crisis, SEC
enforcement officials devoted much of their energy to reining in alleged
crisis-related malfeasance, such as misleading investors about the risks of
subprime loans or mortgage bonds. Few crisis-era enforcement cases remain.
The falloff in accounting-fraud crackdowns by the
SEC also may reflect improved financial reporting by companies because of
Sarbanes-Oxley rules that took effect in 2002 after the Enron Corp. and
WorldCom Inc. scandals.
An initial step in the SEC's new effort is software
that analyzes the "management's discussion and analysis" section of annual
reports where executives detail a company's performance and prospects.
Officials say certain word choices appear to reveal
warning signs of earnings manipulation, and tests to determine if the
analysis would have detected previous accounting frauds "look very
promising," said Harvey Westbrook, head of the SEC's office of quantitative
research.
Companies that bend or break accounting rules tend
to play a "word shell game," said Craig Lewis, the SEC's chief economist and
head of the division developing the model. Such companies try to "deflect
attention from a core problem by talking a lot more about a benign" issue
than their competitors, while "underreporting important risks."
If the word-analysis program works, officials say
it will be added to a new "Accounting Quality Model" that SEC enforcement
staff started using recently. The model trawls data from nearly 9,000
publicly traded companies. A similar computer-powered search for unusual
performance patterns at hedge funds has led to seven enforcement actions in
recent years.
Success won't be easy, partly because suspicious
language or numbers in securities filings aren't necessarily illegal. Some
companies and their lawyers are expected to respond to the crackdown by
trying to outsmart the agency's computers.
"As soon as the SEC suggests it's going to look at
this in terms of the numbers of words, lawyers will be more loquacious,"
said John Coffee, a law professor at Columbia University.
The fraud-detection software looks for big
differences between net income and actual cash outflows available to
investors, according to officials. It then looks for other warning signs,
such as declining market share or weak profitability compared with rivals.
The system also looks for companies with an
unusually high number of off-balance sheet transactions. Enron, Adelphia
Communications Corp. and other large accounting frauds involved the use of
such transactions to hide debt and inflate earnings.
Another sign of possible trouble: auditor changes.
About 9% of companies that file financial reports with the SEC had their
auditor leave last year, according to research firm Audit Analytics. Of the
866 companies that lost their auditor, 66 had two auditors depart, while two
companies went through three auditors.
Sounding an alarm at the SEC "doesn't necessarily
mean the company's done anything wrong," Mr. Lewis said. But his aim is that
something "kicked out of our model as being unusual" is "much more likely to
be associated with a fraud" than having a benign explanation.
Jacob Frenkel, a former SEC enforcement lawyer now
at law firm Shulman, Rogers, Gandal, Pordy & Ecker PA, said computer power
might help the agency refocus attention on financial-reporting issues that
were "the bread and butter of the agency's enforcement program" for decades.
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Professors Are About to Get an Online Education: Georgia Tech's new
Internet master's degree in computer science is the future." by Andy
Kessler, The Wall Street Journal, June 2, 2013 ---
http://online.wsj.com/article/SB10001424127887324659404578504761168566272.html?mod=djemEditorialPage_h
Anyone who cares about America's shortage of
computer-science experts should cheer the recent news out of Georgia Tech.
The Atlanta university is making major waves in business and higher
education with its May 14 announcement that the college will offer the first
online master's degree in computer science—and that the degree can be had
for a quarter of the cost of a typical on-campus degree. Many other
universities are experimenting with open online courses, or MOOCs, but
Georgia Tech's move raises the bar significantly by offering full credit in
a graduate program.
It comes just in time. A shortfall of
computer-science graduates is a constant refrain in Silicon Valley, and by
2020 some one million high-tech job openings will remain unfilled, according
to the Commerce Department.
That's why Georgia Tech's online degree, powered by
Udacity, is such a game-changer. For the same $7,000 a year that New York
City spends per student on school buses, you can now get a master's from one
of the most well-respected programs in the country. Moore's Law says these
fees should drop to $1,000 by 2020—a boon for students and for the economy.
Sadly, MOOCs are not without controversy. Consider
what happened at San Jose State after the university last fall ran a test
course in electrical engineering paid for by the Bill and Melinda Gates
Foundation. Students who worked with online content passed at a higher rate
than classroom-only students, 91% to 60%. The course was so successful that
the school's president decided to expand online courses, including
humanities, which will also be rolled out to other California State
universities.
You'd think professors would welcome these positive
changes for students. Some teachers across the country are, however
cautiously, embracing the MOOC model. But plenty of professors smell a
threat to their livelihood. In an April 29 open letter to the university,
San Jose State philosophy professors wrote: "Let's not kid ourselves;
administrators at the CSU are beginning a process of replacing faculty with
cheap online education."
In April, an Amherst faculty committee decided
against online courses, since they apparently run afoul of the school's
mission of "learning through close colloquy." As it happens, Amherst
professors rank seventh in salary of top liberal arts colleges, pulling in
$137,700. And at Duke, where my son is a student, a faculty council at the
school's arts and sciences college voted 16 to 14 against granting
graduation credits for taking a Duke MOOC. By the way, Duke professors'
average salary is $180,200.
I have nothing against teachers—or even high
salaries, if the teachers are worth it. But half of recent college graduates
don't have jobs or don't use their degree in the jobs they find. Since 1990,
the cost of college has increased at four times the rate of inflation.
Student loans are clocking in at $1 trillion.
Something's got to give. Education is going to
change, the question is how and when. Think about it: Today's job
market—whether you're designing new drugs, fracking for oil, writing mobile
apps or marketing Pop Chips—requires graduates who can think strategically
in real time, have strong cognitive skills, see patterns, work in groups and
know their way around highly visual virtual environments. This is the same
generation that grew up playing online games like Call of Duty and World of
Warcraft, but who are almost never asked to use their online skills in any
classroom.
MOOCs will inevitably come to K-12 education too.
Everyone knows great public school teachers. But we also all know the
tenured type who has been mailing it in for years. Parents spend sleepless
nights trying to rearrange schedules to get out of Mr. Bleh's fourth-period
math class. Online education is about taking the "best in class" teachers
and scaling them to thousands or millions of students rather than 25-30 at a
time.
The union-dominated teaching corps can be expected
to be just as hostile as college professors to moving K-12 to MOOCs. But a
certain financial incentive will exist nonetheless. I noted this in a talk
recently at an education conference where the audience was filled with
people who create education software and services.
I began by pointing out that in 2011 only 7.9% of
11th graders in Chicago public schools tested "college ready." That's
failure, and it's worse when you realize how much money is wasted on these
abysmal results. Chicago's 23,290 teachers—who make an average salary of
$74,839, triple U.S. per capita income and 50% more than median U.S.
household income—cost Chicago taxpayers $1.75 billion out of the city's
$5.11 billion budget.
Why not forget the teachers and issue all 404,151
students an iPad or Android tablet? At a cost of $161 million, that's less
than 10% of the expense of paying teachers' salaries. Add online software,
tutors and a $2,000 graduation bonus, and you still don't come close to the
cost of teachers. You can't possibly do worse than a 7.9% college readiness
level.
Continued in article
Masters of
Accounting and Taxation Online Degree Programs
http://www.trinity.edu/rjensen/CrossBorder.htm#MastersOfAccounting
Bob Jensen's threads on online training and education alternatives ---
http://www.trinity.edu/rjensen/CrossBorder.htm
Teaching Case from The Wall Street Journal Accounting Weekly Review on May
31, 2013
Curious IRS Timing
by:
WSJ Opinion Page Editors
May 29, 2013
Click here to view the full article on WSJ.com
TOPICS: Charitable Deduction, Tax Regulations
SUMMARY: The scandal of excessive scrutiny into non-profit
organizations by the Internal Revenue Service is expanding. At a House
Oversight Committee hearing, Treasury Inspector General Russell George spoke
about the results of an audit into IRS practices in choosing 501(c)(3) and
501(c)(4)applications for special scrutiny. Politically-oriented groups have
a great possibility for undertaking activities that would violate their
non-profit status. But the WSJ Opinion page editors propose that the IRS
tactics could have been directed according to the White House Administration
desires for specific political ends. The related video shows assistant
Editor James Freeman who describes the Commissioner of the IRS meeting with
White House Officials over 180 times whereas his predecessor went to the
White House just once in many more years. The related article by former
Deputy Chief of Staff to President George W. Bush provides background on one
organization that faced IRS scrutiny but is written from the perspective of
a supporter of the entity in question.
CLASSROOM APPLICATION: The article may be used in a tax class or in
an ethics class to discuss the potential for political influence on a
process that should seem, at first glance, to be purely a bureaucratic
control over a straightforward status as a non-profit entity registered with
the IRS.
QUESTIONS:
1. (Advanced) What is the role of a newspaper opinion page editor?
From what general political viewpoint do you expect a WSJ editor to speak?
2. (Introductory) According to this editorial, what are two
possible explanations for the focus of some of the problems at the Internal
Revenue Service?
3. (Advanced) How do you think the editors' political viewpoint
could influence these thoughts on possible explanations for the IRS conduct?
4. (Introductory) Refer to the related video. Why does James
Freeman discuss the number of times that the Commissioner of the Internal
Revenue Service visited the White House?
5. (Advanced) As an accountant who could potentially work for the
IRS, how do you view the possibility of political influence on your work?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Dick Durbin, the IRS, and Me
by Karl Rove
May 30, 2013
Page: A13
"Curious IRS Timing," by WSJ Opinion Page Editors, The Wall Street Journal,
May 31, 2013 ---
http://online.wsj.com/article/SB10001424127887323975004578503040989151234.html?mod=djem_jiewr_AC_domainid
The IRS has admitted targeting groups that wanted
to speak on issues during the 2012 election season. But did the agency also
target tax-exempt groups that opposed Administration policy priorities?
At a House oversight hearing last week, Treasury
Inspector General Russell George opened the door on the possibility of more
IRS political targeting. Asked by Chairman Darrell Issa whether there were
other political criteria that IRS workers had been told to "be on the
lookout" for, Mr. George said he could "not give you a definitive answer,
sir, at this time. But I certainly will."
A definitive answer is needed because troubling
cases are surfacing. The Arlington, Virginia-based Leadership Institute, a
501(c)(3) that trains young conservative activists, says it was audited in
2011-2012 and had to produce some 23,000 pages of documents for the IRS as
well as answer questions about where its interns came from and where they
are currently employed.
Curiously, the intrusive questionnaire came from
the IRS's Baltimore office on February 14, 2012, soon after the Cincinnati
office asked the Hawaii Tea Party on January 26, 2012 to "provide details
regarding your relationship with the Leadership Institute" and "provide
copies of their training materials." The group's audit fell squarely within
the IRS's 2010-2012 season for conservative targeting.
A Pennsylvania pro-Israel group called Z Street
says it filed for 501(c)(3) status in December 2009, intending to operate
purely as an educational group. Founder Lori Lowenthal Marcus says that its
tax counsel called the IRS in July 2010 to check on the slow pace of
approval, and the IRS acknowledged its targeted enforcement.
Asked about the slow pace of approval, the IRS
auditor on the case, Diane Gentry, said the application was taking so long
because auditors were supposed to give special scrutiny to groups "connected
with Israel." Ms. Marcus says Ms. Gentry further explained that many
applications related to Israel had to be sent to "a special unit in D.C. to
determine whether the organization's activities contradict the
Administration's public policies." Z Street filed suit in August 2010 in
federal court in Pennsylvania alleging "viewpoint discrimination," and its
case has since been moved to Washington, D.C. Ms. Gentry did not return our
phone calls.
Why the special scrutiny for pro-Israel groups? A
New York Times article in July 2010 provided a clue: Tax-exempt groups were
donating to West Bank settlers, and State Department officials wanted the
settlers out. "As the American government seeks to end the four-decade
Jewish settlement enterprise and foster a Palestinian state in the West
Bank," the Times wrote, "the American Treasury helps sustain the settlements
through tax breaks on donations to support them."
Did the T-men take their political cues from such
stories, or did Administration officials give them orders? Either
explanation would be a violation of public trust.
This would also suggest a pattern: Washington
officials sent a message for tougher scrutiny of certain 501(c) groups, and
the IRS coincidentally adjusted its enforcement regime. That's what happened
in 2010 and 2012 when Democrats Max Baucus and Chuck Schumer encouraged the
IRS to tighten the screws on conservative tax-exempt groups.
Most tea party groups targeted by the IRS were
applying for 501(c)(4) status, which allows considerable leeway for
political engagement. A 501(c)(4) group can spend 100% of its money on
lobbying and may spend directly in support of candidates or campaigns as
long as that activity isn't its primary purpose.
Continued in article
WASHINGTON (AP) — The Internal Revenue Service inappropriately flagged
conservative political groups for additional reviews during the 2012 election to
see if they were violating their tax-exempt status, a top IRS official said
Friday.
Organizations were singled out because they included the words "tea party" or
"patriot" in their applications for tax-exempt status, said Lois Lerner,
who heads the IRS division that oversees tax-exempt groups.
In some cases, groups were asked for their list of donors, which violates IRS
policy in most cases, she said.
"That was wrong. That was absolutely incorrect, it was insensitive and it was
inappropriate. That's not how we go about selecting cases for further review,"
Lerner said at a conference sponsored by the American Bar Association.
"The IRS would like to apologize for that," she added.
Continued at
http://twittweb.com/taxes+pay+civilized+soc-32550060
Question
What's the difference between Japanese miniskirts and the Nikkei stock price
index?
Answer
Miniskirts have an upper bound.
Meet The Japanese Girlband Whose Skirts Get Shorter When The Nikkei Goes
Up ---
Click Here
http://www.businessinsider.com/meet-the-japanese-girlband-whose-skirts-get-shorter-when-the-nikkei-goes-up-2013-6
Jensen Comment
I guess skirt lengths could be asymptotic. But the epsilon increments near the
upper bound could be so infinitesimal that it's impossible for the human eye to
detect the skirt shortenings as the Nikkei goes up and up and up.
Question
When does an initiative for a change in auditors or the tightening of audit fees
seem the least likely?
Royal Bank of Scotland has no
fewer than three former KPMG executives on its board, all of whom sit on the
nominations committee which will select the new chief executive ---
"Fears raised over close ties between RBS and top accountant KPMG," by
Jim Armitage, The Independent, June 14, 2013 ---
http://www.independent.co.uk/news/business/news/fears-raised-over-close-ties-between-rbs-and-top-accountant-kpmg-8658370.html
"A Technical Dictionary That Fits the Definition of User-Friendly," by
David A. Pogue,
The New York Times, June 20, 2013 ---
http://pogue.blogs.nytimes.com/2013/06/20/a-technical-dictionary-that-fits-the-definition-of-user-friendly/#more-6881
Everybody talks about how Amazon has killed the
American bookstore, how Facebook is isolating our children, how tiny changes
in Google’s search algorithms can destroy small businesses. But Wikipedia
has left some damage in its wake, too.
There was the Encyclopedia Britannica, of course,
which ceased printed publication in 2010. But there was another, less
visible casualty: the Computer Desktop Encyclopedia (C.D.E.).
It’s an online dictionary of 25,000 computer and
consumer electronics terms, written over 30 years by Alan Freedman, his
wife, Irma Morrison, and occasional part-timers. Until about eight years
ago, the C.D.E. served as the built-in computer dictionary for 20
technology-related Web sites. (They used their own names for it:
TechEncyclopedia, ChannelWeb Encyclopedia, ZDNet Dictionary, and so on.)
Today, PCMag.com is the only tech site that still builds in the C.D.E. (FreeDictionary
and YourDictionary.com also incorporate it.)
Mr. Freedman, a corporate computer trainer for many
years, has therefore taken the only logical path: He’s now made the C.D.E.
free online to all, at computerlanguage.com. And he challenged me to compare
his definitions with its rivals.
One thing is for sure: There’s something to be said
for having a single editor. Wikipedia entries, of course, are written
collaboratively by strangers with different agendas and writing styles. And
its technology definitions tend to be by engineers, for engineers.
Continued in article
Computer Desktop Encyclopedia ---
http://computerlanguage.com/
Jensen Comment
I no longer update my own technology glossary, but it is better than most
current computer-term glossaries and encyclopedias (although it's impossible to
beat Google Advanced Search if you take the trouble) for obsolete terms
---
http://www.trinity.edu/rjensen/245gloss.htm
My glossary today is more for historians seeking technical terms that have
dropped from current use. For example, how many of you remember CD-I. This was
my first exposure to great interactive computing (on an analog television set).
I still have an early and long-neglected CD-I player in my studio. I also have a
collection of commercial CD-I disks as well as some of my own creations. Those
were the days my friend. I thought CD-I would never end.
"McGladrey settles fraud lawsuit over
Abbate embezzlement," by Paul Brinkman, Biz Journal, June 14, 2013
---
http://www.bizjournals.com/southflorida/blog/2013/06/mcgladrey-settles-fraud-lawsuit-over.html
The McGladrey accounting firm has settled a lawsuit
that accused the firm of fraud in connection with embezzlement by Miami
Beach Community Health Center CEO Kathryn Abbate.
Although terms of the settlement were not
confidential, the center’s attorney Richard E. Brodsky declined to reveal
the terms.
Abbate was sentenced to six years in prison on
Wednesday for embezzling $7 million over a period of five years.
During that period, accountants working for
McGladrey and CohnReznick audited the center’s accounts.
The center sued both McGladrey and CohnReznick
after learning about Abbate’s theft of funds in August. The center accused
its auditors of failing to detect the embezzlement for years. McGladrey
prepared federal tax returns for the center from 2007 to 2009.
According to the center’s lawsuit, McGladrey fired
its main auditor on the center’s account, Steven D. Schwartz, in January
2011, and Schwartz went to work for CohnReznick.
The lawsuit alleges that Schwartz no longer
performed regular work on the center’s accounts after leaving McGladrey, but
continued to supervise others who did.
The center states in its lawsuit that it was
eventually Schwartz who alerted someone besides Abbate to her embezzlement
in May 2012.
An amended complaint in the lawsuit alleged that
auditors had failed to adequately detect problems with procedures governing
checks and other financial transactions and failed to report those properly
to management and the board of directors.
Continued in article
Bob Jensen's threads on McGladrey ---
http://www.trinity.edu/rjensen/Fraud001.htm
"Who Is The PwC Partner Responsible For MF Global? Someone With A Lot of
Baggage," by Francine McKenna, re:TheAuditors, June 14, 2013 ---
Click Here
http://retheauditors.com/2013/06/14/who-is-the-pwc-partner-responsible-for-mf-global-someone-with-a-lot-of-baggage/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ReTheAuditors+%28re%3A+The+Auditors%29
Bob Jensen's threads on MF Global ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search for the phrase "MF Global"
"Benjamin Lawsky Fills in for AWOL Feds," by Jonathan Weil,
Bloomberg, June 20, 2013 ---
http://www.bloomberg.com/news/2013-06-20/benjamin-lawsky-fills-in-for-awol-feds.html
The superintendent of the New York State Department
of Financial Services today
said Bank of Tokyo Mitsubishi-UFJ Ltd.
agreed to pay $250 million to settle allegations
that it violated state banking laws when it carried out transactions with
Iran and other countries subject to international sanctions. You have to
wonder, too, what's going on over at the Treasury Department's Office of
Foreign Assets Control.
In December, the Treasury division concluded a
parallel investigation of Bank of Tokyo and
settled for only $8.5 million. The contrast
reinforces the perception that the feds are going light on large financial
institutions, and that Lawsky is out to fill the vacuum where he can using
New York state laws.
It's the second big case for Lawsky this week. On
June 18, Lawsky
said Deloitte Financial Advisory Services would
pay $10 million to resolve the agency's investigation into its consulting
work for Standard Chartered Plc, the London-based bank that paid $340
million to the state to settle money-laundering claims last year. The
agreement with Deloitte included a one-year ban on
accepting new consulting work related to matters pending before the New York
agency.
The Deloitte agreement had one feature that was
particularly striking -- and rare for a regulator. The consulting firm,
which is an affiliate of the Big Four accounting firm Deloitte & Touche LLP,
admitted to violations of state banking law.
In the settlement agreement, Deloitte admitted that
it broke state law by "knowingly disclosing confidential supervisory
information to'' Standard Chartered about other banking clients.
Admissions such as these should be a model for all regulators. The New York
department's consent order with Bank of Tokyo didn't include any direct
acknowledgements, but at least it didn't have the dreaded language saying
the company "neither admits nor denies" the allegations.
The way the consent order with Bank of Tokyo was
structured, representatives for both the company and the regulator signed
their names to a list of the agency's findings, which made it seem that Bank
of Tokyo agreed they were true. One of the provisions said Bank of Tokyo
"estimates that it cleared approximately 28,000 U.S. dollar payments through
New York worth close to $100 billion involving Iran, and additional payments
involving Sudan and Myanmar."
There's a glimmer of hope that other regulators may
change their usual "no-admit" approach, at least on the margins. Securities
and Exchange Commission Chairman Mary Jo White this week said the agency's
enforcement division will seek more admissions of wrongdoing from defendants
as a condition of settling cases. The agency's default position for decades
has been for defendants to neither admit nor deny its claims.
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
From the Scout Report on June 21, 2013
My Study Life ---
https://www.mystudylife.com/
Some young scholars may ask the question: "What
time do I need to be at general chemistry?" or "When does my review group
meet?" Keeping track of such matters is a snap with My Study Life, a free
online planner. Visitors can color-code each activity for easy visual
recognition and insert various tasks that might be due on any given day.
Unlike more conventional calendars, this one integrates classes, tasks, and
exams to give students and teachers a full picture of what remains to be
done. This program is available for Chrome, Windows 8, Windows Phone, and
Android, and will soon be available for iOS.
Skype Recorder ---
http://im.simkl.com/
In an increasingly connected world, it's often
necessary to conduct interviews, customer support, and more over Skype.
Simkl is a good way to keep track of conversations users need to reference
later. The conversations can be stored on any computer or to the cloud.
Additionally, visitors can use the same application to record IM
conversations. The program is available in over a dozen languages and it is
compatible with all operating systems
Politicians call for closer consideration of the planned merger between
US Airways and American Airlines
Senators urge scrutiny of American Airlines and US Airways merger
http://www.latimes.com/business/money/la-fi-mo-senators-inquiry-american-us-airways-merger-20130618,0,7109590.story
American and US Airways name merged airline leadership
http://www.usatoday.com/story/todayinthesky/2013/06/10/american-airlines-us-airways-leadership-merger/2407605/
How A Merger Could Affect Congress' Favorite Airport
http://www.npr.org/2013/06/19/191106900/how-a-merger-could-affect-congress-favorite-airport
New American Arriving
http://newamericanarriving.com/
CNN Money: Airline mergers and bankruptcies
http://money.cnn.com/infographic/news/companies/airline-merger/
American Airlines: Company History
http://www.aa.com/i18n/amrcorp/newsroom/company-history.jsp
So often success is trouble turned inside out.
"The Gift of Doubt Albert O. Hirschman and the power of failure," by
Malcolm Gladwell The New Yorker, June 24, 2013 ---
http://www.newyorker.com/arts/critics/books/2013/06/24/130624crbo_books_gladwell?currentPage=all
Jensen Comment
This is a very upbeat review of the Worldly Philosopher: The Odyssey of
Albert O. Hirschman (Princeton) by Princeton historian Jeremy Adelman."
Adelman brilliantly and beautifully brings Hirschman to life, giving us an
unforgettable portrait of one of the twentieth century’s most extraordinary
intellectuals."
As was nearly always the case with Hirschman’s
writing, he made his argument without mathematical formulas or complex
models. His subject was economics, but his spirit was literary. He drew
on Brecht, Kafka, Freud, Flaubert, La Rochefoucauld, Montesquieu, Montaigne,
and Machiavelli, not to mention Homer—he had committed huge sections of the
Odyssey to memory. The pleasure of reading Hirschman comes not only from the
originality of his conclusions but also from the delightfully idiosyncratic
path he took to them. Consider this, from the same essay (and, remember,
this is an economist who’s writing):
While we are rather willing and
even eager and relieved to agree with a historian’s finding that we
stumbled into the more shameful events of history, such as war, we are
correspondingly unwilling to concede—in fact we find it intolerable to
imagine—that our more lofty achievements, such as economic, social or
political progress, could have come about by stumbling rather than
through careful planning. . . . Language itself conspires toward this
sort of asymmetry: we fall into error, but do not usually speak of
falling into truth.
Is it really possible to make a complicated and deeply intellectual argument
"without mathematical formulas and complex models?" Probably not by today's
standards in the Academy.
Just Horsing Around Again
"My Latest Forbes Magazine Article: 'The Madoff of Munis'," by Francine
McKenna, re:TheAuditors, June 11, 2013 ---
http://retheauditors.com/2013/06/11/my-latest-forbes-magazine-article-the-madoff-of-munis/
"Where Should SEC Start A Fraud Crack Down? Maybe Look At Fake
Restatements," by Francine McKenna, Forbes, June 18, 2013 ---
Click Here
http://www.forbes.com/sites/francinemckenna/2013/06/18/where-should-sec-start-a-fraud-crack-down-maybe-look-at-fake-restatements/
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Will the Latest Fight Between NASBA and the AICPA Last for 10 Rounds?
---
http://goingconcern.com/post/aicpa-knows-nasba-mad-its-okay-nasba-gets-mad-sometimes
"NASBA Blackballs AICPA from the Standard Setters’ Club," by Tom
Selling, The Accounting Onion, June 19, 2013 ---
http://accountingonion.com/2013/06/nasba-blackballs-aicpa-from-the-standard-setters-club.html
Jensen Comment
After the APB in the 1960s trembled and sputtered when taking on controversial
accounting standard positions and Congressional pressures mounted for the SEC
(big government) to take over the standard setting responsibilities, the CPA
profession in desperation funded the FASB to become the primary accounting
standard setting body. However, since the 1930s the SEC has always had the power
to trump accounting standards --- a power that's rarely been used except in some
sad issues like oil and gas capitalization of dry holes ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory
After 1933,
the AICPA and the SEC seriously attempted to generate accounting standards,
enforce accounting standards, and provide academic justification for
promulgated standards.
- ASRs of the
SEC
- In a 3-2 vote
the SEC followed George O. May's efforts to mandate external audits of
securities traded across state lines in the U.S.
- 1939-1959
A.D.: Accounting standards were generated by the AICPA's Committee on
Accounting Procedure (CAP) that issued Accounting Research Bulletins (51
ARBs) --- but the tendency was to overlook controversial issues such as
off-balance sheet financing, public disclosure of management forecasts,
price-level accounting, current cost accounting, and exit value
accounting. Controversial items avoided by the CAP included management
compensation accounting, pension accounting, post-employment benefits
accounting, and off balance sheet financing (OBSF). The CAP did very
little to restrain diversity of reporting.
- 1960-1972
A.D.: Accounting standards in the U.S. were generated by the AICPA's
Accounting Principles Board (APB) that had more members than the CAP and
a mandate to attack more controversial reporting issues. The APB
attacked some controversial issues but often failed to resolve their own
disputes on such issues as pooling versus purchase accounting for
mergers.
- 1972-????
A.D. Accounting standards in the U.S. were, and still are, being
generated by the Financial Accounting Standards Board (FASB) that has
seven members, including required members from industry, academe, and
financial analysts in addition to members from public accountancy. The
FASB reports to the Financial Accounting Foundation (FAF). FASB members
must divorce themselves from previous income ties and work full time for
the FASB. The formation of the FASB was a desperation move by CPA's to
stave off threatened takeover of accounting standards by the Federal
Government (there were the Moss and Metcalf bills to do just that under
pending legislation in the U.S. House and Senate). Unlike the CAP and
APB, the FASB has a full-time research staff and has issued highly
controversial standards forcing firms to abide by pension accounting
rules, capitalization of many leases, and booking of many previous OBSF
items (capital leases, pensions, post-employment benefits, income tax
accounting, derivative financial instruments, pooling accounting,
etc.). The road has been long and hard on some other issues where
attempts to issue new standards (e.g., expensing of dry holes in oil and
gas accounting) have been thwarted by highly-publicized political
pressuring by corporations.
- In 1984 the
Governmental Accounting Standards Board (GASB) was established. It
independently reports to FAF as does the FASB. GASB is the independent
organization that establishes and improves standards of accounting and
financial reporting for U.S. state and local governmen
At the moment the SEC is blocking the shift of standard setting from the
FASB to the IASB.
Historically, the SEC prefers to put its resources into enforcement of
financial markets rules and regulations --- not wanting to get sucked into the
pit of month-to-month setting of accounting standards and regulations for
registered companies.
All accounting standard setting authority has not been transferred to the
FASB from the AICPA, especially where the focus of the accounting standards are
not so much to protect investors. For example, I think standards of accounting
for estates (where exit value rules generally are in effect) primarily in the
realm of the AICPA.
Tom's posting concerns the fuzzy realm of standard setting for private
companies where it's questionable that the SEC and FASB have authority to set
accounting standards that still seem to be in the hands of the AICPA. But there
is much controversy at the moment.
"IRS targeted conservative
college interns," by Patrick Howley, The Daily Caller, May 22, 2013
---
http://dailycaller.com/2013/05/20/irs-targeted-conservative-college-interns/
Thank you Dennis Huber for the heads up.
The Internal Revenue Service (IRS) demanded
information about conservative groups’ college-aged interns, prompting
outrage from one of the country’s top conservative activist organizations
and leading one former intern to wonder whether his family’s pizza parlor
would be endangered.
The IRS requested, in an audit, the names of the
conservative Leadership Institute’s 2008 interns, as well as specific
information about their internship work and where the interns were employed
in 2012, according to a document request the IRS sent to the Leadership
Institute, dated February 14, 2012.
“Copies of applications for internships and summer programs; to
include: lists of those selected for internships and
students
in 2008.
– In regards to such internships, please provide information regarding where
the interns physically worked and how the placement was arranged.
– After completing internships and courses, where were the students and
interns
employed?”
The Arlington, Virginia-based Leadership Institute
is a conservative activist training organization founded in 1979 by Virginia
Republican National Committeeman Morton C. Blackwell, the youngest elected
delegate to the 1964 Republican convention that nominated Barry Goldwater.
The institute was audited in 2011. As
The Daily Caller has reported, at least two
different IRS offices made a concerted effort to obtain the group’s training
materials.
"Shakespeare Knew all About
Deniability," by Paul Greenberg, Townhall, May 25, 2013 ---
Click Here
http://townhall.com/columnists/paulgreenberg/2013/05/25/shakespeare-knew-all-about-deniability-n1605943?utm_source=thdaily&utm_medium=email&utm_campaign=nl
. . .
Here's the latest example of how the Great Game of
Deniability is played: It now comes out that, despite earlier claims from
the president's press secretary, the White House knew that an inspector
general's report was about to show that the IRS had targeted conservative
groups like the tea party for special scrutiny. The president's counsel knew
it, the president's chief of staff knew it. But it seems they were careful
not to tell the president about it.
The current presidential press secretary's name is
Jay Carney, but it might as well be Ron Ziegler, who was Richard Nixon's
mouthpiece and was always being caught up in his own contradictions.
How could Mr. Carney claim the president didn't
know that this scandal at the IRS was about to blow up on him -- even though
his closest advisers did? Jay Carney explained that "some matters are not
appropriate to convey to him, and this (was) one of them."
That way, like any gang boss called to testify
before the old McClellan Committee back in the mobsterish Fifties, the
president can claim, "I didn't know nuttin.' " It seems you can take a
president out of Chicago, but not the Chicago out of a president.
. . .
Deniability. It's become almost a standard feature
of modern presidential politics, whether the subject is Watergate,
Iran-Contra, L'Affaire Lewinsky and now the games at the IRS. But the
history of deniability goes back a lot further. All the way back to an
Elizabethan playwright of some note, W. Shakespeare.
Master Will knew all about deniability and how it
works. See Act II, Scene 7 of Antony and Cleopatra. The names may be
different now, but the way White House counsel Kathryn Ruemmler and Chief of
Staff Denis McDonough served their president is pretty much how a Roman
statesman named Pompey wished his friend and servant Menas had had the
subtlety to pull off.
In Shakespeare's account, Pompey is entertaining
the Roman triumvirate -- Marc Antony, Octavius Caesar and Lepidus -- aboard
his galley when Menas interrupts him during cocktail hour. It seems Pompey's
major-domo has devised a scheme that's sure to work, and he can't resist
letting his boss know how clever he's been to come up with it.
Menas begins his whispered aside with Pompey by
tempting him with the one lure no politician may be able to resist -- power.
Great power.
"Wilt thou be lord of all the world?" asks Menas.
"What says't thou?" asks Pompey, who heard him very
well.
"Wilt thou be lord of all the world? That's twice."
"How should that be?"
"But entertain it, and, although thou think me
poor, I am the man will give thee all the world."
"Hast thou drunk well?" asks Pompey, who's been the
one drinking.
"Now, Pompey, I have kept me from the cup. Thou
art, if thou dar'st be, the earthly Jove: Whate'er the ocean pales or sky
inclips is thine, if thou wilt have't."
"Show me which way," says Pompey, who is not an
unambitious man, and Menas shows him:
"These three world-sharers, these competitors, are
in thy vessel: let me cut the cable; and when we are put off, fall to their
throats: All then is thine."
. .
Given the deterioration of the English language
since its Elizabethan zenith, such a scheme might today be known as Policy
Proposal 89, Operation Globe. And given the growth of bureaucracy since
Pompey's time (it was not inconsiderable then) Menas' draft proposal might
have to go through three different levels of the National Security Council
before being considered, debated, redrafted and then indefinitely postponed.
Not so in one of Shakespeare's historical plays,
which require, among other things, clarity and moral force as well as drama.
. .
Menas gets an immediate response to his proposal,
though it is not the one he had hoped for:
"Ah," says Pompey, "this thou shouldst have done,
and not have spoken on't! In me 'tis villainy; in thee't had been good
service. Thou must know 'tis not my profit that does lead mine honour; mine
honour it. Repent that e'er thy tongue hath so betray'd thine act: being
done unknown, I should have found it afterwards well done; but must condemn
it now. Desist, and drink."
Ah, well, so go the best-laid plans of mice and
White House courtiers. Pompey, saddled with a jabbering aide like Menas,
would have found the current White House counsel and chief of staff much
more to his liking. More important than knowing what to advise him, they
would know what to keep from him.
Yes, much better to let the dirty work go forward
and have the president learn the grimy details only later, if ever. And
then, if necessary, he can deny ever knowing about it and, in the most
righteous tones, fire a head bureaucrat or two and snuff out the whole
scandal. That's the essence of what in our era has come to be known as
Plausible Deniability. It's also called "insulating" the chief executive.
Pompey would have called it good service.
As Shakespeare has Pompey say, "being done unknown,
I should have found it afterwards well done; but must condemn it now."
Describing how the IRS had targeted his critics, the president sounded
shocked, shocked! And proceeded to fire the IRS' top administrator. For his
presidential aides had provided him with ... deniability. Pompey would have
been proud of them.
Why Lois Lerner Took the Fifth ---
Click Here
http://live.wsj.com/video/opinion-why-lois-lerner-took-the-fifth/C11E472E-9339-44C9-A2D0-7439F4B6DA33.html?mod=djemEditorialPage_h#!C11E472E-9339-44C9-A2D0-7439F4B6DA33
Jensen Comment
President Obama asked Lois Learner to resign. She flatly refused! President
Obama could fire her, but the fear is that she might then talk.
As a result she could become a
lifelong Federal employee on paid (over $200,000 per year plus benefits) who
never has to go to work. Nice job if you can get it.
World Bank: Annual Report 2012 ---
Click Here
http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/EXTANNREP/EXTANNREP2012/0,,menuPK:8784414~pagePK:64168427~piPK:64168435~theSitePK:8784409,00.html
June 1, 2013 message from Bryce Walker
Hi Bob,
After recently passed the CPA exam, I created a
website to help others avoid the same mistakes I made. I wrote an article to
help inspire accounting students that plan on pursuing a CPA license and to
let them know that all their hard work will pay off in the end.
http://crushthecpaexam.com/becoming-a-cpa/
If you find value in my article I would love to be
listed on your bookmarks page as I think many others would find my story
motivating. Thanks for you time,
Bryce
Bryce Welker, CPA
CRUSHtheCPAexam.com
Bob Jensen's threads on accounting careers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
"30 Terrific (mostly Fee-Based) Tools for Small Businesses," by Jason
Nazar, Forbes. May 28, 2013 ---
Click Here
http://www.forbes.com/sites/jasonnazar/2013/05/28/30-terrific-tools-for-small-businesses/?utm_source=email&utm_medium=email&utm_campaign=222&utm_content=5483&alt=76b29ed3-52e2-4085-85e8-3aa4370ed238
This are essentially Docstock advertisements that are nevertheless informative
for academics as well as small businesses.
1. Accounting & Finance
-
Freshbooks: If you need online invoicing, time tracking and expense
services, this program is easy to navigate, even for the most novice
business owners.
-
Wave Accounting:
Quickly manage payroll and manage your business receipts for free.
-
Expensify: Get a
handle on all of your business expenses and invoices so you can
concentrate on more important things.
2. Customer Support
- ZenDesk:
Streamline your customer service interface, create support boards and
streamline your response time.
-
GetSatisfaction: A great customer community platform for interacting
with your users, getting feedback and providing technical support.
-
SurveyMonkey: Build free surveys to conduct market research, and
keep a pulse on customer desires and satisfaction.
3. Human Resources
-
ZipRecruiter: Find
better talent with cross-job-board posting, resume screening and a
point-based score chart to find the best candidates.
- Intelius:
Run a background check on prospective employees, browse criminal records
and other information to make sure you’re hiring only the best people.
- AnyPerk:
Reward employees with one of the most comprehensive perks programs out
there, which provides discounts in countless services.
4. Legal
-
Legal Zoom Business Attorney Plan: This attorney plan specifically
tailored to small businesses provides attorney reviews of contracts and
other legal documents, for a fraction of the price.
- Docusign:
The most prominent service for eSignatures that is both legal and
secure.
-
Trademarkia: Search
over 6 million registered logos, names and slogans to make sure your
name or idea isn’t taken.
5. Sales
-
Highrise: Organize
notes, tasks and email conversations for up to 30,000 customers, leads,
partners and contacts.
-
Leads360: A sales management solution specifically tailored to turn
leads into conversion, and track your performance so you can easily
improve your sales.
-
BidSketch: Create professional and clean client proposals in just
minutes, and get a certified client signature when they approve.
Continued in article
The Efficient Market Hypothesis Has Run Into
Bankruptcy
George Soros ---
http://www.businessinsider.com/financial-advisor-insights-june-26-2013-6
Book Review of:
JUSTIN FOX, The Myth of the Rational Market: A History of Risk,
Reward, and Delusion on Wall Street (New York, NY: HarperCollins
Publishers, 2009/11 (paper), ISBN 978-0-06-059903-4 (paper), pp. xvi, 390).
The Accounting Review, Vol. 88, No. 3, May 2013, pp. 1129-1131
. . .
The ideas of finance academics taking hold on Wall
Street is a remarkable story. Some examples are the acceptance of portfolio
theory, asset pricing models, the rise of the index fund, the need to
systematically collect data to test the theories, and the massive rise of
derivative trading due to option pricing models developed by Black and
Scholes, and Merton and Roll. Such success is also tempered by examples such
as the failure of portfolio insurance to hedge stock market risk and the
fallout from Long Term Capital Management's inability to cover its
positions. Jensen's influential work on the theory of the firm is also
presented as extending market discipline to the firm.
Fama and Jensen will feature throughout the
remainder of the book, but the later chapters will focus on the rise of
behavioral finance and insights that challenge the EMH. For example, Richard Thaler's work on challenging the notion of efficient markets and rational
choice models is followed by Chapter 11, titled “Bob Shiller Points Out the
Most Remarkable Error,” which refers to Shiller's famous quotation arguing
that observing no patterns in stock prices is not the same as stock prices
being right. The response to such challenges is portrayed as one where the
EMH definition shifts due to counter-arguments being made. In addition, some
previous supporters concede that market anomalies do exist, and this is
accompanied by the rise of work such as Andrei Shleifer's “noise traders”
research. There is now a significant body of literature that highlights that
individuals do not always behave rationally. That does not mean one can
exploit this behavior consistently—particularly if you are a large investor.
Toward the end of the book, Fox crafts a debate
between Fama and Dick Thaler, and Fox makes it clear that the ground has
shifted. However, those who are preaching the demise of the EMH perhaps do
not understand that, while the prices may not always be “right,” the
recommendation to buy an index fund is still good advice, as “markets are
hard to beat” and still harder if you pay someone to manage your portfolio
(p. 306). Furthermore, Markowitz's diversification principle holds, and
“[s]tock prices contain lots of information” (p. 307).
Understanding the powerful forces that make current
prices hard to exploit consistently is one key lesson. On the other hand,
understanding when prices can be manipulated is equally important. The
collapse of financial markets requires us to consider what went wrong. We
should not assume ….
The book encourages the reader to not only
acknowledge the genuine benefits afforded by theoretical advances in
finance, but also to understand the limitations to theory.
Fox is able to provide compelling evidence of the
developments and shortcomings of the past, moralize about the issue, and
conclude that, despite much progress, we have much more to learn.
Is Fox blaming the EMH for the financial crisis? He
gives enough hints for others to draw that conclusion. In spite of this,
this remains a book that provides a balanced discussion. For example, he
acknowledges that stock and bond prices do convey information, are hard to
beat, and that many in Wall Street never accepted the EMH. He also outlines
Shiller's repeated warnings of irrational exuberance and that by definition
the EMH could not predict such an event (prices are random). Academics have
also long acknowledged that the EMH is a theoretical concept; otherwise,
incentives to analyze information would not exist.
So, while Justin Fox's book is fair, balanced,
insightful, and highlights the need to continue to understand why markets
may or may not be efficient, I found some of the commentary around the book
were more critical of the EMH.1
It is as if the critics believe the proposed theory
was accepted beyond question. Post-earnings drift is shown in Ball and
Brown's 1968 paper. Agency and positive accounting theory highlight the role
of incentives, information processing costs, and moral hazard. Active
investors never believed in the EMH, and lessons from behavioral finance
have been well debated.
So why does the message create such controversy,
and are we doing enough as educators to ensure that the complexity of the
issues is communicated? Part of the problem may be the need to search for a
scapegoat, but are we ensuring that investors fully understand issues such
as the paradox of the market, or why some markets are efficient and others
are not?
Textbooks in accounting and finance tend to have
simplistic discussions of the topic, with the evidence concentrating on the
U.S. stock market. It is relatively easy to understand the concept but much
harder to appreciate the complexity of the issue. Have we let loose a
generation of undergraduates who are inadequately trained, and who end up
either treating the EMH as a piece of magic or simply rejecting the whole
concept without the ability to explain why?
Consider those who accept market efficiency on
faith. While they may be price-protected in a well-traded market, they will
be more exposed in illiquid markets and out of their depth in a market where
price setters can exist.
Perhaps the more dangerous groups are those who do
not understand why markets can be difficult to beat and are ill-informed
about the evidence and counter-evidence. Fox concludes that “while mindless
conformism was characteristic of financial bubbles and panics long before
there were finance professors, fostering even more of it has been the
gravest sin of modern finance” (p. 328).
I think this book will challenge readers to better
understand how some of the key developments in finance have evolved—the
characters involved, the contradictions that occurred, and the maturing of
thought, so that the difficult issues surrounding finance can continue to
receive the attention that they deserve. Fox allows the characters to come
alive, and he shows their willingness to be challenged by new ideas and
evidence. Finance is not perfect, but Fox also makes sure that we know of
the contribution that finance has made in better managing and pricing risk.
Reviewer
David Lont
Professor of Accounting
University of Otago
Bob Jensen's threads on the Efficient Market Hypothesis are at
http://www.trinity.edu/rjensen/Theory01.htm#EMH
Fraud Beat:
Canadians Massively Screwed by Their City, Province, and Local Governments
---
http://www.businessinsider.com/the-three-reasons-canada-is-in-big-trouble-2013-6
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Why a $1 million retirement nest egg just isn't enough unless a nearby soup
kitchen is not available
"For Retirees, a Million-Dollar Illusion," by Jeff Sommer, The New
York Times, June 8, 2013 ---
Click Here
http://www.nytimes.com/2013/06/09/your-money/why-many-retirees-could-outlive-a-1-million-nest-egg.html?ref=business&_r=1&pagewanted=all&
¶ In 1953, when “How to Marry a
Millionaire” was in movie theaters, $1 million bought the equivalent of
$8.7 million today. Now $1 million won’t even buy
an
average Manhattan apartment or come remotely close
to paying the
average salary of an N.B.A. basketball player.
¶ Still, $1
million is more money than 9 in 10 American families possess. It may no
longer be a symbol of boundless wealth, but as a
retirement nest egg,
$1 million is relatively big. It may seem like a lot to live on.
¶ But in many
ways, it’s not.
¶ Inflation
isn’t the only thing that’s whittled down the $1 million. The topsy-turvy
world of today’s financial markets — particularly, the still-ultralow
interest rates in the bond market — is upending what many people thought
they understood about how to pay for life after work.
¶ “We’re
facing a crisis right now, and it’s going to get worse,” said
Alicia Munnell, director of the
Center for
Retirement Research at Boston College. “Most
people haven’t saved nearly enough, not even people who have put away $1
million.”
¶ For people
close to retirement, the problem is acute. The conventional financial advice
is that the older you get, the more you should put into bonds, which are
widely considered safer than stocks. But consider this bleak picture: A
typical 65-year-old couple with $1 million in tax-free
municipal bonds want to retire. They plan to
withdraw 4 percent of their savings a year — a common, rule-of-thumb
drawdown. But under current conditions, if they spend that $40,000 a year,
adjusted for inflation, there is a 72 percent probability that they will run
through their bond portfolio before they die.
¶ Suddenly,
that risk-free bond portfolio is looking risky. “The probabilities are
remarkably grim for retirees who insist on holding only bonds in the belief
that they are safe,” says Seth J. Masters, the chief investment officer of
Bernstein Global Wealth Management, a
Manhattan-based firm, which ran these projections for Sunday Business.
“Because we live in this world we tend to think of it as ‘normal,’ but from
the standpoint of financial market history, it’s not normal at all,” Mr.
Masters said. “And that’s very clear when you look at fixed-income returns.”
¶ Several
rounds of intervention by the Federal Reserve and other central banks, aimed
at stimulating a moribund economy, have helped to suppress rates, and so has
low inflation. Low rates have led to cheaper
mortgages and credit cards, helping to balance
family budgets.
¶ But for
savers, low rates have been a trial. The fundamental problem is that
benchmark Treasury yields have been well below 4 percent since early in the
financial crisis. That creates brutal math: if your portfolio’s income is
below 4 percent, you can’t withdraw 4 percent annually, and add inflation
adjustments, without depleting that portfolio over time.
¶ And with
rising life expectancies,
many people will have a lot of time: the average
65-year-old woman today can be expected to live to 86, a man to 84. One out
of 10 people who are 65 today will live past 95, according to projections
from the Social Security Administration.
¶ “If you’re
invested only in bonds and you’re withdrawing 4 percent, plus inflation,
your portfolio will decline,” said Maria A. Bruno,
senior investment analyst at Vanguard. “That’s why
we recommend that most people hold some equities. And why it’s important to
be flexible.” In some years, investors may need to withdraw less than 4
percent, she said, and in some years they can take more.
¶ Clearly,
such flexibility depends on individual circumstances. Billionaires can
afford to be very flexible: just 2 percent of a $1 billion portfolio is
still $20 million. With economizing, even a big spender should be able to
scrape by on that. But $20,000 — the cash flow from a $1 million portfolio
at 2 percent — won’t take you very far in the United States today.
¶ And if
you’re not close to being a millionaire — if you’re starting, say, with
$10,000 in financial assets — you’ve got very little flexibility indeed. Yet
$10,890 is the median financial net worth of an American household today,
according to calculations by
Edward N. Wolff, an
economics professor at New York University. (He bases this estimate on 2010
Federal Reserve data, which he has updated for
Sunday Business according to changes in relevant market indexes.)
¶ A
millionaire household lives in elite territory, even if it no longer seems
truly rich. Including a home in the calculations, such a family ranks in the
top 10.1 percent of all households in the United States, according to
Professor Wolff’s estimates. Excluding the value of a home, a net worth of
$1 million puts a household in the top 8.1 percent. Yet even such families
may have difficulty maintaining their standard of living in retirement.
¶ “The bottom
line is that people at nearly all levels of the income distribution have
undersaved,” Professor Wolff said. “Social
Security is going to be a major, and maybe
primary, source of income for people, even for some of those close to the
top.”
¶ Professor Munnell said that in addition
to relying on Social Security, which she called “absolutely crucial, even
for people with $1 million,” other options include saving more, spending
less, working longer and tapping home equity for living expenses. “There
aren’t that many levers we can use,” she said. “We have to consider them
all.”
¶ THE bond
market has always been a forbidding place for outsiders, but making some
sense of it is important for people who rely on bond income.
¶ Low bond
yields have been a nightmare for many investors, but that’s not the only
issue. Today’s market rates aren’t stable.
Steve Huber, portfolio manager at T. Rowe Price,
said, “Current yields are an anomaly when you consider where rates have been
over the last decade or more.”
¶ Rates are
expected to rise. While that will eventually mean more income for bond
buyers, it will create a host of problems. Already, the market has been
rattled by speculation that after years of big bond-buying, the Fed may soon
begin to taper its appetite. In May, a half-point climb in the yield of
10-year
Treasury notes produced the biggest monthly bond
market losses in nine years. (Yields and prices move in opposite
directions.) Yet yields remain extraordinarily low on a historical basis.
The yield on the benchmark 10-year Treasury note is just under 2.2 percent,
compared with more than 6.5 percent, on average, since 1962, according to
quarterly Bloomberg data.
¶ And bond
investing is likely to remain challenging for years to come. Investors may
face a double-whammy — low yields now and the prospect of significant losses
as yields rise. On Friday, after the Labor Department reported that the
unemployment rate edged up to 7.6 percent from 7.5 percent, yields rose
further, amid uncertainty about the Fed’s intentions.
¶ Despite this
market instability, bonds tend to be the investment of choice as people
retire, because they throw off steady income. But as the projections from
Bernstein Global Wealth Management suggest, over-reliance on bonds leads to
financial quandaries.
¶ These
projections, based on proprietary market and economic forecasts and
portfolio analyses, as well as on standard actuarial and tax data, estimate
future probabilities for investors. That’s a quixotic task at best, intended
to illustrate possible outcomes rather than to provide precise forecasts,
said Mr. Masters at Bernstein.
¶ Still, they
are worrisome. Consider again the 65-year-old couple who are starting to
draw down $1 million in savings this year: if they withdrew 3 percent, or
$30,000, a year, rather than that standard rate of 4 percent,
inflation-adjusted, there is still a one-in-three chance that they will
outlive their money, under current market conditions.
¶ There are
ways to improve these outcomes, but they have their own hazards. Adding
stocks to a portfolio is an obvious counterbalance. And there is now a broad
consensus among asset managers and academics that stocks have an unusually
high likelihood of outperforming bonds over the next decade. That was the
finding of
a recent study by two economists at the Federal Reserve Bank of New York.
¶ The Bernstein projections concur that
adding stocks to a portfolio reduces the risk of outliving your savings. But
it also increases the risk of big losses.
¶Continued in article
This is another reason why financial literacy should be a general
education requirement in every college ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#FinancialLiteracy
Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
"Thunderbird Alumni Protest
Link to For-Profit Laureate," Inside Higher Ed, May 30, 2013 ---
http://www.insidehighered.com/quicktakes/2013/05/30/thunderbird-alumni-protest-link-profit-laureate
Jensen Comment
Since the AACSB has never accredited a for-profit university in North America,
it will be interesting if the AACSB will change its ways and allow for-profit
joint ventures.
May 30, 2013 message from Scott Bonacker
Ernst & Young Latest Big 4 Firm to Have Part II of
PCAOB Inspection Report Released
http://goingconcern.com/post/ernst-young-latest-big-4-firm-have-part-ii-pcaob-inspection-report-released
[The Board] said it had "cause for concern" about
whether the firm's auditors were skeptical enough of their clients'
assertions.
- That was a major reason I quit performing audits
when I became a sole practitioner, wasn't skeptical enough and couldn't
maintain independence. Along with the others, too much of a time commitment
for small offices, etc..
Scott Bonacker CPA –
McCullough and Associates LLC –
Springfield, MO
"The Truth About Paying Down Your Mortgage Early," Business Insider,
June 21, 2013 ---
http://www.businessinsider.com/paying-off-mortgage-with-leftover-money-2013-6
Jensen Comment
Much depends on what your intend to do with the funds that you would otherwise
use to pay down part or all of your mortgage. If it all goes to wine, women, and
casino gambling then pay down at least part of your mortgage. If it goes to buy
gold coins then pay down your mortgage (I'm against buy gold coins in any
circumstances since the transactions costs on resale are so high). If it
goes for home improvements the answer is uncertain and depends upon your
particular real estate market and how much those improvements add to the
monetary and personal value of your home.
Of course your particular income, savings, and tax situation trumps almost
everything.
I have an enormous refinanced mortgage that will not be paid off until I'm
nearly 100 years of age. My strategy is to carry a jumbo mortgage for tax
purposes and invest in an insured tax-exempt fund where the after-tax returns of
my annual tax-exempt cash flow exceed the after-tax cash outflow of my mortgage
costs. Of course this is not a good strategy for everyone because there are
risks in tax-exempt fund values, and tax-exempt bonds are not good inflation
hedges. Old guys like me don't worry so much about inflation. Young investors
should worry about inflation.
What I'm saying is that your outlook on investments and life change with the
seasons of your life. When I was young I always purchased the highest price home
with the biggest mortgage that I could possibly afford. When on the faculty at
the University of Maine in the 1970s I had a big and beautiful house in
town plus a cottage on 12 acres of ocean front. In those days real estate values
just kept going up and up and up.
Two things have changed in my life. One is that I'm no longer young with
worries about inflation and home real estate values. My children will inherit
enough to a point that I'm not worried about inflation or the value of my home
over the next 20 years --- Ka Sara Sara!
The other thing that has changed in my lifetime is the real estate market. Up
in the mountains where I now live expensive property is just not selling. The
market is also limited for other types of property since northern New England is
in an economic and population growth slump. Also the market for second
(vacation) homes is changing --- in part due to higher risk of losing money on
these investments. I sold an Iowa farm a few years ago. This is a totally
different type of investment where values have been rising in large measure
because of the corn ethanol disaster for consumers. Today, however, I think Iowa
farm land is a better investment for farmers who actually drive the tractors on
Iowa farm land relative to far away landlords with no intent to farm the land
themselves. Having said that, farm land is a pretty good long-term inflation
hedge for investors not needing much interim cash flow. At the moment Iowa farm
land may be too high priced. Who really knows? Nobody!
My point is that both your economic and personal situation changes with
seasons of life and states of the economy and tax reforms that might finally get
enacted. Advice is cheap and possibly misleading. It's best to study your
particular situation to a point where you can advise yourself.
Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
Teaching Case on the Special Problems of Accounting for Intangibles in a
Company that is Mostly Human Resources and Intangible Assets
From The Wall Street Journal Accounting Weekly Review on May 24, 2013
Yahoo Deal Shows Power Shift
by:
Joann Lublin, Amir Efrati and Spencer Ante
May 20, 2013
Click here to view the full article on WSJ.com
TOPICS: Intangible Assets, Mergers and Acquisitions
SUMMARY: "Valuations placed on social media sites like Tumblr make
little sense under typical financial analysis' concludes the authors in this
piece on Yahoo's biggest acquisition under Chief Executive Marissa Mayer.
Yahoo has faced challenges in competing against Google, Facebook, and other
Internet companies as the market of online activities--that its founders
essentially developed--has grown and matured. Tumblr's value to Yahoo may be
its appeal to a younger audience and the value to be obtained by Yahoo,
which will produce needed financial results, is clearly discussed in the
related video.
CLASSROOM APPLICATION: The article may be used to introduce
strategic reasons for business combinations or accounting for intangible
assets.
QUESTIONS:
1. (Introductory) Based on the description in the article, what are
the strategic reasons for Yahoo to acquire Tumblr? The related video
available on one of the top tabs to the online article is also helpful to
answer this question.
2. (Introductory) Why is consumer attention focused on social media
important for profitability of Internet based companies? Explain the
importance of advertising in this scenario.
3. (Introductory) Why is it valuable for Yahoo to acquire Tumblr
when the management of Tumblr will not change?
4. (Introductory) Yahoo is paying a premium to acquire Tumblr for
$1 billion. How is that premium measured?
5. (Advanced) Explain how the funding invested in Tumblr by the
venture-capital firm in 2011 must have been based on some "typical financial
analysis" model.
6. (Advanced) Despite what the author concludes, how must the price
paid by Yahoo be determined at least partly on the basis of a financial
model?
7. (Advanced) How will the model determining the price paid for
Tumblr lead to the accounting for this $1 billion by Yahoo when this
acquisition eventually closes? What types of assets are most likely to be
recorded from this transaction?
Reviewed By: Judy Beckman, University of Rhode Island
"Yahoo Deal Shows Power Shift," by Joann Lublin, Amir Efrati and
Spencer Ante, The Wall Street Journal, May 20, 2013 ---
http://online.wsj.com/article/SB10001424127887324787004578493130789235150.html?mod=djem_jiewr_AC_domainid
Yahoo Inc. YHOO -1.00% has agreed to pay $1.1
billion for Tumblr, a six-year-old company with more than 100 million users
but very little revenue, a deal that highlights the shifting balance of
power in the technology business.
Veterans like Yahoo have shown they have staying
power—and they have cash to spend. But companies like Yahoo's target, a
blogging site, have something valuable as well: the rapt attention of
fast-growing communities of users. That has pushed up the price tags as more
established companies fear getting left behind as people's online habits
evolve.
Yahoo and Tumblr announced the agreement on Monday.
Tumblr will be independently operated as a separate business, "per the
agreement and our promise not to screw it up," the companies said. CEO and
founder David Karp will stay on as chief executive. More on Tumblr
In a 2012 interview, Tumblr's David Karp spoke to
the Wall Street Journal about how he started the company and where he's
headed with it. Read the interview.
MoneyBeat: Yahoo Promises 'Not to Screw It Up'
Heard on the Street: Tumblr of Opportunity ATD: Board Approves Deal as
Expected Earlier: Will Yahoo Try to Get Its 'Cool Again' Why Yahoo Is Sweet
on Tumblr Yahoo Wants Out of Microsoft Deal (5/7/2013) Yahoo Scraps Deal for
French Video Site (4/30/2013) Yahoo's Ad Struggles Persist (4/16/2013)
Yahoo, Apple Discuss Deeper iPhone Partnership (4/9/2013)
Timeline: A Changing Internet Pioneer
See key dates in the history of Yahoo, which helped
to revolutionize the Web.
View Graphics
More photos and interactive graphics
The transaction adds Yahoo to the list of
established Internet companies, including Google Inc. GOOG -1.47% and
Facebook Inc., FB -3.24% that have spent $1 billion or more apiece to buy
startup companies in hopes of gaining an edge in growth. Facebook, for
instance, last year paid cash and stock initially valued at about $1 billion
to buy revenue-free Instagram, a popular photo-sharing service.
Google famously paid $1.65 billion in stock seven
years ago for YouTube, the online-video behemoth. In a smaller deal, in
dollar terms, but one that reflects the appetite among old-line Internet
companies for fresh blood, AOL bought Huffington Post for $315 million in
2011.
Yahoo Chief Executive Marissa Mayer's deal for
Tumblr gives Yahoo, one of the original big Internet companies, a
fast-growing Web service that could fill one of its many holes—namely, the
lack of a thriving social-networking and communications hub. Tumblr is
popular with many younger adults, in contrast with Yahoo's older customer
base. Tumblr is also growing more quickly on smartphones than Yahoo.
"You only do an acquisition of this size and scale
if you find an exceptional company, which Tumblr is," Ms. Mayer said Monday.
Some Tumblr users will take time to migrate to
Yahoo's core websites and might never join the fold of its parent, Ms. Mayer
said. At the same time, the blogging service offers several advantages Yahoo
executives said could benefit Yahoo, like a successful track record snagging
users on mobile devices.
"Part of our strategy here is to let Tumblr be
Tumblr," Ms. Mayer said.
Yahoo is paying a premium for the company. When
Tumblr last raised money, in late 2011, the $85 million venture-capital
investment it received valued the company at $800 million.
Yahoo already has plans to generate more revenue
from some Tumblr features like its top-of-site "dashboard" by possibly
including some extra ads. Ms. Mayer credited the company for its already
rich base of big-brand advertisers, which include all of the major film
studios.
The deal is a big win for Mr. Karp, who remains a
large shareholder, and the site's early venture investors, which include
Union Square Ventures, Spark Capital and Sequoia Capital.
Ms. Mayer praised Mr. Karp for his enthusiasm for
entertaining and compelling ads on other media, like TV, that can be "every
bit as good as the content" when pitching products like cars.
"Where are the ads that are like that, where are
the ads that are aspirational?" she asked. "We want that kind of richness in
the online atmosphere."
The acquisition is a big bet for Yahoo, given
Tumblr's financial performance so far. But Yahoo needs the growth. Its
annual revenue has been stuck for years around $5 billion, and the company's
big presence on personal computers hasn't translated well to mobile devices,
where it lacks the advantage of Apple Inc.'s AAPL +0.81% coveted hardware or
Google's ubiquitous smartphone operating software, Android.
Yahoo Chief Financial Officer Ken Goldman said
Yahoo expects its acquisition to add "relatively modest" revenue to its top
line in the second half, when the deal is expected to close, with its
contribution ramping up next year.
Bob Jensen's threads on accounting for intangibles ---
http://www.trinity.edu/rjensen/Theory02.htm#Paradox
"The GAAP Lock-Out Effect and the Investment Behavior of Multinational
Firms," Fadi Shaheen, SSRN, May 30, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2271403
Thank you Paul Caron for the heads up.
Abstract:
This paper looks into the investment behavior of multinational firms with
respect to earnings of their foreign subsidiaries that are locked-out abroad
against the firms’ own real income (present value) interest in order to
avoid the repatriation tax and the associated GAAP “penalty.” The paper
extends the analysis of the existing theoretical models beyond the optimal
repatriation-versus-retention point in order to explore what would be a
second-best optimal investment strategy with respect to locked-out earnings.
The paper shows that the choice of investment in this second-best optimal
setting should differ from that in the first-best optimal setting. One
example is that investing locked-out earnings in passive investments would
generally generate higher present value than in active investments with
higher rates of return. This in turn magnifies the conflict between real and
book income considerations, leading firms to act again against their own
real income interest when investing locked-out earnings abroad, and
resulting in efficiency costs not yet identified, both at the firm level and
to the economy in general.
From Ernst & Young Week in Review on June 6, 2013
11 June 2013 EITF meeting
The Task Force is scheduled to discuss:
- Issue No. 12-G, Accounting for the Difference between the Fair Value
of the Assets and the Fair Value of the Liabilities of a Consolidated
Collateralized Financing Entity
- Issue No. 12-H, Accounting for Service Concession Arrangements
- Issue No. 13-A, Inclusion of the Fed Funds Effective Swap Rate (or
Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge
Accounting Purposes
- Issue No. 13-C, Presentation of an Unrecognized Tax Benefit When a
Net Operating Loss Carryforward or Tax Credit Carryforward Exists
- Issue No. 13-D, Determination of Whether a Performance Target That
Is Allowed to Be Met after the Requisite Service Has Been Provided by
the Employee Is a Vesting Condition or a Condition That Affects the
Grant-Date Fair Value of the Awards
- Issue No. 13-E, Reclassification of Collateralized Mortgage Loans
upon a Troubled Debt Restructuring
Free MBA Degree at the University of Iowa:
Just Submit the Winning PowerPoint File
"Iowa’s Latest MBA Admissions Gimmick: The
$38,000 PowerPoint Deck," Geoff Gloeckler, Bloomberg Businessweek,
June 4, 2013 ---
http://www.businessweek.com/articles/2013-06-04/iowas-latest-mba-admissions-gimmick-the-38-000-powerpoint-deck
Jensen Comment
It might be interesting to develop a thread on alternative themes for this
PowerPoint contest. For example, I like the idea of a theme based upon a
technical question that tests the students skills at research and critical
thinking. It probably should be a theme that students will be exposed to in the
curriculum of the MBA program.
"HARD TIMES: COLLEGE MAJORS, UNEMPLOYMENT AND EARNINGS," by Anthony E.
Carnivale, Georgetown University, May 2013 ---
http://www9.georgetown.edu/grad/gppi/hpi/cew/pdfs/HardTimes.2013.2.pdf
Jensen Comment
I'm somewhat dubious of the data in this study. For example, the attribution of
$43,000 to accounting graduates is inconsistent with other findings of over
$50,000 per year starting salaries in the years under study ---
http://www.naceweb.com/salary-survey-data/?referal=research&menuID=71&nodetype=4
I suspect that in virtually all disciplines the outcomes are skewed by the
variances in the size and quality of the colleges and universities under study.
Unlike engineering, there is a wide variation in accounting jobs ranging from
low-paying clerical jobs to higher-paying professional jobs. Similarly in
finance, jobs vary from low-paid bank tellers to Wall Street bond sellers
earning six figures.
"For Whom Does the FASB Toil? (Not for Investors)," by Tom Selling,
The Accounting Onion, May 31, 2013 ---
http://accountingonion.com/2013/05/for-whom-does-the-fasb-toil-not-for-investors.html
Jensen Comment
Ironically it's not investors and financial analysts who vocally agree with Tom
on wanting the status quo for market valuation of loan losses.
The big banks, however, vocally side
with Tom on not wanting to change to the FASB's proposed change to an accrual
system.
From the CFO Journal's Morning Ledger on June 13, 2013
Regulators are raising the alarm about rising risks in
business loans. Lending to companies has been a boon for banks searching for
revenue. But regulators worry that sweetened loan terms could put banks in
jeopardy if corporate borrowers can’t repay,
the WSJ’s Shayndi Raice and Michael R. Crittenden
report.
Looser standards have made it easier for corporate
borrowers to negotiate bargains. Bill Shea, CFO of
1-800-Flowers.com,
arranged a $200 million revolving credit line with six banks, including J.P.
Morgan, which led the deal in April. The banks fought for the leading role,
Mr. Shea tells Raice and Crittenden, giving him power to negotiate rate,
fees, covenants and the structure of the deal. “It put us in a very good
position to negotiate a very attractive deal.” Mr. Shea says the fees his
company paid to J.P. Morgan for leading the deal were the lowest he has seen
since before the crisis.
But bankers, consultants and regulators tell the
Journal that bank examiners are now pulling out more loans for inspection,
questioning loan officers more thoroughly about credit standards and
studying other underwriting functions more closely than they have in years.
The regulators are worried that some banks are making loans to companies
without proper protections in place. “There’s a consistent theme of ‘do not
lower your underwriting standards in order to attract volume,’ ” said Scott
Polakoff, a former acting director of the Office of Thrift Supervision who
now advises banks on their dealings with regulators at consulting firm
FinPro
Jensen Comment
It's not surprising industry is lobbying against the proposed credit loss and
loan loss (bad debts) accounting model proposed by the FASB that will beef up
bad debt reserves ---
http://www.elfaonline.org/issues/accounting/pdfs/ELFACreditLossesCommentLtr.pdf
From the CFO Journal's Morning Ledger on June 13, 2013
Regulators are raising the alarm about rising risks in
business loans. Lending to companies has been a boon for banks searching for
revenue. But regulators worry that sweetened loan terms could put banks in
jeopardy if corporate borrowers can’t repay,
the WSJ’s Shayndi Raice and Michael R. Crittenden
report.
Looser standards have made it easier for corporate
borrowers to negotiate bargains. Bill Shea, CFO of
1-800-Flowers.com,
arranged a $200 million revolving credit line with six banks, including J.P.
Morgan, which led the deal in April. The banks fought for the leading role,
Mr. Shea tells Raice and Crittenden, giving him power to negotiate rate,
fees, covenants and the structure of the deal. “It put us in a very good
position to negotiate a very attractive deal.” Mr. Shea says the fees his
company paid to J.P. Morgan for leading the deal were the lowest he has seen
since before the crisis.
But bankers, consultants and regulators tell the
Journal that bank examiners are now pulling out more loans for inspection,
questioning loan officers more thoroughly about credit standards and
studying other underwriting functions more closely than they have in years.
The regulators are worried that some banks are making loans to companies
without proper protections in place. “There’s a consistent theme of ‘do not
lower your underwriting standards in order to attract volume,’ ” said Scott
Polakoff, a former acting director of the Office of Thrift Supervision who
now advises banks on their dealings with regulators at consulting firm
FinPro
Jensen Comment
It's not surprising industry is lobbying against the proposed credit loss and
loan loss (bad debts) accounting model proposed by the FASB that will beef up
bad debt reserves ---
http://www.elfaonline.org/issues/accounting/pdfs/ELFACreditLossesCommentLtr.pdf
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?
"U.S. banks push back on change in loan loss accounting," by Dena
Aubin, Fox Business, May 13, 2013 ---
http://www.foxbusiness.com/news/2013/05/13/us-banks-push-back-on-change-in-loan-loss-accounting/
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.
"Rule Split to Put U.S. Banks at a Loss," by Michael Rapoport, The
Wall Street Journal, February 27, 2013 ---
Click Here
http://professional.wsj.com/article/SB10001424127887323293704578330490452665994.html?mod=ITP_moneyandinvesting_0&mg=reno64-wsj
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.
Continued in article
A good example of this dissatisfaction is the May 31, 2013 reaction to the
FASB from ELFA (Equipment Leasing and Finance Association) ---
http://www.elfaonline.org/issues/accounting/pdfs/ELFACreditLossesCommentLtr.pdf
Teaching Case
From The Wall Street Journal Accounting Weekly Review on April 5, 2013
Regulators Let Big Banks Look Safer Than They Are
by:
Sheila Bair
Apr 02, 2013
Click here to view the full article on WSJ.com
TOPICS: Banking, Derivatives, Fair-Value Accounting Rules,
Investments, Regulation
SUMMARY: The point of this opinion page piece by the former
chairman of the FDIC is that "capital-ratio rules...[lead to the view that]
fully collateralized loans are considered riskier than derivatives
positions.... The recent Senate report on the J.P. Morgan Chase 'London
Whale' trading debacle revealed emails, telephone conversations and other
evidence of how Chase managers manipulated their internal risk models to
boost the bank's regulatory capital ratios.... [B]ecause regulators allow
banks to use a process called 'risk weighting,' [banks] raise their capital
ratios by characterizing the assets they hold as 'low risk.'" Ms. Bair goes
on to describe the process of asset measurement by comparing risk-weighted
to "accounting-based" assets.
CLASSROOM APPLICATION: The article may be used in a class when
introducing fair value disclosures, accounting for derivatives, financial
statement analysis for banking, or just the various asset valuation methods
that may be used as identified in the U.S. FASB's or IASB's Conceptual
Framework.
QUESTIONS:
1. (Introductory) Who is Sheila Bair? What is Ms. Bair's concern
with bank regulation and banks' capital ratios? In your answer, define the
latter term.
2. (Advanced) Define the contents of a bank's balance sheet:
identify major assets, major liabilities, and the types of capital, or
shareholders' equity you expect to see on a bank balance sheet.
3. (Advanced) "On average, the three big universal banking
companies (J.P. Morgan Chase, Bank of America and Citigroup) risk-weight
their assets at only 55% of their total assets. For every trillion dollars
in accounting assets, these megabanks calculate their capital ratio as if
the assets represented only $550 billion of risk." How is it possible that
total assets as reported in a bank balance sheet only contain risk
representing a little more than half of their reported amounts?
4. (Advanced) What are the different valuation methods that may be
used for a bank's assets-in fact, for any company's assets? Cite
authoritative literature from a conceptual framework discussing the use of
these valuation methods and the types of assets for which they should be
used.
5. (Advanced) What are the three levels of determining fair values
for which accounting standards require different types of disclosure? For
which of these categories of assets is Ms. Bair concerned about bank's risk
assessment? (Note that the bank regulatory capital requirements are
different from the accounting disclosure requirements for assets reported at
fair values.)
6. (Advanced) Refer to the related article. Who was the London
Whale and how did his and his manager's actions show that valuation models
can be manipulated?
7. (Advanced) Refer again to the London Whale. How do "capital
regulations create incentives for even legitimate models to be manipulated,"
as stated by Ms. Bair?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
JP Morgan 'Whale' Report Signals Deeper Problem
by Dan Fitzpatrick and Gregory Zuckerman
Jul 14, 2012
Online Exclusive
"Regulators Let Big Banks Look Safer Than They Are," by Sheila Bair, The
Wall Street Journal, April 2, 2013 ---
http://online.wsj.com/article/SB10001424127887323415304578370703145206368.html?mod=djem_jiewr_AC_domainid
The recent Senate report on the J.P. Morgan Chase
JPM +0.21% "London Whale" trading debacle revealed emails, telephone
conversations and other evidence of how Chase managers manipulated their
internal risk models to boost the bank's regulatory capital ratios. Risk
models are common and certainly not illegal. Nevertheless, their use in
bolstering a bank's capital ratios can give the public a false sense of
security about the stability of the nation's largest financial institutions.
Capital ratios (also called capital adequacy
ratios) reflect the percentage of a bank's assets that are funded with
equity and are a key barometer of the institution's financial strength—they
measure the bank's ability to absorb losses and still remain solvent. This
should be a simple measure, but it isn't. That's because regulators allow
banks to use a process called "risk weighting," which allows them to raise
their capital ratios by characterizing the assets they hold as "low risk."
For instance, as part of the Federal Reserve's
recent stress test, the Bank of America BAC +0.33% reported to the Federal
Reserve that its capital ratio is 11.4%. But that was a measure of the
bank's common equity as a percentage of the assets it holds as weighted by
their risk—which is much less than the value of these assets according to
accounting rules. Take out the risk-weighting adjustment, and its capital
ratio falls to 7.8%.
On average, the three big universal banking
companies (J.P. Morgan Chase, Bank of America and Citigroup C +0.75% )
risk-weight their assets at only 55% of their total assets. For every
trillion dollars in accounting assets, these megabanks calculate their
capital ratio as if the assets represented only $550 billion of risk.
As we learned during the 2008 financial crisis,
financial models can be unreliable. Their assumptions about the risk of
steep declines in housing prices were fatally flawed, causing catastrophic
drops in the value of mortgage-backed securities. And now the London Whale
episode has shown how capital regulations create incentives for even
legitimate models to be manipulated.
According to the evidence compiled by the Senate
Permanent Subcommittee on Investigations, the Chase staff was able to
magically cut the risks of the Whale's trades in half. Of course, they also
camouflaged the true dangers in those trades.
The ease with which models can be manipulated
results in wildly divergent risk-weightings among banks with similar
portfolios. Ironically, the government permits a bank to use its own
internal models to help determine the riskiness of assets, such as
securities and derivatives, which are held for trading—but not to determine
the riskiness of good old-fashioned loans. The risk weights of loans are
determined by regulation and generally subject to tougher capital treatment.
As a result, financial institutions with large trading books can have less
capital and still report higher capital ratios than traditional banks whose
portfolios consist primarily of loans.
Compare, for instance, the risk-based ratios of
Morgan Stanley, MS 0.00% an investment bank that has struggled since the
crisis, and U.S. Bancorp, USB 0.00% a traditional commercial lender that has
been one of the industry's best performers. According to the Fed's latest
stress test, Morgan Stanley reported a risk-based capital ratio of nearly
14%; take out the risk weighting and its ratio drops to 7%. USB has a
risk-based ratio of about 9%, virtually the same as its ratio on a non-risk
weighted basis.
In the U.S. and most other countries, banks can
also load up on their own country's government-backed debt and treat it as
having zero risk. Many banks in distressed European nations have
aggressively purchased their country's government debt to enhance their
risk-based capital ratios.
In addition, if a bank buys the debt of another
bank, it only needs to include 20% of the accounting value of those holdings
for determining its capital requirements—but it must include 100% of the
value of bonds of a commercial issuer. The rules governing capital ratios
treat Citibank's debt as having one-fifth the risk of IBM IBM -0.05% 's. In
a financial system that is already far too interconnected, it defies reason
that regulators give banks such strong capital incentives to invest in each
other.
Regulators need to use a simple, effective ratio as
the main determinant of a bank's capital strength and go back to the drawing
board on risk-weighting assets. It does make sense to look at the riskiness
of banks' assets in determining the adequacy of its capital. But the current
rules are upside down, providing more generous treatment of derivatives
trading than fully collateralized small-business lending.
The main argument megabanks advance against a tough
capital ratio is that it would force them to raise more capital and hurt the
economic recovery. But the megabanks aren't doing much new lending. Since
the crisis, they have piled up excess reserves and expanded their securities
and derivatives positions—where they get a capital break—while loans, which
are subject to tougher capital rules, have remained nearly flat.
Continued in article
Jensen Comment
I am opposed in large measure to fair value accounting for troubled loans
because in most instances there just is no market for troubled loans.
Tom and I have already gone round and round for the granulation issue where
two identical loans such as hog farming sewage lagoon loans where one bankrupt
borrower (Sven) is a certain to eventually make good on the loan whereas Ole
will take advantage of bankruptcy to never pay back bank losses on his hog
farming corporation. How would Tom value
these otherwise identical troubled loans?
The FDIC position is closer to the new FASB proposed accounting for loan
losses.
He never mentions that the FDIC "stress tests" require granulation of details
about why Ole's loan is more troublesome than Sven's loan. An assumed market for
hog sewage lagoon loans does not drill (granulate) down as to why Ole's loan is
more troublesome than Sven's loan even though both loans are in default. The
FASB approach
allows for recognition of expected payback differences between the two hog
farmers. The FDIC, on the other hand, requires this type of information in
stress tests.
Tom implies that fair values of troubled loans are not disclosed unless they
are booked into the ledgers. He doesn't mention our
AECM debates
where I propose multi-column reporting with hard-to-estimate and volatile fair
values reported in an adjoining column.
He does not mention the volatility in earnings that results from fair value
bookings that are not realized and may never be realized.
Since we've been round and round previously I see no need to debate Tom's
version of "Truth" once again since he insists that fair values be booked rather
than simply reported in an adjoining column.
My answer on fair value accounting is and will remain that the best way to
report fair values and changes in
OCI are in
multiple columns of financial statements.
In this thread Tom Selling wrote:
If bankers had their way, there would be no change
to current standards.
Jensen Comment
That would leave differences between how impairments are calculated between IFRS
and US GAAP. The following is a passage from the 2012 edition of "IFRS and US
GAAP: similarities and differences" by PWC ---
http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2012.pdf
Page 91
For available-for-sale debt instruments, the
impairment models for financial assets may result in different impairment
triggers and different impairment measurement criteria. In considering
whether a decline in fair value is other than temporary, US GAAP looks to
(1) management’s intent and ability to hold the security and (2)
expectations of recovery of the cost basis in the security. The impairment
trigger drives the measurement of the impairment loss. Under IFRS, the
impairment triggers for available-for-sale debt instruments and loans and
receivables are the same; however, the available-for-sale impairment
loss is based on fair value while impairment of loans and
receivables is calculated by discounting estimated cash flows (excluding
credit losses that have not been incurred) by the original effective
interest rate. Additional differences around reversals of impairment losses
and impairment of equities also must be considered.
Jensen Comment
Under both IFRS and US GAAP prior to the proposed 2013 revisions, the financial
instruments are carried at fair value even when fair values decline as long as
the fair value movements are deemed "temporary." This led to an enormous
dispute between the IASB and European banks holding Greek bonds when the banks
deemed that the value decline in those Greek bonds were "temporary."
Thus it's no wonder that the bankers prefer this fair value model to the 2013
proposed changes in loan impairment accounting.
And I'm sorry that you are questioning the "independence" of the FASB from
industry pressure on this issue without considering the track record of the FASB
on resisting industry pressure on other issues. The bottom line is that the USA
bankers do not like the 2013 Exposure Draft revising the above 2012 impairment
models for financial assets.
I hope the FASB does not abandon the ED due to banking industry pressures.
Respectfully,
Bob Jensen
Bob Jensen's threads on fair value accounting and bad debts ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValueFails
Bob Jensen's threads on accounting standard setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Another Socialism Failure
"The Big Money Is Bailing On Argentina, Again, Over Fears Of Fresh Crisis,"
by Brian Winter, Business Insider, June 13, 2013 ---
http://www.businessinsider.com/investors-are-leaving-argentina-2013-6
More than a decade after Argentina's epic financial
collapse of 2001-02, many investors are rushing for the door once again.
From big Chinese and Brazilian companies like miner
Vale do Rio Doce SA, to small-business owners and savers, the fear of a new
crisis has led to canceled investments and suitcases of cash leaving the
country.
The mass exodus, which has been limited only by
leftist President Cristina Fernandez's capital controls, is threatening to
undermine Latin America's No. 3 economy even further by leaving it short of
hard currency and new jobs.
The underlying problems range from Fernandez's
hostile treatment of the private sector, to severe financial distortions
such as a parallel exchange rate, to the general feeling that Argentina is
due for one of the periodic spasms that have racked the country every 10
years or so going back to the 1930s.
Some say such worries are overblown, arguing that
Argentina has defied doomsday predictions for the past decade, which was by
some measures its best economic run since World War Two.
Yet for many, the feeling is of a gathering storm.
"The end of this story has already been written,
and it ends in crisis," said Roberto Lavagna, who as economy minister from
2002 to 2005 helped create Argentina's current export-driven policy
framework, and is still widely respected on Wall Street.
While everyone agrees any crisis won't be as bad as
the 2001-02 meltdown - which saw nationwide riots, two presidents quit, and
the economy shrink by one-fifth - it could still be enough to severely
disrupt lives and business plans.
By relying on short-term fixes such as price
controls and bans on Argentines buying dollars, Fernandez may just be
delaying the inevitable while piling up even more problems.
"The longer they try to delay things, the worse
they will be," said Lavagna, who worked for Fernandez's late husband and
predecessor, Nestor Kirchner, before falling out over what he saw as the
couple's increasingly anti-business agenda.
"You can't have growth without investment."
Continued in article
Another Capitalism Success
Miracle in Chile ---
http://en.wikipedia.org/wiki/Miracle_of_Chile
Note that Chile did not end the wealth gap in Chile nearly as much as it raised
the levels of income and opportunity for the poor higher than the rest of Latin
and South America. The rich got richer and the poor got richer.
Also see where the Chilean state lends a hand ---
http://link.springer.com/article/10.1007/BF02719329
Programs for New Small Businesses in Chile ---
http://startupchile.org/
Control Fraud --- "cases where the officers who control what look like
legitimate entities use them as “weapons” to commit crimes. Each time, Alan
Greenspan, former chairman of the Federal Reserve, played a catastrophic role.
First, his policies created the fraud-friendly (criminogenic) environment that
produces epidemics of control fraud, then he failed to identify those epidemics
and incipient crises, and finally, he failed to counter them."
"The Age of Fraud," by Bill Black, by Barry Ritholtz, June 14, 2013
---
http://www.ritholtz.com/blog/2013/06/the-age-of-fraud/
. . .
At the heart of Greenspan’s failure lies an ethical
void in the brand of economics that has dominated American universities and
policy circles for the last several decades, a brand known as “free market
fundamentalism” or the “neoclassical school.” (I call it “theoclassical
economics” for its quasi-religious belief system.) Mainstream economists who
follow this school assert a deeply flawed and controversial concept known as
the “efficient market hypothesis,” which holds that financial markets
magically regulate themselves (they automatically “self-correct”) and are
thus immune to fraud. When an economist starts believing in that kind of
fallacy, he is bound to become blind to reality. Let’s take a look at what
blinded Greenspan:
- Greenspan knew that markets were “efficient”
because the efficient market hypothesis is the foundational pillar
underlying modern finance theory.
- Markets can’t be efficient if there is control
fraud, so there must not be any.
- Wait, there are control frauds! Tens
of thousands of them.
- Then control fraud must not really be harmful,
or markets would not be efficient.
- Control fraud, therefore, must not be immoral.
As crime boss Emilio Barzini put it in The Godfather, “It’s
just business.”
As delusional and immoral as this “logic” chain is,
many elite economists believe it. This warped perspective has spawned
policies so perverse that they turn the world of finance into the optimal
environment for criminals. The upshot is that most of our elite financial
leaders and professionals have thrown integrity out the window, and we end
up with recurrent, intensifying financial crises, de factoimmunity
for our most elite criminals, and the rise of crony capitalism. Let’s do a
little time travel to see exactly how this plays out.
. . .
How to create a regulatory black hole
Alan Greenspan was Ayn Rand’s protégé, but he moved
radically to the wacky side of Rand on the issue of financial fraud. And
that, friends, is pretty wacky. Greenspan pushed the idea that preventing
fraud was not a legitimate basis for regulation, and said so in a
famous encounter [3] with Commodities Futures
Trading Commission (CFTC) Chair Brooksley Born. “I don’t think there is any
need for a law against fraud,” Born recalls Greenspan telling her. Greenspan
actually believed the market would sort itself out if any fraud occurred.
Born knew she had a powerful foe on any regulation.
She was right. Greenspan, with the rabid support of
the Rubin wing of the Clinton administration, along with Republican Chairman
of the Senate Banking Committee Phil Gramm, crushed Born’s effort to
regulate credit default swaps (CDS). The plutocrats and their political
allies deliberately created what’s known as a regulatory black hole – a
place where elite criminals could commit their crimes under the cover of
perpetual night.
Greenspan chose another Fed economist, Patrick
Parkinson, to testify on behalf of the bill to create the regulatory black
hole for these dangerous financial instruments. Parkinson offered the old
line that efficient markets easily excluded fraud — otherwise, they wouldn’t
be efficient markets! (Parkinson would later tell the Financial Crisis
Inquiry Commission in 2011 that the “whole concept” of a related financial
instrument known as an “ABS CDO” had been an “abomination”). Greenspan’s
successor richly rewarded Parkinson for being stunningly wrong in his
belief: Ben Bernanke appointed Parkinson — who had no experience as a
supervisor or examiner — as the Fed’s head of supervision.
Lynn Turner, former chief accountant of the SEC,
told me of Greenspan’s infamous question to his group of senior officials
who met at the Fed in late 1998 or early 1999 (roughly the same time as
Greenspan’s conversation with Born): “Why does it matter if the banks are
allowed to fudge their numbers a little bit?” What’s wrong with a “little
bit” of fraud?
Conservatives often support the “broken windows”
theory of criminal activity, which asserts that you stop serious blue-collar
crime by cracking down on minor offenses. Yet mysteriously, they never apply
the concept to white-collar financial crimes by elites. The little-bit-of
fraud-is-ok concept got made into law in the Commodities Futures
Modernization Act of 2000, which created the regulatory black hole for
credit default swaps. That black hole was compounded by the Commodity
Futures Trading Commission under the leadership of Wendy Gramm, spouse of
Senator Phil Gramm.
Enron’s fraudulent leaders were delighted to
exploit that black hole, because they were engaged in a massive control
fraud. They appointed Wendy Gramm to their board of directors and proceeded
to use derivatives to manipulate prices and aid their cartel in driving
electricity prices far higher on the Pacific Coast. In a bizarre irony, the
massive increase in prices led to the defeat of California Governor Gray
Davis (the leading opponent of the cartel) and his replacement by Governor
Schwarzenegger – a man who was part of the group that met secretly with
Enron’s leadership to try to defeat Davis’s efforts to get the federal
regulators to kill the cartel.
How damaging was Greenspan’s dogmatic and
delusional defense of elite financial frauds in the case of Enron? If you
look closely, you can see that Enron brought together all the critical
elements of a financial crisis: big-time accounting control fraud,
derivatives, cartels, and the use of off-balance sheet scams to inflate
income and hide real losses and leverage. On top of all that, many of the
world’s largest banks aided Enron and its extremely creative CFO Andrew
Fastow to create frauds. The Fed could have responded by adopting and
enforcing mandates to end the criminal practices that were driving the
epidemic, but it didn’t. Instead, Greenspan and other Fed economists
championed Enron’s leadership and cited the company as proof that regulation
was unnecessary to prevent control fraud. They were so extreme that they
attacked their own senior supervisors for daring to criticize the banks’
role in aiding and abetting Enron’s activities.
Later, when risky derivatives activities and
control frauds at large financial institutions were pushing us toward the
catastrophic crash of 2007-2008, the Fed took no meaningful action based on
the lessons learned from Enron. Greenspan and the senior leadership of the
Fed had learned absolutely nothing, which shows how disabling economic dogma
is to regulators – making them worse than simply useless. They become
harmful, again attacking their supervisors for criticizing the banks’
fraudulent “liar’s” loans. When Bernanke placed Patrick Parkinson (an
economist blind to fraud by elite banksters) in a supervisory role at the
Fed, he sealed the fate of millions of Americans whose financial well-being
would be sucked right into that regulatory black hole – and removed the
ability of the accursed supervisors to criticize the largest banks.
How to protect predatory lenders
Finally, we come to the mortgage meltdown of 2008,
when the entire housing industry went into freefall. Central to this crisis
is the story of the liar’s loan — mortgage-industry slang for a mortgage
that a lender gives without checking tax returns, employment history, or
anything else that might reliably indicate that the borrower can make the
payments.
The Fed, and only the Fed, had authority under the
Home Ownership and Equity Protection Act (HOEPA) to ban liar’s loans by all
lenders. At a series of hearings mandated by Congress, dozens of witnesses
representing home mortgage borrowers and state and local criminal
investigators urged the Fed to do this. The testimony included a study that
found a 90 percent incidence of fraud in liar’s loans.
What did Greenspan and Bernanke do? Exactly
nothing. They consistently refused to act.
Greenspan went so far as to refuse pleas to send
Fed examiners into bank holding company affiliates to find the facts and
collect data on liar’s loans. Simultaneously, the Fed’s economists dismissed
the warnings from progressives about fraudulent liar’s loans as “merely
anecdotal.” In 2005, the desperate Fed regulators, blocked by Greenspan from
sending in the examiners to get data from the banks, resorted to simply
sending a letter to the largest banks requesting information. The Fed
supervisor who received the banks’ response to that letter termed the data
“very alarming.”
If you suspect that the banks would typically
respond to such requests by understating their problem assets significantly,
then you have the right instincts to be a financial regulator.
. . .
We did not have to suffer this crisis. Economists
who were not blinded by neoclassical theory, like George Akerlof (who won
the Nobel Prize in 2001) and Christina Romer (adviser to President Obama
from 2008-2010), had warned their colleagues about accounting control fraud
and liar’s loans, as did criminologists and regulators like me. But
Greenspan (and Timothy Geithner) refused to see the obvious truth.
Alan Greenspan had no excuse for assuming fraud out
of existence, and his exceptionally immoral position on fraud and regulation
proved catastrophic to America and much of the world. We cannot afford the
price, measured in many trillions of dollars, over 10 million jobs, and
endless suffering, of unethical economists.
Bob Jensen's threads on the Efficient Market Hypothesis ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH
From the CFO Journal's Morning Ledger on June 5, 2013
KPMG: Safeguards ‘sound and effective’
KPMG is completing an internal review that’s likely to result in
only minor changes to the accounting firm’s controls,
the WSJ’s
Michael Rapoport reports.
The insider-trading scandal involving Scott London, a
former KPMG senior partner, prompted the firm to review its internal
safeguards, which the firm has said already were “world-class.” The review
is almost done, and the KPMG “will be considering possible enhancements to
our training and monitoring,” a spokesman said. But the review “supports the
conclusion that the fundamental architecture of our insider-trading policies
is sound and effective.” The firm’s code of conduct states that employees
“should not disclose any confidential or private information to third
parties.”
Jensen Comment
This is on the heels of KPMG having to pay out $153 million in a negotiated
settlement on its botched Fannie Mae audit (from which it was fired).
KMPG was fired
from what was arguably its largest client in history. Fannie Mae under a
bonus-seeking CEO perpetrated one of the largest earnings management frauds in
history ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
"Fannie, KPMG
Settle Class-Action Suit," by Michael Rapoport and Nick Timiraos, The
Wall Street Journal, May 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324326504578469591902348434.html?mod=WSJ_Markets_LEFTTopStories
This is on the heels of one of the felonious partner insider trading scandal:
"Another 'Rogue' Audit Partner; Another 'Duped' Audit Firm," by Francine
McKenna, Forbes, April 10, 2013 ---
http://www.forbes.com/sites/francinemckenna/2013/04/10/another-rogue-audit-partner-another-duped-audit-firm/
KPMG is at it again. In the most
recent allegation of violating independence standards of the accounting
profession
"Threats to Independence Raise Ethical Questions for the
Big-Four CPA Firms," by Steven Mintz, Ethics Sage, May 7, 2013 ---
http://www.ethicssage.com/2013/05/threats-to-independence-raise-ethical-questions-for-the-big-four-cpa-firms.html
"Someone Convinced KPMG and GE to
End Their Little Loan Staff Arrangement," by Caleb Newquist, Going
Concern, January 24, 2012 ---
http://goingconcern.com/post/someone-convinced-kpmg-and-ge-end-their-little-loan-staff-arrangement
And the list of the happy face and sad face incidents involving KPMG go on
and on and on at
http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
Teaching Case from The Wall Street Journal Accounting Weekly Review on
June 6, 2013 ---
KPMG Finds Its Safeguards 'Sound and Effective'
by:
Michael Rapoport
Jun 04, 2013
Click here to view the full article on WSJ.com
TOPICS: Internal Controls
SUMMARY: Following the admission by Scott London--former KPMG
senior partner responsible for the Herbalife Ltd., Skechers USA Inc. , and
other audit engagements-that he disclosed inside information to a friend,
KPMG reviewed its internal control systems. System controls in place are
described by the firm as 'world-class' and "...the review 'supports the
conclusion that the fundamental architecture of our insider trading policies
is sound and effective,'...." The article then describes the actions taken
by the firm to inform its clients before they might learn on the news of
accusations about Mr. London's actions.
CLASSROOM APPLICATION: The article may be used in an auditing class
or in another class covering internal control systems.
QUESTIONS:
1. (Introductory) Who is Scott London? To what wrongdoing has he
admitted?
2. (Advanced) What is the objective of internal controls at public
accounting firms?
3. (Introductory) According to the article, what are some of the
internal control procedures in place at KPMG?
4. (Advanced) Given the actions to which Mr. London has confessed,
how can KPMG conclude that its own internal control systems are "sound and
effective" as stated in the title?
5. (Introductory) At how many of the large public accounting firms
have there been cases of insider trading?
6. (Introductory) According to the article, what factors have led
to KPMG not having lost significant numbers of clients due to this debacle?
In your answer, comment on who selects a company's auditor.
7. (Advanced) Access the related graphic "Keeping Clients", also
available by direct link on the WSJ web site at
http://online.wsj.com/article/SB10001424127887323469804578525603736288878.html
How was this list of KPMG southwestern office compiled? How were the data
points determined?
8. (Advanced) What is the importance of "tone at the top" in
maintaining an effective system of internal control?
Reviewed By: Judy Beckman, University of Rhode Island
"KPMG Finds Its Safeguards 'Sound and Effective'," by Michael Rapoport, The
Wall Street Journal, June 4, 2013 ---
http://online.wsj.com/article/SB10001424127887324423904578523570186372226.html?mod=djem_jiewr_AC_domainid
KPMG LLP is completing an internal review that is
likely to result in only minor changes to the accounting firm's controls in
the wake of an insider-trading scandal.
Scott London, a former KPMG senior partner, last
week agreed to plead guilty to securities fraud after admitting in April
that he had passed confidential information on Herbalife Ltd., HLF +1.66%
Skechers USA Inc. SKX +0.36% and other KPMG auditing clients to a friend,
who made profits by illegally trading on the tips.
Mr. London is expected to enter his plea in court
in the next few weeks.
The case prompted KPMG to review its internal
safeguards, which the firm has said already were "world-class." They include
training for employees, a whistleblower system and monitoring of the
personal investments of partners and managers. All KPMG employees must agree
annually to comply with the firm's code of conduct, which prohibits insider
trading and warns against practices that could lead to the release of
confidential client information.
The review is nearing completion, and the firm
"will be considering possible enhancements to our training and monitoring,"
a KPMG spokesman said. But the review "supports the conclusion that the
fundamental architecture of our insider trading policies is sound and
effective," he said.
The firm's code of conduct states that employees
"should not disclose any confidential or private information to third
parties." Even with other KPMG partners and employees, such information
should be shared only on "a need-to-know basis." Documents with confidential
information are supposed to be placed in secure bins for shredding when they
are disposed of.
Mr. London has said KPMG had no involvement in the
scheme. Nevertheless, the firm acted quickly to protect its reputation and
prevent any loss of clients when it learned of Mr. London's conduct.
In a matter of hours, KPMG moved to tell clients
the news, before they could find it out elsewhere. The firm even tracked
down a client in Tokyo, and issued a news release to inform the public after
9 p.m. on a Monday night. KPMG's message: Mr. London was a rogue partner who
flouted its rules, an isolated case that wasn't reflective of the firm.
Clients said the quick response was critical.
"There would have been nothing worse than reading it in the paper before I
got a call," said Lester Aaron, chief financial officer of Unico American
Corp., UNAM +0.85% a Woodland Hills, Calif., insurance company that uses
KPMG as its auditor.
The outreach is one major reason KPMG has been able
to avoid serious damage to its reputation, attorneys and accounting experts
said. KPMG hasn't lost any audit clients in the Pacific Southwest region,
where Mr. London headed the firm's audit practice and where a tally by The
Wall Street Journal suggests KPMG has about 40 clients. Many of them have
publicly reiterated their support for KPMG since the London incident by
issuing proxy statements recommending that shareholders ratify the company's
continuing use of the firm.
Another reason KPMG has emerged relatively
unscathed: Clients and investors recognize how hard it is for even the
most-stringent safeguards to prevent all misconduct, and realize that such
cases could happen at their own companies, some say.
"As long as it appears to be a one-off, a rogue
employee, they're not going to take a hit," said Charles Elson, a
corporate-governance expert at the University of Delaware. "Only if you can
demonstrate the issue is systemic should it have any impact on them."
There was "disappointment and a sense of betrayal"
in KPMG's Los Angeles practice after Mr. London's conduct was disclosed,
said a person familiar with the situation, but the practice has since
"gotten back to business."
Harland Braun, Mr. London's lawyer, doesn't dispute
KPMG's characterization of his client as a lone wolf, but he noted Mr.
London came clean quickly once he was exposed. Mr. Braun said the confession
freed up KPMG to move to prevent any damage.
If Mr. London had contested the case against him,
"the thing could have dragged on for months," Mr. Braun said, hurting the
firm and causing uncertainty for its clients. "There would have been no way
for KPMG to protect itself if Scott kept his mouth shut."
Companies' reluctance to bolt also might reflect
the sometimes entrenched, long-term relationships between companies and
audit firms, some auditing experts said. Many companies have used the same
auditor for decades or even a century or more. Critics have said that leads
to coziness that can threaten the independence of an audit. Some favor "term
limits" for audit firms, which the accounting industry opposes.
Continued in article
Bob Jensen's threads on KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm
"Former PWC consultant Nicholas Glynatsis jailed for insider trading," by
Andrew Main, The Australian June 07, 2013 ---
Click Here
http://www.theaustralian.com.au/business/former-pwc-consultant-nicholas-glynatsis-jailed-for-insider-trading/story-e6frg8zx-1226659294782
From the CFO Journal's Morning Ledger on June 5, 2013
The long-awaited money-market-fund overhaul appears to
be moving forward. The SEC is scheduled to vote this morning on a proposal
that could eventually do away with the dollar-a-share value that has defined
money-market funds,
DealBook’s Nathaniel Popper reports.
The proposal, which aims to fix structural problems
that make the funds susceptible to investor runs, would require “prime”
funds whose shares are held by corporations and other institutional
investors to allow their values to float like those of other mutual funds,
the
WSJ’s Andrew Ackerman and Jessica Holzer note.
If it passes, the proposal will still face months of
public comment before a final vote.
Today’s vote is the culmination of efforts to
resurrect reform, which appeared to be on life support late last year. The
SEC had been facing pressure from Fed Chairman Ben Bernanke and
then-Treasury Secretary Timothy Geithner, who threatened to override the
commission if it failed to act. In November, the Financial Stability
Oversight Council issued its own recommendations to overhaul money funds
after the SEC failed to agree on a plan.
Industry executives have warned that big institutions
would stop using money funds if they had a floating share value, Popper
notes, though some have struck a more conciliatory note recently.
As CFOJ reported back in April,
some corporate treasurers have been looking for
alternative investments because they think the looming changes could
complicate accounting and leave companies facing potential tax liabilities.
From the CFO Journal on June 6, 2013
IFRS makes progress around the world
Over 100 countries use International Financial Reporting Standards,
but as more consider adopting those accounting rules, the foundation that
oversees them is taking stock for the first time of how they are being
applied and enforced,
Emily Chasan writes.
In a new report, the IFRS Foundation, which oversees the IASB, studied 66
jurisdictions for information about how IFRS is being used. The group found
that 55 of those jurisdictions require the use of IFRS for all, or almost
all, public companies. Even a handful of countries that have not formally
required the rules are using them. While the U.S. has yet to make a decision
on whether to incorporate IFRS, more than 450 foreign companies are filing
their reports in IFRS.
Bob Jensen's threads on the controversies of accounting standard setting
---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
From the CFO Journal on June 6, 2013
FASB’s Seidman: Americans prefer rules to principles
Outgoing FASB Chairman Leslie Seidman has had plenty of time to
tackle long-standing questions about whether accounting principles are more
desirable than specific accounting rules,
writes Emily Chasan.
The debate over whether detailed rules and bright-line exceptions are more
or less useful than broad principles that require management judgment has
dominated her past 1o years on the board. “I think it’s undeniable that we
Americans like our rules,” Ms. Seidman said at a Financial Executives
International conference in New York
on Tuesday, where she was discussing the accounting rulemakers’
soon-to-be-completed joint project on revenue-recognition accounting. She
made the comments in her final public speech as chairman of the U.S.
accounting rulemaker.
"Study: Rules-based Accounting Shields Firms From Lawsuits," by Jr.
Deputy Accountant Adrienne Gonzalez, Going Concern, January 15, 2013 ---
http://goingconcern.com/post/study-rules-based-accounting-shields-firms-lawsuits
According to groundbreaking research by Richard
Mergenthaler, assistant professor of accounting at the University of Iowa
Tippie College of Business, shareholders are more likely to sue firms that
use principles-based accounting standards over rules-based standards.
Continued in article
Jensen Comment
I would have hypothesized that it would be the other way around on the basis
that it's really hard to nail Jello to a wall.
Principles-Based standards also complicate enforcement of regulations
There are some hurdles that have to be passed before
we’re going to be comfortable making the ultimate decision about whether to
incorporate IFRS into the U.S. reporting regime. Sticking points include the
independence of the International Accounting Standards Board and “the quality
and enforceability of standards.
Mary Shapiro, U.S. Securities and
Exchange Commission Chairman, January 5, 2012 ---
http://www.businessweek.com/news/2012-01-06/sec-s-schapiro-says-she-regrets-loss-in-investor-access-battle.html
Jensen Comment
I interpret
"enforceability of standards"
to
center around the increased difficulty of issuing citations for rule breaking
under IFRS principles-based standards. The IFRS-like principle may be to "drive
safely in a school zone"
whereas the FASB bright line might be to drive under 20 mph. It is much easier
to issue citations for rule breakers who drive over the posted speed limit.
Pat
Walters and I have a friendly debate running over bright lines (FASBs) versus
principles-based rules (IFRS) in accountancy. I'm a bright lines guy who favors
20 mph signs in front of the schools and the historic 3% SPE outside equity
bright line that was the smoking gun that brought down Andersen and Enron. I
don't know how Pat feels about speed limit signs, but I suspect she worries that
these bright lines might encourage us old folks to press the pedal to 20 mph
when we can only safely drive in a school zone at 5 mph.
Be that as
it may, Daniel Henninger has a WSJ article that seems to take my side in
this debate. What's interesting is that new technology sometimes favors rules.
Serena Williams will pass on knowing that she indeed had a foot fault in the
2009 U.S. Open women's semifinal, because new technology records bright line
violations that are virtually impossible to dispute. The feuding Jimmy Connors
and John McEnroe will pass on never knowing for certain who was right and who
was wrong in most of their disputed calls.
If there
was no bright line for a foot fault, then Serena Williams would not have to
concede that she was wrong. In principle she may have been totally fair in her
serve. And Enron and Andersen might still be thriving. And Franklin Raines might
still be managing the earnings levels and his bonus amounts at Fannie Mae ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
Bob Jensen's threads on Bright Lines Versus Principles-Based Rules ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines
From the CFO Journal's Morning Ledger on June 14, 2013
SEC says Revlon misled
investors, directors
Revlon agreed to pay $850,000 to settle SEC charges that it misled
shareholders during a “going-private transaction,” and kept critical
information from independent board members,
the
WSJ’s Serena Ng and Saabira Chaudhuri report.
The company didn’t admit or deny the findings. The SEC
complaint stemmed from Revlon’s attempt four years ago to go private. The
move was part of a complicated plan by the heavily indebted company to pay
down a loan from MacAndrews & Forbes, the holding company of Ronald
Perelman, the billionaire who controls Revlon.
Bob Jensen's Fraud Updates
http://www.trinity.edu/rjensen/FraudUpdates.htm
From the CFO Journal's Morning Ledger on June 6, 2013
Companies turn to 3-D printing to cut costs
Thanks to cheaper equipment and better technology, 3-D printing is
moving into the mainstream of business faster than many people realize,
CIO Journal’s Clint Boulton reports.
GE‘s
Aviation unit prints fuel injectors and other components within the
combustion system of a jet engine. GE is also experimenting with 3-D
printing to produce a medical device, the ultrasound probe. Researchers at
GE say that 3-D printing could help cut the costs of manufacturing certain
parts of the probe by 30%.
Jensen Comment
This technology seems to be betting for an accounting research case study
in cost accounting.
Bob Jensen's Helpers for Case Writers ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
I had a genuinely wonderful teaching experience this
past semester. As I discussed in a blog posting on January 1, 2013, I helped set
up a class in Victorian Literature for 10 second semester senior accounting
majors. We read and discussed Great Expectations, North & South, and The Mill on
the Floss.
"A Good Suggestion," by Joe Hoyle, Teaching Blog, June 1, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/06/a-good-suggestion.html
Jensen Comment
This makes me wonder what role a Victorian Literature professor might play in
setting up an accounting course for 10 second semester senior English majors. If
she listened to what her students want most it might be more of a skills course
in financial literacy, personal finance, and business law and ethics pertaining
to accounting.
What do you think it should contain for graduating English majors?
It would be a lot of work, but it might be interesting to have students do a
project on detecting accountants in literature or accounting frauds in
literature.
"Advice to practicing accountants who might want to teach," by Jim
Martin, MAAW's Blog, June 8, 2013 ---
http://maaw.blogspot.com/2013/06/7-advice-to-practicing-accountants-who.html
Collateralized Debt Obligation (CDO) ---
http://en.wikipedia.org/wiki/Collateralized_debt_obligation
"One of Wall Street's Riskiest Bets Returns," by Katy Burne, The
Wall Street Journal, June 4, 2013 ---
http://online.wsj.com/article/SB10001424127887324423904578525701936124838.html?mod=djemCFO_h
Investors are once again clamoring for a risky
investment blamed for helping unleash the financial crisis: the synthetic
CDO.
In a sign of how hard Wall Street is trying to
satisfy voracious demand for higher returns amid rock-bottom interest rates,
J.P. Morgan Chase JPM -0.83% & Co. and Morgan Stanley MS -0.71% bankers in
London are moving to assemble so-called synthetic collateralized debt
obligations.
CDOs give investors a chance to bet on the
creditworthiness of a basket of companies. Basic CDOs pool bonds and offer
investors a slice of the pool. Synthetic CDOs pool, instead of the bonds
themselves, insurance-like derivative contracts on the bonds.
Like their crisis-era predecessors, the new CDOs
would be sliced up into different levels of risk and returns. Investors who
want a chance at the highest returns would have to buy the riskiest slice.
While spreading risk in some ways, synthetic CDOs
also can multiply the financial damage if companies fall behind on their
debt payments.
During the financial crisis, CDOs pegged to soured
mortgage loans caused losses to careen around the world.
Their catastrophic impact was denounced by many
lawmakers and investors, and the market for all kinds of highly engineered
financial instruments evaporated.
Some details of the deals being worked on at J.P.
Morgan and Morgan Stanley aren't clear, including the size of the CDOs and
which investment firms have expressed an interest in buying slices of them.
The banks declined to comment.
A small number of institutional investors recently
approached the two banks and asked them if they would put together the
synthetic CDOs, according to people familiar with the discussions.
The requests were made in London, a global center
of derivatives trading.
J.P. Morgan and Morgan Stanley now are trying to
line up more investors as buyers for the instruments, said a person familiar
with the talks. An investor usually buys just one slice of a CDO, which
usually is chopped into about six pieces.
The banks likely won't proceed with the CDOs unless
they can sign up enough investors.
J.P. Morgan and Morgan Stanley aren't expected to
invest in their own deals because of postcrisis rules that require banks to
set aside large amounts of capital against possible losses on these types of
investments.
The interest by potential investors in new
synthetic CDOs shows that demand for higher returns is intense, said Brian
Reynolds, chief market strategist at brokerage firm Rosenblatt Securities
Inc. "Wall Street will create new, more complex, more risky structures to
satisfy that demand," he said.
In the peak year of 2007, financial firms issued
$634 billion of synthetic CDOs, according to data provider Creditflux. Sales
fell to $98 billion in 2009. Since then, some hedge funds and banks have
worked together to bundle derivatives into custom-made trades, but those
private deals were often small and weren't evaluated by credit-rating firms.
A CDO driven by a different aim is also in the
works. Citigroup Inc. C -1.42% now is selling a CDO using derivatives tied
to the bank's portfolio of loans to shipping companies, but this deal isn't
motivated by investor demand for higher returns.
Instead, the impetus for the roughly $500 million
deal, being pitched only outside the U.S., is Citigroup's desire to make
room on its balance sheet for new loans and hold less capital as a cushion
against potential losses on the shipping loans, said a person familiar with
the transaction.
Investors in the deal will be on the hook for some
losses. In return, the deal is expected to pay an annual yield of 13% to
15%, according to the person familiar with the offering. Citigroup declined
to comment.
It isn't clear how much investors would stand to
earn on the synthetic CDOs being assembled by J.P. Morgan and Morgan
Stanley. Investment-grade corporate bonds now yield less than 5%.
Efforts to pull off the deals show that banks and
investors battered by CDOs during the financial crisis are increasingly
willing to ignore bad memories in order to reach for higher returns. In
markets ranging from commercial mortgage-backed securities to junk bonds,
investors are eager to buy even the very riskiest investments, some of which
now deliver yields of more 20% per year.
Before the crisis, CDOs and synthetic CDOs were a
big cog in Wall Street's so-called structured-finance machine, bringing in
substantial fees for securities firms that put together the deals.
In 2007, Goldman Sachs Group Inc. GS -1.15% created
a CDO called Abacus 2007-AC1 for hedge-fund firm Paulson & Co., which wanted
to magnify a bet against the U.S. housing market.
Continued in article
Jensen Comment
If the CDO market is not manipulated by Wall Street brokers, I see nothing wrong
with the return of the CDO markets. CDOs allow diversification of mortgage
investment risk. The huge financial scandal was caused not so much by the CDOs
themselves as by the poisoned mortgages bundled in the CDOs, mortgages that had
100% probability of default. If the mortgages bundled in CDOs have much lower
probability of default then the CDO market is a good idea.
Safeguards must always be put in place with respect to how any products on
Wall Street are marketed and the fairness and efficiency of those markets.
Bob Jensen's threads of frauds in Wall Street marketing and market
manipulation are summarized in a timeline at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
I wrote the following at
http://www.trinity.edu/rjensen/TheoryTAR.htm#Replication
Introduction to Replication Commentaries
In this message I will define a research "replication" as an
experiment that exactly and independently reproduces hypothesis testing of
an original scientific experiment. The replication must be done by
"independent" researchers using the same hypotheses and models that test
those hypotheses such as multivariate statistical models. Researchers must
be sufficiently independent such that the replication is not performed by
the same scientists or students/colleagues of those scientists. Experimental
data sets may be identical in original studies and replications, although if
replications generate different data sets the replications also test for
errors in data collection and recording. When identical data sets are used,
replicators are mainly checking analysis errors apart from data errors.
Presumably a successful replication "reproduces" exactly the same
outcomes and authenticates/verifies the original research. In scientific
research, such authentication is considered extremely important. The
IAPUC Gold Book makes a distinction between reproducibility and
repeatability at
http://goldbook.iupac.org/
For purposes of this message, replication, reproducibility, and
repeatability will be viewed as synonyms.
This message does not make an allowance for "conceptual replications"
apart from "exact replications," although such refinements should be duly
noted ---
http://www.jasnh.com/pdf/Vol6-No2.pdf
This message does have a very long quotation from a study by Watson et
al. (2008) that does elaborate on quasi-replication and partial-replication.
That quotation also elaborates on concepts of
external versus
internal validity grounded in the book:
Cook, T. D., & Campbell, D. T. (1979).
Quasi-experimentation: Design &
analysis issues for field settings.
Boston: Houghton Mifflin Company.
I define an "extended study" as one which may have similar hypotheses but
uses non-similar data sets and/or non-similar models. For example, study of
female in place of male test subjects is an extended study with different
data sets. An extended study may vary the variables under investigation or
change the testing model structure such as changing to a logit model as an
extension of a more traditional regression model.
Extended studies that create knew knowledge are not replications in terms
of the above definitions, although an extended study my start with an exact
replication.
Replication Research May Take Years to Resolve
Purdue University is investigating “extremely serious” concerns about the
research of Rusi Taleyarkhan, a professor of nuclear engineering who has
published articles saying that he had produced nuclear fusion in a tabletop
experiment,
The New York Times
reported. While the research was published in Science in 2002, the findings
have faced increasing skepticism because other scientists have been
unable to replicate them. Taleyarkhan did not respond to inquiries from
The Times about the investigation.
Inside Higher Ed, March 08, 2006 ---
http://www.insidehighered.com/index.php/news/2006/03/08/qt
The New York Times March 9 report is at
http://www.nytimes.com/2006/03/08/science/08fusion.html?_r=1&oref=slogin
"Climategate's Phil Jones Confesses to Climate Fraud," by Marc
Sheppard, American Thinker, February 14, 2010 ---
http://www.americanthinker.com/2010/02/climategates_phil_jones_confes.html
Interesting Video
"The Placebo Effect," by Gwen Sharp, Sociological Images,
March 10, 2011 ---
Click Here
http://thesocietypages.org/socimages/2011/03/10/the-placebo-effect/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+SociologicalImagesSeeingIsBelieving+%28Sociological+Images%3A+Seeing+Is+Believing%29
A good example of replication in econometrics is illustrated by the
inability of obscure graduate students and an economics professor at
the University of Massachusetts to to replicate the important findings of
two famous Harvard monetary economics scientists named Carmen Reinhart and
Kenneth Roghoff ---
http://en.wikipedia.org/wiki/Carmen_Reinhart#Research_and_publication
In 2013, Reinhart and Rogoff were in the
spotlight after researchers discovered that their 2010 paper "Growth in
a Time of Debt" in the American Economic Review Papers and Proceedings
had a computational error. The work argued that debt above 90% of
GDP was particularly harmful to economic growth, while corrections have
shown that the negative correlation between debt and growth does not
increase above 90%. A separate and previous criticism is that the
negative correlation between debt and growth need not be causal.
Rogoff and Reinhardt claimed that their fundamental conclusions were
accurate, despite the errors.
A review by
Herndon, Ash and
Pollin of [Reinhart's] widely cited paper with
Rogoff, "Growth
in a time of debt", argued that "coding
errors, selective exclusion of available data, and unconventional
weighting of summary statistics lead to serious errors that inaccurately
represent the relationship between public debt and GDP growth among 20
advanced economies in the post-war period."
Their error detections that received worldwide attention demonstrates
that high debt countries grew at 2.2 percent, rather than the −0.1 percent
figure claimed by Reinhart and Rogoff.
I'm critical of this replication example in one respect. Why did it take
over two years. In chemistry such an important finding would've most likely
been replicated in weeks or months rather than years.
Thus we do often have a difference between the natural sciences and
the social sciences with respect to how immediate replications transpire.
In the natural sciences it is common for journals to not even publish
findings before they've been replicated. The social sciences, also known as
the softer sciences, are frequently softer with respect to timings of
replications.
How Accountics Scientists Should Change:
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review
I just don't give a damn" ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
Sudipta Basu has posted a new comment in Research
Tools, on the post titled "Gaming Publications and Presentations at
Academic...".
To view the comment (and 3 other comment(s) in the
thread), or to post your own, visit:
http://commons.aaahq.org/comment/19181
posted 05:13 PM EST by
Sudipta Basu
| Comment: |
You (Bob
Jensen) will
probably love the new issue of Perspectives on Psychological
Science (November 2012) which is entirely devoted to (lack of)
Replication and other Research (mal)Practice issues in
psychology (behavioral research). I think there is lots of
thought-provoking material with implications for accounting
research (not only of the accountics variety). The link for the
current issue is (will change once the next issue is uploaded):
http://pps.sagepub.com/content/current
One website that provides useful
documentation on errors in standard accountics databases,
differences between databases, and their implications for
previously published research is (even as I agree that many
researchers pay little attention to these documented problems):
http://www.kellogg.northwestern.edu/rc/crsp-cstat-references.htm
I note
that several accounting researchers appear as authors in the
website above, although likely fewer than desired (possible
biases in database coverage...) |
Humor for June 1-30, 2013
Explanations To 15 Jokes Only Smart People Can Understand ---
http://www.businessinsider.com/smart-joke-explanations-2013-6
Buzz Aldrin and Thomas Dolby Geek Out and Sing “She Blinded Me With Science”
---
Click Here
http://www.openculture.com/2013/06/buzz_aldrin_and_thomas_dolby_geek_out_and_sing_she_blinded_me_with_science.html
The (Humor) Challenge: Zachary Quinto vs. Leonard Nimoy ---
http://www.ritholtz.com/blog/2013/06/the-challenge-zachary-quinto-vs-leonard-nimoy/
Want to Know What Makes the Troops Laugh? Comedian Louis CK in Afghanistan
(Quite NSFW) ---
Click Here
http://www.openculture.com/2013/06/want_to_know_what_makes_the_troops_laugh_comedian_louis_ck_in_afghanistan_quite_nsfw.html
Throw Mamma from the train
"Mich. man recognizes mom as bank robbery suspect," Yahoo News,
June 26, 2013 ---
Click Here
Very Old Accountant Jokes (and a few like the constipated
accountant's budge it remedy) that I'd not heard before
Ever wonder why they call it a Form 1040?
For every $50 you earn, you get $10, they get $40.
What is the definition of an accountant?
Someone who solves a problem you did not know you had in a way you don't
understand.
How many accountants does it take to change a light bulb?
How much money do you have?
What is the definition of a good tax accountant?
Someone who has a loophole named after him.
When does a person decide to become an accountant?
When he realizes he doesn't have the charisma to succeed as an
undertaker.
What does an accountant use for birth control?
His personality.
What's an extroverted accountant?
One who looks at your shoes while he is talking to you instead of his
own.
What is an auditor?
Someone who arrives after the battle and bayonets the wounded.
Why did the auditor cross the road?
Because he looked in the file and that's what they did last year.
Why did the auditor get run over crossing the road?
Auditors never actually do the risk assessment well until after the accident
happens.
How do you drive an accountant completely insane?
Tie him to a chair, stand in front of him and fold a road map the wrong way.
What do accountants suffer from that ordinary people don't?
Depreciation.
If an accountant's wife cannot sleep what does she say?
"Darling, tell me about your work."
What did the accountant say when he got a blank check?
My deductions have at last caught up with the salary.
What did the accountant say when he looked at the tax form?
The man who set the standard deduction must have been a bachelor. I am lying
when I am listing myself as a head of household.
Why the accountant started smoking?
So he can deduct cigarettes from his income tax. Called it loss by
fire. So his medical expenses went above the 71/2% threshold.
How does an accountant stay out of debt?
He learns to act his wage.
Where do homeless accountants live?
In a tax shelter.
Did you hear about the constipated accountant?
He couldn't budget so he had to work it out with paper and pencil.
Did you hear about the shy and retiring accountant?
The accountant is $1 million shy and hence is retiring.
God Made a Dog ---
http://www.youtube.com/watch_popup?feature=player_embedded&v=lJ7AfSO2fKs
The Problem of George's Socks by Barbara Bush ---
https://www.youtube.com/watch?v=dx5ZE5nE9X8
The Johnny Carson Story ---
http://offtheedgehumorpics.blogspot.com/2013/03/the-johnny-carson-story-in-5-minutes.html
Things we don't do in the latter seasons of life ---
https://www.youtube.com/watch_popup?v=A6XUVjK9W4o
Italian Spelling Bee ---
http://www.jest.com/e/153248
June 26, 2013
Anthony Weiner Surges to Lead in Democratic Mayoral Race: NBC NY/WSJ/Marist Poll
He stood erect for the media upon hearing the good news.
50 Common Misquotations ---
http://www.ritholtz.com/blog/2013/05/50-common-misquotations/
Unconfirmed Facts forwarded by Auntie Bev
It takes glass one million years to decompose, which means it never wears out
and can be recycled an infinite amount of times!
Gold is the only metal that doesn't rust, even if it's buried in the ground
for thousands of years.
Your tongue is the only muscle in your body that is attached at only one end.
If you stop getting thirsty, you need to drink more water. When a human body
is dehydrated, its thirst mechanism shuts off.
Each year 2,000,000 smokers either quit smoking or die of tobacco-related
diseases.
Zero is the only number that cannot be represented by Roman numerals.
Kites were used in the American Civil War to deliver letters and newspapers.
The song, Auld Lang Syne, is sung at the stroke of midnight in almost every
English-speaking country in the world to bring in the new year.
Drinking water after eating reduces the acid in your mouth by 61 percent.
Peanut oil is used for cooking in submarines because it doesn't smoke unless
it's heated above 450F.
The roar that we hear when we place a seashell next to our ear is not the
ocean, but rather the sound of blood surging through the veins in the ear.
Nine out of every 10 living things live in the ocean.
The banana cannot reproduce itself. It can be propagated only by the hand of
man.
Airports at higher altitudes require a longer airstrip due to lower air
density.
The University of Alaska spans four time zones.
The tooth is the only part of the human body that cannot heal itself.
In ancient Greece , tossing an apple to a girl was a traditional proposal of
marriage. Catching it meant she accepted.
Warner Communications paid $28 million for the copyright to the song Happy
Birthday.
Intelligent people have more zinc and copper in their hair.
A comet's tail always points away from the sun.
The Swine Flu vaccine in 1976 caused more death and illness than the disease
it was intended to prevent.
Caffeine increases the power of aspirin and other painkillers, that is why it
is found in some medicines.
The military salute is a motion that evolved from medieval times, when
knights in armor raised their visors to reveal their identity.
If you get into the bottom of a well or a tall chimney and look up, you can
see stars, even in the middle of the day.
When a person dies, hearing is the last sense to go. The first sense lost is
sight.
In ancient times strangers shook hands to show that they were unarmed.
Strawberries are the only fruits whose seeds grow on the outside.
Avocados have the highest calories of any fruit at 167 calories per hundred
grams.
The moon moves about two inches away from the Earth each year.
The Earth gets 100 tons heavier every day due to falling space dust.
Due to earth's gravity it is impossible for mountains to be higher than
15,000 meters.
Mickey Mouse is known as "Topolino" in Italy.
Soldiers do not march in step when going across bridges because they could
set up a vibration which could be sufficient to knock the bridge down.
Everything weighs one percent less at the equator.
For every extra kilogram carried on a space flight, 530 kg of excess fuel are
needed at lift-off.
The letter J does not appear anywhere on the periodic table of the elements.
Forwarded by Auntie Bev
79
I just took a leaflet out of my mailbox, informing me that I can have sex at
79.
I'm so happy, because I live at number 71.
So it's not too far to walk home afterwards.
And it's the same side of the street.
I don't even have to cross the road!
~~~~~
Answering machine message,
"I am not available right now,
but thank you for caring enough to call.
I am making some changes in my life.
Please leave a message after the beep.
If I do not return your call,
you are one of the changes."
~~~~~
Aspire to inspire before you expire.
~~~~~
My wife and I had words,but I didn't get to use mine.
~~~~~
Frustration is trying to find your glasses without your glasses.
~~~~~
Blessed are those who can give without remembering
and take without forgetting.
~~~~~
The irony of life is that,
by the time you're old enough to know your way around,
you're not going anywhere.
~~~~~
God made man before woman so as to give him time
to think of an answer for her first question.
~~~~~
I was always taught to respect my elders,
but it keeps getting harder to find one.
~~~~~
Every morning is the dawn of a new error.
~~~~~
The quote of the month is by Jay Leno:
"With hurricanes, tornados, fires out of control,mud slides, flooding,
severe thunderstorms tearing up the country from one end to another,
and with the threat of bird flu and terrorist attacks,
are we sure this is a good time to take God out of the
Pledge of Allegiance?"
Forwarded by Paula
While I sat in the reception area of my
doctor's office, a woman rolled an elderly man in a wheelchair into the room.
As she went to the receptionist's desk, the man sat there, alone and silent.
Just as I was thinking I should make small talk with him, a little boy slipped
off his mother's lap and walked over to the wheelchair. Placing his hand on
the man's, he said, “I know how you feel. My Mom makes me ride in the
stroller too.”
*****
As I was nursing my baby, my cousin's six-year-old daughter, Krissy,
came into the room. Never having seen anyone breast feed before, she was
intrigued and full of all kinds of questions about what I was doing. After
mulling over my answers, she remarked, “My mom has some of those, but I don't
think she knows how to use them.”
*****
Out bicycling one day with my eight-year-old
granddaughter, Carolyn, I got a little wistful. “In ten years,” I said,
“you'll want to be with your friends and you won't go walking, biking, and
swimming with me like you do now. Carolyn shrugged. “In ten years you'll be
too old to do all those things anyway.”
******
Working as a pediatric nurse, I had the difficult assignment of giving
immunization shots to children. One day, I entered the examining room to give
four-year-old Lizzie her injection. “No, no, no!” she screamed. “Lizzie,”
scolded her mother, "that's not polite behavior.” With that, the girl yelled
even louder, “No, thank you! No, thank you!"
******
On the way back from a Cub Scout meeting, my grandson innocently said to my
son, “Dad, I know babies come from mommie's tummies, but how do they get there
in the first place?” After my son hemmed and hawed awhile, my grandson finally
spoke up in disgust, “You don't have to make up something, Dad. It’s okay if
you don’t know the answer.”
*****
Just before I was deployed to Iraq, I sat my eight-year-old son down
and broke the news to him. “I’m going to be away for a long time,” I told
him. “I’m going to Iraq.”
“Why?” he asked. “Don't you know there’s a war going on over there?”
*****
Paul Newman founded the Hole in the Wall Gang
Camp for children stricken with cancer, AIDS, and blood diseases. One
afternoon, he and his wife, Joanne Woodward, stopped by to have lunch with the
kids. A counselor at a nearby table, suspecting the young patients wouldn’t
know Newman was a famous movie star,
explained, “That’s the man who made this camp possible. Maybe you’ve seen his
picture on his salad dressing bottle?” Blank stares. "Well, you’ve probably
seen his face on his lemonade carton.” An eight-year-old girl perked up. “How
long was he missing?”
*****
And my personal favorite…God’s Problem Now!
His wife's graveside service was just barely finished, when there was
a massive clap of thunder, followed by a tremendous bolt of lightning,
accompanied by even more
thunder rumbling in the distance. The little old man looked at the pastor and
calmly said, "Well, she’s there."
Forwarded by Paula
Jacob, age 92, and Mary, age 89, living in Fort Myers, are all excited about
their decision to get married. They go for a stroll to discuss the wedding, and
on the way they pass a drugstore. Jacob suggests they go in.
Jacob addresses the man behind the counter: "Are you the owner?"
The pharmacist answers, "Yes."
Jacob: "We're about to get married. Do you sell heart medication?"
Pharmacist: "Of course, we do."
Jacob: "How about medicine for circulation?"
Pharmacist: "All kinds."
Jacob: "Medicine for rheumatism?"
Pharmacist: "Definitely."
Jacob: "How about suppositories?"
Pharmacist: "You bet!"
Jacob: "Medicine for memory problems, arthritis and Alzheimer's?"
Pharmacist: "Yes, a large variety. The works."
Jacob: "What about vitamins, sleeping pills, Geritol, antidotes for
Parkinson's disease?"
Pharmacist: "Absolutely."
Jacob: "Everything for heartburn and indigestion?" Pharmacist: "We sure do.."
Jacob: "You sell wheelchairs and walkers and canes?"
Pharmacist: "All speeds and sizes."
Jacob: "Adult diapers?"
Pharmacist: "Sure." Then, getting concerned he asked "Are you both feeling
alright, is there something you need?"
Jacob: "No...We'd like to use this store as our Bridal Registry.
Forwarded by Paula
Charlie was installing a new door and found that one of the hinges was
missing.
cid:4F7AEC5226DF41428EAB98877AEA4F1C@ADWCF30cid:CF72AAAEEEED4971A376C1159C1616D2@ADWCF30
He asked his wife Mary if she would go to Lowes and pick up a hinge.
cid:A80B308A1EB94325BFE3E402FD3255AB@ADWCF30
Mary agreed to go. While she was waiting for the manager to finish
serving a customer, her eye caught a beautiful bathroom faucet.
cid:EA2C748235BC44C1A97B8CFF55D3EE5B@ADWCF30
When the manager was finished, Mary asked him, "How much is that faucet?"
cid:686C61D760FF48CBA52C8D829BD7C6F3@ADWCF30
The manager replied, "That's a gold plated faucet and the price is
$500.00.
Mary exclaimed, "My goodness, that’s an expensive faucet -- certainly out
of my price range."
She then proceeded to describe the hinge that Charlie had sent her to
buy.
The manager said that he had them in stock and went into the storeroom to
get one.
From the storeroom the manager yelled. "Ma'am, you wanna screw for the
hinge?"
Mary shouted back, "No, but I will for the faucet."
This is why you can't send a woman to Lowes or Home Depot.
Forwarded by Jim Kirk
1. Johnny 's mother had three children. The first child w as named April
The second child was named May . What was the third child 's name?
Answer: Johnny of course
2. There is a clerk at the butcher shop, he is five feet ten inches tall,
and he wears size 13 sneakers. What does he weigh?
Answer: Meat.
3. Before Mt. Everest was discovered, what was the highest mountain in the
world?
Answer: Mt. Everest; it just wasn 't discovered yet. [ You 're not very
good at this are you?]
4. How much dirt is there in a hole that measures two feet by three feet by
four feet?
Answer: There is no dirt in a hole.
5. What word in the English Language is always spelled incorrectly?
Answer: Incorrectly
6. Billy was born on
December 28th, yet his birthday is always in
the summer. How is this possible?
Answer: Billy lives in the Southern Hemisphere
7. In California , you cannot take a picture of a man with a wooden leg. Why
not?
Answer: You can 't take pictures with a wooden leg. You need a camera to
take pictures.
8. What was the President 's Name in 1975?
Answer: Same as is it now - Barack Obama [Oh, come on ...]
9. If you were running a race, and you passed the person in 2nd place, what
place would you be in now?
Answer: You would be in 2nd. Well, you passed the person in second
place, not first.
10. Which is correct to say, "The yolk of the egg are white" or "The yolk of
the egg is white"?
Answer: Neither, the yolk of the egg is yellow [Duh]
11. If a farmer has 5 haystacks in one field and 4 haystacks in the other
field, how many haystacks would he have if he combined them all in another
field?
Answer: One. If he combines all of his haystacks, they all become one
big one.
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.
Humor Between June 1-30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor063013
Humor Between June 30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor063013
Humor Between May 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor053113
Humor Between April 1-30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor04301
Humor Between March 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor033113
Humor Between February 1-28, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor022813
Humor Between January 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor013113
Humor Between December 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor123112
Humor Between November 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor113012
Humor Between October 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor103112
Humor Between September 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor093012
Humor Between August 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor083112
Humor Between July 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor073112
Humor Between June 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor063012
Humor Between May 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor053112
Humor Between April 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor043012
Humor Between March 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor033112
Humor Between February 1-29, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor022912
Humor Between January 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor013112
And that's
the way it was on June 30, 2013 with a little help from my friends.
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob
Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
|
For an elaboration on the reasons you should join a ListServ (usually
for free) go to http://www.trinity.edu/rjensen/ListServRoles.htm |
|
AECM (Accounting Educators)
http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
|
|
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down)
CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access. |
|
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk
This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA. |
|
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation. |
|
Business Valuation Group
BusValGroup-subscribe@topica.com
This discussion group is headed by Randy Schostag
[RSchostag@BUSVALGROUP.COM] |
Concerns That Academic Accounting Research is Out of Touch With Reality
|
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of the
shift from Gemeinschaft to
Gesellschaft. Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting
Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool
Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free
(updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA
Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Bob Jensen's
Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
May 31, 2013
Bob
Jensen's New Bookmarks May 1-31, 2013
Bob Jensen at
Trinity University
For
earlier editions of Fraud Updates go to
http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Click here to search Bob Jensen's web site if you
have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's
Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm
All
my online pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
FASB Accounting Standards Updates ---
http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB/Page/SectionPage&cid=1176156316498
Hasselback Accounting Faculty
Directory ---
http://www.hasselback.org/
Blast from the Past With Hal
and Rosie Wyman ---
http://www.cs.trinity.edu/~rjensen/temp/Wyman2011.htm
Bob
Jensen's threads on business, finance, and accounting glossaries ---
http://www.trinity.edu/rjensen/Bookbus.htm
2012 AAA
Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view
these videos.
Bob Jensen is an obscure speaker following Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc
2013 IFRS Blue Book
(Not Free) ---
http://shop.ifrs.org/ProductCatalog/Product.aspx?ID=1717
Links to
IFRS Resources (including IFRS Cases) for Educators ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Bob
Jensen's threads on controversies in accounting standard setting ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
American
Accounting Association Past Presidents are listed at
http://www.cs.trinity.edu/~rjensen/temp/PastPresidentsAAA.htm
"2012 tax
software survey: Which products and features yielded frustration or bliss?" by
Paul Bonner, Journal of Accountancy, September 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Sep/20125667.htm
Center for Financial Services
Innovation ---
http://cfsinnovation.com/
"Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
Note this has a good explanation of how the inspection process works.
PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx
Bob
Jensen's taxation helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
Subtle Distinctions in Technical
Terminology
Machine Learning, Big Data, Deep Learning, Data Mining, Statistics, Decision &
Risk Analysis, Probability, Fuzzy Logic FAQ ---
http://wmbriggs.com/blog/?p=6465
Today’s FBI: Facts and Figures 2013-2014—which provides an in-depth look
at the FBI and its operations—is now available ---
http://www.fbi.gov/stats-services/publications/todays-fbi-facts-figures/facts-and-figures-031413.pdf/view
AICPA Fraud Resource Center ---
Click Here
http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/FRAUDPREVENTIONDETECTIONRESPONSE/Pages/fraud-prevention-detection-response.aspx
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Technical Tax Course Materials from
Lexis-Nexus
Graduate Tax Series ---
http://taxprof.typepad.com/files/graduate-tax-series-description-082911.pdf
CGMA Portfolio of Tools for Accountants
and Analysts ---
http://www.cgma.org/Resources/Tools/Pages/tools-list.aspx
Includes ethics tools and learning cases.
From the IRS
IRS Criminal Investigation Issues Fiscal 2012 Report, IR-2013-50, May 10, 2013
---
http://www.irs.gov/uac/Newsroom/IRS-Criminal-Investigation-Issues-Fiscal-2012-Report
Humor Between May 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor053113
Humor Between April 1-30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor043013
Humor Between March 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor033113
Humor Between February 1-28, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor022813
Humor Between January 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor013113
Humor Between December 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor123112
Humor Between November 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor113012
Humor Between October 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor103112
Humor Between September 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor093012
Humor Between August 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor083112
Humor Between July 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor073112
Humor Between June 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor063012
Humor Between May 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor053112
Humor Between April 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor043012
Humor Between March 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor033112
Humor Between February 1-29, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor022912
Humor Between January 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor013112
Is the AAA Leadership Abandoning the AAA Commons?
How many of you heard about "Brilliantly Disguised Opportunities"
until the cover story in the Winter 2013 Edition of Accounting Education News
arrived in your snail mail boxes? That by the way is the theme of the 2013
forthcoming AAA Annual Meetings in Anaheim.
None of the recent past presidents of the AAA showed much interest in the
Commons until they took office as Presidents-Elect and eventually President. But
after being elected to this top office they actively used the AAA Commons as a
primary vehicle for communicating with the AAA Membership. Mostly their postings
were about AAA matters, although Sue Haka and Greg Waymire were inspired to post
about their research interests as well.
Current President Karen Pincus has not had a single posting to the AAA
Commons in 2013, although she had seven posts before becoming President.
President Elect Mary Barth as never had a single post to the Commons and
never even posted a comment. Since Mary arguably is our leading accountics
scientist, I urged her to commence a Quant Corner on the Commons where
editors of TAR, JAR, JAE, and other accountics science journal editors would
encourage authors to post discussions about forthcoming articles in those
journals. Mary never answered my appeal.
There's huge problem of inspiring any of our accountics scientists to become
active in the Commons on behalf of accountics scientists ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
My good friend A, Rashad Abdek-Khalik has a grand total of one posting to the
Commons and that was a long time ago. He certainly is not a leading candidate
for becoming President of the AAA on the basis of his Commons contributions.
Competition from his opponent is more encouraging. Christine Botosan accumulated
88 postings and 14 comments on the Commons. Good work Kathy. If elected I look
forward to even more postings.
My intent here is not to make any of our current or future AAA leaders feel
guilty about neglect of the Commons. They are very, very busy professors in
other regards. However, the AAA is paying a lot of money to maintain the
Commons, and I sense membership in the Commons is waning. The lack of interest
of our current and future leaders, other than Christine Botosan, is certainly
not helping to revive interest in the Commons.
Personally, I would rather go to the Commons more often to learn something
instead of post something I already know. I am by far and above the most
prolific professor posting the AAA Commons, but I take no pride in this. In
retirement I would instead like to back off and let the younger generation
overwhelm me with their postings to the Commons.
And the AAA leadership could certainly do more to encourage this expensive
AAA resource. It is an expensive resource. Without more AAA leadership promotion
and guidance I fear it's becoming wasted money.
April 13, 2013 reply from Dan Stone
Thanks Bob,
1. Do we really know the costs of AAA commons? Is
this really an expensive resource? What evidence exists for this assertion?
2. I'm President of the AAA IS section. I've had
trouble even getting the IS section leadership to use AAA commons. The
reactions are that having to logon, and check another messaging source, is
more trouble than it is worth, particularly in light of cloud sources (which
don't require logons) for sharing online resources.
I'm not sure the AAA leadership is really the
problem here. It may simply be that the commons was a good idea whose time
never came (as is true of many, many technologies)..
April 14, 2013 reply from Bob Jensen
Hi Dan,
The Commons still has great potential for practitioners , researchers,
and AAA leaders (including section and region presidents) to communicate
with accounting teachers.
I'm still in favor of the Commons and feel that it was growing in
popularity when AAA Presidents like Sue Haka were putting out messages that
members wanted to access. It also helped when Julie Smith David, bless her
heart, was putting out challenges for people to use the Commons.
Before dropping the Commons I would like to see the AAA leadership making
a push to promote usage. I still like my idea of a Tech Corner where editors
of our top accountics science journals arm twist authors with forthcoming
articles to discuss their research in a language that communicates better
with accounting teachers and practitioners.
When IFRS was front and center in curriculum revisions in the USA the
large accounting firms, not just the Big Four, were putting up very helpful
IFRS learning links as free teaching resources. I think we can get expanded
activity from the large firms for other topics they would like to see in our
college courses, topics that are not just in accounting.
I think there's still a chance for the Commons to be a very valuable
resource. What we need is less Jensen and more members on the Commons.
Jensen will gladly back off when members commence to post more and more to
the Commons.
Respectfully,
Bob Jensen
Congratulations
to Bob May and Best Wishes for a Happy Retirement
Bob was one of my Ph.D. students
I feel like I'm closer to the twilight zone each time one of my former doctoral
students retire
Bob's Resume ---
http://acsprod.mccombs.utexas.edu/FEG/index.asp?uid=126
From
AccountingWeb on May 14, 2014
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Celebrated Accounting Professor Robert May Retires
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Robert May, PhD, who has served as KPMG Centennial Professor
of Accounting, chairman, and dean of the accounting
department at the University of Texas at Austin McCombs
School of Business, is retiring this month after thirty-four
years. In an interview with AccountingWEB's Jason Bramwell,
May talks about the
McCombs School of Business Master in Professional Accounting
(MPA) program,
which he is credited with developing. The MPA program has
been widely recognized as the leading graduate accounting
program in America and has been ranked number one by US
News & World Report for the past six years.
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May Day: Retiring Texas Accounting Professor to Give
Commencement Speech |
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After a forty-three-year academic career – the last
thirty-four of which were spent as professor,
chairman, and dean in the department of accounting
at the University of Texas at Austin McCombs School
of Business – Robert May, PhD, will be addressing
2013 graduating Master in Professional Accounting (MPA)
students one last time. |
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Some Comments About Accountics Science Versus Real Science
This is the lead article in the May 2013 edition of The Accounting Review
"On Estimating Conditional Conservatism
Authors
Ray Ball (The University of Chicago)
S. P. Kothari )Massachusetts Institute of Technology)
Valeri V. Nikolaev (The University of Chicago)
The Accounting Review, Volume 88, No. 3, May 2013, pp. 755-788
The concept of conditional conservatism (asymmetric
earnings timeliness) has provided new insight into financial reporting and
stimulated considerable research since Basu (1997). Patatoukas and Thomas
(2011) report bias in firm-level cross-sectional asymmetry estimates that
they attribute to scale effects. We do not agree with their advice that
researchers should avoid conditional conservatism estimates and inferences
from research based on such estimates. Our theoretical and empirical
analyses suggest the explanation is a correlated omitted variables problem
that can be addressed in a straightforward fashion, including fixed-effects
regression. Correlation between the expected components of earnings and
returns biases estimates of how earnings incorporate the information
contained in returns. Further, the correlation varies with returns, biasing
asymmetric timeliness estimates. When firm-specific effects are taken into
account, estimates do not exhibit the bias, are statistically and
economically significant, are consistent with priors, and behave as a
predictable function of book-to-market, size, and leverage.
. . .
We build on and provide a different interpretation
of the anomalous evidence reported by PT. We begin by replicating their
[Basu (1997). Patatoukas and Thomas (2011)] results. We then provide
evidence that scale-related effects are not the explanation. We control for
scale by sorting observations into relatively narrow portfolios based on
price, such that within each portfolio approximately 99 percent of the
cross-sectional variation in scale is eliminated. If scale effects explain
the anomalous evidence, then it would disappear within these portfolios, but
the estimated asymmetric timeliness remains considerable. We conclude that
the data do not support the scale-related explanation.4 It thus becomes
necessary to look for a better explanation.
Continued in article
Jensen Comment
The good news is that the earlier findings were replicated. This is not common
in accountics science research. The bad news is that such replications took 16
years and two years respectively. And the probability that TAR will publish a
one or more commentaries on these findings is virtually zero.
How does this differ from real science?
In real science most findings are replicated before or very quickly after
publication of scientific findings. And interest is in the reproducible results
without also requiring an extension of the research for publication of the
replication outcomes.
In accountics science there is little incentive to perform exact replications
since top accountics science journals neither demand such replications nor will
they publish (even in commentaries) replication outcomes. A necessary condition
to publish replication outcomes in accountics science is the extend the research
into new frontiers.
How long will it take for somebody to replicate these May 2013 findings of
Ball, Kothari, and Nikolaev? If the past is any indicator of the future the BKN
findings will never be replicated. If they are replicated it will most likely
take years before we receive notice of such replication in an extension of the
BKN research published in 2013.
Bob Jensen's threads on replication and commentaries in accountics science
---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Darrell Duffie: Big Risks Remain In the Financial System
A Stanford theoretician of financial risk looks at how to fix the "pipes and
valves" of modern finance
Stanford Graduate School of Business, May 2013
Click Here
http://www.gsb.stanford.edu/news/headlines/darrell-duffie-big-risks-remain-financial-system?utm_source=Stanford+Business+Re%3AThink&utm_campaign=edfd4f11fb-Stanford_Business_Re_Think_Issue_Thirteen5_17_2013&utm_medium=email&utm_term=0_0b5214e34b-edfd4f11fb-70265733&ct=t%28Stanford_Business_Re_Think_Issue_Thirteen5_17_2013%29
. . .
In March, Duffie and the Squam Lake Group proposed
a dramatic new restriction on executive pay at “systemically important”
financial institutions. Duffie argues that top bank executives still have
lopsided incentives to take excessive risks. The proposal: Force them to
defer 20 percent of their pay for five years, and to forfeit that money
entirely if the bank’s capital sinks to unspecified but worrisome levels
before the five years is up.
“On most issues,” Duffie said, “the banks would be
glad to see me go away.”
Jensen Comment
Squam Lake and its 30 islands is in the Lakes Region of New Hampshire ---
http://en.wikipedia.org/wiki/Squam_Lake
It is better known as "Golden Pond" after Jane Fonda, her father (Henry) and
Katherine Hepburn appeared in the Academy Award winning movie called "On
Golden Pond" that was filmed on Squam Lake. Professor Duffie now has some
"golden ideas" for finance reforms.
Bob Jensen's threads on the banking bailout ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Google Glass ---
http://en.wikipedia.org/wiki/Google_Glass
"The Porn Industry Has Already Dreamed Up Awesome Ideas For Google Glass,"
by Dylan Love, Business Insider, May 25, 2013 ---
http://www.businessinsider.com/google-glass-porn-2013-5
Less Awesome Ideas for Google Glass
Bob Jensen's threads on education technology ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm
Bob Jensen's threads on Tools and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm
The Big Four Accounting Firms Are All in the Ten: Who dares say that
accounting is a dull career?
"Fifty Most Popular Employers for Business Students," Bloomberg
Businessweek, May 9, 2013 ---
http://images.businessweek.com/slideshows/2013-05-09/fifty-most-popular-employers-for-business-students
Bob Jensen's threads on careers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
Congratulations
to Tom Selling who will be teaching part-time at SMU ---
http://accountingonion.com/2013/04/grilled-accounting-onions.html
And
congratulations to David Albrecht who will be teaching full time at La
Sierra University in California.
"Facebook, One (one sorry)
Year Later: What Really Happened in the Biggest IPO Flop Ever," The
Atlantic, May 2013 ---
http://www.theatlantic.com/business/archive/2013/05/facebook-one-year-later-what-really-happened-in-the-biggest-ipo-flop-ever/275987/
Why is My Nexus 7 So Slow? 8
Ways to Speed it Up Again ---
Click Here
http://www.howtogeek.com/164106/why-is-my-nexus-7-so-slow-8-ways-to-speed-it-up-again/?utm_source=newsletter&utm_medium=email&utm_campaign=260513
"PayPal or Credit Card—Which
is Safer?" by Laura Adams, Money Girl, May 14, 2013 ---
http://moneygirl.quickanddirtytips.com/paypal-or-credit-card.aspx
Bob Jensen's helpers for
personal finance ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
In the realm of R&D accounting there's always been a debate about whether R&D
expenditures should be totally expensed (as in FAS 2) versus whether only
research (R) should be expensed and development D booked as as asset. It would
be interesting to see a real world case written up about the following R&D real
world project.
"Exxon Takes Algae Fuel Back to the Drawing Board: A $300 million project
seems to have failed to produce a cheap way to make fuel from algae," by
Kevin Bullis, MIT's Technology Review, May 20, 2013 ---
Click Here
http://www.technologyreview.com/view/515041/exxon-takes-algae-fuel-back-to-the-drawing-board/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130521
From the CFO.com
Morning Ledger on May 24, 2013
The U.S. and China have struck an agreement giving
U.S. accounting regulators access to documents from Chinese accounting
firms,
Michael Rapoport writes in the WSJ.
The deal, expected to be announced
Friday, could help U.S. regulators investigate the auditors of
U.S.-listed Chinese companies that might have been involved in accounting
fraud.
The agreement will allow the U.S. Public Company
Accounting Oversight Board to see audit records and other documents held by
Chinese audit firms. The China Securities Regulatory Commission and China’s
Ministry of Finance will help the PCAOB obtain the documents.
The agreement doesn’t address or resolve a similar but
separate dispute in which the Securities and Exchange Commission is
demanding access to documents from Chinese audit firms, as it, too, probes
possible fraud. Nor does the agreement allow the PCAOB into China for
inspections of Chinese firms that audit U.S.-traded companies, which the
U.S. regulator has pushed for.
From the CFO.com
Morning Ledger on May 14, 2013
The yen’s recent plunge has sent companies
scrambling to find cost-effective hedges to preserve their profits
Dozens of U.S. and European companies have taken multimillion-dollar hits
since the yen started its slide back in November, reducing the dollar or
euro value of their Japanese earnings,
writes CFOJ’s Emily Chasan in today’s Marketplace
section. To protect themselves from sharp
currency swings, multinationals can buy options or forward contracts to lock
in exchange rates at a given level. But this hedging can be costly, and it
doesn’t always pay. “What the currency markets giveth they also taketh
away,” says Kenneth Janke Jr., deputy CFO of
Aflac.
Corporate bankers say they’ve been inundated with
calls from companies asking for help finding new risks they can hedge on
favorable terms. The yen’s move “is just waking people up,” says Ed McGann,
global head of currency administration at Bank of New York Mellon.
Under accounting rules, companies that hedge a
specific risk typically get favorable accounting treatment that lets them
avoid a hit to income from the cost of the hedge. But a hedge aimed at
offsetting a broader economic or operating risk may not qualify for that
treatment, and would therefore count against earnings.
Jensen Comment
Meanwhile the IASB and FASB are rewriting the rules of hedge accounting.
From the CFO.com
Morning Ledger on May 7, 2013
Guilty plea in KPMG
insider trading case
A California jewelry-store owner agreed to plead guilty to a criminal charge
in the insider-trading scandal that brought down a senior partner at
KPMG,
the
WSJ’s Michael Rapoport reports.
Bryan Shaw was charged with one count of conspiracy
and has signed an agreement with federal prosecutors indicating he intends
to plead guilty. Mr. Shaw admitted to plotting with his friend, former KPMG
partner Scott London, to commit securities fraud, the U.S. attorney’s office
in Los Angeles said. Mr. Shaw could face up to five years in prison, though
he is likely to receive a lesser sentence under federal sentencing
guidelines.
Why white collar
crime usually pays even when getting caught is 100% certain ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
This must hurt Francine a bit. She's seemingly gone easy on KPMG (compared to me)
over the years relative to her despised Deloitte.
"Another 'Rogue' Audit Partner; Another 'Duped' Audit Firm," by Francine
McKenna, Forbes, April 10, 2013 ---
http://www.forbes.com/sites/francinemckenna/2013/04/10/another-rogue-audit-partner-another-duped-audit-firm/
There are things you anticipate, worry about, know
will be troublesome once they happen. It’s safe to say global audit firm
KPMG wasn’t worrying it would someday hear the leader of its Los Angeles
audit practice was passing confidential client information to someone else
who then traded on it.
KPMG announced late Monday via press release that
the firm had “separated” a senior partner, one with a very visible role,
from the firm. The firm had” “been informed” about his “rogue” actions and
“regrets” the impact his actions may have had.
I was half-expecting, “He’s not our kind”.
That’s a lot of passive construction. Who informed
the firm about the illegal and unethical activity? The firm clearly did not
discover
Scott London’s betrayal on its own. If London was
not trading on the information himself, the anomalies wouldn’t show up in
the information he’s required to provide to the firm to prove his
independence from audit clients each year.
Deloitte wasn’t the one who discovered that its
Vice Chairman and
Chicago charity circuit regular
Tom Flanagan was trading on the inside information
of several Fortune 500 companies including
Berkshire Hathaway. In that case it was FINRA, the
securities self-regulatory organization, that saw trading activity by an
audit firm partner in a company with M&A activity.
When Deloitte tax partner
Arnie McClellan’s wife “eavesdropped” on her
husband’s phone calls where he discussed his client’s M&A targets and then
called her sister in London, Deloitte didn’t know until London authorities
called. McClellan’s wife said her husband was innocent and everyone believed
her. She did serve time for initially lying about her own involvement.
It wasn’t
Ernst & Young that uncovered tax partner James
Gansman passing M&A tips to his lover who, in
turn, passed them to hers. Gansman’s “swinging” partner ended up on an SEC
watch list and
Gansmen went to jail based on her testimony
against him. He did not profit from his breach of client confidentiality
other than in ways some men might prefer to the discounted watch, dinners,
and few thousand dollars Scott London, the KPMG partner we heard about
yesterday, says he received.
Surely more information will come out over the next
few week, from KPMG, from additional companies affected and from the media,
who will pursue this story like pit bulls. One reporter who emailed me
yesterday said these stories of have “legs”. Hubris, and stupidity in
unexpected places, are great media fodder.
KPMG said in its press release that the firm
resigned as auditor from two of London’s clients,
Herbalife and Skechers, although it did not name
them. He was the top partner on those audits. The time and money those
companies will have to spend to appoint a new auditor, re-audit years of
financial statements and fend off media attention will probably be
subsidized, one-way or another, by KPMG. In the Flanagan case,
Deloitte paid for the necessary independent investigations
to support the firm’s claim to clients that it was
still independent as an auditor. None of them – Berkshire Hathaway,
Walgreens, Sears Holdings among the victims – fired the firm.
The SEC and PCAOB did not fine or sanction
Deloitte or Ernst & Young in any of the cases.
But surely Scott London, KPMG’s “rogue”, had access
to confidential information about more clients of the firm than just the
ones he was directly responsible for. He was the partner in charge of the
audit practice for a huge market, Los Angeles. He has the right, and the
responsibility, to know about every interesting or problematic thing going
on at the audit clients in his practice group. He may be a “concurring” or
quality review partner on more companies’ audits and can “drop by” audit
committee and other client meetings on a relationship-building basis. The
exposure to KPMG and to the clients of this practice unit, and perhaps
others, may be larger than what’s been admitted by the firm so far.
Scott London is
making statements to the press. He’s wealthy
enough to afford a lawyer and PR – but obviously not wealthy enough to
resist the temptation of
a “discount” on a watch and a few bucks. (London
didn’t even get a watch. He got a discount. Looking for the tippee?
Go look for a prominent LA jeweler in financial trouble who’s too cheap to
pay well for stealing a man’s career, professional reputation and, possibly,
his freedom.)
My sources tell me KPMG is not paying for London’s
defense. Deloitte
sued Flanagan to assuage its clients. I would
expect that’s next. If KPMG’s
behavior during the 2005 tax shelter scandal is
any indication, Scott London will be completely abandoned, not just fired,
as long as he’s not needed to absolve the firm of any guilt or
accountability for his actions. KPMG has been “duped”, betrayed by its own,
and that’s a tragedy, for sure.
Continued in article
Bob Jensen's threads on the "Two Faces" of KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm
April 9, 2013 reply from Dennis Beresford
Bob, Maybe if the KPMG Los Angeles partner
ultimately is sentenced to 45 years in prison (such as Attica) it would
actually put an end to this kind of "white collar" crime.
Denny
April 10, 2013 reply from Bob Jensen
Hi Denny,It will never happen. The biggest problem with white collar
crime is that it pays even if you know you're going to get caught (at least
if you know the rudiments of hiding the loot off shore or with friends and
understand time value of money) ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
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]
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).
If you aren’t now, you will by
the time you finish the new Bebchuk and Fried paper on executive
compensation. They paint a fairly gloomy picture of managers exerting their
power to “extract rents and to camouflage the extent of their rent
extraction.” Rather than designed to solve agency cost problems, the paper
makes the case that executive pay can by an agency cost in and of itself.
Let’s hope things aren’t this bad.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=364220
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]
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
KPMG is at it again. In the most
recent allegation of violating independence standards of the accounting
profession
"Threats to
Independence Raise Ethical Questions for the Big-Four CPA Firms," by Steven
Mintz, Ethics Sage, May 7, 2013 ---
http://www.ethicssage.com/2013/05/threats-to-independence-raise-ethical-questions-for-the-big-four-cpa-firms.html
KPMG is at it again. In the most recent allegation
of violating independence standards of the accounting profession,
KPMG’s Columbus, Ohio office was auditing
JobsOhio’s books while, at the same time, an out-of-state office of the firm
was seeking $1 million in taxpayer money from JobsOhio for an unnamed
client. As the state’s lead economic-development agency, JobsOhio is charged
with recommending financial incentives for companies seeking to relocate in
the state. On November 5, 2012, about the time that the audit was being
conducted, KPMG was also listed on a sheet of eight pending grant
commitments from the state for fiscal year 2013, one of which was for the
unnamed client.
I will return to this case later on, but first a
review of the recent insider trading charges against the firm. I have
previously
written about about
insider trading at KPMG. In that case, KPMG resigned two audit accounts and
withdrew its blessing on the financial statements of Herbalife for the past
three years and of Skechers for the past two. KPMG withdrew its audit
opinions, a serious step for any auditor, after concluding it was not
independent because of alleged insider trading.
The KPMG insider trading case is a particularly
egregious one because it involves an auditor tipping off a friend about
stock of audit clients. Scott London, the KPMG auditor, did not trade in the
stock himself but he did gain personal wealth (“unjust enrichment”) when his
friend, Brian Shaw, used the inside information to trade in stock of
Herbalife Ltd. and Skechers USA Inc. Shaw benefitted by $1.27 million on the
trades. Shaw paid London $50,000 cash and gave him a Rolex watch.
Looking at the JobsOhio case, as KPMG was auditing
JobsOhio's books in the fall of 2012 the firm also was seeking $1 million in
taxpayer money from JobsOhio for an unnamed client. JobsOhio, the state's
privatized development agency, said that the grant request was handled
separately from and without the knowledge of the firm's auditing division.
The ethical problem for KPMG in the JobsOhio case
is independence in appearance. This is an important requirement of an
independent audit because factual independence is sometimes difficult to
determine. Factual independence goes to the mindset of the auditor in
approaching an audit with objectivity and professional skepticism. It is
difficult to assess so appearances serve as a proxy in that regard.
JobsOhio denies any conflict of interest.
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.”
Most observers would probably conclude that the two
offices of KPMG would never collude on their own to achieve some benefit for
the firm. However, the more troubling issue is whether JobsOhio might
perceive some pressure on them to provide financial incentives to the KPMG
audit client perhaps to make it less likely that KPMG would point out
problems with the JobsOhio audit, assuming any occur.
The accounting profession has strict independence
standards to protect the public interest. Shareholders, creditors, and the
beneficiaries of public funds rely on the honesty, trustworthiness, and
responsibility of auditors to go the extra mile to ensure that the financial
statements of entities that operate in the public interest are based on an
independent audit – both in fact and in appearance.
KPMG is not alone in violating the most basic and
cherished independence standards. As I have previously
blogged, in 2010 Deloitte and Touche was
investigated by the SEC for repeated insider trading by Thomas P. Flanagan,
a former management advisory partner and a Vice Chairman at Deloitte.
Flanagan traded in the securities of multiple Deloitte clients on the basis
of inside information that he learned through his duties at the firm. The
inside information concerned market moving events such as earnings results,
revisions to earnings guidance, sales figures and cost cutting, and an
acquisition. Flanagan’s illegal trading resulted in profits of more than
$430,000. In the SEC action, Flanagan was sentenced to 21 months in prison
after he pleaded guilty to securities fraud.
On January 7, 2013, the
SEC announced it is investigating whether Ernst &
Young violated independence rules by letting its lobbying unit perform work
for several major audit clients. The SEC inquiry began shortly after Reuters
reported in March 2012 that Washington Council Ernst & Young, the E&Y unit,
was registered as a lobbyist for several corporate audit clients including
Amgen, CVS Caremark, and Verizon Communications.
The problem for EY is that U.S. independence rules
bar auditors from serving in an "advocacy role" for audit clients. The goal
is to allow auditors to maintain some degree of objectivity regarding the
companies they audit, based on the idea that auditors are watchdogs for
investors and should not be promoting management's interests.
Finally, in December 2012,
Thomson Reuters announced it signed a three-year
contract with PwC, the company’s auditor, to provide use of the Thomson
Reuters ONESOURCE Corporate Tax solution for China. PwC U.K. also uses this
Thomson Reuters software for its tax clients. Business alliances between a
company and its auditor are prohibited under U.S. and U.K. auditor
regulations. Once again an independence violation exists because such
arrangements create a “mutuality of interests” as a result of the business
relationship between the auditor and audit client.
Continued in
article
Bob Jensen's
threads on KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm
Bob Jensen's
threads on auditor professionalism and independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"11 Reasons Why Getting An MBA (from a prestigious program) Is
Better Than Getting A CFA," by Linette Lopez, Business Insider, May
24, 2013 ---
http://www.businessinsider.com/getting-an-mba-better-than-getting-a-cfa-2013-5
Jensen Comment
I'm not certain there's a whole lot of value in this apples versus tomatoes
comparison. Ms. Lopez makes an underlying assumption that CFAs are primarily
backroom analysts. I'm reminded of a neighbor I had in Maine who was a CFA who
made a lot of money as the owner of an insurance and investment services
company.
She also makes an implicit assumption that the MBA degree is from a
prestigious MBA program like an Ivy League MBA degree. Actually, most MBA
degrees are from somewhat less prestigious state universities that have much
more variability in terms of student networking, ties with powerful alumni,
employment opportunities, and faculty consulting at high levels in corporations.
A lot more of those MBAs are in unemployment lines or stuck in the same jobs
they had before entering an MBA program.
Also complicating the issue is that a lot of CFAs are also MBAs who later
elected to specialize for better jobs in the financial services industry.
I also feel that it would be misleading to compare CPA versus CFA careers.
The main problem is variability. For example, there's a huge difference between
being a Big 10 CPA firm partner versus being a solo practitioner with mostly tax
clients in Bangor, Maine. Similarly, there's a world of difference between being
a CFA in a large Wall Street bank versus being a solo practitioner selling
insurance and financial services in Bangor, Maine.
Annual income can be a poor basis of comparison since some professionals in a
small town in the USA make ten times more than their counterparts in big CPA
firms and banks. There's a lot of serendipity in life.
Bob Jensen's threads on careers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
From Scott Bonacker on May 24, 2013
Saw a couple of interesting items -
This one is about 'best practices' in internal
emails - actually I think it is not anything new at all, this law firm
apparently forgot and got lax.
From the story:
........ litigation initiated by one of its
former clients who alleged the firm had overcharged on legal fees. When
the firm sued the client to recover $675,000 in unpaid accounts, the
client counterclaimed for more than $22-million in punitive damages. In
the process of pre-trial discovery – where parties are required to
exchange relevant documents relating to the case – e-mails written by
lawyers at DLA Piper were uncovered that seemed to substantiate the
client’s complaint, that made the firm look greedy, ravenous and
rapacious, and in the process, did a minor hatchet job on the legal
profession.
http://www.theglobeandmail.com/report-on-business/small-business/sb-marketing/customer-service/a-few-internal-e-mails-can-do-a-lot-of-damage/article11475408/
(http://goo.gl/KqovQ
)
The other is about work-life balance -
From the story:
Constantly checking your work e-mail while
out to dinner with your family or that “quick check” of your work
messages that ends up taking hours on the weekends are two signs that
your work life is overtaking your personal time. Creating separation
between work and your personal life and developing good work habits can
help you to respond more appropriately to the everyday stresses of your
business.
http://www.theglobeandmail.com/report-on-business/small-business/sb-growth/day-to-day/three-tips-to-finally-get-your-work-e-mail-under-control/article11675856/
(http://goo.gl/RZ2gl
)
Scott Bonacker CPA –
McCullough and Associates LLC –
Springfield, MO
"Social Media: Ten Things Accountants Should Never Do," by Mark Lee,
AccountingWeb, May 23, 2013 ---
Click Here
http://www.accountingweb.com/article/social-media-ten-things-accountants-should-never-do/221837?source=technology
Bob Jensen's threads on social media ---
http://www.trinity.edu/rjensen/ListservRoles.htm
"The Fix Was In Crime in College Hoops," FBI, May 20, 2013 ---
http://www.fbi.gov/news/stories/2013/may/crime-in-college-hoops/crime-in-college-hoops
It’s a cautionary tale for college and professional
athletes alike.
Following a three-year FBI investigation dubbed
Operation Hook Shot, eight people—including former University of San Diego
(USD) basketball star Brandon Johnson, the school’s all-time point and
assist leader—were convicted and sentenced to federal prison terms for
taking part in a sports bribery conspiracy. The eighth and final defendant,
illegal bookmaker Richard Francis Garmo, was sentenced last month.
The case began—as most of our sports bribery
matters do—as an organized crime investigation. In 2009, we began looking
into the activities of a criminal enterprise operating in the San Diego
area. Along with selling marijuana, the group was operating an illegal
online gambling business. A related criminal activity, Bureau investigators
discovered, was a scheme to fix USD men’s basketball games.
Playing a pivotal role in the scheme was Thaddeus
Brown, an assistant basketball coach at USD during the 2006-2007 season.
Brown had placed bets with the illegal gambling business operated by Garmo
and two partners-in-crime. Though no longer with the team, he still had
contacts among the USD players. During the 2009-2010 season, he recruited
Johnson—USD’s starting point guard—to influence the outcome of basketball
games in exchange for money. Brown was paid handsomely for his role in the
conspiracy—up to $10,000 per game.
During that season, it’s believed that at least
four games were “fixed” with Johnson’s assistance. Perhaps the senior point
guard would miss a free throw now and then or draw a technical foul. Or he
would just pass up a shot—at one point Johnson was heard on electronic
surveillance talking about how he wouldn’t shoot at the end of a particular
game because it would have cost him $1,000.
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Teaching Case
on Stock Splits from The Wall Street Journal Accounting Weekly Review on May
17, 2013
Whole Foods Parties Like It's 1999
by:
Justin Lahart
May 09, 2013
Click here to view the full article on WSJ.com
TOPICS: Earning Announcements, Stockholders' Equity
SUMMARY: "When it reported results late
Tuesday [May 7, 2013], Whole Foods Market
did something unusual. It announced a 2-for-1 stock split." The article
discusses the history and usage of stock splits as well as their ability to
"signal [that a company] thinks its future is bright."
CLASSROOM APPLICATION: The article may be used when introducing
stock splits and dividends in a financial reporting class.
QUESTIONS:
1. (Introductory) With what other announcement did Whole Foods
Market announce a 2-for-1 stock split?
2. (Advanced) What is a stock split? In your answer, specifically
define the impact of a stock split on par value, the total number of shares
outstanding, and the account balances related to common stock in the
corporate balance sheet.
3. (Introductory) The author cites the average stock price of a
company in the S&P 500 as evidence supporting the argument that "plenty of
stocks seem ripe for a split." What does this statement mean?
4. (Advanced) Why does the author write that "splits, of course, do
nothing to alter the fundamentals of a company"?
5. (Advanced) What signal is sent by a company issuing a stock
split? Why might institutional investors prefer share buybacks (treasury
stock purchases) and dividend payouts to stock splits?
Reviewed By: Judy Beckman, University of Rhode Island
"Whole Foods
Parties Like It's 1999," by Justin Lahart, The Wall Street Journal, May 9, 2013
---
http://online.wsj.com/article/SB10001424127887324059704578471242897872354.html?mod=djem_jiewr_AC_domainid
Up
until the dot-com crash, stock splits were a regular feature of the market.
Since then, they have fallen into disuse. Just 13 companies in the S&P 500
split their shares last year, down from an average of 65 a year in the 1980s
and 1990s. Even during years when the stock market struggled, companies were
readier to split shares: In 1994, for example, there were 47 stock splits.
And by the old standards, there are certainly
plenty of stocks that seem ripe for a split: The average stock price among
companies in the S&P 500 is now about $67, compared with $47 at the end of
1999.
Splits, of course, do nothing to alter the
fundamentals of a company. In that regard, they are essentially meaningless,
like the Dow Jones Industrial Average hitting 15,000 or, for that matter,
birthdays and anniversaries. Yet they can be a way for a company to signal
it thinks its future is bright, since it suggests confidence the shares
won't fall precipitously from a lower price point.
The thing is, the signal probably works best on
individual investors. Institutional investors are more interested in signals
that are backed with cash, like share buybacks and dividend increases.
And since individual investors have retreated from
direct ownership of stocks over the past decade, the views of institutional
investors are more important to companies these days.
But splits might still have some value. Consider:
If a company decides to signal its faith in the future through a stock
split, and then falters, it merely looks stupid. But if it falters after
share buybacks and dividend increases, it not only looks stupid, it has less
cash to see its way through the rough patch.
Brookings Institution ---
http://en.wikipedia.org/wiki/Brookings_Institution "
Jensen Comment
Technically Brookings is bipartisan and has an excellent reputation among
liberal and conservative economists, If anything, it probably leans slightly to
the left.
Why some senators need some lessons in economics
"Think tank The Brookings Institute laid down each plan one by one. The only
one it doesn't take seriously at ALL is Warren's," by Linette Lopez,
Business Insider, May 20, 2013 ---
http://www.businessinsider.com/brookins-slams-warren-student-loan-plan-2013-5
(Senator)
Elizabeth Warren made headlines last week for
saying that she believed students should pay the same rate for loans as big
Wall Street banks, 0.75%.The Obama
administration extended 3.4% interest rate on subsidized federal student
loans last year, but that measure is set to expire in July leaving room for
reform. The House Republicans, The President's Office, Democratic Senators
Jack Reed (D-RI) and Dick Durbin (D-IL), and Senator Elizabeth Warren.
Think tank
The Brookings Institute laid down each plan one by
one. The only one it doesn't take seriously at ALL is Warren's.
From Brookings:
Sen. Warren’s proposal
should be quickly dismissed as a cheap political gimmick. It proposes only a
one-year change to the rate on one kind of federal student loan, confuses
market interest rates on long-term loans (such as the 10-year Treasury rate)
with the Federal Reserve’s Discount Window (used to make short-term loans to
banks), and does not reflect the administrative costs and default risk that
increase the costs of the federal student loan program.
Setting aside this one
embarrassingly bad proposal, the remaining proposals raise a set of
questions that need to be answered in order to select the ideal policy...
Ultimately, Brookings advocates for (shocking) a
compromise. The Obama plan allows the rate to move with market conditions
(as do the House Republicans). The two plans differ in that Obama does not
want the rate to vary over the life of the loan (House Republicans do).
Durbin and Reed's plan looks a lot like the House
Republican plan, but puts a cap on interest rates and uses a different
benchmark for the rate — the 91-day Treasury rate plus a percentage
determined by the Education Secretary to cover administrative costs rather
than 10-year Treasury Bonds.
But again — Warren proposal is nowhere.
Jensen Comment
This reminds me of the time two first-year and naive Congressional
representatives proposed, in an effort to reduce fuel prices, that the U.S.
Government buy the oil refineries from the profit-mongering big oil companies
like Exxon, Shell, and BP. What they failed to understand is that the oil
companies would like nothing better than to unload their refineries on the U.S.
government. Profits are made in the production of oil and in the retailing of
oil products. Refineries tend to be high risk in the supply chain and are
somewhat losing operations when risks are factored into the equation. I forget
the details, but when oil companies proposed supporting their proposal they
dropped it like a hot potato.
From the CFO.com Morning
Ledger on May 21, 2013
Apple paid little to
no corporate income tax to any national government on tens of billions of
dollars in overseas income over the past four years, Senate investigators
found.
Today’s WSJ reports
that the Senate panel has put out a 40-page report and is expected to air
its findings at a hearing today.
Tim Cook is expected
to testify and propose changes to a tax code that provides American
companies strong incentives to keep overseas earnings bottled up at foreign
subsidiaries.
The
investigation found no evidence that Apple did anything illegal. The panel’s
new report focuses on Apple units in Ireland, where Apple has long based its
overseas operations. These units are beyond the reach of the IRS. But Irish
tax law only considers companies residents of the small European country if
they are managed and controlled there, and Apple manages them from the U.S.
The result: Apple pays little or no taxes to either country on much of its
revenue earned outside the U.S., according to the report.
Although Ireland is often used as a corporate tax haven, ahead of some of
the questions it expects
on Tuesday, Apple said it has a base of operations there with
4,000 people, reports
Emily Chasan in CFOJ. The company said its
tax payments account for $1 of every $40 in corporate income tax the U.S.
Treasury collects. It also said it doesn’t use “tax gimmicks,” and that its
overseas funds are primarily derived from overseas sales.
Sounds Like Something to Be Ordered in a Pub on St. Patrick's Day
"Did Apple Pare Its Tax Bill With a 'Double Irish?' by Carol Matlack,
Bloomberg Businessweek, May 22, 2013 ---
http://www.businessweek.com/articles/2013-05-22/did-apple-pare-its-tax-bill-with-a-double-irish
From the CFO.com Morning
Ledger on May 21, 2013
Shareholders can’t shoot
down golden parachutes
Shareholders’ opinion on lucrative severance payments to senior executives
doesn’t count for much. Unlike say-on-pay votes, which typically happen
annually, advisory votes on golden parachutes aren’t required until just
before investors vote on approving a takeover, CFOJ’s
Vipal Monga
reports. That
takes pressure off directors to act on the outcome, because they won’t have
to face shareholders again if the takeover deal closes. Also, the votes give
shareholders little power to change severance packages that already
exist. Heinz shareholders voted against multimillion-dollar severance
packages last month, but it won’t have any impact when executives leave
following the takeover deal with 3G Capital and Berkshire Hathaway, because
severance packages were already in place before the deal was in the works.
"Governor Cuomo Seeks to Turn SUNY Campuses (all 64) Into Tax-Free Zones,"
by Don Troop, Chronicle of Higher Education, May 23, 2013 ---
http://chronicle.com/blogs/bottomline/governor-cuomo-seeks-to-turn-suny-campuses-into-tax-free-zones/
. . .
In a statement released by Governor Cuomo’s
office, Nancy L. Zimpher, chancellor of SUNY, said, “The governor has said
many times that SUNY is the economic engine for New York, and these new
tax-free zones will further our campuses’ ability to innovate, create jobs,
and attract new companies through public-private partnerships.”
Under the plan, the companies would pay no sales,
property, or business taxes for a decade, and employees would pay no income
taxes. The venture seeks to replicate the economic success of SUNY’s
College of Nanoscale Science and Engineering,
which Mr. Cuomo said had attracted billions of dollars of investment to
Albany, N.Y.
The tax-free areas would include all SUNY campuses
outside of New York City and north of Westchester County, and up to 200,000
square feet adjoining the campuses, three million square feet for designated
private colleges, and 20 state-owned properties.
In making the announcement at the
soon-to-be-completed NanoFabX building on the Albany campus, Mr. Cuomo, a
Democrat, was joined Sen. Dean G. Skelos, the Senate Republican Conference
leader; Sen. Jeffrey A. Klein, the Independent Democratic Conference leader;
and Assembly Speaker Sheldon Silver, the Albany Times-Union
reported. A press aide to Mr. Cuomo cautioned that
the presence of the lawmakers did not mean they were endorsing the plan,
although all three men spoke favorably of the prospect of more jobs for New
Yorkers.
Richard Overmoyer is executive director of the
University Economic Development Association, a national group that
encourages university-based economic development. As a past deputy secretary
for technology innovation at the Pennsylvania Department of Community and
Economic Development, Mr. Overmoyer helped create the Keystone Innovation
Zone Tax-Credit Program, which assists start-up companies in the state.
He cautioned that the broadness of Mr. Cuomo’s
proposal, as presented, raised many questions about its viability.
“The challenge is how you draw those maps,” Mr.
Overmoyer said. In Pennsylvania, “we purposely did it in a way that limited
that geographic range to no more than four square miles around the campus.”
“Some of the SUNY campuses are in rural settings,”
he said. “Do you really want to encourage development on greenfield sites?
That’s not going to help you.”
A bill containing the details of Governor Cuomo’s
tax proposal will be introduced during the current legislative session,
which is scheduled to end on June 21. Many details remain to be worked out,
the governor’s office said.
Jensen Comment
If this is such a good idea why hasn't it already happened in the State of
Mississippi?
How About $275,000 Per New Job
and More Incentives for Each of 30 Future Years?
"Mississippi Sets A Record For Unreported Subsidies (to companies)," by
Kenneth Thomas, Business Insider, May 24, 2013 ---
http://www.businessinsider.com/mississippi-sets-a-record-for-unreported-subsidies-2013-5
Teaching Case
from The Wall Street Journal Accounting Weekly Review on May 3, 2013
The Big Number
by:
Emily Chasan
Apr 30, 2013
Click here to view the full article on WSJ.com
TOPICS: business combinations
SUMMARY: More than two-thirds of deals to acquire privately held
companies resulted in post-closing escrow claims in 2012 according to "a
study by advisory firm Shareholder Representative Services.... The claims
involved purchase-price adjustments, indemnifications or 'earn outs,' which
specify performance targets or milestones an acquired company must meet
after closing." INSTRUCTORS: REMOVE THE FOLLOWING STATEMENTS BEFORE
DISTRIBUTING TO STUDENTS AS THEY ANSWER QUESTIONS 2, 3 AND 4 IN THE REVIEW.
FASB codification section ASC 805-30-25-5 through 25-7 establishes
requirements for contingent portions of the fair value of consideration
given by an acquirer in a business combination. Paragraph 25-5 states, "The
acquirer shall recognize the acquisition-date fair value of contingent
consideration as part of the consideration transferred in exchange for the
acquire." For the two-thirds of acquisitions of non-public companies
discussed in this article, paragraph 25-7 states, "the acquirer shall
classify as an asset a right to the return of previously transferred
consideration if specified conditions are met." Returns of consideration
adjusted after the business combination likely would result in a reduction
of Goodwill.
CLASSROOM APPLICATION: The article may be used to introduce issues
in contingent payment portions of the purchase price in a business
combination. It also helps students to understand that the process of a
business combination takes an extended period of time--similar to, but
longer than, a real estate transaction--with a purchase-and-sale agreement
date followed by a closing date.
QUESTIONS:
1. (Introductory) According to the article, what happens in
two-thirds of business combinations in which the acquired firm is
non-public?
2. (Advanced) What is contingent consideration in a business
combination? How does a contingent consideration provision protect both the
acquirer and an acquired firm?
3. (Introductory) Based on discussion in the article, how long does
it take to resolve contingent portions of consideration in business
combinations?
4. (Advanced) What does authoritative accounting literature require
in accounting for contingent consideration portions of business
combinations? Cite specific authoritative guidance in your answer.
5. (Advanced) What asset do you think is most likely adjusted in
the two-thirds of business combinations discussed in this article?
Reviewed By: Judy Beckman, University of Rhode Island
"The Big Number,"
by Emily Chasan, The Wall Street Journal, April 30, 2013 ---
http://online.wsj.com/article/SB20001424127887324743704578447253910673688.html?mod=djem_jiewr_AC_domainid
7%
Proportion of deals to acquire privately held
companies that resulted in post-closing escrow claims last year
When the acquisition of a privately held company
closes, the terms aren't usually final. More than two-thirds of the time,
the buyer, generally a large public company, moves to modify the purchase
price or claw back funds put in escrow.
While deals between public companies typically are
sorted out at closing, acquisitions of private companies generally require a
sum of money to be held in escrow for 12 to 18 months after that, so the
buyer has time to evaluate any problems that emerge.
A study, by advisory firm Shareholder
Representative Services, of 420 mergers and acquisitions of private
companies whose escrow periods expired last year found that 67% spawned
post-closing claims. The claims involved purchase-price adjustments,
indemnifications or "earn outs," which specify performance targets or
milestones an acquired company must meet after closing.
"After closing, the buyer has that period to kick
the tires and see if everything that was represented is all true," said Paul
Koenig, SRS's co-chief executive.
On average, escrow claims took seven months to
resolve, but some companies get tied up in litigation for years.
Outpatient-services provider Alliance Healthcare Services Inc. AIQ +0.86%
said last month that it received a $1.2 million indemnification settlement
this year from its 2008 acquisition of Medical Outsourcing Services LLC.
After the deal closed, the U.S. government identified compliance issues at
the acquired company related to Medicare billing practices, Alliance
Healthcare said.
Post-closing claims most commonly stemmed from tax
and intellectual-property issues.
What's New with COSO?
| May 14, 2013 2013 Internal
Control-Integrated Framework Released
COSO has issued the 2013 Internal Control–Integrated Framework
(Framework). The Framework published in 1992 is recognized as the
leading guidance for designing, implementing and conducting internal
control and assessing its effectiveness. The 2013 Framework is
expected to help organizations design and implement internal control in
light of many changes in business and operating environments since the
issuance of the original Framework, broaden the application of internal
control in addressing operations and reporting objectives, and clarify
the requirements for determining what constitutes effective internal
control.
COSO has also issued Illustrative Tools for Assessing
Effectiveness of a System of Internal Control and the Internal
Control over External Financial Reporting (ICEFR): A Compendium of
Approaches and Examples. The Illustrative Tools are
expected to assist users when assessing whether a system of internal
control meets the requirements set forth in the updated Framework.
The ICEFR Compendium is particularly relevant to those who
prepare financial statements for external purposes based upon
requirements set forth in the updated Framework.
Read
Press Release
Download
Executive Summary
Read
FAQs
Download
PowerPoint Slides
Purchase Framework
and Tools |
May 22, 2013 question from Glen Gray
Bob,
I’m going to tap your knowledge again.
I’m wondering whatever happen to expert systems at
the accounting firms. They invested lots of money in expert systems in the
1980s and early 1990, but it appears that they have completely disappeared.
In your treads do you have any articles (academic or professional) that
specifically discuss this disappearance? Sadly, based on my search,
accounting-related expert system articles disappeared before the actual
expert systems disappeared.
Glen L. Gray, PhD, CPA
Dept. of Accounting & Information Systems
College of Business & Economics
California State University, Northridge
18111 Nordhoff ST
Northridge, CA 91330-8372
http://www.csun.edu/~vcact00f
May 22, 2013 reply from Bob Jensen
It would be better if you contact Miklos with your question. Miklos was
more of an expert on "expert systems" of large CPA firms ---
Click Here
http://raw.rutgers.edu/MiklosVasarhelyi/Resume
Articles/CHAPTERS IN BOOKS/C10. expert systems app in act.pdf
I suspect that the comparative advantage of expert systems declined in
the 21st Century as better and broader knowledge bases evolved after the
roaring 1990s.
"Accounting Firms That Use Expert Systems," by Casey Reader, eHow
Contributor ---
http://www.ehow.com/info_8736025_accounting-firms-use-expert-systems.html
. . .
Inferences
To provide the most relevant information to
users, an expert system will often deploy a complex set of inference
rules. For instance, the program may receive a question about income tax
law and then be able to correctly glean that certain information about
housing law might also be relevant. Much of the work of programming
expert systems involves developing new inference rules for new contexts.
Often programs will need to be updated for new rules.
Disadvantages
Though expert systems have been effective in
certain disciplines, such as accounting, they have some limitations that
have kept them from more widespread use. Expert systems are generally
only effective within very narrow ranges of knowledge. The ability to
infer what knowledge will be relevant to any specific problem can be
difficult for a computer to understand outside of a specialized range.
For this reason, only specialized disciplines tend to use them.
Read more: Accounting Firms That Use Expert Systems | eHow
http://www.ehow.com/info_8736025_accounting-firms-use-expert-systems.html#ixzz2U3EtmYfP
Note the references listed at the end of the above article.
Jensen Comment
I also suspect that expert systems are somewhat a victim of SOX that
provided more profits from detail testing in auditing while putting up
barriers to auditing analytical reviews, consulting conflicts, and expert
systems. For example, four of the Big Five firms separated themselves from
their consulting divisions where expert systems were conceived and
developed. And Andersen imploded shortly after Andersen Consulting broke
away.
I don't think expert systems necessarily died, but they fell short of
their 1990 promises as both the auditing profession and the former
consulting divisions of Big Five firms changed.
Expert systems and analytical review in general at one time were the
great hopes of replacing labor on audits. But the enormous auditing scandals
that were faulted, in large measure, for the failures of such labor saving
innovations did a lot of damage to the hopes for such systems. For a summary
of the hopes that failed to materialize see
http://www.thefreelibrary.com/The+future+of+expert+systems.-a016086624
"Governments using accrual accounting set to soar ," by Nick
Mann, Public Finance International, May 14, 2013 ---
http://www.publicfinanceinternational.org/news/2013/05/governments-using-accrual-accounting-set-to-soar/
Jensen Comment
But still less than half
The question for cost accountants is whether some robot costs should be
charged to direct labor rather than manufacturing overhead. For example, suppose
that a leased robot has an on-the-job clock with rental fees being paid by the
hour. Can a case be made that these rental fees by the hour should be charged
to direct labor?
"It’s Time to Talk about the Burgeoning Robot Middle Class: How will
a mass influx of robots affect human employment?" by Illah Nourbakhsh, MIT's
Technology Review, May 14, 2013 ---
Click Here
http://www.technologyreview.com/view/514861/its-time-to-talk-about-the-burgeoning-robot-middle-class/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130515
Jensen Comment
Note that robots can do more than physical things in factories. Robots can
become teachers, doctors, surgeons, auditors, accountants, soldiers, sailors,
pilots, truck drivers, musicians, etc. If we can figure out how to program them
to cheat in terms of billions of dollars they can even be elected to office.
The key to robotics in the service sector is to make them interactive in
terms of letting them do what they do best in interaction with humans doing what
they do best. Surgery is a good example. Although there is a miniscule margin of
error, robotic surgeons can perform delicate surgeries in interaction with human
surgeons who might be located thousands of miles away. These robots actually
make decisions and are not just hand extensions of the surgeon.
I've always admired drivers of 18-wheel trucks who can back those big rigs
into tight alleys. The day is probably already here when a robot can back a big
rig into tight places better than our top truck drivers.
For years robots have been landing airplanes, and the day may come when
robots are better pilots than our top pilots. The automatic pilots are making
decisions and are not just hand extensions of the pilots who are there mostly to
override the robot when something malfunctions. Years ago I was on an American
Airlines flight years ago when the pilot announced that the touch down had been
a bit rough because the automatic pilot landed the aircraft. I'm sure robotic
landings have smoothed out since then.
The question for cost accountants is whether some robot costs should be
charged to direct labor rather than manufacturing overhead. For example, suppose
that a leased robot has an on-the-job clock with rental fees being paid by the
hour. Can a case be made that these rental fees by the hour should be charged to
direct labor?
Robotics Displacing Labor Even in Higher
Education
"The New Industrial Revolution," by Jeffrey R. Young, Chronicle of Higher
Education's Chronicle Review, March 25, 2013 ---
http://chronicle.com/article/The-New-Industrial-Revolution/138015/?cid=cr&utm_source=cr&utm_medium=en
Baxter is a new type of worker, who is having no
trouble getting a job these days, even in a tight economy. He's a little
slow, but he's easy to train. And companies don't hire him, they buy him—he
even comes with a warranty.
Baxter is a robot, not a human, though human
workers in all kinds of industries may soon call him a colleague. His
plastic-and-metal body consists of two arms loaded with sensors to keep his
lifeless limbs from accidentally knocking over anyone nearby. And he has a
simulated face, displayed on a flat-panel computer monitor, so he can give a
frown if he's vexed or show a bored look if he's waiting to be given more to
do.
Baxter is part of a new generation of machines that
are changing the labor market worldwide—and raising a new round of debate
about the meaning of work itself. This robot comes at a price so
low—starting at just $22,000—that even businesses that never thought of
replacing people with machines may find that prospect irresistible. It's the
brainchild of Rodney Brooks, who also designed the Roomba robot vacuum
cleaner, which succeeded in bringing at least a little bit of robotics into
millions of homes. One computer scientist predicts that robots like Baxter
will soon toil in fast-food restaurants topping pizzas, at bakeries sliding
dough into hot ovens, and at a variety of other service-sector jobs, in
addition to factories.
I wanted to meet this worker of the future and his
robot siblings, so I spent a day at this year's Automate trade show here,
where Baxter was one of hundreds of new commercial robots on display. Simply
by guiding his hands and pressing a few buttons, I programmed him to put
objects in boxes; I played blackjack against another robot that had been
temporarily programmed to deal cards to show off its dexterity; and I
watched demonstration robots play flawless games of billiards on toy-sized
tables. (It turns out that robots are not only better at many professional
jobs than humans are, but they can best us in our hobbies, too.)
During a keynote speech to kick off the trade show,
Henrik Christensen, director of robotics at Georgia Tech, outlined a vision
of a near future when we'll see robots and autonomous devices everywhere,
working side by side with humans and taking on a surprisingly diverse set of
roles. Robots will load and unload packages from delivery trucks without
human assistance—as one company's system demonstrated during the event.
Robots will even drive the trucks and fly the cargo planes with our
packages, Christensen predicted, noting that Google has already demonstrated
its driverless car, and that the same technology that powers military drones
can just as well fly a FedEx jet. "We'll see coast-to-coast package delivery
with drones without having a pilot in the vehicle," he asserted.
Away from the futuristic trade floor, though, a
public discussion is growing about whether robots like Baxter and other new
automation technologies are taking too many jobs. Similar concerns have
cropped up repeatedly for centuries: when combines first arrived on farms,
when the first machines hit factory assembly lines, when computers first
entered businesses. A folk tune from the 1950s called "The Automation Song"
could well be sung today: "Now you've got new machines for to take my place,
and you tell me it's not mine to share." Yet new jobs have always seemed to
emerge to fill the gaps left by positions lost to mechanization. There may
be few secretaries today, but there are legions of social-media managers and
other new professional categories created by digital technology.
Still, what if this time is different? What if
we're nearing an inflection point where automation is so cheap and efficient
that human workers are simply outmatched? What if machines are now leading
to a net loss of jobs rather than a net gain? Two professors at the
Massachusetts Institute of Technology, Andrew McAfee and Erik Brynjolfsson,
raised that concern in Race Against the Machine: How the Digital
Revolution Is Accelerating Innovation, Driving Productivity, and
Irreversibly Transforming Employment and the Economy (Digital Frontier
Press, 2011). A
recent report on
60 Minutes featured the book's thesis and quoted critics concerned
about the potential economic crisis caused by robots, despite the cute faces
on their monitors.
But robots raise an even bigger question than how
many jobs are left over for humans. A number of scholars are now arguing
that all this automation could make many goods and services so cheap that a
full-time jobs could become optional for most people. Baxter, then, would
become a liberator of the human spirit rather than an enemy of the working
man.
That utopian dream would require resetting the role
work plays in our lives. If our destiny is to be freed from toil by robot
helpers, what are we supposed to do with our days?
To begin to tackle
that existential question, I decided to invite along a scholar of work to
the Automate trade show. And that's how my guest, Burton J. Bledstein, an
expert on the history of professionalism and the growth of the modern middle
class, got into an argument with the head of a robotics company.
It happened at the booth for Adept Technology Inc.,
which makes a robot designed to roam the halls of hospitals and other
facilities making deliveries. The latest model—a foot-tall rolling platform
that can be customized for a variety of tasks—wandered around the booth,
resembling something out of a Star Wars film except that it
occasionally blasted techno music from its speakers. Bledstein was
immediately wary of the contraption. The professor, who holds an emeritus
position at the University of Illinois at Chicago, explained that he has an
artificial hip and didn't want the robot to accidentally knock him down. He
needn't have worried, though; the robot is designed to sense nearby objects
and keep a safe distance.
The company's then-CEO, John Dulchinos, assured us
that on the whole, robots aren't taking jobs—they're simply making life
better for human employees by eliminating the most-tedious tasks. "I can
show you some very clear examples where this product is offloading tasks
from a nurse that was walking five miles a day to allow her to be able to
spend time with patients," he said, as the robot tirelessly circled our
feet. "I think you see that in a lot of the applications we're doing, where
the mundane task is done by a robot which has very simple capability, and it
frees up people to do more-elaborate and more-sophisticated tasks."
The CEO defended the broader trend of companies'
embracing automation, especially in factory settings where human workers
have long held what he called unfulfilling jobs, like wrapping chicken all
day. "They look like zombies when they walk out of that factory," he said of
such workers. "It is a mind-numbing, mundane task. There is absolutely no
satisfaction from what they do."
"That's your perception," countered Bledstein. "A
lot of these are unskilled people. A lot of immigrants are in these jobs.
They see it as work. They appreciate the paycheck. The numbness of the work
is not something that surprises them or disturbs them."
"I guess we could just turn the clock back to 1900,
and we can all be farmers," retorted Dulchinos.
But what about those displaced workers who can't
find alternatives, asked Bledstein, arguing that automation is happening not
just in factories but also in clerical and other middle-class professions
changed by computer technology. "That's kind of creating a crisis today.
Especially if those people are over 50, those people are having a lot of
trouble finding new work." The professor added that he worried about his
undergraduate students, too, and the tough job market they face. "It might
be a lost generation, it's so bad."
Dulchinos acknowledged that some workers are
struggling during what he sees as a transitional period, but he argued that
the solution is more technology and innovation, not less, to get to
a new equilibrium even faster.
This went on for a while, and it boiled down to
competing conceptions of what it means to have a job. In Bledstein's seminal
book, The Culture of Professionalism, first published in 1976, he
argues that Americans, in particular, have come to define their work as more
than just a series of tasks that could be commodified. Bledstein tracks a
history of how, in sector after sector, middle-class workers sought to
elevate the meaning of their jobs, whether they worked as athletes,
surgeons, or funeral directors: "The professional importance of an
occupation was exaggerated when the ordinary coffin became a 'casket,' the
sealed repository of a precious object; when a decaying corpse became a
'patient' prepared in an 'operating room' by an 'embalming surgeon' and
visited in a 'funeral home' before being laid to rest in a 'memorial park.'"
The American dream involves more than just
accumulating wealth, the historian argues. It's about developing a sense of
personal value by connecting work to a broader social mission, rather than
as "a mechanical job, befitting of lowly manual laborer."
Today, though, "there's disillusionment with
professions," Bledstein told me, noting that the logic of efficiency is
often valued more than the quality of service. "Commercialism has just taken
over everywhere." He complained that in their rush to reduce production
costs, some business leaders are forgetting that even manual laborers have
skills and knowledge that can be tough to simulate by machine. "They want to
talk about them as if these people are just drones," he said as we took a
break in the back of the exhibit hall, the whir of robot motors almost
drowning out our voices. "Don't minimize the extent of what quote-unquote
manual workers do—even ditch diggers."
In Genesis, God
sentences Adam and Eve to hard labor as part of the punishment for the apple
incident. "Cursed is the ground because of you; through painful toil you
will eat food from it all the days of your life" was the sentence handed
down in the Garden of Eden. Yet Martin Luther argued, as have other
prominent Christian leaders since, that work is also a way to connect with
the divine.
Continued in article
"Rethink Robotics invented a $22,000 humanoid
(i.e. trainable) robot that competes with low-wage workers," by Antonio
Regalado, MIT's Technology Review, January 16, 2013 ---
Click Here
http://www.technologyreview.com/news/509296/small-factories-give-baxter-the-robot-a-cautious-once-over/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130116
"Rise of the Robots," by Paul Krugman,
The New York Times, December 8, 2012 ---
http://krugman.blogs.nytimes.com/2012/12/08/rise-of-the-robots/
¶Catherine Rampell and Nick Wingfield write
about the
growing evidence for “reshoring” of manufacturing
to the United States. They cite several reasons: rising wages in Asia; lower
energy costs here; higher transportation costs. In a
followup piece, however, Rampell cites another
factor: robots.
¶The most valuable part of each
computer, a motherboard loaded with microprocessors and memory, is
already largely made with robots, according to my colleague Quentin
Hardy. People do things like fitting in batteries and snapping on
screens.
¶As more
robots are built, largely by other robots, “assembly can be done here as
well as anywhere else,” said Rob Enderle, an analyst based in San Jose,
Calif., who has been following the computer electronics industry for a
quarter-century. “That will replace most of the workers, though you will
need a few people to manage the robots.”
¶Robots mean that labor costs don’t
matter much, so you might as well locate in advanced countries with
large markets and good infrastructure (which may soon not include us, but
that’s another issue). On the other hand, it’s not good news for workers!
¶This is an
old concern in economics; it’s “capital-biased technological change”, which
tends to shift the distribution of income away from workers to the owners of
capital.
¶Twenty years
ago, when I was writing about globalization and inequality, capital bias
didn’t look like a big issue; the major changes in income distribution had
been among workers (when you include hedge fund managers and CEOs among the
workers), rather than between labor and capital. So the academic literature
focused almost exclusively on “skill bias”, supposedly explaining the rising
college premium.
¶But
the college premium hasn’t risen for a while.
What has happened, on the other hand, is a notable shift in income away from
labor:.
"Harley Goes Lean to Build Hogs," by James R. Hagerty, The Wall
Street Journal, September 22, 2012 ---
http://professional.wsj.com/article/SB10000872396390443720204578004164199848452.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj
If the global economy slips into a deep slump,
American manufacturers including motorcycle maker Harley-Davidson Inc. that
have embraced flexible production face less risk of veering into a ditch.
Until recently, the company's sprawling factory
here had a lack of automation that made it an industrial museum. Now,
production that once was scattered among 41 buildings is consolidated into
one brightly lighted facility where robots do more heavy lifting. The number
of hourly workers, about 1,000, is half the level of three years ago and
more than 100 of those workers are "casual" employees who come and go as
needed.
All the jobs are not going to Asia, They're going to Hal ---
http://en.wikipedia.org/wiki/2001_Space_Oddessey
"When Machines Do Your Job: Researcher Andrew McAfee says advances in
computing and artificial intelligence could create a more unequal society,"
by Antonio Regalado, MIT's Technology Review, July 11, 2012 ---
http://www.technologyreview.com/news/428429/when-machines-do-your-job/
Are American workers losing their jobs to machines?
That was the question posed by
Race Against the Machine, an influential
e-book published last October by MIT business school researchers Erik
Brynjolfsson and Andrew McAfee. The pair looked at troubling U.S. employment
numbers—which
have declined since the recession of 2008-2009 even as economic output has
risen—and concluded that computer technology was
partly to blame.
Advances in hardware and software mean it's
possible to automate more white-collar jobs, and to do so more quickly than
in the past. Think of the airline staffers whose job checking in passengers
has been taken by self-service kiosks. While more productivity is a
positive, wealth is becoming more concentrated, and more middle-class
workers are getting left behind.
What does it mean to have "technological
unemployment" even amidst apparent digital plenty? Technology Review
spoke to McAfee at the Center for Digital Business, part of the MIT Sloan
School of Management, where as principal research scientist he studies
new employment trends and definitions of the workplace.
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.
"Patented Book Writing System Creates, Sells
Hundreds Of Thousands Of Books On Amazon," by David J. Hull, Security Hub,
December 13, 2012 ---
http://singularityhub.com/2012/12/13/patented-book-writing-system-lets-one-professor-create-hundreds-of-thousands-of-amazon-books-and-counting/
Philip M. Parker, Professor of Marketing at INSEAD Business School,
has had a side project for over 10 years. He’s created
a computer system that can write books about specific subjects in about 20
minutes. The patented algorithm has so far generated hundreds of thousands
of books. In fact, Amazon lists over 100,000 books attributed to Parker, and
over 700,000 works listed for his company,
ICON Group International, Inc. This doesn’t
include the private works, such as internal reports,
created for companies or licensing of the system itself through a separate
entity called
EdgeMaven Media.
Parker is not so much an author as a compiler, but
the end result is the same: boatloads of written works.
"Raytheon's Missiles Are Now Made by Robots," by Ashlee Vance,
Bloomberg Business Week, December 11, 2012 ---
http://www.businessweek.com/articles/2012-12-11/raytheons-missiles-now-made-by-robots
A World Without Work," by Dana Rousmaniere, Harvard Business Review
Blog, January 27, 2013 ---
Click Here
http://blogs.hbr.org/morning-advantage/2013/01/morning-advantage-a-world-with.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Jensen Comment
Historically, graduates who could not find jobs enlisted in the military. Wars
of the future, however, will be fought largely by drones, robots, orbiting
orbiting satellites. This begs the question of where graduates who cannot find
work are going to turn to when the military enlistment offices shut down and
Amazon's warehouse robotics replace Wal-Mart in-store workers.
If given a choice, I'm not certain I would want to be born again in the 21st
Century.
The Sad State of Economic Theory and Research ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
"HTML5 Moodle Mobile
App Comes to Android, iOS," by David Nagel, T.H.E. Journal, May 9,
2013 ---
http://thejournal.com/articles/2013/05/09/html5-moodle-mobile-apps-comes-to-android-ios.aspx
Bob Jensen's threads on Tools
and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm
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?
"U.S. banks push back on change in loan loss accounting," by Dena
Aubin, Fox Business, May 13, 2013 ---
http://www.foxbusiness.com/news/2013/05/13/us-banks-push-back-on-change-in-loan-loss-accounting/
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.
"Rule Split to Put U.S. Banks at a Loss," by Michael Rapoport, The
Wall Street Journal, February 27, 2013 ---
Click Here
http://professional.wsj.com/article/SB10001424127887323293704578330490452665994.html?mod=ITP_moneyandinvesting_0&mg=reno64-wsj
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.
Continued in article
Bob Jensen's threads on fair value accounting and bad debts ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValueFails
Bob Jensen's threads on accounting standard setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
List of AACSB Universities With Accounting Accreditation (in addition to
business school accreditation) ---
https://www.aacsb.net/eweb/DynamicPage.aspx?Site=AACSB&WebKey=4BA8CA9A-7CE1-4E7A-9863-2F3D02F27D23
"AACSB approves revised accounting school accreditation standards," by
Chris Baysden, Journal of Accountancy, May 14, 2013 ---
http://www.journalofaccountancy.com/News/20137919.htm?goback=.gde_4977040_member_244826335
Thank you Dennis Huber for the heads up.
Jensen Comment
Standards for such things as "creative curriculums and new program concepts" are
still vague. Most of the programs accredited to date are traditional, and there
is not one for-profit accredited university or one program that is all or mainly
online. It's still not possible to my knowledge to attain accounting
accreditation without first attaining AACSB business school accreditation. This
is a major constraint on innovation since business school deans that are the
AACSB accreditation gate keepers tend to block non-traditional programs such as
for-profit university programs and distance education programs. However, some
AACSB accredited universities have limited distance education alternatives for
courses and degrees, but these were generally allowed only when the a university
previously had such accreditation for its onsite programs.
Are there any examples of "creative creative curriculum and new program
concepts?" worthy of mention in accounting programs having AACSB accounting
accreditation. The University of Connecticut has AACSB accounting accreditation
and offers an online distance education degree. However, the University of
Maryland having AACSB accreditation put its online accounting degree program off
to the University College that does not have AACSB accreditation.
It still seems to me that in North America the AACSB only talks the talk with
respect to ""creative curriculums and new program concepts." Only in Europe has
there been AACSB walking the walk in its desperate effort to go global. I would
even go so far as to conjecture that the AACSB has accredited some programs in
Europe that would not make it in North America, including universities with some
questionable executive doctoral programs.
What going "Dutch" means in terms of defined-benefit pensions"
If only the old folks could survive on tulips
"More Defined Benefit Pension Plans Going Bankrupt," by Mike Shedlock,
Townhall, May 28, 2013 ---
Click Here
http://finance.townhall.com/columnists/mikeshedlock/2013/05/28/more-defined-benefit-pension-plans-going-bankrupt-n1607352?utm_source=thdaily&utm_medium=email&utm_campaign=nl
Bob Jensen's threads on pension accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Pensions
Bob Jensen's threads on the looming entitlements crisis ---
http://www.trinity.edu/rjensen/Entitlements.htm
"Accounting Fraud Targeted With Crisis-Related Enforcement Ebbing, SEC Is
Turning Back to Main Street," by Jean Eaglesham, The Wall Street Journal,
May 27, 2013 ---
U.S. securities regulators are turning back toward
Main Street, renewing their focus on accounting fraud and other
financial-disclosure failings.
Such cases were long a staple of the Securities and
Exchange Commission's enforcement efforts, leading to more than 25% of
civil-enforcement actions filed by the agency in its 2003 to 2005 financial
years. The financial crisis shifted attention and money elsewhere. In the
year ended last September, accounting fraud and financial-disclosure
problems made up just 11% of SEC enforcement actions.
But as the volume of crisis-related cases ebbs, top
SEC officials are expected to announce soon a broad shuffling of resources
in the agency's enforcement division that will include an increased focus on
accounting fraud, according to people close to the agency.
The decision to hunt for wrongdoing by Main Street,
as well as Wall Street, puts America's corporations in the SEC's cross
hairs.
The move is led by SEC Chairman Mary Jo White and
co-enforcement chiefs George Canellos and Andrew Ceresney, said the people
close to the agency. It isn't clear how much money or manpower will be
devoted to the effort, though the SEC already is developing a computer
program to sift language in financial reports for clues that executives
might be misstating results, agency officials say.
Mr. Ceresney, a former federal prosecutor who
joined the SEC in April, and Mr. Canellos have told employees there are no
plans to get rid of five specialized enforcement units started in 2009 that
are devoted to market abuse, asset management, foreign corrupt practices,
municipal securities and structured products. People close to the SEC expect
changes to some of the units, though, which they say could give the agency
more leeway to make accounting fraud a top priority.
"We have to be more proactive in looking for it,"
Scott Friestad, a senior SEC enforcement official, told a legal conference
last month. "There's a feeling internally that the issue hasn't gone away."
During and after the financial crisis, SEC
enforcement officials devoted much of their energy to reining in alleged
crisis-related malfeasance, such as misleading investors about the risks of
subprime loans or mortgage bonds. Few crisis-era enforcement cases remain.
The falloff in accounting-fraud crackdowns by the
SEC also may reflect improved financial reporting by companies because of
Sarbanes-Oxley rules that took effect in 2002 after the Enron Corp. and
WorldCom Inc. scandals.
An initial step in the SEC's new effort is software
that analyzes the "management's discussion and analysis" section of annual
reports where executives detail a company's performance and prospects.
Officials say certain word choices appear to reveal
warning signs of earnings manipulation, and tests to determine if the
analysis would have detected previous accounting frauds "look very
promising," said Harvey Westbrook, head of the SEC's office of quantitative
research.
Companies that bend or break accounting rules tend
to play a "word shell game," said Craig Lewis, the SEC's chief economist and
head of the division developing the model. Such companies try to "deflect
attention from a core problem by talking a lot more about a benign" issue
than their competitors, while "underreporting important risks."
If the word-analysis program works, officials say
it will be added to a new "Accounting Quality Model" that SEC enforcement
staff started using recently. The model trawls data from nearly 9,000
publicly traded companies. A similar computer-powered search for unusual
performance patterns at hedge funds has led to seven enforcement actions in
recent years.
Success won't be easy, partly because suspicious
language or numbers in securities filings aren't necessarily illegal. Some
companies and their lawyers are expected to respond to the crackdown by
trying to outsmart the agency's computers.
"As soon as the SEC suggests it's going to look at
this in terms of the numbers of words, lawyers will be more loquacious,"
said John Coffee, a law professor at Columbia University.
The fraud-detection software looks for big
differences between net income and actual cash outflows available to
investors, according to officials. It then looks for other warning signs,
such as declining market share or weak profitability compared with rivals.
The system also looks for companies with an
unusually high number of off-balance sheet transactions. Enron, Adelphia
Communications Corp. and other large accounting frauds involved the use of
such transactions to hide debt and inflate earnings.
Another sign of possible trouble: auditor changes.
About 9% of companies that file financial reports with the SEC had their
auditor leave last year, according to research firm Audit Analytics. Of the
866 companies that lost their auditor, 66 had two auditors depart, while two
companies went through three auditors.
Sounding an alarm at the SEC "doesn't necessarily
mean the company's done anything wrong," Mr. Lewis said. But his aim is that
something "kicked out of our model as being unusual" is "much more likely to
be associated with a fraud" than having a benign explanation.
Jacob Frenkel, a former SEC enforcement lawyer now
at law firm Shulman, Rogers, Gandal, Pordy & Ecker PA, said computer power
might help the agency refocus attention on financial-reporting issues that
were "the bread and butter of the agency's enforcement program" for decades.
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Feds shut down 'financial
hub of the cyber-crime world'," by Bob Sullivan, NBC News, May 28,
2013 ---
http://redtape.nbcnews.com/_news/2013/05/28/18560809-feds-shut-down-financial-hub-of-the-cyber-crime-world?lite
Thank you Dennis Huber for the heads up.
Liberty Reserve was the financial glue that held
together a massive worldwide network of cybercriminals, but the network that
enabled $6 billion to change hands has been ripped apart, U.S. prosecutors
said Tuesday, leaving thousands of criminals wondering where the money is.
One of the world’s most widely used digital
currencies, Liberty Reserve was used as a secret money system for credit
card thieves, identity thieves, Ponzi scheme peddlers, hackers for hire,
child pornographers, even drug dealer websites, federal officials claim in
an indictment unsealed Tuesday in Manhattan federal court. The
virtual
money system allowed perhaps a million criminals to
anonymously move money around the world.
The scope of the crime is "staggering," federal
officials allege in the indictment: Liberty Reserve had a million users and
serviced 55 million transactions since 2006. Some are calling this the
largest money laundering prosecution in history.
"(Liberty Reserve is) a criminal business
venture...designed to help criminals conduct illegal transactions and
launder the proceeds," the unusually colorful indictment says. "(It was) a
financial hub of the cyber-crime world."
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Question
How would you account for warranty obligations of Tesla electric automobiles?
"Tesla's Earnings Quality Is Sketchy, But Its Stock Keeps Soaring," by
Herb Greenberg, Business Insider, May 16, 2013 ---
http://www.businessinsider.com/teslas-stocks-keep-soaring-2013-5
If profits matter going forward, so does earnings
quality. And according to Gradient Analytics, the earnings quality gets a
grade of 'F."
What stands out the most?
"So many things," says Gradient research director
Donn Vickrey. "By declaring themselves profitable, I said there is just no
way. How can this be at this point in the cycle? It has to be purely a paper
profit and at that some elements of the paper may be lower quality than
usual."
Paper or not, Vickrey believes whatever Tesla's
profitability, it isn't sustainable.
Rather than go through all of his points, let's
focus on just one: warranty accruals. This is the amount the company puts
aside for expected warranty expenses — a non-cash charge that hits earnings
as a cost of goods sold. The lower the provision, the less of a hit to
earnings.
It's highly subjective, and Tesla current reserves
at a rate, relative to sales, in-line with Ford and General Motors. But its
warranty is longer than mainstream auto companies and "its product is based
on new technology with unproven reliability," according to Gradient's report
on Tesla." Of particular concern: The firm's eight-year, 100,000 mile
battery warranty could prove to be extremely costly."
But what if the company is so new it simply doesn't
know — so uses existing auto companies as a benchmark?
Under accounting rules, Vickrey says, if you don't
know what they'll be "they should be higher, not lower."
Continued in article
Bob Jensen's threads on warranty accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#LifetimeWarranties
From the TaxProf Blog on May 16, 2013 ---
http://taxprof.typepad.com/
For a change, the liberals and conservatives are equally upset over this IRS
scandal
The Deepening IRS Scandal
From the TaxProf Blog on May 29, 2013 ---
http://taxprof.typepad.com/
For a change, the liberals and conservatives are equally upset over this IRS
scandal
The IRS Scandal, Day #20
"Americans Deserve the IRS," by Walter E. Williams, Townhall,
May 29, 2013 ---
Click Here
http://townhall.com/columnists/walterewilliams/2013/05/29/inority-view-n1607099?utm_source=thdaily&utm_medium=email&utm_campaign=nl
From The Wall Street Journal Accounting Weekly Review on May 17. 2013
Wider Problems Found at IRS
by:
John McKinnon and Siobhan Hughes
May 13, 2013
Click here to view the full article on WSJ.com
TOPICS: IRS, Taxation, Treasury Department
SUMMARY: The IRS has apologized for inappropriately targeting
specific political groups' applications for tax-exempt status as 501(c)(4)
organizations. The apology came just prior to a report being issued by the
Treasury Department's inspector general for tax administration, which finds
that lower level IRS employees targeted certain political terms in deciding
on which applications to scrutinize for potential violation of the 501(c)
tax exempt status. As reported in the related article, "A congressional aide
familiar with the findings of the inspector general's report said it
concludes that tea-party groups were delayed in the application process, and
were asked unnecessary questions." The Treasury Department audit was
initiated after "the controversy arose in early 2012, when reports began to
surface that newly formed tea-party and other conservative groups that had
applied for tax-exempt status were receiving letters from the IRS asking for
disclosure of their donors and other information that typically isn't
requested of groups making such applications." Many find the apology too
late and are calling for resignations since "IRS officials, in congressional
testimony soon after [the reports surfaced], denied targeting of tea party
groups had occurred."
CLASSROOM APPLICATION: The article is useful to discuss the role of
the IRS; its potential for overstepping bounds; and the controls needed to
ensure such inappropriate behavior in government does not run rampant,
including an audit function within our U.S. system of checks and balances.
The article can also be used for a similar discussion when covering
accounting for not-for-profit organizations or in an auditing, ethics, or
other professional-practice oriented course.
QUESTIONS:
1. (Introductory) What organization has issued a report on the
Internal Revenue Service (IRS)? What is the organization's responsibility
within the U.S. government in general and for the IRS?
2. (Introductory) According to the main and related articles, what
are the findings of the report on the IRS's actions in relation to certain
not-for-profit organizations?
3. (Advanced) What is the possbile concern about organizations with
politically oriented names and the potential for violation of requirements
for 501(c)(4) status?
4. (Advanced) What are the "wider problems" driving the title of
this article?
5. (Introductory) Click on the related article and its video of one
of this article's authors, John McKinnon. When did the IRS decide to
apologize for its actions in targeting certain groups?
6. (Advanced) What is the source of the complaint that the IRS
leaders lied about the targeting of specific political groups for scrutiny?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
IRS Apologizes for Scrutiny of Conservative Groups
by John McKinnon and Corey Boles
May 11, 2013
Page: A1
"Wider Problems Found at IRS," by John McKinnon and Siobhan Hughes, The
Wall Street Journal, May 13, 2013 ---
http://online.wsj.com/article/SB10001424127887324715704578478851998004528.html?mod=djem_jiewr_AC_domainid
The Internal Revenue Service's scrutiny of
conservative groups went beyond those with "tea party" or "patriot" in their
names—as the agency admitted Friday—to also include ones worried about
government spending, debt or taxes, and even ones that lobbied to "make
America a better place to live," according to new details of a government
probe.
The investigation also revealed that a high-ranking
IRS official knew as early as mid-2011 that conservative groups were being
inappropriately targeted—nearly a year before then-IRS Commissioner Douglas
Shulman told a congressional committee the agency wasn't targeting
conservative groups.
Enlarge Image image image Associated Press
Tax-exempt groups organized under section 501(c)(4)
of the Internal Revenue Code are allowed to engage in some political
activity, but the primary focus of their efforts must remain promoting
social welfare. Previously
IRS Apologizes for Scrutiny of Conservative Groups
IRS Apologizes for Improper Scrutiny of GOP Groups
The new disclosures are likely to inflame a
widening controversy over IRS handling of dozens of applications by
tea-party, patriot and other conservative groups for tax-exempt status.
The details emerged from disclosures to
congressional investigators by the Treasury Inspector General for Tax
Administration. The findings, which were reviewed by The Wall Street
Journal, don't make clear who came up with the idea to give extra scrutiny
to the conservative groups.
The Internal Revenue Service inappropriately
flagged conservative political groups for additional reviews during the 2012
election to see if they were violating their tax exempt status. John
McKinnon reports on the News Hub.
The inspector general's office has been conducting
an audit of the IRS's handling of the applications process and is expected
to release a report this week. The audit follows complaints last year by
numerous tea-party and other conservative groups that they had been singled
out and subjected to excessive and inappropriate questioning. Many groups
say they were asked for lists of their donors and other sensitive
information.
On Sunday, a government official said the report
will note that IRS officials told investigators that no one outside the IRS
was involved in developing the criteria the agency now acknowledges were
flawed.
On Friday, Lois Lerner, head of the IRS
tax-exempt-organizations division, said the agency was "apologetic" for what
she termed "absolutely inappropriate" actions by lower-level workers. She
said those workers had selected some conservative groups for extra scrutiny
to determine whether their applications should be approved. She said they
had picked groups for extra scrutiny according to whether they had "tea
party" or "patriot" in their names, among other criteria.
s. Lerner came to the IRS in 2001 from the Federal
Election Commission, and assumed her current position in 2006. IRS officials
said Sunday that Ms. Lerner wasn't available for comment, and she didn't
respond to an emailed request.
GOP lawmakers stepped up their criticism on Sunday.
"The bottom line is [IRS officials] used key words to go after
conservatives," Rep. Darrell Issa (R., Calif.), said Sunday on NBC's "Meet
the Press." "There has to be accountability for the people who did it. And,
quite frankly…there's got to be accountability for people who were telling
lies about it being done."
Some Democrats also voiced criticism. "I'm
concerned about that," said Sen. Dianne Feinstein (D., Calif.), also on NBC.
"Somebody made the decision that they would give extra scrutiny to this
particular group. And I think we have to understand why."
The IRS said over the weekend it is in the process
of independently confirming the dates mentioned on the timeline of events
contained in the inspector general report, "but we believe the [inspector
general's] timeline is correct." The IRS said the report supports its view
that its missteps weren't politically motivated and were limited to
lower-level workers.
The IRS also said the report reflects that "IRS
senior leadership was not aware of this level of specific details" at the
time of a March 2012 hearing where Mr. Shulman denied any targeting of
conservative groups. Mr. Shulman, who no longer works for the IRS, declined
to comment.
The new details suggest that agency workers were
examining statements in applications for tax-exempt status to determine
whether groups had political leanings.
Tax-exempt social-welfare groups organized under
section 501(c)(4) of the Internal Revenue Code are allowed to engage in some
political activity, but the primary focus of their efforts must remain
promoting social welfare. That social-welfare activity can include lobbying
and advocating for issues and legislation, but not outright
political-campaign activity. But some of the rules leave room for IRS
officials to make judgment calls and probe individual groups for further
information.
Organizing as such a group is desirable, not just
because such entities typically don't have to pay taxes, but also because
they generally don't have to identify their donors.
IRS officials said last week that the focused
review of conservative groups was initiated by lower-level civil servants in
the IRS Cincinnati office, not by political appointees in Washington, and
that it wasn't politically motivated. They say it stemmed from a misguided
effort to centralize review of a growing number of applications for
tax-exempt 501(c)(4) status.
But questions continued to swirl about the failure
of IRS officials to disclose the problems until the inspector general's
report was about to become public.
The timeline contained in the draft report
indicates that IRS scrutiny of tea-party and other conservative groups began
as early as 2010 and came to the attention of Ms. Lerner, the head of the
tax-exempt-organizations division, at least by the following year.
The report's timeline indicates that the criteria
were changed to be more neutral in July 2011 after Ms. Lerner "raised
concerns." The criteria for heightened scrutiny continued to evolve over the
next year or so, even as complaints from tea-party groups—and questions from
GOP lawmakers—mounted over IRS inquiries to various groups about their
activities.
Letters from Ms. Lerner in April and May 2012
responding to questions by Republican lawmakers made no mention of the
problems that had surfaced in the IRS unit.
According to the draft report, on April 24 and 25
of last year, officials in Ms. Lerner's office were reviewing "troubling
questions" that had been asked of organizations, including "the names of
donors."
Ms. Lerner's April 26 letter to Mr. Issa, the
chairman of the House Oversight and Government Reform Committee, said that
"there are instances where donor information may be needed…such as when the
application presents possible issues of…private benefit."
The report indicates that in 2010 and 2011, some
IRS workers weren't just singling out groups because their names contained
certain words, as IRS officials suggested on Friday, but appeared to be
probing for indications of political interests or leanings.
Continued in article
WASHINGTON (AP) — The Internal Revenue Service inappropriately flagged
conservative political groups for additional reviews during the 2012 election to
see if they were violating their tax-exempt status, a top IRS official said
Friday.
Organizations were singled out because they included the words "tea party" or
"patriot" in their applications for tax-exempt status, said Lois Lerner,
who heads the IRS division that oversees tax-exempt groups.
In some cases, groups were asked for their list of donors, which violates IRS
policy in most cases, she said.
"That was wrong. That was absolutely incorrect, it was insensitive and it was
inappropriate. That's not how we go about selecting cases for further review,"
Lerner said at a conference sponsored by the American Bar Association.
"The IRS would like to apologize for that," she added.
Continued at
http://twittweb.com/taxes+pay+civilized+soc-32550060
Apart from the most recent IRS scandal currently in the news, the GAO found
over 60 internal control deficiencies in the IRS
"Improvements Are Needed to Enhance the Internal Revenue Service’s Internal
Controls," by Steve n T . Miller, Former Acting Commissioner of Internal
Revenue, May 13, 2013 ---
http://www.gao.gov/assets/660/654563.pdf
"Wal-Mart and Violations of the Foreign Corrupt Practices Act," by
Accounting Professor Steven Mintz, Ethics Sage, May 21, 2013 ---
http://www.ethicssage.com/2013/05/wal-mart-and-violations-of-the-foreign-corrupt-practices-act.html
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Business Acquisitions and Derivatives
"Puts, calls or forward contracts can be complex," Ernst & Young
Technical Line 2013-10, May 15, 2013 ---
Click Here
http://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_BB2538_ComplexDealStructures_Part2_15May2013/$FILE/TechnicalLine_BB2538_ComplexDealStructures_Part2_15May2013.pdf
What you need to know
• Today’s buyers and sellers of businesses are
coming up with innovative deal structures that include call or put
options or forward contracts indexed to the portion of the business not
acquired .
• The accounting for these options and forward
contracts over noncontrolling interest s can be complex and often will
affect future earnings, earnings per share and other operating metrics.
• Companies should carefully consider the
potential consequences before entering into deals that include the us e
of call or put options and forward contracts .
Overview
While the volume of merger and acquisition (M&A) activity has declined
slightly in recent years , we are seeing an increase in the complexity
of deal structures, particularly those using contingent consideration or
call or put options or forward contracts (referred to in this
publication as equity contracts) that allow the buyer and seller to
share the economic risks of an acquired business for a period of time .
The accounting for acquisitions using these
features can be complex and often will affect future earnings. Before
consummating these transactions, companies should full y understand the
accounting implications and effects on future earnings, earnings per
share (EPS) and other financial metrics.
This publication — the second in a series —
addresses the accounting for equity contracts entered into between a
buyer ( i.e., the new parent that acquires a controlling interest in a
business ) and noncontrolling interest (NCI) holders in a business
combination . In December 2012 , we issued a companion publication ,
Complex deal structures can affect future earnings and other metrics ,
which focused on accounting and valuation considerations for contingent
consideration issued in a business combination. No. 20 1 3 - 10 15 May
201 3 Technical Line
In this issue:
Overview
Use of call options, put options or forward contracts
Initial recognition of NCI in a business combination
Roadmap for initial classification of equity con tracts over NCI
Evaluating whether an equity contract is embedded or freestanding
Embedded call or put options
Embedded forward contracts and certain combinations of embedded
options
Redeemable NCI
Freestanding equity contracts
Effect of equity contracts on NCI on EPS
Examples of common transactions
Jensen Comment
One huge difference between USA GAAP and IFRS is that international accounting
standards now ignore embedded derivatives which, in my viewpoint, greatly
weakens IFRS.
One big difference between options (puts and calls) versus futures contracts
is that options losses are limited (bounded) to the premiums paid up front
for options contracts. Futures contracts are free initially but can expose
parties to unbounded risks unless hedged in some way. Another big difference is
that futures contracts are cleared daily for cash whereas options subsequent
cash flows for options only when they are settled. American options can be net
settled on any date before maturity in terms on current spot prices less strike
prices.. European options can be net settled only on maturity dates at strike
prices. Asian options are settled on the basis of averaging of former spot
prices and strike prices.
Bob Jensen's threads on accounting for derivative financial instruments
---
http://www.trinity.edu/rjensen/caseans/000index.htm
Earnings Misstatements, Restatements and Corporate Governance
Sandeep Nabar
Spears School of Business
Oklahoma State University
Yongtae Kim
Leavy School of Business
Santa Clara University
500 El Camino Real
Santa Clara, CA 95053
William G. Heninger
Marriott School of Management
Brigham Young University
Abstract
We investigate the corporate governance characteristics of firm s that
restate previously-reported accounting data. Unlike other stud ies that
focus on either the misstatement or the restatement only, we examine changes
in the governance characteristics of restating firms from the initial
misstatement to the restatement. While the other studies are concerned with
the causes of financial misreporting, we endeavor to obtain insight s into
the changes that lead to the detection and correction of such misreporting.
We find that prior to the misstatement, misstating firms are more likely to
have CEOs who sit on nominating committees, less independent boards of
directors, and less independent audit committees, relative to control firms.
Our results indicate that pre-misstatement agency conflicts are not resolved
prior to restatements. Boards and audit committees of restating firms
continue to be re latively less independent at the time of the restatement.
We also find that restating firms are more likely to experience CFO turnover
than control firms. Based on the results, we conclude that the restatements,
which constitute an admission and correction of accounting irregulari ties,
are not attribut able to governance improvements in firms.
. . .
When a company restates its financial statements it
is admitting to a material error or irregularity in previously issued
financial statements. In 2004, 414 public companies restated their financial
statements due to accounting errors This represents a 28% increase over 2003
restatements and, except for a 2% decrease in 2 003, it also represents the
e continuation of an increasing trend in the number of restated financial
statements by an average of 16% since 2000. In addition, 15% of the
companies s restating their financial statements in 2004 had restated their
financial statements at least one other time times since 1997. However,
even more troubling is the finding that nearly 40% of the 2004 restatements
re ported errors in at least three prior annual reports (Huron
Consulting Group, 2005). These multi-year restatements point to recurring
accounting errors. Recurring errors and repeated restatements suggest that,
in many cases, it is difficult to resolve agency conflicts that lead to
misreporting of financial statements.
. . .
Our results also suggest that restating firms are
more likely to be audited by Big-6 auditors than are control firms. This
result calls into question the belief that audit quality is always
positively related to audit firm size (e.g., Palmrose 1988), and is
consistent with regulators’ concerns (Roman 2002) that conflicts of interest
ma y often impair the independence of large audit firms. Finally our
examination of how firms change over the misstatement- restatement period
indicates that restating firms ar e more apt to change their CFOs than are
the control firms. While this result is consiste nt with new-CFO diligence,
we cannot exclude the possibility that accounting problems cause the old-CFO
departures. The latter explanation, nevertheless, underscores the impor tant
role that corporate gove rnance plays in the financial reporting process.
Jensen Comment
It's important to remember that correlation is not necessarily causation. My
wife's superstar spine surgeon in Boston has a somewhat higher record of
surgical "errors" because he's willing to take on many referrals that other
spine surgeons will not touch due to high risks such as older patients that are
lousy candidates for 15-hour surgeries and otherwise high risk delicate
surgeries that can lead to complications or death.
This guy is very, very good and has a lot of guts.
In a somewhat similar manner the "Big 6" audit firms take on clients that
smaller audit firms will not or cannot touch. The medical analogy only goes so
far. I don't think it's so much "guts" as it is having the capability to do
complicated audits. The "Big 6" may be the only auditor firms with needed
experts in specialized global operations, derivative financial instruments
experts, etc. where audit mistakes have a higher probability of happening in
spite of having the needed experts around the world.
The "Big 6" are also sought out by some clients because they have the deepest
pockets when the audits get screwed up as when KPMG performed a horrid audit of
Fannie Mae that required Deloitte to make over a million correcting journal
entries.
Jensen Comment
KMPG was fired from what was arguably its largest client in history. Fannie Mae
under a bonus-seeking CEO perpetrated one of the largest earnings management
frauds in history ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
"Fannie, KPMG
Settle Class-Action Suit," by Michael Rapoport and Nick Timiraos, The
Wall Street Journal, May 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324326504578469591902348434.html?mod=WSJ_Markets_LEFTTopStories
Fannie Mae FNMA +9.76% and its former auditor KPMG
LLP agreed Tuesday to pay $153 million to settle a long-running class-action
lawsuit in which Ohio public pension funds and other shareholders accused
the company of issuing false and misleading financial reports in the early
2000s.
The settlement was reached through mediation,
according to documents filed in federal court in Washington, and is subject
to court approval. Fannie and KPMG will each pay half of the $153 million.
"We are satisfied with the outcome and pleased to
put the matter behind us," said Bradley Lerman, general counsel at Fannie
Mae.
Seth Oster, a KPMG spokesman, said that it was in
the firm's best interest to "avoid the significant additional costs and the
distraction and inherent uncertainty of protracted litigation." A person
familiar with the situation said KPMG has already accounted for the
settlement.
The litigation began in 2004 after federal
regulators accused Fannie of violating accounting rules, partly in a bid to
boost executives' bonuses, and ordered the company to restate four years'
worth of earnings. The regulators said Fannie had incorrectly applied the
rules relating to derivatives contracts to allow it to spread out losses
over a long period of time instead of recognizing them upfront.
The class-action suit had also named Franklin
Raines, Fannie's former chief executive, as a defendant, but last year U.S.
District Judge Richard Leon dismissed the suit against Mr. Raines and two
other senior executives. The judge said the plaintiffs hadn't produced any
direct evidence showing that executives intended to deceive investors or
even that executives knew their statements were false.
The Ohio Public Employees Retirement System and the
State Teachers Retirement System of Ohio were the lead plaintiffs in the
lawsuit. Ohio Attorney General Mike DeWine, who announced the settlement,
said in a statement that he was "pleased to see this litigation finally
resolved" and that it "brings closure to this matter."
The settlement "represents a reasonable agreement
to end this long-standing dispute," said Alfred Pollard, general counsel for
the Federal Housing Finance Agency, which regulates Fannie.
Fannie Mae sued KPMG in 2006 alleging negligence
and breach of contract. The two sides reached a settlement in 2010; details
of that settlement weren't disclosed.
Fannie and its smaller sibling, Freddie Mac, FMCC
+9.05% have spent tens of millions of dollars beating back securities
class-action lawsuits on behalf of former executives as a result of the
accounting scandals, even after the companies were seized by the U.S.
government through a legal process known as conservatorship in 2008.
. . . flexibility also gave Fannie the ability
to manipulate earnings to hit -- within pennies -- target numbers
for executive bonuses. Ofheo details an example from 1998, the year
the Russian financial crisis sent interest rates tumbling. Lower
rates caused a lot of mortgage holders to prepay their existing home
mortgages. And Fannie was suddenly facing an estimated expense of
$400 million.
Well, in its
wisdom, Fannie decided to recognize only $200 million, deferring the
other half. That allowed Fannie's executives -- whose bonus plan is
linked to earnings-per-share -- to meet the target for maximum bonus
payouts. The target EPS for maximum payout was $3.23 and Fannie
reported exactly . . . $3.2309. This bull's-eye was worth $1.932
million to then-CEO James Johnson, $1.19 million to
then-CEO-designate Franklin Raines, and $779,625 to then-Vice
Chairman Jamie Gorelick.
That same year
Fannie installed software that allowed management to produce
multiple scenarios under different assumptions that, according to a
Fannie executive, "strengthens the earnings management that is
necessary when dealing with a volatile book of business." Over the
years, Fannie designed and added software that allowed it to assess
the impact of recognizing income or expense on securities and loans.
This practice fits with a Fannie corporate culture that the report
says considered volatility "artificial" and measures of precision
"spurious."
This
disturbing culture was apparent in Fannie's manipulation of its
derivative accounting. Fannie runs a giant derivative book in an
attempt to hedge its massive exposure to interest-rate risk.
Derivatives must be marked-to-market, carried on the balance sheet
at fair value. The problem is that changes in fair-value can cause
some nasty volatility in earnings.
So, Fannie
decided to classify a huge amount of its derivatives as hedging
transactions, thereby avoiding any impact on earnings. (And we mean
huge: In December 2003, Fan's derivatives had a notional value of
$1.04 trillion of which only a notional $43 million was not
classified in hedging relationships.) This misapplication continued
when Fannie closed out positions. The company did not record the
fair-value changes in earnings, but only in Accumulated Other
Comprehensive Income (AOCI) where losses can be amortized over a
long period.
Fannie had
some $12.2 billion in deferred losses in the AOCI balance at
year-end 2003. If this amount must be reclassified into retained
earnings, it might punish Fannie's earnings for various periods over
the past three years, leaving its capital well below what is
required by regulators.
In all, the
Ofheo report notes, "The misapplications of GAAP are not limited
occurrences, but appear to be pervasive . . . [and] raise serious
doubts as to the validity of previously reported financial results,
as well as adequacy of regulatory capital, management supervision
and overall safety and soundness. . . ." In an agreement reached
with Ofheo last week, Fannie promised to change the methods involved
in both the cookie-jar and derivative accounting and to change its
compensation "to avoid any inappropriate incentives."
But we don't
think this goes nearly far enough for a company whose executives
have for years derided anyone who raised a doubt about either its
accounting or its growing risk profile. At a minimum these
executives are not the sort anyone would want running the U.S.
Treasury under John Kerry. With the Justice Department already
starting a criminal probe, we find it hard to comprehend that the
Fannie board still believes that investors can trust its management
team.
Fannie Mae
isn't an ordinary company and this isn't a run-of-the-mill
accounting scandal. The U.S. government had no financial stake in
the failure of Enron or WorldCom. But because of Fannie's implicit
subsidy from the federal government, taxpayers are on the hook if
its capital cushion is insufficient to absorb big losses. Private
profit, public risk. That's quite a confidence game -- and it's time
to call it.
**********************************
:"Sometimes
the Wrong 'Notion': Lender Fannie Mae Used A Too-Simple Standard For
Its Complex Portfolio," by Michael MacKenzie, The Wall Street
Journal, October 5, 2004, Page C3
Lender Fannie Mae Used A Too-Simple
Standard For Its Complex Portfolio
What exactly
did
Fannie Mae do wrong?
Much has been
made of the accounting improprieties alleged by Fannie's regulator,
the Office of Federal Housing Enterprise Oversight.
Some investors
may even be aware the matter centers on the mortgage giant's $1
trillion "notional" portfolio of derivatives -- notional being the
Wall Street way of saying that that is how much those options and
other derivatives are worth on paper.
But
understanding exactly what is supposed to be wrong with Fannie's
handling of these instruments takes some doing. Herewith, an effort
to touch on what's what -- a notion of the problems with that
notional amount, if you will.
Ofheo alleges
that, in order to keep its earnings steady, Fannie used the wrong
accounting standards for these derivatives, classifying them under
complex (to put it mildly) requirements laid out by the Financial
Accounting Standards Board's rule 133, or FAS 133.
For most
companies using derivatives, FAS 133 has clear advantages, helping
to smooth out reported income. However, accounting experts say FAS
133 works best for companies that follow relatively simple hedging
programs, whereas Fannie Mae's huge cash needs and giant portfolio
requires constant fine-tuning as market rates change.
A Fannie
spokesman last week declined to comment on the issue of hedge
accounting for derivatives, but Fannie Mae has maintained that it
uses derivatives to manage its balance sheet of debt and mortgage
assets and doesn't take outright speculative positions. It also uses
swaps -- derivatives that generally are agreements to exchange
fixed- and floating-rate payments -- to protect its mortgage assets
against large swings in rates.
Under FAS 133, if
a swap is being used to hedge risk against another item on the
balance sheet, special hedge accounting is applied to any gains and
losses that result from the use of the swap. Within the application
of this accounting there are two separate classifications:
fair-value hedges and cash-flow hedges.
Fannie's
fair-value hedges generally aim to get fixed-rate payments by
agreeing to pay a counterparty floating interest rates, the idea
being to offset the risk of homeowners refinancing their mortgages
for lower rates. Any gain or loss, along with that of the asset or
liability being hedged, is supposed to go straight into earnings as
income. In other words, if the swap loses money but is being applied
against a mortgage that has risen in value, the gain and loss cancel
each other out, which actually smoothes the company's income.
Cash-flow
hedges, on the other hand, generally involve Fannie entering an
agreement to pay fixed rates in order to get floating-rates. The
profit or loss on these hedges don't immediately flow to earnings.
Instead, they go into the balance sheet under a line called
accumulated other comprehensive income, or AOCI, and are allocated
into earnings over time, a process known as amortization.
Ofheo claims
that instead of terminating swaps and amortizing gains and losses
over the life of the original asset or liability that the swap was
used to hedge, Fannie Mae had been entering swap transactions that
offset each other and keeping both the swaps under the hedge
classifications. That was a no-go, the regulator says.
"The major
risk facing Fannie is that by tainting a certain portion of the
portfolio with redesignations and improper documentation, it may
well lose hedge accounting for the whole derivatives portfolio,"
said Gerald Lucas, a bond strategist at Banc of America Securities
in New York.
The bottom line is that both the FASB and the IASB must someday soon
take another look at how the real world hedges portfolios rather than
individual securities. The problem is complex, but the problem has come
to roost in Fannie Mae's $1 trillion in hedging contracts. How the SEC
acts may well override the FASB. How the SEC acts may be a vindication
or a damnation for Fannie Mae and Fannie's auditor KPMG who let Fannie
violate the rules of IAS 133.
Video on the efforts of some members of Congress seeking to cover up
accounting fraud at Fannie Mae ---
http://www.youtube.com/watch?v=1RZVw3no2A4
May 31, 2011 message from Roger Collins
Of possible interest...
http://www.nytimes.com/2011/05/29/books/review/book-review-reckless-endangerment-by-gretchen-morgenson-and-joshua-rosner.html?ref=books
"It’s hardly news that the near meltdown of America’s
financial system enriched a few at the expense of the rest of us. Who’s
responsible? The recent report of the Financial Crisis Inquiry Commission blamed
all the usual suspects — Wall Street banks, financial regulators, the mortgage
giants Fannie Mae and Freddie Mac,
and subprime lenders — which is tantamount to blaming
no one. “Reckless Endangerment” concentrates on particular individuals who
played key roles.
The authors, Gretchen Morgenson, a Pulitzer
Prize-winning business reporter and columnist at The New York Times, and Joshua
Rosner, an expert on housing finance, deftly trace the beginnings of the
collapse to the mid-1990s, when the Clinton administration called for a
partnership between the private sector and Fannie and Freddie to encourage home
buying. The mortgage agencies’ government backing was, in effect, a valuable
subsidy, which was used by Fannie’s C.E.O.,
James A. Johnson, to increase home ownership while
enriching himself and other executives. A 1996 study by the Congressional Budget
Office found that Fannie pocketed about a third of the subsidy rather than
passing it on to homeowners. Over his nine years heading Fannie, Johnson
personally took home roughly $100 million. His successor, Franklin D. Raines,
was treated no less lavishly...."
continued in article...
Roger
Bob Jensen's threads on earnings management fraud at Fanny Mae ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
Tom Selling takes on what he claims is a "self-serving" Ernst & Young
"Do Survey Results Mean that External Audits Don’t Protect Against Earnings
Manipulation? (What a Surprise!)," by Tom Selling, The Accounting Onion,
May 10, 2013 ---
Click Here
http://accountingonion.com/2013/05/do-survey-results-mean-that-external-audits-dont-protect-against-earnings-manipulation-what-a-surprise.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29
Jensen Comment
This time I think Tom is on to something. It would be great if E&Y would reply
to his blog post, but I doubt that this is going to happen. The usual reply is
that external auditors are not paid to detect fraud unless the fraud is material
to the audited financial statement outcomes. It would seem that the survey
results in this instance would mostly affect financial statements in great gobs.
Bob Jensen's threads on creative accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
Bob Jensen's threads on Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm
Also See
"New Report on Financial Reporting Fraud Released: Role of External
Auditor Examined," Center for Audit Quality, May 9, 2013 ---
http://www.thecaq.org/newsroom/release_05092013.htm
2012 Internet Crime Report
IC3 via FBI, May 14, 2013
http://www.fbi.gov/news/stories/2013/may/internet-crime-in-2012/internet-crime-in-2012
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
The 3 Secrets Of Highly Successful Graduates (Slide Show)
"Amazing Career Advice For College Grads From LinkedIn's Billionaire Founder,"
by Nicholas Carlson, Business Insider, May 12, 2013 ---
http://www.businessinsider.com/amazing-career-advice-for-college-grads-from-linkedins-billionaire-founder-2013-5
Jensen Comment
I'm not sure I agree with all of this. If you search long enough and hard enough
almost everything appears somewhere in the library and/or in Web documents. The
problem is sorting out the wheat from the chaff beforehand in the context of
your particular talent, skills, determination, family circumstances, living
environment, health, opportunities, and constraints.
Millionaires and billionaires, like Reid Hoffman, often feel they have the
answers to success when in fact much of their success is a matter of luck along
the serendipitous road in life. I grant them the fact that sometimes you help to
make your own luck, but by it's very definition taking "risks" with careers
means that there will be many losers as long as a few winners along that
serendipitous road.
Also most people really do not have the talent for and drive to becoming
successful entrepreneurs. Advising most graduates to become entrepreneurs may be
setting them on a road to failure.
To illustrate my point, I think that many accounting graduates are better off
to become lifelong employees as public accountants, internal auditors,
governmental accountants, FBI agents, etc. Most of them are likely to fall on
very hard times if they quit their jobs and leverage up to create a startup
company.
Hopefully, some of them will take the plunge and form a new venture in a
quest for the American Dream. But this is not good advice for the majority of
those graduates looking down the road at their lifelong careers. Tell most of
those graduates that they may find great careers as public accountants, internal
auditors, governmental accountants, FBI agents, professors, etc. At the
same time tell them to keep their eyes open to opportunities and to be willing,
if they have the inspiration to do so, to take the plunge. But also tell them
not to become victims of get-rich-quick frauds.
Bob Jensen's threads on careers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
"Southern
Illinois University to Offer Online Accounting Degree," by Gail Perry,
AccountingWeb, May 6, 2013 ---
http://www.accountingweb.com/article/southern-illinois-university-offer-online-accounting-degree/221747?source=education
A new program
at Southern Illinois University (SIU) in Carbondale, IL allows off-campus
students to complete an accounting degree completely online. SIU is the only
Association to Advance Collegiate Schools of Business (AACSB)
International-accredited public institution in Illinois to offer the online
undergraduate accounting degree, according to College of Business officials.
Earning the top-tier AACSB accreditation places SIU's in the top one percent
of the nation's accounting programs.
Beginning in the fall of 2013, students can
complete the requirements for a Bachelor of Science degree in accounting
exclusively with online classes. The online program is open to off-campus
students who have completed the initial core coursework typically covered
during the first two years of college.
Jill Gebke, assistant dean for the College of
Business, explained the reasoning behind the new program. "We identified a
large transfer population, All of the community colleges are at least an
hour away. They told us there's a demand for the accounting program. This
was the most convenient way to serve the community college students."
"The program innovation happening right now in the
College of Business is very exciting. Our online accounting degree
completion option is just another example of that innovation and our
continuing growth. This degree allows students the flexibility to blend
their studies with work and family commitments and it is equal in quality,
value, and accreditation with our on-campus program," said Dennis Cradit,
dean of the College of Business.
"What we have learned from our online MBA and our
online undergraduate business administration degrees, we have used in
designing this online accounting degree. Our number one priority is to
provide an exceptional learning experience and this program is a clear
reflection of our commitment to that goal," Cradit added.
Typically, the new online accounting degree
completion program will take about 24 months to finish over a six-semester
time span. However, it is possible to complete the program in a minimum of
18 months.
The online accounting program incorporates
approximately 60 hours of coursework covering core areas of the business
curriculum. The program is divided into 10 "course pairings," with each
including two 3-credit-hour courses. Each course runs eight weeks, allowing
students to focus on two classes at a time while still completing four
courses each semester.
The same faculty members teach both the online and
on-campus classes. However, the online option allows students the
opportunity to complete their bachelor's degree through a nationally ranked,
accredited institution from anywhere in the world and at their convenience,
according to Jill Gebke, assistant dean for the College of Business. And
while the face-to-face classroom setting is ideal for learning, Gebke told
AccountingWEB that there are many students whose circumstances prevent them
from attending on-campus.
Continued in
article
"'U.S.
News' Sizes Up Online-Degree Programs, Without Specifying Which Is No. 1,"
by Nick DeSantis, Chronicle of Higher Education, January 10, 2012 ---
http://chronicle.com/article/US-News-Sizes-Up/130274/?sid=wc&utm_source=wc&utm_medium=en
Some, but not all, all of the online degree programs offer business and
accounting degrees.
Bob Jensen's threads about online
education alternatives ---
http://www.trinity.edu/rjensen/CrossBorder.htm#Education
"An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations:
1998–2010"
Mark S. Beasley North Carolina State University
Joseph V. Carcello University of Tennessee Dana R. Hermanson Kennesaw State
University
Terry L. Neal University of Tennessee
Center for Audit Quality, May 2013
http://www.thecaq.org/resources/pdfs/CAQ_deficienciesMay2013.pdf
EXECUTIVE SUMMARY
This study examines U.S. Securities and Exchange Commission (SEC) sanctions
against auditors over the period 1998–2010 that are related to instances of
alleged fraudulent financial reporting by U.S. publicly traded companies.
During that time period, there were 87 separate instances where the SEC
imposed such sanctions, and this report summarizes our analysis of alleged
auditor deficiencies noted by the SEC in these 87 cases.
In considering the results contained in this
report, it is important to appreciate that SEC allegations of fraudulent
financial reporting are rare, with 347 cases examined by the SEC from
1998–2007 out of thousands of U.S. public companies. 1 Despite the small
number of fraud-related SEC enforcement actions, we believe that analysis of
these 87 cases involving auditor sanctions by the SEC provides important
insights for auditors and others concerned with improving audit quality,
especially in the context of detecting material financial statement
misstatements due to fraud. Thus, we highlight key findings related to the
audits underlying these 87 cases.
The primary results of our analysis are as follows:
• From 1998–2010, we identified 87 instances of
SEC investigations of fraudulent financial reporting leading to
sanctions against auditors. Based on companies with available
information for these 87 SEC investigations, the associated registrant
companies were primarily small (median revenues and assets under $40
million) and concentrated in four key industries (over 40 percent of the
sample is in financial services / insurance, general manufacturing,
telecommunications, or consumer goods manufacturing).
• Based on available information for these 87
SEC investigations involving auditors, 58 percent of the audit reports
issued for the last fraudulently reported financial statements included
an unqualified opinion with no additional report modifications.
The other 42 percent of the companies received unqualified audit
opinions on the last fraudulently reported financial statements, but
those reports included explanatory paragraphs that addressed other
issues noted by the auditor, such as highlighting changes in accounting
principle or going concern issues.
• For purposes of our study, we
categorized the Big Six/Big Four international firms and the next tier
of global network or national firms as “national firms.” 2 Here is a
summary of the 87 instances we examined:
-Total instances of SEC investigations
examined in this study 87
-SEC sanctions involving audits performed
by non-national firms 46
-SEC sanctions involving audits performed
by national firms 35
-Bogus audits 3 where auditor did not
perform procedures 6
Of the 35 national firm cases, nine
involved audits performed by Arthur Andersen. There were six
instances where the auditor prepared the financial statements or did
not perform any meaningful level of audit procedures. We refer to
these six instances as “bogus audits
An Analysis of Alleged Auditor Deficiencies in SEC
Fraud Investigations: 1998–2010 3
• In Accounting and Auditing Enforcement
Releases (AAERs) involving sanctions against auditors, the SEC typically
alleges that the auditor either (a) violated the anti-fraud statutes
(e.g., by participating in the fraud) or (b) performed a negligent audit
that allowed the fraud to occur (without the auditor actively
participating in the fraud). Among the 81 cases examined (excluding the
six bogus audits noted above), the SEC charged the auditor for violating
the anti-fraud statutes in 24 cases. The remaining 57 cases were limited
to allegations of deficient audits unrelated to anti-fraud statutes. •
Among these 81 cases, the SEC issued sanctions against individual
auditors in 80 cases and sanctions against the audit firm in 27
instances (26 cases involved sanctions against both individual auditors
and the audit firm, with the SEC sanctioning only the audit firm in one
case).
• The top five areas cited by the SEC in these
81 cases involved the following:
1. Failure to gather sufficient competent
audit evidence (73 percent of the cases)
2. Failure to exercise due professional care (67 percent)
3. Insufficient level of professional skepticism (60 percent)
4. Failure to obtain adequate evidence related to management
representations (54 percent)
5. Failure to express an appropriate audit opinion (47 percent)
• Most of the 81 cases involved multiple
alleged deficiencies. For example, 58 of the cases cited more than one
of the top three deficiencies, and 42 cases cited the top three
deficiencies.
• The most common deficiencies were quite
similar for national firms and non-national firms. The top four issues
are consistent across these two groups (with a slightly different
ranking), and 11 of the top 14 deficiencies appear in both the national
firm and non-national firm lists. Based on findings contained in this
report, we explore implications for the audit process centered around
four key themes. To that end, we explore challenges associated with each
of the four themes found in the analysis:
1. Failure to Exercise Due Professional
Care: Some of the deficiencies cited suggest a failure on the part
of the auditor to discharge responsibilities with competence and
diligence to the best of the auditor’s ability, including the
performance of procedures generally expected to be performed in an
audit. This suggests that there may be opportunities for additional
training and education on the fundamentals of the audit process.
Also, there may be opportunities for additional analysis to better
understand root causes that led to failures in the execution of
those fundamentals in a particular audit engagement, so as to
strengthen the competence and diligence of the performance of the
audit.
2. Insufficient Levels of Professional
Skepticism: Similarly, some of the cases examined highlight
challenges in maintaining appropriate levels of professional
skepticism that affect the auditor’s mindset. Interestingly, the
concept of professional skepticism has been embedded in auditing
standards for decades; however, in some cases auditors may have
struggled in maintaining an appropriate mindset throughout the
various stages of the audit process. This challenge has implications
for training and helps to motivate analyses such as the present
study to understand root causes of failures in applying professional
skepticism consistently. Additional research is needed to determine
if these challenges may be exacerbated by differences in cultural
norms that will be increasingly realized as the audit process
continues to be affected by globalization or as new generations of
audit professionals emerge who may apply professional skepticism
differently than today’s audit professionals.
3. Inadequate Identification and Assessment
of Risks: The findings noted in this report also have implications
regarding the risk assessment process, given that all cases examined
in the study involved undetected instances of fraudulent financial
reporting. While auditing standards have been risk-based for a
number of years, more recent developments in the risk management
arena, 5 including the emerging discipline of enterprise risk
management, Beasley, Carcello , Hermanson, and Neal. 2013. are
revealing a number of complexities associated with any risk
identification and risk assessment task. Any improvement in risk
assessment skills that can be identified will help enhance audit
quality and improve the recognition of fraud risk. The audit
profession, including undergraduate and graduate accounting
programs, may want to leverage insights that are emerging in other
risk management disciplines to better train and educate audit
professionals in risk identification and risk assessment tasks.
4. Failure to Respond to Identified Risks
with Appropriate Audit Responses to Gather Sufficient Competent
Audit Evidence: In some cases, the auditor failed to adjust audit
procedures to gather sufficient competent evidence in light of risks
identified and documented by the audit team. While this type of
deficiency may be the result of the first three concerns noted
above, it may also be triggered by failure to adequately link audit
procedures to underlying risks. Because prior research has shown
that this type of linkage can be a difficult task, perhaps greater
emphasis on quality control review of these linkages may be
beneficial, or new tools and techniques may be needed to facilitate
this difficult linkage task. Training and education on the use of
those tools may be warranted as well. The next section discusses the
research approach, and Section 3 presents the results of our
analysis. Section 4 develops the implications of the analysis, and
Section 5 profiles the research team. The Appendix presents the
detailed findings underlying the tables presented in the monograph.
Bob Jensen's threads on professionalism in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Best Undergraduate Business
Schools in International Business ---
http://www.businessweek.com/reports/business-schools/best-undergraduate-business-schools-2013#r=lr-sr
From the CFO.com
Morning Ledger on May 7, 2013
The Road to Convergence: Update for Audit
Committees
Revenue recognition, financial instruments and
lease accounting are among the areas the FASB and IASB are addressing in
their collaboration on key accounting standards. When finalized, these new
standards have the potential to dramatically change the way companies
account for many of their most common transactions. Learn about recent
standard-setting developments and questions audit committees should consider
in preparing for changes.
For details
see
http://deloitte.wsj.com/cfo/2013/05/07/the-road-to-convergence-update-for-audit-committees/
FASB, IASB release 2013
converged financial-reporting standard for leases
"IASB chair: Lease changes unpopular, but necessary," by Ken Tysiac, Journal
of Accountancy, May 18, 2013 ---
http://www.journalofaccountancy.com/News/20138001.htm
"FASB lease
proposal moves forward (4-3 vote) despite dissenting views," by Ken
Tysiac, Journal of Accountancy, April 10, 2013 ---
http://www.journalofaccountancy.com/News/20137752.htm
FASB decided Wednesday to move forward with a
re-proposal on financial reporting for leases that will be converged with
that of the International Accounting Standards Board (IASB).
FASB Chairman Leslie Seidman cast the deciding vote
in a 4–3 decision. Board members Tom Linsmeier, Marc Siegel, and R. Harold
Schroeder dissented.
The lease proposal, which is scheduled to be
released for public comment by FASB in May, would put all leases on the
balance sheet. It would require a dual expense-recognition approach for
lessees (excluding short-term leases), depending on whether significant
consumption occurs during the lease period.
So in general, equipment and vehicle leases that
tend to depreciate significantly during the life of a lease would be
accounted for differently from property leases, in which the asset usually
does not depreciate and sometimes increases in value over the lease period.
In some cases, the dividing line between the two
types of leases can be murky. And the very idea of having two models for
accounting for leases is troubling for some because it can create complexity
for users.
“Many people think that there should be one model
here,” Seidman said. “That is not universal. But they do not agree about
which model. So we’ve done our best to try and articulate a distinction that
reflects what some perceive as the economics of the difference between what
I’ll call ‘rentals’ and what I’ll call ‘finance-type leases.’ ”
During Wednesday’s meeting, FASB’s staff asked
board members to address the effects the proposal would have on financial
reporting complexity. Linsmeier said the proposal introduces significant
complexity for users because it divulges lease information in multiple
places in the financial statements without bringing it all together in one
footnote.
“If [users] are trying to bring all that
information that’s spread throughout the financial statements together to
understand what the rights and obligations are under a lease, and what the
related income statement and cash flows effects are, we did not provide them
sufficient information to do so,” Linsmeier said.
The leases project has been watched carefully by
various constituents because of its breadth, as many organizations are
parties to lease contracts. Because of the extent to which leases are used,
arriving at a converged standard could bring significant global
comparability to financial statements.
The IASB plans to release its exposure draft by
June 30.
“We have worked tirelessly with the IASB on this
proposal, and we are going out with a converged proposal, which I think is a
significant accomplishment,” Seidman said. “I would like to try to end up
with a converged improvement on the accounting for leases, and so on that
basis, I’d like to move forward with this exposure draft.”
From CFO.com Morning Ledger
on May 3, 2013
Lease-accounting proposal
still seen costing companies
Despite significant changes,
companies and investors expect that a coming proposal aimed at overhauling
lease-accounting rules will be more costly in some areas than the current
standard,
Emily Chasan writes.
The FASB and IASB are preparing to shortly release a new lease-accounting
proposal for public comment, FASB Chairman Leslie Seidman said at a Baruch
College accounting conference in New York on Thursday. “It’s appropriate at
this point to re-expose that revised set of conclusions,” Ms. Seidman said.
Both versions of the proposal contemplate bringing trillions of dollars of
leasing obligations onto corporate balance sheets, but the new proposal
allows companies to record lease expenses in two ways, among other changes.
Some investors worry that the boards have made so many compromises that the
new rule won’t give them a clear picture of corporate leasing obligations.
“Ultimately, what’s going to end up back on the balance sheet as a result of
applying the standard really isn’t going to satisfy too many users of
financial statements,” Mark LaMonte, managing director at Moody’s.
From the CFO.com Morning
Ledger on May 16, 2013
The FASB and IASB just rolled out a revised proposal
to overhaul lease-accounting rules—a move that could effectively boost U.S.
companies’ reported debt by hundreds of billions of dollars,
the WSJ’s Michael Rapoport reports.
If adopted, the new proposal would require companies
to carry all but the shortest leases on real estate, construction equipment
and other items on their balance sheets as obligations akin to debt. The
current rules allow companies to keep many leases off their books, drawing
criticism from regulators that firms sometimes structure the terms of their
leases to keep them off the balance sheet.
The change could have a big effect on a wide range of
companies, from retailers and restaurant chains, which lease real estate at
hundreds or thousands of locations, to airlines and package-delivery
companies, which finance aircraft through leases.
The proposal also would change how some companies
reflect the costs from leases in calculating their earnings, Rapoport notes.
It would set up a two-track system in which the costs of leasing real estate
would be recognized evenly over the term of the lease, while the costs of
leasing other items would be more front-loaded—higher in the early years of
a lease, lower in the later years. We’ll have more updates on the new
proposal at CFOJ throughout the day, so stay tuned.
Jensen Question
So how do lessees minimize the balance sheet impact of booking operating leases
such as a sandwich shop in a Galleria Mall?
I would consider just shortening the operating lease period to a year or less in
the case where the former operating lease had a longer term. The FASB has never
really seriously taken up the issue of anticipated lease renewals of "operating
leases." Of course shortening a lease could alter the rental prices,
especially if the lessor is taking on more risk of non-renewal.
Of course the sandwich shop will
now have to post the contracted liabilities for monthly rent for 12 months or
less, but the shortened contract gets the shop out of having to post 60 months
of future rent obligation if the 60 months lease is no longer contracted with
the Mall. Both the Galleria and the sandwich shop of course expect to renew the
lease annually.
One problem with putting lease
renewal debt or assets on the balance sheet is deciding when the anybody's-guess number of
renewals should be terminated. For example, neither the Galleria or the sandwich
shop has any idea of how many times the lease will be renewed. The number or
future renewals is subject to all sorts of unknowable events of the future.
A huge difference between
renting space in a Galleria Mall versus renting a jumbo jet is that the Galleria
normally does not provide options to actually own leased apace in such a mall
that was not intended to be a condo mall.
FASB, IASB release 2013
converged financial-reporting standard for leases
"IASB chair: Lease changes unpopular, but necessary," by Ken Tysiac, Journal
of Accountancy, May 18, 2013 ---
http://www.journalofaccountancy.com/News/20138001.htm
Bob Jensen's
threads on lease accounting are at
http://www.cs.trinity.edu/~rjensen/temp/LeaseAccounting.htm
"FASB to Ease in New
Revenue Recognition Standards," by Michael Cohn, AccountingToday, May 2, 2013
---
Click Here
http://www.accountingtoday.com/news/FASB-Ease-Revenue-Recognition-Standards-66581-1.html?CMP=OTC-RSS&utm_source=twitterfeed&utm_medium=twitter
Jensen Comment
This is an "easing" that extends the transition period as requested by the SEC.
. . .
Beswick (from the SEC)
cautioned that the new principles-based standards will require careful
monitoring, as they dispense with many of the complex rules and anti-abuse
provisions of the earlier standards.
“When you put a new standard in place and you’re
talking about the top line, there are obviously going to be implementation
issues,” he said. “Leslie has talked about this, that there is going to be
an implementation group to try to deal with those issues, and I think we can
probably see some of them right now. When you’re going away from some of the
more proscriptive guidance to more subjective, there’s going to have to be a
discussion of people accepting different views and subjectivity. We’re
supportive of where they are right now, and of the implementation process.”
Beswick is pleased that FASB will have a long
transition period so they can work through some of the abuse prevention
issues. “In this time period, we want to see how people are going to start
thinking about some of these transactions, and if we need to beef stuff up
through the implementation group to narrow potential abuse preventions,
we’ll do that,” he said. “Ultimately if we need to leave it in place, we’ll
leave it in place. It is what it is.”
Continued in article
Bob Jensen's threads on
revenue recognition gimmicks and controversies ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
From CFO.com Morning Ledger on May 15, 2013
We’re seeing some worrying economic data out of Europe
this morning: France fell into recession in the first quarter, while Germany
just barely eked out growth with a 0.1% rise in Q1 GDP. Germany had a
surprisingly weak start to the year, depressed by cold winter weather as
well as sagging exports and slack investment, the country’s statistics
office said. Economists had been forecasting 0.3% growth,
the WSJ notes. GDP
fell 0.2% for the euro zone as a whole—the bloc’s sixth consecutive
quarterly contraction.
The difference between Europe’s two largest economies
looks narrow over the first three months of the year but European officials
think France will continue to lag behind, “threatening the cohesion of the
twin policy motor that has traditionally driven the European project,”
Reuters says.
In contrast to Europe’s woes, the CBO offered a nugget
of upbeat news on the U.S. economy—the deficit is shrinking much faster than
expected. The CBO said the federal deficit is expected to shrink to $642
billion in the fiscal year ending
Sept. 30, narrowing from the agency’s $845
billion forecast of three months ago and sharply lower than last year’s
$1.087 trillion shortfall,
the WSJ’s Damian Paletta reports.
The drastic shift is thanks to higher-than-expected individual and corporate
tax payments, due in part to growth and higher rates that kicked in at the
beginning of the year, and large dividend payments that Fannie Mae and
Freddie Mac plan to make to the government this year.
Question
Aside from curriculum content, what is the leading difference between MBA
degrees and Law degrees?
Answer
It used to be that law schools require one more year (two semesters) of
additional courses. Most MBA programs require two years or the equivalent of two
years of business studies. Although some MBA programs are designed for less than
two years of study, those shortcut versions generally require prerequisite
business and economics courses before matriculating. Until now, law schools
tended not to have short cut versions allowing students to graduate in less than
three years.
"THE TWO - YEAR LAW DEGREE : UNDESIRABLE BUT PERHAPS UNAVOIDABLE," by
Stephen Gellers, N.Y.U. Journal of Legislation and Public Policy Quorum,
April 3, 2013 ---
http://nyujlpp.org/wp-content/uploads/2013/03/Quorum-2013-Gillers-Law-School1.pdf
Bloomberg Terminal ---
http://en.wikipedia.org/wiki/Bloomberg_Terminal
"BLOOMBERG CEO: It Was A Mistake To Let Our Journalists Have Access To
Clients' Bloomberg Terminal Data." by Julia La Roche, Business Insider,
May 10, 2013 ---
http://www.businessinsider.com/bloomberg-statement-on-terminal-story-2013-5
Wall Street has been buzzing about a bombshell
New York Post story revealing that some
Bloomberg News
reporters were using private client information from Bloomberg Terminals to
spy on
Goldman Sachs employees.
This was discovered after an unidentified Bloomberg
reporter pointed out that a Goldman partner had not logged into his terminal
and asked if he was still employed by the firm, the report said.
After Goldman complained, Bloomberg suspended
access to this terminal customer data to its reporters.
Business Insider also learned that Bloomberg News
reporters used private information from JPMorgan Bloomberg Terminal users
for some of their coverage of the JPMorgan "London Whale" trade, according
to sources.
Bloomberg LP's CEO and president Daniel Doctoroff
has recognized this was a mistake. He also tapped Steve Ross to the new
post of Client Data Compliance Officer.
He sent the following email to employees:
Since our founding more
than 30 years ago, the proper safeguarding of customer data has been a
central tenet of Bloomberg’s culture.
A Bloomberg client recently raised a concern that Bloomberg News reporters
had access to limited customer relationship management data through their
use of the Bloomberg terminal. Although we have long made limited customer
relationship data available to our journalists, we realize this was a
mistake.
Having recognized this mistake, we took immediate action. Last month we
changed our policy so that all reporters only have access to the same
customer relationship data available to our clients. Additionally, we
decided to further centralize our data security efforts by appointing Steve
Ross, one of our most senior executives, to the new position of Client Data
Compliance Officer. Steve is responsible for reviewing and, if necessary,
enhancing protocols which among other things will continue to ensure that
our news operations never have access to confidential customer data.
To be clear, the limited customer relationship data previously available to
our reporters never included access to our trading, portfolio, monitor,
blotter or other related systems or our clients' messages. Moreover,
reporters could not see news stories that clients read, or the securities
they viewed. Bloomberg has very strict data security policies in place, in
addition to significant and rigorous training, processes and protocols. Upon
hiring, all Bloomberg employees enter into confidentiality provisions,
including Bloomberg News.
Client trust is our highest priority and the cornerstone of our business,
and we are deeply committed to ensuring the complete integrity and
confidentiality of our clients' data in all situations and at all times.
Dan
Jensen Comment
Among other things this real-time database of market transactions allows users
(e.g., CPA firms) to derive the yield curves needed for valuation of derivative
financial instruments ---
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm
Many university libraries, including the campus library at Trinity
University, have Bloomberg terminals for students and faculty.
Do you believe this? I don't believe this was an accounting mistake at
all.
It seems like more of a case of hidden reserves.
"$42.6 million hidden in city fund through accounting error: The
money was found in a Transportation Department special fund, making officials
wonder whether other misplaced money can be found," by Laura J. Nelson, Los
Angeles Times, May 8, 2013 ---
http://www.latimes.com/news/local/la-me-misplaced-money-20130510,0,4280581.story
Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
"The Pentagon Is Wasting Billions Of Dollars Because It Can't Audit Its
Own Contracts," by David Francis (The Fiscal Times), Business Insider,
May 22, 2013 ---
http://www.businessinsider.com/pentagon-wastes-billions-it-cant-audit-2013-5
"Improvements Are Needed to Enhance the Internal Revenue Service’s
Internal Controls," by Steve n T . Miller, Acting Commissioner of
Internal Revenue, May 13, 2013 ---
http://www.gao.gov/assets/660/654563.pdf
Jensen Comment
The GAO declared that it's impossible to audit the Pentagon and the IRS. Both
departments rely a lot on the Fifth Amendment.
Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Question
Is this a benefit or a kiss of death?
Cleveland Kidnapping Hero Charles Ramsey Is Getting Free Burgers For Life
(From a Bunch of Pennsylvania Restaurants) ---
http://www.businessinsider.com/charles-ramsey-gets-burgers-for-life-2013-5
Question
For financial reporting purposes when does a subsidiary become "insignificant"?
Hint
A bookkeeper's embezzlement is insignificant if it only amounts to $1,000 from a
"few" accounts. But what happens when "a few" stands for 400 such accounts?
From the CFO.com Morning Ledger on May 23, 2013
Following the Senate’s findings that Apple has not
paid taxes on tens of billion dollars of its business based in Ireland,
a WSJ review has found that
some of the biggest U.S. companies have quietly
removed hundreds of offshore subsidiaries from their publicly disclosed
financial filings over the past several years. Companies say they are taking
advantage of SEC rules that demand disclosure only when subsidiary
operations are “significant.”
Oracle, for instance, disclosed more than 400 subsidiaries in its
2010 annual report. By 2012 the list had been whittled to eight—five of
which were located in Ireland. Similar decreases in the number of disclosed
subsidiaries were found in filings by
Google,
FedEx,
Raytheon and
Microsoft.
But the subsidiaries should matter to investors.
“Companies are required to identify their subsidiaries so investors can make
informed judgments about a company’s operations and financial condition,”
said SEC spokesman John Nester. He added that companies may omit
subsidiaries for lack of significance.
"Financial Instruments Accounting Changes Seen Entangling Non-Financial
Firms," by Emily Chason, The Wall Street Journal, May 7, 2013 ---
Click Here
http://blogs.wsj.com/riskandcompliance/2013/05/07/financial-instruments-accounting-changes-seen-entangling-non-financial-firms/?KEYWORDS=Financial+Instruments
Accounting rule makers expect forthcoming changes
to financial instrument accounting rules will have the biggest impact on
financial firms, but non-financial companies also hope their disclosures
won’t become more complex after the planned overhaul. The U.S. Financial
Accounting Standards Board and London-based International Accounting
Standards Board are both working on proposals that would push companies to
make more timely adjustments for expected losses on financial assets, such
as loans or trade receivables.
The current accounting for such instruments came
under fire during the financial crisis after investors complained that banks
had been too slow to take write-downs on assets, such as securitized
mortgage loans, even though they fully expected to incur losses.
The proposed rules have built in some practical
elements for non-financial companies that make it easier to evaluate smaller
pools of assets. Still, those firms are still worried that their staff would
have to do more work to keep monitoring changes in the market value of
financial instruments, executives said at a conference last week.
Financial firms are expected to face the biggest
changes from the new rules but “they also have the skill set to deal with
it,” Katherine Gill-Charest, controller at media company
Viacom Inc. said at a Baruch College accounting
conference last week, noting that banks already do these analyses in their
business and can easily translate them for accounting purposes, she said.
But for non-financial companies that deal in “plain vanilla” securities it
may be more difficult to make those calls, especially since any write-downs
on those assets will immediately affect a company’s profit and loss
statement under the proposed rules, Ms. Gill-Charest said.
“That puts more pressure on the process that may
already exist,” she said.
FASB Chairman Leslie Seidman said on the panel that
accounting rule makers don’t expect companies to have a crystal ball to
estimate future losses, but want to allow them to use all of their
historical experience to disclose estimable losses more quickly.
Some executives are hoping that the process will
get simpler for non-financial companies, especially those with large cash
holdings, who have to disclose a lot of detail about financial instruments
already.
“I’m hopeful about this,” Robert Laux, senior
director of financial accounting and reporting at
Microsoft Inc. , said
at the conference. “The amount devoted to financial instruments in
Microsoft’s footnotes is shockingly a lot.”
For companies like Microsoft, they are often
required to make complex disclosures in this area even though these assets
are not part of their main business. Financial instruments disclosures at
the software company, which has about $80 billion in investable financial
assets, take up about 50% of its financial statement footnotes, Mr. Laux
said. “If you looked at our footnotes you’d think Microsoft is a financial
institution,” he said. One of the problems, he said, is trying to get the
ability to reduce disclosures on financial instruments if the information is
deemed material in a prior year, but may no longer be material in the
current year.
The FASB is accepting comments this month on its
proposal to and says it will also evaluate
comments on a similar project by the International Accounting Standards
Board.
At Long Last
The FASB Proposes Taking Some Unrealized Fair Value Changes Out of Earnings and
Relegate them to OCI
From a Deloitte "Heads Up" on April 19, 2013
http://deloitte.wsj.com/cfo/2013/04/19/recognition-and-measurement-of-financial-instruments-fasb-amendments-to-proposed-asu/
. . .
Under the proposed ASU, the unconditional fair
value option for financial assets and financial liabilities in ASC 825³
would be replaced with a conditional fair value option that would be
available when:
—Financial assets are held and managed in a
hold-and-sell business model (i.e., otherwise accounted for at fair
value through other comprehensive income).
—An entity manages the net exposure for a group
of financial assets and financial liabilities on a fair value basis and
provides net exposure information to its management.
—A hybrid financial liability contains an
embedded derivative that significantly modifies its cash flows as long
as it is clear (with little or no analysis) that separation of the
embedded derivative is not precluded.
However, the ED notes that for financial assets and
financial liabilities outside the scope of the proposed ASU such as the
following, a fair value option would no longer be available:
a. Guarantees and other contingencies accounted
for in accordance with [ASC] 460, Guarantees, or contingencies accounted
for under [ASC] 450, Contingencies, that will not be within the scope of
the forthcoming proposed [ASU] on insurance contracts. The effective
date and transition provisions to eliminate the fair value optionfor
these items would be consistent with the guidance in the proposed [ASU]
on financial instruments.[⁵]
b. Rights and obligations under an insurance
contract and obligations under a warranty that currently are accounted
for under [ASC] 944, Financial Services—Insurance, or would be accounted
for in accordance with the forthcoming proposed [ASU] on insurance
contracts. . . .
c. Rights under a warranty that would be
accounted for in accordance with the guidance in the fourthcoming [ASU]
on revenue recognition. . . .
d. Written loan commitments accounted for in
accordance with the proposed [ASU] on financial instruments. . . .
e. Firm commitments that otherwise would not be
recognized at inception and that involve only financial instruments. . .
. The effective date and transition provisions for these items would be
consistent with the guidance in the proposed [ASU] on
financial instruments.[⁶]
Entities would cease using the fair value option
under ASC 825 for each of these instruments in accordance with the effective
date and transition method for each related project. For example, public
entities would no longer be able to apply the fair value option under ASC
825 to rights under a warranty accounted for in accordance with
the forthcoming final standard on revenue recognition for fiscal and interim
periods that begin on or after January 1, 2017.⁷ The revenue standard will
permit entities to apply the new guidance retrospectively or by using a
cumulative-effect approach.⁸ The FASB has not decided what the effective
dates will be for its forthcoming standard on insurance contracts or for the
proposed ASU.
Editor’s
Note: Replacing the unconditional fair value option with one
that can be applied only in limited circumstances reduces the number of
accounting choices for similar instruments and is expected to improve
comparability. Improving comparability is one of the stated objectives in
the proposed ASU. The ED does not propose eliminating the fair value option
under ASC 860-10-35 for servicing assets and servicing liabilities.
Jensen Comment
Guess we know how intermediate textbook authors will be spending their summer
breaks, especially those end-of-chapter materials and test banks.
Of course certain types of hedges (cash flow hedges and FX hedges) under FAS
133 recorded fair value changes to OCI to the extent that the hedges were
effective. Fair value hedges did do not use OCI.
Soon you won't have to be hedging to get OCI relief for unrealized fair value
changes in general.
Does this seem, at least in a way, how the FASB has come full circle from FAS
115?
Bob Jensen's threads on the controversies of fair value accounting ---
http://www.trinity.edu/rjensen/theory02.htm#FairValue
From the CFO.com Morning Ledger on May 13, 2013
Shift to valuations, estimates challenges auditors
Corporate auditors must increasingly adjust their approach to
handle corporate financial statements that are now dominated by estimates
and valuations of assets, PCAOB member Jay Hanson said. In a speech posted
to the PCAOB website, Mr. Hanson said estimates and measurements are one of
the most frequently identified trouble spots by the U.S. auditor watchdog,
as managers and accountants have to spend more time focusing on the fair
value of financial instruments, goodwill impairments and intangible assets
in the new economy,
Emily Chasan notes. “Thirty
years ago, financial statements were dominated by tangible assets and
historical cost accounting,” Mr. Hanson said. “Today, after rapid advances
in technology, the development of innovative business models and the
mind-numbing complexity of many investments, the balance sheets of an
increasing number of companies are dominated by valuation estimates.”
Bob Jensen's threads on the controversies of fair value accounting ---
http://www.trinity.edu/rjensen/theory02.htm#FairValue
Overview Of The New 3.8%
Investment Income Tax, Part 3: Gains From The Sale Of Property
[Forbes,
Part 1,
Part 2.]
Part 3]
Bob
Jensen's universal health care messaging ---
http://www.trinity.edu/rjensen/Health.htm
"Preserving the American Dream," Center for Innovation, Stanford
University Graduate School of Business, April 26, 2013 ---
http://csi.gsb.stanford.edu/preserving-american-dream
Bob Jensen's Threads on the American Dream ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm
"Warren Buffett Investing Quotes"
by Barry Ritholtz, May 5, 2013
http://www.ritholtz.com/blog/2013/05/warren-buffett-investing-quotes/
Given that its the Berkshire annual meeting this
weekend, now is as good a time to roll out these quotes from Warren himself:
“To invest successfully, you need not understand
beta, efficient markets, modern portfolio theory, option pricing or emerging
markets. You may, in fact, be better off knowing nothing of these. That, of
course, is not the prevailing view at most business schools, whose finance
curriculum tends to be dominated by such subjects. In our view, though,
investment students need only two well-taught courses
-How to Value a Business, and How to Think About Market Prices.”
Source: Chairman’s Letter, 1996
“The best thing that happens to us is when a great
company gets into temporary trouble…We want to buy them when they’re on the
operating table.”
Source: Businessweek, 1999
“None of this means, however, that a business or
stock is an intelligent purchase simply because it is unpopular; a
contrarian approach is just as foolish as a follow-the-crowd strategy.
What’s required is thinking rather than polling. Unfortunately, Bertrand
Russell’s observation about life in general applies with unusual force in
the financial world: “Most men would rather die than think. Many do.”
Source: Chairman’s Letter, 1990
“Over the long term, the stock market news will be
good. In the 20th century, the United States endured two world wars and
other traumatic and expensive military conflicts; the Depression; a dozen or
so recessions and financial panics; oil shocks; a flu epidemic; and the
resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Source: The New York Times, October 16, 2008
“The line separating investment and speculation,
which is never bright and clear, becomes blurred still further when most
market participants have recently enjoyed triumphs. Nothing sedates
rationality like large doses of effortless money. After a heady experience
of that kind, normally sensible people drift into behavior akin to that of
Cinderella at the ball. They know that overstaying the festivities ¾ that
is, continuing to speculate in companies that have gigantic valuations
relative to the cash they are likely to generate in the future ¾ will
eventually bring on pumpkins and mice. But they nevertheless hate to miss a
single minute of what is one helluva party. Therefore, the giddy
participants all plan to leave just seconds before midnight. There’s a
problem, though: They are dancing in a room in which the clocks have no
hands.”
Source: Letter to shareholders, 2000
“You don’t need to be a rocket scientist. Investing
is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
Source: Warren Buffet Speaks, via msnbc.msn
Fundamentals Approach to Valuing a Business
In the great book Dear Mr. Buffett, Janet Tavakoli shows how Warren
Buffet learned value (fundamentals) investing while taking Benjamin Graham's
value investing course while earning a masters degree in economics from Columbia
University. Buffet also worked for Professor Graham.
The following book supposedly takes the Graham approach to a new level
(although I've not yet read the book). Certainly the book will be controversial
among the efficient markets proponents like Professors Fama and French.
Purportedly a Great, Great Book on Value Investing
From Simoleon Sense, November 16, 2009 ---
http://www.simoleonsense.com/
OMG Did I Die & Go to heaven?
Just Read, Applied Value Investing, My Favorite Book of the Past 5
Years!!
Listen To This Interview!
I have a confession, I might have read the best
value investing book published in the past 5 years!
The book is called
Applied Value Investing By Joseph Calandro Jr. In
the book Mr. Calandro applies the tenets of value investing via (real) case
studies. Buffett, was once asked how he would teach a class on security
analysis, he replied, “case studies”. Unlike other books which are
theoretical this book provides you with the actual steps for valuing
businesses.
Without a doubt, this book ranks amongst the best
value investing books (with SA, Margin of Safety, Buffett’s letters to
corporate America, and Greenwald’s book) & you dont have to take my word for
it. Seth Klarman, Mario Gabelli and many top investors have given the book a
plug!
Here is an interview with the author of the book, Applied Value Investing
( I recommend listening to this). Who knows perhaps
yours truly will interview him soon.
Miguel
P.S.
A fellow blogger and friend will soon post a review
of this book (hint: Street Capitalist!).
Video:
Warren Buffett's Secrets To Success ---
http://www.businessinsider.com/business-news/nov-24-alice1-2009-11
Bob Jensen's threads on valuation are at
http://www.trinity.edu/rjensen/roi.htm
Bob Jensen's threads on the economic crisis are at
http://www.trinity.edu/rjensen/2008Bailout.htm
Question
If your compensation is tied to e.p.s. performance, what may be your best
strategy?
Answer
Shrink the denominator.
From the CFO.com Morning Ledger on May 6, 2013
Stock buybacks appear to be making an impact on
executive pay. As companies ramp up repurchases, compensation targets tied
to per-share earnings are helping boost compensation,
the
WSJ’s Scott Thurm and
Serena Ng report.
The link worries some investors and compensation advisers because the figure
is too easy to manipulate. “If you’re a CFO or
a top executive, you can determine if the EPS goes up or not based on a
stock buyback,” says Robin Ferracone, CEO of pay consultant Farient
Advisors.
S&P 500 companies spent nearly $408 billion on share
buybacks last year. Their net income grew 5% on average from 2011, but
per-share earnings rose 6.1%—meaning buybacks contributed nearly a fifth of
the growth in per-share earnings.
Safeway CEO
Steven Burd received a $2.3 million stock award this past March in part
because he oversaw a 61% jump in the company’s per-share profit last year.
What made the difference was $1.2 billion in stock buybacks mostly financed
with borrowed money, though the company said the buybacks “had no impact on
Mr. Burd’s 2012 compensation.”
Researchers say companies that tie executive pay to
per-share earnings are more likely to buy back stock. In a recent paper,
Baruch College accounting professor Carol Marquardt found that companies
that use accelerated share repurchases are more likely to reward executives
for boosting per-share earnings. The overall trend highlights the complexity
of paying for performance, Thurm and Ng write. “Goals can be set too low,
and numerical targets often involve relatively subjective judgments about
what should be counted.” And the targets can encourage short-term moves that
may not pay off in the long run.
Why aren't the fair value advocates
raising more fuss?
On April 30, 2013, the FASB issued a proposal that would indefinitely defer for
nonpublic employee benefit plans certain quantitative fair value disclosures for
investments in their plan sponsors' nonpublic entity equity securities. Comments
on the FASB's exposure draft are due May 31, 2013.
Ernst & Young reaction ---
Click Here
http://www.pwc.com/us/en/cfodirect/publications/in-brief/2013-23-fasb-proposes-to-defer-quantitative-disclosures-for-nonpublic-employee-benefit-plans.jhtml?display=/us/en/cfodirect/publications/in-brief&j=122192&e=rjensen@trinity.edu&l=353859_HTML&u=6425889&mid=7002454&jb=0
WRESTLING WITH REFORM: FINANCIAL SCANDALS
AND THE LEGISLATION THEY INSPIRED ---
http://www.sechistorical.org/
Thank you Jim McKinney for the heads up.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
History of Fraud in America ---
http://www.trinity.edu/rjensen/FraudAmericanHistory.htm
Is this charity scalping donors?
"$6 Million Worth Of Hair Donations To Locks Of Love Have Gone Missing,"
by Megan Willett, Business Insider, May 14, 2013 ---
http://www.businessinsider.com/locks-of-love-could-be-missing-hair-2013-5
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
From CFO.com Morning Ledger on May 2, 2013
SEC backs swaps shift
The SEC voted unanimously to give overseas financial firms more
leeway in adhering to their home countries’ rules governing swaps,
the
WSJ reports. Under the proposal, overseas
branches of U.S.-based banks would be able to adhere to foreign regulations
if the banks were conducting that particular piece of business only with
dealers located outside the U.S. Overseas firms doing deals with U.S. firms
also could adhere to a foreign jurisdiction’s rules, if they are broadly
comparable with U.S. requirements, which SEC Chairman Mary Jo White said
would be interpreted broadly, not “line by line.” The SEC’s approach is
narrower than that of the CFTC, which outlined its own requirements last
year.
The law does not
pretend to punish everything that is dishonest. That would seriously interfere
with business.
Clarence Darrow ---
Click Here
"Leniency for Offshore Cheats: Courts Hand Down Lighter
Sentences Than in Other Types of Tax-Shelter Cases," by Laura Saunders, The
Wall Street Journal, May 5, 2013 ---
http://online.wsj.com/article/SB10001424127887323687604578465132983095400.html?mod=djemCFO_t
U.S. courts are doling out more lenient punishment
to tax evaders hiding money offshore than to other tax cheats.
Despite a high-profile government crackdown on
secret offshore financial accounts since 2009, the average sentence in those
cases has been about half as long as in some other types of tax cases,
according to a comparison of Internal Revenue Service statistics and data
compiled by former U.S. Justice Department lawyer Jack Townsend. In many
cases, judges are also opting for shorter sentences than recommended under
federal guidelines.
Since U.S. officials began their intense campaign
four years ago, they have charged at least 71 taxpayers with crimes.
The average sentence handed down in offshore cases
has been less than 15 months, according to Mr. Townsend. In contrast, the
average sentence in tax-shelter schemes has been 30 months over the past
three fiscal years, according to IRS data.
Three-quarters of taxpayers charged in offshore
account cases have pleaded guilty. So far, judges have handed down prison
sentences about half the time.
"The cases involving offshore bank accounts are
drawing lighter sentences than other criminal tax cases," said Mr. Townsend,
who practices at Townsend & Jones LLP in Houston. He calls the discrepancy
"troubling, because cheating is cheating."
Experts say many factors have contributed to
lighter sentences in offshore cases. Among them: the IRS's successful
limited-amnesty programs, in which taxpayers admit having secret accounts;
cooperation by defendants; and light sentences in the first wave of cases in
the current campaign due to poor case selection.
Judges also may have been less harsh because of
huge penalties many defendants owe, including one equal to half the highest
balance in an account. Defendants so far have agreed to pay a total of more
than $170 million to resolve their cases. More than two dozen cases are
still pending.
Spokesmen for the IRS and the Justice Department
declined to comment.
The latest lenient sentence, and the most dramatic,
came in the case of Mary Estelle Curran, a wealthy 79-year-old widow in Palm
Beach, Fla. On April 25, Federal District Court Judge Kenneth Ryskamp
scolded prosecutors for pursuing her and sentenced her to a year of
probation. Within a minute, he revoked the probation, making her a free
woman.
Ms. Curran had pleaded guilty to having secret
foreign accounts containing more than $40 million. Her lawyers said she
inherited the money from her husband and relied on European advisers who
told her not to declare it to the U.S. Ms. Curran tried to enter the IRS's
limited-amnesty program in 2009, but the agency turned her down. She was
indicted in late 2011 and faced up to 37 months in prison.
Prosecutors concurred in asking for probation for
Ms. Curran. Although she didn't go to prison, she agreed to pay the
government almost $22 million.
While experts called Ms. Curran's case an
"outlier," two other defendants recently received sentences that were below
guidelines.
On April 10, Sybil Nancy Upham, who pleaded guilty
in 2010 in connection with concealing about $11 million in accounts in
Switzerland and Liechtenstein, was sentenced to three years of probation
rather than a possible 30 to 37 months in prison. She agreed to pay more
than $5.5 million.
On April 25, Michael Canale, formerly a doctor at
the Veterans Administration, was sentenced to six months in prison in
connection with $1.5 million held in secret Swiss accounts, compared with a
possible 24 to 30 months under the guidelines.
Continued in article
Bob Jensen's threads on why white collar crime pays even if you know ahead
of time that you will probably get caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
"Europe imposes mandatory (14 to 25 year) rotation on audits," by Rachael Singh,
AccountancyAge, April 25, 2013 ---
http://www.accountancyage.com/aa/news/2264090/europe-imposes-mandatory-rotation-on-audits
It's anywhere from 14-25 years and can vary by individual EU member state
rules
http://www.foxbusiness.com/news/2013/04/24/eu-lawmakers-in-tentative-deal-on-accounting-cap-sources/
Seems to be 14 years where member EU states can extend the tenure of the
audit firm to 25 years
From the CFO.com Morning Ledger on April 26, 2013
EU committee backs watered-down plan on auditor rotation. Bold
plans to shake up the European audit market are being scaled back after a
group of influential EU lawmakers backed compulsory rotation of auditors
only every 25 years,
the
FT reports. The
European Parliament’s legal affairs committee endorsed a watered-down
version of the auditing reforms proposed in 2011 by the European Commission,
which wanted audit-firm rotation every six to 12 years. It also rejected the
commission’s proposal for a crackdown on auditors doing additional work,
which had raised the prospect of a breakup of one or more of the Big Four.
Also see
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=152441
"PBS Frontline Nails It On How Wall Street Screws Main Street," by
Andrew Haigney, Business Insider, May 5, 2013 ---
http://www.businessinsider.com/the-retirement-gamble-pbs-frontline-exposes-how-wall-street-screws-main-street-2013-5
"6 Retirement Accounts You Should Know
About (Part2)," by Laura Adams, Money Girl, April 23, 2013, Episode
311 ---
http://moneygirl.quickanddirtytips.com/retirement-plan-types-pt2.aspx
Frontline broadcast on "The Retirement
Gamble," April 23, 2013 ---
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
For details see
http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/the-retirement-gamble-facing-us-all/
If you’ve been watching any commercial television
lately, you are well aware that the financial services industry is very busy
running expensive ads imploring us to worry about our retirement futures.
Open a new account today, they say.
They are not wrong that we should be doing
something: America is facing a retirement crisis. One in three Americans has
no retirement savings at all. One in two reports that they can’t save
enough. On top of that, we are living longer, and health care costs, as we
all know, are increasing.
But, as I found when investigating the retirement
planning and mutual funds industries in The Retirement Gamble, which airs
tonight on FRONTLINE, those advertisements are imploring us to start saving
for one simple reason. Retirement is big business — and very profitable. It
doesn’t take a genius to figure out that the more we save into the
industry’s financial products, the more money they make in fees and
commissions trading our hard-earned cash. And as long as they don’t run away
with our money or invest it in a Ponzi scheme, they have little in the way
of accountability to us when something goes wrong. And even then it can be
hard to fight back.
Big banks, brokerages, insurance companies and
other financial service providers operate under something called a
suitability standard — which says they don’t have to give you the best
advice, just advice that isn’t too egregiously terrible.
Let’s say you sit down with an adviser at your
brokerage or bank and ask for some advice on how you should allocate your
retirement savings, or which funds you might want to choose for your IRA.
You’ll get lots of advice, but chances are it won’t
be worth much. Eighty five percent of all financial advisers and financial
planners are really just brokers or salesman. Their incentive is to sell you
a product that makes them a higher commission, not necessarily a product
that maximizes your chances of saving more. Only 15 percent of advisers are
“fiduciaries” — advisers who by law must operate with your best interests in
mind.
Last year, the Obama administration proposed a rule
to mandate that all financial advisers, financial planners and other
assorted financial wizards would have to adopt a fiduciary standard when it
came to employee retirement accounts such as your 401(k) or IRA account. The
financial services industry, which today manages something upwards of $10
trillion of our retirement nest eggs, thought this was a bad idea and pushed
back hard. Scores of their protest letters poured into the U.S. Labor
Department, the branch of our government responsible for regulating employee
retirement accounts.
Congress, too, was hit with a furious lobbying
campaign. This would be way too expensive, the industry said; if we have to
provide such a standard of service, we will either have to pack up and find
another business line, or have to pass the increased costs on to our
customers. The Obama administration pulled their proposal last fall.
How would a new fiduciary rule change things?
Chances are you would be sold less expensive products, not only in your IRA
accounts but inside your company 401(k) as well. It’s all about fees. While
reporting on retirement plans for FRONTLINE, nothing has been more
surprising to me than the corrosive effect of fees on our retirement
savings.
It’s this simple: Fund fees can erode as much as
half or more of your prospective gains.
For the sake of dramatizing the point, John Bogle,
founder of Vanguard, the world’s largest mutual fund company and pioneer of
low-cost index funds, gave me a startling example while we were filming.
Assume you are invested in a mutual fund, he says, with a gross return of 7
percent, but that the mutual fund charges you an annual fee of 2 percent.
Over a 50-year investing lifetime, that little 2
percent fee will erode 63 percent of what you would have had. As Bogle puts
it, “the tyranny of compounding costs” is overwhelming.
In short, fees matter. So what can you do? You
aren’t going to find a fund that invests your money for free, but experts
say you can come close by buying index funds. Their fees can be a tenth of
what the average mutual funds charges. And over time, in bull and bear
markets, on average, index funds perform better than their more expensive
actively managed fund cousins. This is no secret to anyone who is paying
attention.
So why aren’t our trusted financial advisers and
those ads telling us to buy index funds? Why do some 401(k) plans not even
offer them on their menus?
It’s because even though an index fund might be a
better option for you and me, a broker operating under a suitability
standard has no incentive to sell it to us. He or she will make higher
commissions from options that have higher fees.
Sadly, a recent AARP study reported that 70 percent
of mutual fund savers were not even aware that they were paying any fees at
all.
Continued in article
Dan Stone's summary of the above Frontline
show:
Enjoyed it though didn't
find much new here. Basic messages:
1. index funds are cheaper and, in the long run, preferred (Jack Bogle)
2. managed funds are a scam to generate fees for the mutual fund industry
(which some would certainly debate)
3. most Americans don't have enough for retirement
4. mutual funds make it hard to determine their fees
5. the financial services industry, through massive donations, prevents any
attempts to increase transparency in the financial services industry.
I've bought Pound Foolish, after hearing an interview with its author, but
haven't
started reading it yet
(http://www.amazon.com/Pound-Foolish-Exposing-
Personal-Industry/dp/1591844894)
Dan Stone
Bob Jensen's personal finance helpers
(but not his advice which is free and not worth the money) ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
Remember that my financial advice is free and probably not
worth the money. After selling the family farm in Iowa and my home in San
Antonio, most of my liquid savings are invested in an enormous Vanguard
Long-Term "Guaranteed" Tax Exempt Fund.
"Apocalypse, Not Now, for Municipal Bonds," by Randall W. Forsyth, Barron's,
April 23, 2013 ---
http://online.barrons.com/article/SB50001424052748703889404578438641361922074.html?mod=BOL_da_udwsd#articleTabs_article%3D0
$573.2 million in Munis defaulted in 2013 (0.6% of the $3.7 trillion
outstanding) .
My investment returns were very satisfactory and stable throughout the economic
crisis that sent stocks soaring.
At my age I care more about steady annual tax-exempt cash flows rather than
valuation ups and downs and hyper inflation risk.
When I need cash for something big like a new tractor I simply write a Vanguard
check. I love the liquidity of this fund.
Fortunately, however, my TIAA lifetime annuities cover virtually all of our
living expenses, including payments on a large mortgage.
I could write a Vanguard check to pay off the mortgage, but there are tax
advantages of not doing so unless unlikely tax reform clobbers tax exempt
interest income.
"Here's Why So Many Wealthy Athletes Wind Up Broke," by Claes Bell,
Business Insider, April 23, 2013 ---
http://www.businessinsider.com/4-money-lessons-from-broke-athletes-2013-4
. . .
Whether you're making $50,000 a year or $5 million,
poor tax planning, overspending and other common errors can trash your
finances, Dawson says. Here are four common money mistakes that typically
land athletes in trouble, and how you can avoid them.
Continued in article (Slide Show)
Before wasting money for investment advice, take advantage of free services
---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
And don't end up an prison like Wesley Snipes who gambled with the IRS and lost.
Also carefully study the following:
Frontline broadcast on "The Retirement Gamble," April 23, 2013 ---
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
For details see
http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/the-retirement-gamble-facing-us
Economist Magazine:
The price of a Big Mac over Three Decades
"Symptoms Don't Lie," by Peter
Schiff, Townhall Finance, May 12, 2013 ---
http://finance.townhall.com/columnists/peterschiff/2013/05/12/symptoms-dont-lie-n1593199?utm_source=thdaily&utm_medium=email&utm_campaign=nl
. . .
n my latest commentary I discussed how the
Big Mac Index (The Economist Magazine's 30
year data set on Big Mac prices) provided strong anecdotal evidence that
inflation in the United States is higher than official figures. More
information has come in since then that tells me the same thing: that
Americans are downsizing their lives as their incomes fail to keep pace with
rising prices. These symptoms are at odds with the widespread belief in an
accelerating recovery that has resulted in braggadocio in Washington and
euphoria on Wall Street.
Earlier this week Tyson Foods, one of the nation's
largest providers of packaged meat products, announced that although their
top line sales revenue increased by almost 2% (roughly in line with U.S. GDP
growth), operating margins collapsed by almost 50%, leading to a 43% decline
in profit. Consumer shifts away from relatively higher priced/higher margin
beef and pork products to lower cost/lower margin chicken products were to
blame. Tyson also noted that cost conscious consumers shifted away from
higher margin packaged chicken products to fresh meat cuts, thereby
sacrificing convenience for cost.
According to government statisticians, the Tyson
announcement would reveal modest growth and low inflation. After all,
revenue at the company grew and spending on their products had increased
modestly. But rising prices were obscured by consumers purchasing lower
quality products. Not only are consumers avoiding the beef and pork that
they otherwise may have preferred, but they are opting out of the
convenience of prepared foods. This behavior is symptomatic of diminished
consumer purchasing power. This is known as getting poorer.
See the graph at
http://www.europac.net/commentaries/changing_conversation
Jensen Comment
Because price changes in food and fuel made the inflation index look bad and
resulted in higher inflation adjustments to Social Security recipients, the
government took food and fuel prices out of the inflation index. The USA
government is very good at lying with statistics.
Let's face it old folks should
not be eating at fast food restaurants (bad for their health) and leaving home
(not enough years left for good memories).
"Bernanke And Friends Are Setting The Stage For An Avalanche," John
Mauldin, Business Insider, May 4, 2013 ---
http://www.businessinsider.com/mauldin-the-qe-sandpile-2013-5
. . .
The Critical State
Something only a math nerd could love? Scientists
refer to this as a critical state. The term critical state can mean the
point at which water would go to ice or steam, or the moment that critical
mass induces a nuclear reaction, etc. It is the point at which something
triggers a change in the basic nature or character of the object or group.
Thus, (and very casually for all you physicists) we refer to something being
in a critical state (or use the term critical mass) when there is the
opportunity for significant change.
"But to physicists, [the critical state] has always
been seen as a kind of theoretical freak and sideshow, a devilishly unstable
and unusual condition that arises only under the most exceptional
circumstances [in highly controlled experiments]… In the sandpile game,
however, a critical state seemed to arise naturally through the mindless
sprinkling of grains."
Thus, they asked themselves, could this phenomenon
show up elsewhere? In the earth's crust triggering earthquakes, or as
wholesale changes in an ecosystem – or as a stock market crash? "Could the
special organization of the critical state explain why the world at large
seems so susceptible to unpredictable upheavals?" Could it help us
understand not just earthquakes, but why cartoons in a third rate paper in
Denmark could cause world-wide riots?
Buchanan concludes in his opening chapter: "There
are many subtleties and twists in the story … but the basic message, roughly
speaking, is simple: The peculiar and exceptionally unstable organization
of the critical state does indeed seem to be ubiquitous in our world.
Researchers in the past few years have found its mathematical fingerprints
in the workings of all the upheavals I've mentioned so far [earthquakes,
eco-disasters, market crashes], as well as in the spreading of epidemics,
the flaring of traffic jams, the patterns by which instructions trickle down
from managers to workers in the office, and in many other things. At the
heart of our story, then, lies the discovery that networks of things of all
kinds – atoms, molecules, species, people, and even ideas – have a marked
tendency to organize themselves along similar lines. On the basis of this
insight, scientists are finally beginning to fathom what lies behind
tumultuous events of all sorts, and to see patterns at work where they have
never seen them before."
Now, let's think about this for a moment. Going
back to the sandpile game, you find that as you double the number of grains
of sand involved in an avalanche, the probability of an avalanche becomes
2.14 times more likely. We find something similar in earthquakes. In terms
of energy, the data indicate that earthquakes become four times less likely
each time you double the energy they release. Mathematicians refer to this
as a "power law," a special mathematical pattern that stands out in contrast
to the overall complexity of the earthquake process.
Fingers of Instability
So what happens in our game? "…after the pile
evolves into a critical state, many grains rest just on the verge of
tumbling, and these grains link up into 'fingers of instability' of all
possible lengths. While many are short, others slice through the pile from
one end to the other. So the chain reaction triggered by a single grain
might lead to an avalanche of any size whatsoever, depending on whether that
grain fell on a short, intermediate or long finger of instability."
Now, we come to a critical point in our discussion
of the critical state. Again, read this with the markets in mind (again,
emphasis mine):
"In this simplified setting of the sandpile, the
power law also points to something else: the surprising conclusion that even
the greatest of events have no special or exceptional causes. After
all, every avalanche large or small starts out the same way, when a single
grain falls and makes the pile just slightly too steep at one point.
What makes one avalanche much larger than another has nothing to do with its
original cause, and nothing to do with some special situation in the pile
just before it starts. Rather, it has to do with the perpetually
unstable organization of the critical state, which makes it always possible
for the next grain to trigger an avalanche of any size."
Now, let's couple this idea with a few other
concepts. First, Hyman Minsky (who should have been a Nobel laureate) points
out that stability leads to instability. The more comfortable we get with a
given condition or trend, the longer it will persist and then when the trend
fails, the more dramatic the correction. The problem with long term
macroeconomic stability is that it tends to produce unstable financial
arrangements. If we believe that tomorrow and next year will be the same as
last week and last year, we are more willing to add debt or postpone savings
in favor of current consumption. Thus, says Minsky, the longer the period of
stability, the higher the potential risk for even greater instability when
market participants must change their behavior.
Relating this to our sandpile, the longer that a
critical state builds up in an economy, or in other words, the more "fingers
of instability" that are allowed to develop a connection to other fingers of
instability, the greater the potential for a serious "avalanche."
We Are Managing Uncertainty
Or, maybe a series of smaller shocks lessens the
long reach of the fingers of instability, giving a paradoxical rise to even
more apparent stability. As the late Hunt Taylor wrote:
"Let us start with what we know. First, these
markets look nothing like anything I've ever encountered before. Their
stunning complexity, the staggering number of tradable instruments and their
interconnectedness, the light-speed at which information moves, the degree
to which the movement of one instrument triggers nonlinear reactions along
chains of related derivatives, and the requisite level of mathematics
necessary to price them speak to the reality that we are now sailing in
uncharted waters….
"I've had 30-plus years of learning experiences in
markets, all of which tell me that technology and telecommunications will
not do away with human greed and ignorance. I think we will drive the car
faster and faster until something bad happens. And I think it will come,
like a comet, from that part of the night sky where we least expect it. This
is something old.
"I think shocks will come, but they will be
shallower, shorter. They will be harder to predict, because we are not
really managing risk anymore. We are managing uncertainty –
too many new variables, plus leverage on a scale we have never encountered
(something borrowed). And, when the inevitable occurs, the buying
opportunities that result will be won by the technologically enabled swift."
Another way to think about it is the way Didier
Sornette, a French geophysicist, has described financial crashes in his
wonderful book Why Stock Markets Crash (the math, though, was far
beyond me!). He wrote, "[T]he specific manner by which prices collapsed is
not the most important problem: a crash occurs because the market has
entered an unstable phase and any small disturbance or process may have
triggered the instability. Think of a ruler held up vertically on your
finger: this very unstable position will lead eventually to its collapse, as
a result of a small (or an absence of adequate) motion of your hand or due
to any tiny whiff of air. The collapse is fundamentally due to the unstable
position; the instantaneous cause of the collapse is secondary."
When things are unstable, it isn't the last grain
of sand that causes the pile to collapse or the slight breeze that causes
the ruler on your fingertip to fall. Those are the "proximate" causes.
They're the closest reasons at hand for the collapse. The real reason,
though, is the "remote" cause, the farthest reason. The farthest reason is
the underlying instability of the system itself.
A fundamentally unstable system is exactly what we
saw in the recent credit crisis. Consumers all through the world's largest
economies borrowed money for all sorts of things, because times were good.
Home prices would always go up and the stock market was back to its old
trick of making 15% a year. And borrowing money was relatively cheap. You
could get 2% short-term loans on homes, which seemingly rose in value 15% a
year, so why not buy now and sell a few years down the road?
Greed took over. Those risky loans were sold to
investors by the tens and hundreds of billions of dollars, all over the
world. And as with all debt sandpiles, the fault lines started to appear.
Maybe it was that one loan in Las Vegas that was the critical piece
of sand; we don't know, but the avalanche was triggered.
You may not remember this, but I was writing about
the problems with subprime debt way back in 2005 and 2006. But as the
problem actually emerged, respected people like Ben Bernanke (the chairman
of the Fed) said that the problem was not all that big and that the fallout
would be "contained." (I bet he wishes he could have that statement back!)
But it wasn't contained. It caused banks to realize
that what they thought was AAA credit was actually a total loss. And as
banks looked at what was on their books, they wondered about their fellow
banks. How bad were they? Who knew? Since no one did, they stopped lending
to each other. Credit simply froze. They stopped taking each other's letters
of credit, and that hurt world trade. Because banks were losing money, they
stopped lending to smaller businesses. Commercial paper dried up. All those
"safe" off-balance-sheet funds that banks created were now folding (what my
friend Paul McCulley first labeled as the Shadow Banking System). Everyone
sold what they could, not what they wanted to, to cover their debts. It was
a true panic. Businesses started laying off people, who in turn stopped
spending as much.
As I read through this again, I think I have an
insight. It is one of the reasons we get "fat tails." In theory, returns on
investment should look like a smooth bell curve, with the ends tapering off
into nothing. According to the theoretical distribution, events that deviate
from the mean by five or more standard deviations ("5-sigma events") are
extremely rare, with 10 or more sigma being practically impossible – at
least in theory. However, under certain circumstances, such events are more
common than expected; 15-sigma or even rarer events have happened in the
world of investments. Examples of such unlikely events include Long Term
Capital in the late '90s and any of a dozen bubbles in history. Because the
real-world commonality of high-sigma events is much greater than in theory,
the distribution is "fatter" at the extremes ("tails") than a truly normal
one.
Thus, the build-up of critical states, those
fingers of instability, is perpetuated even as, and precisely because, we
hedge risks. We try to "stabilize" the risks we see, shoring them up with
derivatives, emergency plans, insurance, and all manner of risk-control
procedures. And by doing so, the economic system can absorb body blows that
would have been severe only a few decades ago. We distribute the risks and
the effects of the risk throughout the system.
Yet as we reduce the known risks, we sow the seeds
for the next 10-sigma event. It is the improbable risks that we do not yet
see that will create the next real crisis. It is not that the fingers of
instability have been removed from the equation, it is that they are in
different places and are not yet visible.
A second related concept is from game theory. The
Nash equilibrium (named after John Nash, he of The
Beautiful Mind) is a kind of optimal strategy for games involving two
or more players, whereby the players reach an outcome to mutual advantage.
If there is a set of strategies for a game with the property that no player
can benefit by changing his strategy while (if) the other players keep their
strategies unchanged, then that set of strategies and the corresponding
payoffs constitute a Nash equilibrium.
A Stable Disequilibrium
So we end up in a critical state of what Paul
McCulley calls a "stable disequilibrium." We have "players" of this game
from all over the world tied inextricably together in a vast dance through
investment, debt, derivatives, trade, globalization, international business,
and finance. Each player works hard to maximize their own personal outcome
and to reduce their exposure to "fingers of instability."
But the longer we go on, asserts Minsky, the more
likely and violent an "avalanche" is. The more the fingers of instability
can build. The more that state of stable disequilibrium can go critical on
us.
Go back to 1997. Thailand began to experience
trouble. The debt explosion in Asia began to unravel. Russia was defaulting
on its bonds. (Astounding. Was it less than ten years ago? Now Russian is
awash in capital. Who could anticipate such a dramatic turn of events?)
Things on the periphery, small fingers of instability, began to impinge on
fault lines in the major world economies. Something that had not been seen
before happened: the historically sound and logical relationship between 29-
and 30-year bonds broke down. Then country after country suddenly and
inexplicably saw that relationship in their bonds begin to correlate, an
unheard-of event. A diversified pool of debt was suddenly no longer
diversified.
The fingers of instability reached into Long Term
Capital Management and nearly brought the financial world to its knees.
If it were not for the fact that we are coming to
the closing innings of the Debt Supercycle, we would already be in a robust
recovery. But we are not. And sadly, we have a long way to go with this
deleveraging process. It will take years.
You can't borrow your way out of a debt crisis,
whether you are a family or a nation. And, as too many families are finding
out today, if you lose your job you can lose your home. People who were once
very creditworthy are now filing for bankruptcy and walking away from homes.
All those subprime loans going bad put huges numbers of homes back onto the
market, which caused prices to fall on all homes, which caused an entire
home-construction industry to collapse, which hurt all sorts of ancillary
businesses, which caused more people to lose their jobs and give up their
homes, and on and on. The connections in the housing part of the sandpile
were long and deep.
It's all connected. We built a very unstable sand
pile and it came crashing down, and now we have to dig out from the problem.
And the problem was too much debt. It will take years, as banks write off
home loans and commercial real estate and more, and we get down to a more
reasonable level of debt as a country and as a world.
And, bringing this tale of instability up to date,
we find that Ben Bernanke and his central bank colleagues worldwide have
taken much of the burden of sovereign debt upon their mighty shoulders. But
as they push their Sisyphean, quantitative easing boulders up the
ever-steepening sandpile of the global economy, which side of the pile will
collapse first? Will it be the European side, already dangerously unstable?
Or the Japanese side, where the QE boulder is about to grow into a real
whopper? Or could it happen over on the China slope, which is riddled with
fiscal and financial crevasses?
And lest we be complacent here in the US, we only
need
Niall Ferguson to remind us, as he did here at the
conference this morning, that the US may be in the grip of a profound
structural malaise that neither easing nor austerity can relieve. I'll have
much more to say about Niall's presentation and those of our other speakers
in coming weeks. We were treated to some world-class thinking and
synthesizing of views here today, with much more to come tomorrow! And I'll
keep on asking everyone who comes to the stage, "But what about Japan?"
Our 10th Annual Strategic Investment
Conference is definitely shaping up as our best ever. And with intellects
like Niall Ferguson, Lacy Hunt, and Nouriel Roubini, as well as premier
investment managers that include the entire partner team from GaveKal (Louis
and Charles Gave and Anatole Kaletsky), Jeffrey Gundlach,
Kyle Bass, and Mohamed El-Erian, how could it not
be the best? In his afternoon presentation, Mohamed did a beautiful job of
tying together the themes we focused on today – and he was introduced by his
best friend (and early-morning walking and debating partner), the
irrepressible and incorrigible Paul McCulley, who was also our keynote
speaker last night.
The conference is turning out to be everything that
my co-host, Altegris, and I hoped and expected it would be. We are already
working hard to get the conference videos ready, in order to send them to
the attendees and all Mauldin Circle members over the coming weeks. In the
meantime, here is a great montage from last year's conference for you to
enjoy. If you are not yet a Mauldin Circle member, let
this clip remind you of the unique benefits
offered to those who join my inner circle.
Back in July,
2012 the Danish central bank,
Nationalbanken,
lowered the deposit rate to -0.2
per cent. Back then we wrote
that it was going to be costly
for the banks, and that money
market rates were going deeper
into negative territory. With
Draghi’s
comments last week, how did
that whole negative deposit rate
action turn out for Denmark?
Nordea had a
note out last week on that
very subject. Now, before we
move, let’s remember that Danish
monetary policy is tailored
around the
FX peg. The deposit rate was
there to assure outflow because
of mounting pressure on the EUR/DKK
pair. Read
more (for a fee)
Read the comments at
https://twitter.com/edwardnh/statuses/331729766426218496
Is Fed Chairman Ben Berrnanke a Junk Yard Dog?
"Yields on Junk Bonds Reach New Low As Investors Fight for Returns, Payout
on Debt From Weak Companies: Takes Its First Dip Below 5%," by Katy
Burne, The Wall Street Journal, May 8, 2013 ---
http://online.wsj.com/article/SB10001424127887324744104578470812182691622.html?mod=djemCFO_t
Jensen Comment
My parents were very conservative investors and put the bulk of their retirement
savings into certificates of deposits with FDIC banks that sometimes paid nearly
a 6% APR on government-insured long-term CDs. In retirement hey lived
largely on the interest on those savings.
If they were alive today they would be lucky to find a FDIC bank paying
something close to 1%. What many people in the USA do not understand is that
the Fed low-interest rate policy has become what is tantamount to a tax of
people who do not want to take equity risks with their savings. It is really
confiscation of their savings if they are burning capital rather than income on
capital. Who was it who promised no new taxes on middle income families and the
elderly? Yeah right!
Humor for May 1-31, 2013
Ten Pills and You're Fine ---
http://www.youtube.com/watch?feature=player_embedded&v=4U1ShwjleSE
Evian Commercial ---
http://www.youtube.com/watch?v=pfxB5ut-KTs
ABC News About Catching Baby Ducks ---
http://www.youtube.com/watch_popup?v=9hnbmml8fOY&hd=1
Five Masculine Moments ---
http://www.youtube.com/watch?v=JvlQYi5LoYM&feature=youtu.be
The Diving Giraffes (Yeah Right!) ---
http://www.youtube.com/watch_popup?v=uFxnBrO9n7o&sns=em
Voices from the Wild ---
http://www.wimp.com/animalvoiceovers/
Ray Stevens on Illegal Immigration ---
http://www.youtube.com/embed/WgOHOHKBEqE?feature=player_detailpage
The Darwin Awards ---
http://www.darwinawards.com/
"Strategic Humor: Cartoons from the (HBR) June 2013 Issue," by Meghan Ennes,
Harvard Business Review, May 20, 2013 ---
Click Here
http://blogs.hbr.org/hbr/hbreditors/2013/05/strategic_humor_cartoons_from_the_june_2013_issue.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
13 Jokes That Every Math Geek Will Find Hilarious Walter Hickey ---
http://www.businessinsider.com/13-math-jokes-that-every-mathematician-finds-absolutely-hilarious-2013-5
A Bit of Humor
Bumper Stickers ---
http://funny2.com/bumper.htm
Black holes are where God divided by zero
Egrets? I've had a few
I never thought I'd miss Nixon
Without geometry, life is pointless
Custer wore an Arrow shirt
I didn't climb to the top of the food chain to become a vegetarian!
So many stupid people, and so few asteroids
I didn't believe in reincarnation in my last life, either!
Conserve toilet paper - use both sides
When you do a good deed, get a receipt in case heaven is like the IRS
My mother was a moonshiner, and I love her still
The control key on the keyboard does not work
I don't have a beer gut, I have a protective covering for my rock hard abs
I had the right to remain silent, but I didn't have the ability
To err is human, to blame it on somebody else shows management potential
If you can read this, I've lost the trailer!
Frankly, Scallop, I don't give a clam
I R S: We've got what it takes to take what you've got
As long as there are tests, there will be prayer in public schools
I'm only speeding 'cause I really have to poop!
If it isn't broken, fix it until it is
I'm 33 1/3 RPM in an iPod world
I'm retired. Go around me (a good reply when somebody sends you a tiresome
questionnair)
Quoting one is plagiarism. Quoting many is research.
TaxProf Paul Caron is moving from Ohio to California.
On May 6, 2013 his blog posting was as follows:
http://taxprof.typepad.com/
(Hat Tip: Ann Carlson, Eric Zolt.) I have just
moved to California and turned in my Ohio license plate for a new California
license plate -- please honk if you see me on the road in Southern
California:
For more tax license plates, see
here,
here,
here, and
here.
Bob Jensen's threads on accounting humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor
Forwarded by Paula
A priest dies and is waiting in line at the Pearly Gates. Ahead of him is a
guy who's dressed in sunglasses, a loud shirt, leather jacket, and jeans.
Saint Peter addresses this cool guy, 'Who are you, so that I may know whether
or not to admit you to the Kingdom of Heaven ? '
The guy replies, 'I'm Jack, retired airline pilot from Houston.'
Saint Peter consults his list. He smiles and says to the pilot, 'Take this
silken robe and golden staff and enter the Kingdom.' The pilot goes into Heaven
with his robe and staff.
Next, it's the priest's turn. He stands erect and booms out, 'I am Father
Bob, pastor of Saint Mary's for the last 43 years.'
Saint Peter consults his list. He says to the priest, 'Take this cotton robe
and wooden staff and enter the Kingdom.
'Just a minute,' says the good father. 'That man was a pilot and he gets a
silken robe and golden staff and I get only cotton and wood. How can this be?
'Up here - we go by results,' says Saint Peter. 'When you preached - people
slept. When he flew, people prayed.'
Humor Between May 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor053113
Humor Between April 1-30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor04301
Humor Between March 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor033113
Humor Between February 1-28, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor022813
Humor Between January 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor013113
Humor Between December 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor123112
Humor Between November 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor113012
Humor Between October 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor103112
Humor Between September 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor093012
Humor Between August 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor083112
Humor Between July 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor073112
Humor Between June 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor063012
Humor Between May 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor053112
Humor Between April 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor043012
Humor Between March 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor033112
Humor Between February 1-29, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor022912
Humor Between January 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor013112
And that's
the way it was on May 31, 2013 with a little help from my friends.
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob
Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
|
For an elaboration on the reasons you should join a ListServ (usually
for free) go to http://www.trinity.edu/rjensen/ListServRoles.htm |
|
AECM (Accounting Educators)
http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
|
|
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down)
CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access. |
|
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk
This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA. |
|
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation. |
|
Business Valuation Group
BusValGroup-subscribe@topica.com
This discussion group is headed by Randy Schostag
[RSchostag@BUSVALGROUP.COM] |
Concerns That Academic Accounting Research is Out of Touch With Reality
|
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of the
shift from Gemeinschaft to
Gesellschaft. Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting
Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool
Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free
(updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA
Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Bob Jensen's
Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
April 30, 2013
Bob
Jensen's New Bookmarks April 1-30, 2013
Bob Jensen at
Trinity University
For
earlier editions of Fraud Updates go to
http://www.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to
http://www.trinity.edu/rjensen/bookurl.htm
Click here to search Bob Jensen's web site if you
have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron"
enter the phrase Jensen AND Enron. Another search engine that covers Trinity and
other universities is at
http://www.searchedu.com/
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's
Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm
All
my online pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
FASB Accounting Standards Updates ---
http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB/Page/SectionPage&cid=1176156316498
Hasselback Accounting Faculty
Directory ---
http://www.hasselback.org/
Blast from the Past With Hal
and Rosie Wyman ---
http://www.cs.trinity.edu/~rjensen/temp/Wyman2011.htm
Bob
Jensen's threads on business, finance, and accounting glossaries ---
http://www.trinity.edu/rjensen/Bookbus.htm
2012 AAA
Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view
these videos.
Bob Jensen is an obscure speaker following Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc
2013 IFRS Blue Book
(Not Free) ---
http://shop.ifrs.org/ProductCatalog/Product.aspx?ID=1717
Links to
IFRS Resources (including IFRS Cases) for Educators ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Bob
Jensen's threads on controversies in accounting standard setting ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
American
Accounting Association Past Presidents are listed at
http://www.cs.trinity.edu/~rjensen/temp/PastPresidentsAAA.htm
"2012 tax
software survey: Which products and features yielded frustration or bliss?" by
Paul Bonner, Journal of Accountancy, September 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Sep/20125667.htm
Center for Financial Services
Innovation ---
http://cfsinnovation.com/
"Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
Note this has a good explanation of how the inspection process works.
PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx
Bob
Jensen's taxation helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
Subtle Distinctions in Technical
Terminology
Machine Learning, Big Data, Deep Learning, Data Mining, Statistics, Decision &
Risk Analysis, Probability, Fuzzy Logic FAQ ---
http://wmbriggs.com/blog/?p=6465
Today’s FBI: Facts and Figures 2013-2014—which provides an in-depth look
at the FBI and its operations—is now available ---
http://www.fbi.gov/stats-services/publications/todays-fbi-facts-figures/facts-and-figures-031413.pdf/view
AICPA Fraud Resource Center ---
Click Here
http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/FRAUDPREVENTIONDETECTIONRESPONSE/Pages/fraud-prevention-detection-response.aspx
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Technical Tax Course Materials from
Lexis-Nexus
Graduate Tax Series ---
http://taxprof.typepad.com/files/graduate-tax-series-description-082911.pdf
CGMA Portfolio of Tools for Accountants
and Analysts ---
http://www.cgma.org/Resources/Tools/Pages/tools-list.aspx
Includes ethics tools and learning cases.
Humor Between April 1-30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor043013
Humor Between March 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor033113
Humor Between February 1-28, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor022813
Humor Between January 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor013113
Humor Between December 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor123112
Humor Between November 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor113012
Humor Between October 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor103112
Humor Between September 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor093012
Humor Between August 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor083112
Humor Between July 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor073112
Humor Between June 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor063012
Humor Between May 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor053112
Humor Between April 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor043012
Humor Between March 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor033112
Humor Between February 1-29, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor022912
Humor Between January 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor013112
Is the AAA Leadership Abandoning the AAA Commons?
How many of you heard about "Brilliantly Disguised Opportunities"
until the cover story in the Winter 2013 Edition of Accounting Education News
arrived in your snail mail boxes? That by the way is the theme of the 2013
forthcoming AAA Annual Meetings in Anaheim.
None of the recent past presidents of the AAA showed much interest in the
Commons until they took office as Presidents-Elect and eventually President. But
after being elected to this top office they actively used the AAA Commons as a
primary vehicle for communicating with the AAA Membership. Mostly their postings
were about AAA matters, although Sue Haka and Greg Waymire were inspired to post
about their research interests as well.
Current President Karen Pincus has not had a single posting to the AAA
Commons in 2013, although she had seven posts before becoming President.
President Elect Mary Barth as never had a single post to the Commons and
never even posted a comment. Since Mary arguably is our leading accountics
scientist, I urged her to commence a Quant Corner on the Commons where
editors of TAR, JAR, JAE, and other accountics science journal editors would
encourage authors to post discussions about forthcoming articles in those
journals. Mary never answered my appeal.
There's huge problem of inspiring any of our accountics scientists to become
active in the Commons on behalf of accountics scientists ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
My good friend A, Rashad Abdek-Khalik has a grand total of one posting to the
Commons and that was a long time ago. He certainly is not a leading candidate
for becoming President of the AAA on the basis of his Commons contributions.
Competition from his opponent is more encouraging. Christine Botosan accumulated
88 postings and 14 comments on the Commons. Good work Kathy. If elected I look
forward to even more postings. Update: Christine Botosan won the election
so maybe she will revive AAA Leadership interest in the Commons.
My intent here is not to make any of our current or future AAA leaders feel
guilty about neglect of the Commons. They are very, very busy professors in
other regards. However, the AAA is paying a lot of money to maintain the
Commons, and I sense membership in the Commons is waning. The lack of interest
of our current and future leaders, other than Christine Botosan, is certainly
not helping to revive interest in the Commons.
Personally, I would rather go to the Commons more often to learn something
instead of post something I already know. I am by far and above the most
prolific professor posting the AAA Commons, but I take no pride in this. In
retirement I would instead like to back off and let the younger generation
overwhelm me with their postings to the Commons.
And the AAA leadership could certainly do more to encourage this expensive
AAA resource. It is an expensive resource. Without more AAA leadership promotion
and guidance I fear it's becoming wasted money.
April 13, 2013 reply from Dan Stone
Thanks Bob,
1. Do we really know the costs of AAA commons? Is
this really an expensive resource? What evidence exists for this assertion?
2. I'm President of the AAA IS section. I've had
trouble even getting the IS section leadership to use AAA commons. The
reactions are that having to logon, and check another messaging source, is
more trouble than it is worth, particularly in light of cloud sources (which
don't require logons) for sharing online resources.
I'm not sure the AAA leadership is really the
problem here. It may simply be that the commons was a good idea whose time
never came (as is true of many, many technologies)..
April 14, 2013 reply from Bob Jensen
Hi Dan,
The Commons still has great potential for practitioners , researchers,
and AAA leaders (including section and region presidents) to communicate
with accounting teachers.
I'm still in favor of the Commons and feel that it was growing in
popularity when AAA Presidents like Sue Haka were putting out messages that
members wanted to access. It also helped when Julie Smith David, bless her
heart, was putting out challenges for people to use the Commons.
Before dropping the Commons I would like to see the AAA leadership making
a push to promote usage. I still like my idea of a Tech Corner where editors
of our top accountics science journals arm twist authors with forthcoming
articles to discuss their research in a language that communicates better
with accounting teachers and practitioners.
When IFRS was front and center in curriculum revisions in the USA the
large accounting firms, not just the Big Four, were putting up very helpful
IFRS learning links as free teaching resources. I think we can get expanded
activity from the large firms for other topics they would like to see in our
college courses, topics that are not just in accounting.
I think there's still a chance for the Commons to be a very valuable
resource. What we need is less Jensen and more members on the Commons.
Jensen will gladly back off when members commence to post more and more to
the Commons.
Respectfully,
Bob Jensen
"These Slides Show Why We Have Such A Huge Budget Deficit And Why Taxes
Need To Go Up," by Rob Wile, Business Insider, April 27, 2013 ---
http://www.businessinsider.com/cbo-presentation-on-the-federal-budget-2013-4
This is a slide show based on a presentation by a Harvard Economics Professor.
Bob Jensen's threads on Entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm
The Downside of Fair Value Accounting for Money Funds
From the CFO.com Morning Ledger on April 30, 2013
Treasurers Hunt for Money Fund Alternatives
Corporate treasurers are hunting for alternatives
to money-market funds as the SEC eyes reforms. The biggest concern is that
money funds would have to report daily changes in the value of their
underlying assets, which would make their share prices fluctuate, writes
Vipal Monga in today’s Marketplace section. That could complicate accounting
and leave companies facing potential tax liabilities.
Proponents of floating share prices say the shift
would boost transparency. And any fluctuations in asset values aren’t
expected to be dramatic. But treasurers worry that even a little bit of
volatility would force them to track the value of the funds more closely,
which could require more staff and upgrades in software and accounting
systems. “The investor would need to keep track of the cost basis of each
investment, and would have a tax liability to pay on any gain,” said Tom
Deas, treasurer of chemical company FMC and chairman of the National
Association of Corporate Treasurers.
Among the alternatives, some corporate treasurers
are looking at separately managed accounts, which are custom-made investment
vehicles run by money managers. “If money funds are forced to go to a
floating NAV, we will see a lot of companies shift a larger portion of their
balances to separately managed portfolios,” said Jerry Klein, managing
director at investment adviser Treasury Partners. Even so, companies have
found that it’s not easy to recreate the advantages of money
funds—especially in terms of easy access to their cash.
"Amortized Cost Accounting is “Fair” for Money Market Funds," by
Dennis R. Beresford, U.S. Chamber of Commerce Center for Capital Markets
Competitiveness, Fall 2012
http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/Money-Market-Funds_FINAL.layout.pdf
Summary
Recent events have caused the U.S.
Securities and Exchange Commission (SEC) to rethink the long-standing use of
amortized cost by money market mutual funds in valuing their investments in
securities. This practice supports the use of the stable net asset value (a
“buck” a share) in trading shares in such funds. Some critics have
challenged this accounting practice, arguing that it somehow misleads
investors by obfuscating changes in value or implicitly guaranteeing a
stable share price.
This paper shows that the use of
amortized cost by money market mutual funds is supported by more than 30
years of regulatory and accounting standard-setting consideration. In
addition, its use has been significantly constrained through recent SEC
actions that further ensure its appropriate use. Accounting standard setters
have accepted this treatment as being in compliance with generally accepted
accounting principles (GAAP). Finally, available data indicate that
amortized cost does not differ materially from market value for investments
industry wide. In short, amortized cost is “fair” for money market funds.
Background
Money market
mutual funds have been in the news a great deal recently as the SEC first
scheduled and then postponed a much-anticipated late August vote to consider
further tightening regulations on the industry.1
Earlier, Chairman Mary
Schapiro had testified to Congress about her intention to strengthen the SEC
regulation of such funds, in light of issues arising during the financial
crisis of 2008 when one prominent fund “broke the buck,” resulting in modest
losses to its investors. Sponsors of some other funds have sometimes
provided financial support to maintain stable net asset values. And certain
funds recently experienced heavy redemptions due to the downgrade of the
U.S. Treasury’s credit rating and the European banking crisis.
Money market funds historically have
priced their shares at $1, a practice that facilitates their widespread use
by corporate treasurers, municipalities, individuals, and many others who
seek the convenience of low-risk, highly liquid investments. This $1 per
share pricing convention also conforms to the funds’ accounting for their
investments in short-term debt securities using amortized cost. This method
means that, in the absence of an event jeopardizing the fund’s repayment
expectation with respect to any investment, the value at which these funds
carry their investments is the amount paid (cost) for the investments, which
may include a discount or premium to the face amount of the security. Any
discount or premium is recorded (amortized) as an adjustment of yield over
the life of the security, such that amortized cost equals the principal
value at maturity.
Some commentators have criticized the
use of this amortized cost methodology and argued for its elimination. In a
telling example of the passionate but inaccurate attention being devoted to
this issue, an editorial in the June 10, 2012, Wall Street Journal
described this longstanding financial practice in a heavily regulated
industry as an “accounting fiction” and an “accounting gimmick.”
. . .
Reasoning for Use of Amortized Cost
The FASB has been considering various
aspects of the accounting for financial instruments for approximately 25
years. During that time it has issued standards on topics such as accounting
for marketable securities, accounting for derivative instruments and
hedging, impairment, disclosure, and others. Also, the FASB has issued
standards or endorsed standards issued by the AICPA of a specialized nature
applying to certain industry groups such as investment companies, insurance
companies, broker/dealers, and banks. Further, the FASB is presently
involved in a major project that has encompassed approximately the past 10
years, whereby it is endeavoring to conform its standards on financial
instruments to the related standards issued by the International Accounting
Standards Board. Aspects of that project have stalled recently, and the two
boards have reached different conclusions on certain key issues. Other
aspects of that project are moving forward.
Over this 25-year period, probably the
most controversial aspect of the financial instruments project has been to
what extent those instruments should be carried at market or fair value in
financial statements rather than historical cost. On several occasions the
FASB has indicated a strong preference for fair value as a general
objective. But there has been a great deal of opposition from many quarters,
and the FASB has tended to determine the appropriate measurement attribute
for particular instruments (fair value, amortized cost, etc.) in different
projects based on the facts and circumstances in each case.
. . . (very long passages
from this 21-page article are not quoted here)
Conclusion
Accounting for investment securities
by money market mutual funds appropriately remains based on amortized cost.
The amortized cost method of accounting is supported by the very short-term
duration, high quality, and hold-to-maturity nature of most of the
investments held. The SEC’s 2010 rule changes have considerably strengthened
the conditions under which these policies are being applied. As a result of
the 2010 SEC rule changes, funds now report the market value of each
investment in a monthly schedule submitted to the SEC that is then made
publicly available after 60 days. That provides additional information for
investors. And the FASB’s current thinking articulates this accounting
treatment as GAAP.
Jensen Comment
My main objection to booking fair values of HTM investments is that the interim
adjustments for fair values that will never be realized destroys the income
statement. Of course, the FASB and IASB have systematically destroyed the
concept of net earnings in many other standards to a point where these standard
setters can no longer even define net earnings.
The good news is that the FASB has a proposal to offset fair value
adjustments of assets and liabilities to Other Comprehensive Income (OCI)
instead of current earnings. Let's hope this becomes the rule of the land.
Research Studies from the Chamber's Center for Capital Markets ---
http://www.centerforcapitalmarkets.com/resources/publications/
From the CFO.com Morning Ledger on April 30, 2013
Herbalife struggles to find new auditor.
Herbalife isn’t
having an easy a time finding an auditor to replace
KPMG, which
resigned earlier this month in the wake of the scandal surrounding
ex-partner Scott London.
Skechers, the other company that KPMG had to drop, found a new
auditor outside the Big 4 in BDO USA. Herbalife said
in its quarterly filing
on Monday that there can’t be assurance that it will
be able to find a new auditor. Its “substantial international operations
that require significant capacity and capabilities” mean the pool to choose
from is limited. And it has historically used other big firms for tax,
consulting and advisory work, which may, “in certain instances, impair the
ability of certain firms to serve as our independent registered public
accounting firm.” Until a new auditor can vouch for its financials,
Herbalife will be ineligible to use shelf and other registration statements
that incorporate its financials as reference. CFOJ will be diving deeper
into this topic later today, so stay tuned.
Jensen Question
High risk drivers are assigned to risk pools where automobile insurance
companies are forced (for higher prices) to share drivers in those risk pools.
Will this one day happen to high risk audit clients?
$53,300: The Average Starting Salary for New Accounting Grads (in
2013) ---
http://www.naceweb.com/salary-survey-data/?referal=research&menuID=71&nodetype=4
Jensen Comment
I think such starting salary surveys are highly misleading unless they also show
cost of living adjustments. A starting salary of $53,300 will go a lot further
in San Antonio than in San Francisco, NYC, Los Angeles, and Honolulu where
people earning $53,300 should probably get food stamps and subsidized housing.
I would go to work for $20,000 if the starting job had world class training
and exposures to clients thirsting to hire away CPAs from top accounting firms.
It's all about windows of opportunity that trump starting salaries in nearly
every instance.
I would not opt for an MBA program were graduates have average starting
salaries of $143,800 (and a high standard deviation and kurtosis) relative to a
Masters of Accounting Program where average starting salaries are $53,300 with a
small standard deviation and negligible kurtosis. By kurtosis I mean that a few
superstar graduates (such as those with whiz-kid computer science undergraduate
degrees from elite universities) with starting salaries over $250,000 are
skewing the average.
There are also misleading "expected" compensations contingent upon such
things as sales. For example, a marketing or finance job may look great when
told that last year's hires earned an average of $143,800 with commissions and
bonuses thrown in. But what about those that came in below average because they
just had a harder time selling products and services?
Please warn students that the most important thing about a new job is not the
anticipated salary. It's the anticipated opportunity with a few other factors
thrown in such as tension, long hours, geographic location, and constant travel.
For example, a CPA firm may pay double for going to Moscow, but do you really
want to start your career in Moscow where it's really dangerous on the streets
and housing is rather Spartan?
"Ten career tips for young CPAs," by Mark Ursick, cpa2biz,
February 25, 2013 ---
http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2013/CPA/Feb/BuildCareers.jsp
Jensen Comment
I especially agree with: "Don’t limit your challenges;
challenge your limits."
The most gung ho student I ever had studying the accounting for
derivative financial instruments and hedging strategies never limited
his challenges even though he was less gifted than some of my students.
He just worked and worked and worked as a student.
His first job was with a Big Four firm in Houston and within three
years he was the technical guy who virtually was in charge on an audit
of a company that had over $1 billion in derivatives. He's since moved
on to become a leading executive at Microsoft.
In contrast I had more brilliant students who got buy in my
accounting theory course but would run like somebody yelled "Fire" if
they had an opportunity to audit derivative financial instruments
contracts. They never became executives in any companies.
The downloadable Robert Half salary guide ---.
http://www.roberthalf.com/SalaryGuide
Bob Jensen's threads on careers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers
"Making Board Games in the Classroom," by Anastasia Salter,
Chronicle of Higher Education, April 29, 2013 ---
http://chronicle.com/blogs/profhacker/making-board-games-in-the-classroom/48983?cid=wc&utm_source=wc&utm_medium=en
I just got home from
THATCamp Games II
at Case Western Reserve University, where we
played and made a lot of games. In the past I’ve talked about
making games for the classroom using lots of
technologies (Inform
7,
inklewriter,
Twine,
Scratch), but games don’t require any computing
power to be great. Physical board and card games can be powerful systems of
representation and more immediately accessible for exploring something in a
classroom. This might bring back made memories for some of us of classroom
jeopardy–but when the mechanics of the game fit the content, it can be much
more powerful than that.
During THATCamp Games II I taught a crash course
workshop in making educational board games. Here’s
the full Prezi from
the workshop. The same basic process can be used for designing a game for a
lesson or in asking students to make a game, which itself can provoke a
different way of thinking about an idea. Here’s an overview of the process
we used:
Phase One: Imagine
- Brainstorm an educational objective
- Choose a central mechanic
- Clarify your theme
and concept
Most of us learned through board games at some
point–even if it was the foundations of capitalism in Monopoly, a reductive
version of the American dream in the Game of Life, or just color recognition
from Candyland. But board games can address much more complex topics:
Pandemic models cooperative disaster response to
the spreading of infectious diseases;
Eco
Fluxx poses questions of environmentalism
through a changing rules system; and there’s even an
Umberto Eco: The Name of the Rose board game.
A straightforward goal–a purpose behind the
game–works best when it can clearly be connected with the game. One of the
teams during the workshop chose creative thinking and connected it with
competitive challenges, as seen in the prototype above for “Think. Build.
Tell.” These mechanics can then be interwoven with a theme, ideally in a way
that strengthens both. For instance, a rebranded version of Monopoly may
have a new “theme”, but it doesn’t really change gameplay–while moving a
strategy game to a different era often rewrites all the rules.
Phase Two: Make
- Imagine your game space metaphor
- Design your system and pieces
- Prototype your
playable design
There are lots of ways to think of game boards, but
all of them have to represent something complex in a simple way. Most of
them do that through using a visual metaphor–Monopoly simplifies the city to
a single block, Sorry uses complete abstraction, The Game of Life conflates
movement through space with movement through stages of life. One way to
jumpstart game design thinking is to take all the pieces of a game box and
throw away the rules, then imagine a new ruleset that makes all those pieces
work together. This helps us explore how all the pieces of a physical game
combine to form a system–it’s a lot more transparent than most video games.
Continued in article
Gamification ---
http://en.wikipedia.org/wiki/Gamification
"Why Gamification is Really Powerful," by Karen Lee, Stanford Graduate
School of Business, September 2012 ---
http://stanfordbusiness.tumblr.com/post/32317645424/why-gamification-is-really-powerful
Karen Lee is the Social Web Strategist at the Stanford GSB
"How Deloitte Made Learning a Game," by Jeanne C. Meister, Harvard
Business Review Blog, January 2, 2013 ---
Click Here
http://blogs.hbr.org/cs/2013/01/how_deloitte_made_learning_a_g.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
"Games in the Classroom (part 4)," by Anastasia Salter, Chronicle
of Higher Education, October 6, 2011 ---
http://chronicle.com/blogs/profhacker/games-in-the-classroom-part-4/36294?sid=wc&utm_source=wc&utm_medium=en
Bob Jensen's threads on Edutainment ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
"Europe imposes mandatory (14 to 25 year) rotation on audits," by Rachael Singh,
AccountancyAge, April 25, 2013 ---
http://www.accountancyage.com/aa/news/2264090/europe-imposes-mandatory-rotation-on-audits
It's anywhere from 14-25 years and can vary by individual EU member state
rules
http://www.foxbusiness.com/news/2013/04/24/eu-lawmakers-in-tentative-deal-on-accounting-cap-sources/
Seems to be 14 years where member EU states can extend the tenure of the
audit firm to 25 years
From the CFO.com Morning Ledger on April 26, 2013
EU committee backs watered-down plan on auditor rotation. Bold
plans to shake up the European audit market are being scaled back after a
group of influential EU lawmakers backed compulsory rotation of auditors
only every 25 years,
the
FT reports. The
European Parliament’s legal affairs committee endorsed a watered-down
version of the auditing reforms proposed in 2011 by the European Commission,
which wanted audit-firm rotation every six to 12 years. It also rejected the
commission’s proposal for a crackdown on auditors doing additional work,
which had raised the prospect of a breakup of one or more of the Big Four.
Jensen Comment
It is not at all certain whether Europe has the jurisdiction to impose audit
firm rotation on multinationals headquartered outside of Europe. For example,
General Electric does a lot of business in Europe. However, it's worldwide
headquarters is in the USA, and it does the majority of its business outside
Europe.
Can Europe force the USA-based General Electric to drop (after 25 years) KPMG
that has audited GE since the beginning of time?
Will this effectively impose 25-year audit firm rotation on the entire world?
I doubt that this will narrowly apply to multinational corporations
headquartered in Europe since this might trigger a mass exodus of corporate
headquarters.
This could be a boon to medium-sized audit firms who want to join the big
leagues since the large audit firms will probably shed clients up for rotation
because the audit fees are just not worth the startup costs and relocation costs
for auditors.
But turning medium-sized firms into large firms will be costly, especially in
terms of auditing clients with very complicated contracts like big banks,
multinational corporations, insurance companies, etc.
It will be an enormous boon to accounting
education programs since turnover of auditors is going to be enormous, thereby
creating huge demand for new graduates in accounting.
Personally I think the law will be rescinded in the next 25 years after
lawmakers come to their senses on what this will really cost in terms of setup
taking on enormous clients like General Electric. An added consideration will be
on how it makes being in the audit profession less desirable with prospects of
having to become gypsies without homes. Rather than move many senior auditors
may simply go to work for clients or other companies rather than face the
transactions costs of having to sell homes, take children out of schools, etc.
Audit firms will either lose their best auditors or have to double their
salaries as incentives to stay with the audit firms.
Bob Jensen's threads on the disastrous (in terms of audit costs and gypsy
lifestyles required for auditors) proposal to require audit firm rotation ---
http://www.trinity.edu/rjensen/Fraud001c.htm#Rotation
From the CFO.com Morning Ledger on April
29, 2013
Debate grows over corporate tax havens
The
FT takes a deep dive
into the growing global anger over corporate tax avoidance. There has been a
blurring of the distinctions between tax havens and larger industrialized
countries that use fiscal measures as a source of competitive advantage to
secure investment, jobs and revenues,
writes Vanessa Houlder. Economies such as
the Netherlands and Ireland have sucked up corporate investment by helping
companies avoid—entirely legally—hefty tax bills at home. The Netherlands
and Luxembourg had booked foreign direct investment of $5.8 trillion by the
end of 2012—more than the U.S., U.K. and Germany combined. Meanwhile, the
OECD is warning of a “race to the bottom” on corporate taxes.
Teaching Case from The Wall Street Journal Accounting
Weekly Review on April 26, 2013
Attention Online Shoppers: Senate Weighs Sales-Tax Bill
by:
John McKinnon and Siobhan Hughes
Apr 22, 2013
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: sales tax
SUMMARY: "The Senate is expected to vote as soon as this week on
legislation allowing states to require Internet retailers to collect sales
taxes.... Online retail sales totaled $169 billion in 2010, about 4.4% of
total retail sales.... From 2002 to 2010, such sales rose at an average
annual rate of 18%, compared with 2.6% for total retail sales. " States are
therefore focusing on Internet sales rather than catalogue retailers because
the Internet sales are growing so much faster.
CLASSROOM APPLICATION: The article may be used in a tax class, in a
financial accounting class covering sales taxes, or in an MBA class.
QUESTIONS:
1. (Advanced) Who is responsible for paying sales taxes? How are
sales taxes collected and remitted? To what governing authorities in the
U.S. are they remitted?
2. (Introductory) What proposed new tax law related to online sales
has been moving through the U.S. Senate this week?
3. (Advanced) Why has the Senate proposed this bill with an
exemption for smaller retailers? In your answer, include the definition of
"smaller retailer" that is included in the Senate proposed legislation.
4. (Introductory) Why does online retailer Amazon support the
legislation?
5. (Advanced) Why do you think this Senate bill focuses on online
retail sales but not catalogue retailers?
SMALL GROUP ASSIGNMENT:
Group discussion (may vary according to the mix of in-state, out-of-state,
and international students in the class): 1. Compare the sales tax rates
applied in your home state or home country. 2. How would your state
legislator estimate the amount of tax losses being incurred in your home
state or country because of untaxed internet sales?
Reviewed By: Judy Beckman, University of Rhode Island
"Attention Online Shoppers: Senate Weighs Sales-Tax Bill,"
by John McKinnon and Siobhan Hughes, The Wall Street Journal, April 22, 2013 ---
http://online.wsj.com/article/SB10001424127887323551004578437040452142034.html?mod=djem_jiewr_AC_domainid
The Senate is expected to vote as
soon as this week on legislation allowing states to require Internet
retailers to collect sales taxes, opening up a battle over a tax break that
consumers love but that states say costs millions.
The outcome is uncertain, largely because of
opposition from some conservatives who see the move as a new tax and an
unfair burden on business, and from lawmakers from states that don't tax
sales.
But Senate Majority Leader Harry Reid's decision to
move to a procedural vote on the proposal suggests its prospects are
improving. In a nonbinding vote last month, senators approved a broadly
worded resolution of support for the idea by a wide margin, 75-24.
Conservative opposition has appeared to splinter, as more lawmakers see the
growth in online sales as a major source of revenue.
A 1992 U.S. Supreme Court ruling held that states
can't force retailers to collect sales tax unless they have a physical
presence—such as a warehouse or store—within their borders. Consumers are
supposed to pay tax themselves, but few do; states seldom pursue those who
don't.
State officials say catalog sales by out-of-state
merchants also cost them revenue, but online sales are a bigger worry.
Online retail sales totaled $169 billion in 2010, about 4.4% of total retail
sales, according to the U.S. Census Bureau. From 2002 to 2010, such sales
rose at an average annual rate of 18%, compared with 2.6% for total retail
sales.
Governors estimate state and local governments lose
about $20 billion a year in sales-tax revenue because of online sales.
Brick-and-mortar retailers have argued that tax-free sales give online
retailers an unfair edge.
Supporters of the legislation—which would affect
some mail-order sales as well—say it would help states collect taxes that
are already owed.
Backing by high-profile former and current GOP
governors, including Haley Barbour of Mississippi and Bob McDonnell of
Virginia, has given the measure a boost. "As we started getting some
Republican governors…Republican senators got more comfortable," said Dan
Crippen, executive director of the National Governors Association.
Support from a few big online retailers, notably
Amazon.com Inc., AMZN -7.81% also has helped. Amazon has said it supports a
national online sales tax, and a spokesman said the company is in favor of
the Senate bill, known as the Marketplace Fairness Act. The company often
has opposed state-by-state legislation, instead brokering deals to build new
distribution centers in certain states.
But some online retailers warn the legislation
could create significant new regulatory burdens on small businesses that
sell over the Internet. EBay Inc. EBAY +0.34% on Sunday said it sent tens of
millions of emails urging its active U.S. sellers to push for changes to
Congress's sales-tax bill. EBay said the bill's sales threshold for
triggering the tax is too low.
"The legislation treats you and big multi-billion
dollar online retailers—such as Amazon—exactly the same," said John Donahoe,
eBay's chief executive, in one of the emails. He said only businesses with
at least $10 million in annual out-of-state sales, or 50 or more employees,
should qualify for sales tax, compared with the $1 million sales threshold
in the bill.
Forcing businesses to comply with tax laws of other
states "is an incredible precedent to set right now," said Jim DeMint, a
former Republican senator from South Carolina who now is president of the
conservative Heritage Foundation. He added, "it violates federalism" to
require businesses in one state to collect taxes for another.
Sen. Max Baucus (D., Mont.), Finance Committee
chairman, said he opposes the bill because it could hurt businesses in his
state, which has no sales tax. He said in an interview he hopes it can be
improved through amendments. The decision to vote on the measure without
full consideration by Mr. Baucus's committee could generate opposition.
A top Senate Democratic aide predicted that the
legislation would pass the Senate, but even supporters worry that opposition
could grow if the bill remains pending too long. Sixty votes would be needed
to overcome a filibuster threat.
Continued in article
The FASB issued the following accounting standard updates (ASUs);
-
ASU 2013-07, Presentation of Financial Statements (Topic 205):
Liquidation Basis of Accounting
-
ASU 2013-06, Not-for-Profit Entities (Topic 958): Services Received from
Personnel of an Affiliate
"Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:
The Illuminati were amateurs. The second huge financial scandal of the year
reveals the real international conspiracy: There's no price the big banks can't
fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425
Conspiracy theorists of the world, believers in the
hidden hands of the Rothschilds and the Masons and the Illuminati, we
skeptics owe you an apology. You were right. The players may be a little
different, but your basic premise is correct: The world is a rigged game. We
found this out in recent months, when a series of related corruption stories
spilled out of the financial sector, suggesting the world's largest banks
may be fixing the prices of, well, just about everything.
You may have heard of the Libor scandal, in which
at least three – and perhaps as many as 16 – of the name-brand
too-big-to-fail banks have been manipulating global interest rates, in the
process messing around with the prices of upward of $500 trillion (that's
trillion, with a "t") worth of financial instruments. When that sprawling
con burst into public view last year, it was easily the biggest financial
scandal in history – MIT professor Andrew Lo even said it "dwarfs by orders
of magnitude any financial scam in the history of markets."
That was bad enough, but now Libor may have a twin
brother. Word has leaked out that the London-based firm ICAP, the world's
largest broker of interest-rate swaps, is being investigated by American
authorities for behavior that sounds eerily reminiscent of the Libor mess.
Regulators are looking into whether or not a small group of brokers at ICAP
may have worked with up to 15 of the world's largest banks to manipulate
ISDAfix, a benchmark number used around the world to calculate the prices of
interest-rate swaps.
Interest-rate swaps are a tool used by big cities,
major corporations and sovereign governments to manage their debt, and the
scale of their use is almost unimaginably massive. It's about a $379
trillion market, meaning that any manipulation would affect a pile of assets
about 100 times the size of the United States federal budget.
It should surprise no one that among the players
implicated in this scheme to fix the prices of interest-rate swaps are the
same megabanks – including Barclays, UBS, Bank of America, JPMorgan Chase
and the Royal Bank of Scotland – that serve on the Libor panel that sets
global interest rates. In fact, in recent years many of these banks have
already paid multimillion-dollar settlements for anti-competitive
manipulation of one form or another (in addition to Libor, some were caught
up in an anti-competitive scheme,
detailed in Rolling Stone last year, to
rig municipal-debt service auctions). Though the jumble of financial
acronyms sounds like gibberish to the layperson, the fact that there may now
be price-fixing scandals involving both Libor and ISDAfix suggests a single,
giant mushrooming conspiracy of collusion and price-fixing hovering under
the ostensibly competitive veneer of Wall Street culture.
The Scam Wall Street Learned From the Mafia
Why? Because Libor already affects the prices of
interest-rate swaps, making this a manipulation-on-manipulation situation.
If the allegations prove to be right, that will mean that swap customers
have been paying for two different layers of price-fixing corruption. If you
can imagine paying 20 bucks for a crappy PB&J because some evil cabal of
agribusiness companies colluded to fix the prices of both peanuts and peanut
butter, you come close to grasping the lunacy of financial markets where
both interest rates and interest-rate swaps are being manipulated at the
same time, often by the same banks.
"It's a double conspiracy," says an amazed Michael
Greenberger, a former director of the trading and markets division at the
Commodity Futures Trading Commission and now a professor at the University
of Maryland. "It's the height of criminality."
The bad news didn't stop with swaps and interest
rates. In March, it also came out that two regulators – the CFTC here in the
U.S. and the Madrid-based International Organization of Securities
Commissions – were spurred by the Libor revelations to investigate the
possibility of collusive manipulation of gold and silver prices. "Given the
clubby manipulation efforts we saw in Libor benchmarks, I assume other
benchmarks – many other benchmarks – are legit areas of inquiry," CFTC
Commissioner Bart Chilton said.
But the biggest shock came out of a federal
courtroom at the end of March – though if you follow these matters closely,
it may not have been so shocking at all – when a landmark class-action civil
lawsuit against the banks for Libor-related offenses was dismissed. In that
case, a federal judge accepted the banker-defendants' incredible argument:
If cities and towns and other investors lost money because of Libor
manipulation, that was their own fault for ever thinking the banks were
competing in the first place.
"A farce," was one antitrust lawyer's response to
the eyebrow-raising dismissal.
"Incredible," says Sylvia Sokol, an attorney for
Constantine Cannon, a firm that specializes in antitrust cases.
All of these stories collectively pointed to the
same thing: These banks, which already possess enormous power just by virtue
of their financial holdings – in the United States, the top six banks, many
of them the same names you see on the Libor and ISDAfix panels, own assets
equivalent to 60 percent of the nation's GDP – are beginning to realize the
awesome possibilities for increased profit and political might that would
come with colluding instead of competing. Moreover, it's increasingly clear
that both the criminal justice system and the civil courts may be impotent
to stop them, even when they do get caught working together to game the
system.
If true, that would leave us living in an era of
undisguised, real-world conspiracy, in which the prices of currencies,
commodities like gold and silver, even interest rates and the value of money
itself, can be and may already have been dictated from above. And those who
are doing it can get away with it. Forget the Illuminati – this is the real
thing, and it's no secret. You can stare right at it, anytime you want.
Continued in article
Bob Jensen's Rotten to the Core threads on the banking industry ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
GOVERNMENTAL ACCOUNTING RESEARCH SYSTEM ONLINE - NOW AVAILABLE ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=152425
More on how to lie with statistics, tables, and graphs
"Did Reinhart-Rogoff Screw Up Their Debt Research?" by Barry Ritholtz,
April 16th, 2013 ---
http://www.ritholtz.com/blog/2013/04/did-reinhart-rogoff-screw-up-their-debt-research/
"How much of Reinhart/Rogoff has survived?" by Gavyn Davies,
Financial Times, April 19, 2013 ---
http://blogs.ft.com/gavyndavies/2013/04/19/how-much-of-reinhartrogoff-has-survived/?
. . .
However, if the economy is working well below
capacity, a rise in the budget deficit may not raise interest rates, but may
instead raise aggregate demand and thus boost GDP growth. Under some
circumstances, this might even reduce the debt ratio for a while.
In summary, the most dramatic version of the RR
stylised fact is no longer a stylised fact. RR were right to argue that,
over most normal periods, higher public debt has been associated with lower
real GDP growth rates, but a sudden discontinuity at 90 per cent is not
proven. Furthermore, causation might work in both directions, depending on
economic circumstances. The timing of these effects is not a definitive
indicator of true causation, and the relationship may be very different in a
time of full employment from a time of high unemployment.
The moral of this story is that it is an illusion
to expect that the complicated relationship between public debt and GDP
growth will always and everywhere be the same.
More on how to lie with statistics, tables, and graphs
"Did Reinhart-Rogoff Screw Up Their Debt Research?" by Barry Ritholtz,
April 16th, 2013 ---
http://www.ritholtz.com/blog/2013/04/did-reinhart-rogoff-screw-up-their-debt-research/
"Reinhart, Rogoff, and How the Macroeconomic Sausage Is Made," by
Justin Fox, Harvard Business Review Blog, April 17, 2013 ---
Click Here
http://blogs.hbr.org/fox/2013/04/reinhart-rogoff-and-how-the-ma.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
After watching a presentation by Kaggle founder and
CEO Anthony
Goldbloom at
a conference last year, I went up to the front of
the room to ask him a question about macroeconomics.
Kaggle organizes
competitions
in which data scientists (which in most cases means anybody who wants to
sign up) compete to build predictive models based on huge troves of data.
Goldbloom founded the company after working as a macroeconomic modeler at
the Reserve Bank of Australia and the Australian Treasury.
"Could you use the Kaggle approach to make
macroeconomic predictions?" I asked him.
"No," he replied. "Not nearly enough data."
I couldn't help but think back to that as
controversy erupted this week over Harvard economists Carmen Reinhart and
Kenneth Rogoff's
oft-cited three-year-old finding that
economic growth
plummets when a country's debt-to-GDP ratio exceeds 90%.
Three University of Massachusetts economists — Thomas
Herndon, Michael Ash, and Robert Pollin — came out with a
working paper that
recrunched the Reinhart and Rogoff data set and arrived at a very different
result: instead of average -0.1% growth in countries with debt/GDP of more
than 90%, they came up with 2.2% growth.
Most of the attention since then has focused on an
Excel error that Herndon, Ash, and Pollin found —
which caused five countries to be excluded from the analysis — and Reinhart
and Rogoff
have subsequently acknowledged. That's pretty
embarrassing, but it only changed the result by 0.3 percentage points. Most
of the difference had to do instead with how Reinhart and Rogoff weighted
the results from different countries. They chose to give each country's
average growth in a particular debt/GDP range the same weight, regardless of
how many years the country had been in that situation. As Herndon-Ash-Pollin
write, this isn't an indefensible approach (they do argue that Reinhart and
Rogoff should have devoted a lot more ink to defending it). But by taking a
different approach, and instead weighting countries' results by how many
years they were above 90% debt/GDP, they were able to get a very different
result.
This is watching the sausage of macroeconomics
being made. It's not appetizing. Seemingly small choices in how to handle
the data deliver dramatically different results. And it's not hard to see
why: The Reinhart-Rogoff data set, according to Herndon-Ash-Pollin's
analysis, contained just 110 "country-years" of debt/GDP over 90%, and 63 of
those come from just three countries: Belgium, Greece, and the UK.
This is a problem inherent to macroeconomics. It's
not like an experiment that one can run multiple times, or observations that
can be compared across millions of individuals or even hundreds of
corporations. In the words attributed to economist Paul Samuelson, "We have
but one sample of history." And it's just not a very big sample.
So what to do about it? One response is to dig for
more data, and Reinhart and Rogoff have been doing that,
going back to 1800 to
examine episodes of public debt overhangs. Another is to have different
people crunch it in different ways, which is what Herndon-Ash-Pollin did, or
assemble different data sets, as several
other scholars
have done.
But the biggest challenge may be how to present it.
My reading of Reinhart-Rogoff, Herndon-Ash-Pollin, and the other papers
linked to in the preceding paragraph is that rising debt loads do weigh on
growth. Yes, there's causation at work in both directions: low growth
results in bigger debts — which has clearly been the case in the U.S. over
the past couple of years. But attempts to separate that effect out by
looking at growth rates well after a spike in debt do indicate slower growth
after higher debt. And for economists of every school but so-called
modern monetary theory, it's
logical that big debts would eventually eat
up resources and slow growth.
What there isn't, though, is an obvious tipping
point where debt becomes too high, and deficit spending becomes a drag
rather than a stimulus. At least not one that's obvious before the fact. The
initial Reinhart-Rogoff research seemed to indicate a sharp dropoff in
average growth after debt passed 90% of GDP. But they also reported a
significantly smaller dropoff in median growth, and their
subsequent analyses, as well as the Herndon-Ash-Pollin rework of their data,
similarly show a dropoff but not a dramatic inflection point.
In the 1990s, the consensus seemed to be that for
the U.S. the inflection point was a public debt/GDP ratio of 50% — which is
exactly what the country was nearing at the time. Higher than that, and the
bond market vigilantes would punish the U.S. with much higher interest rates
on government debt. The central teaching of what came to be known as
Rubinomics
was that cutting the deficit would actually stimulate
the economy as it brought interest rates down.
Now, of course,
U.S. public
debt is up to 76% of GDP, yet the bond market
vigilantes all seem to have retired or moved to Europe. In the long
aftermath of a global financial crisis, with deflation a real threat, the
U.S. can get away with running huge deficits with no immediate consequence.
In fact, the
Keynesian reasoning goes, big deficits now will lead to a better long
run growth picture (and thus lower future debt/GDP ratios).
Is this reasoning correct? Well, right now the
evidence would seem to support it: The U.S. is muddling through, while
austerity measures have pushed Europe back into recession and most of
Southern Europe into depression. For whatever it's worth, Reinhart and
Rogoff have advocated continued deficit spending too — at least for now.
But this is macroeconomics. It's hard to muster
conclusive evidence, and almost impossible to generate much in the way of
useful predictive ability. One response to this fog would be to throw up our
hands and not do anything at all. Another is to acknowledge that our
knowledge is limited and proceed anyway on a mix of data, theory, and
intuition.
This, to a certain extent, is what the Reinhart-Rogoff
project of the past few years (most notably their book
This Time is Different)
has been all about. It's a combination of history, data-crunching, and
informed opinion — intended to be consumed and debated by an audience of far
beyond academic macroeconomics. Which is exactly what's happening now. That
can't be a bad thing, can it?
Continued in article
April 19, 2013 reply from Bob Jensen
Hi Tom,
I fully agree with respect to pressures by journal editors to replicate.
But how often does this happen in accountics science? If the journal editors
were going to insist on tempting other (independent) researchers to
replicate they would have to offer something worthwhile like a promise to
publish the replications. Instead journals like TAR have a practice of not
publishing replications or even commentaries about accountics science
findings.
In real science most journals will publish something regarding exact
replications, such as publishing abstract summaries of replication outcomes
commentaries.. TAR referees are not willing to do this as far as I can tell
---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Bill Cooper and I collaborated on changing the AAA journal policy on data
availability. We were both on the AAA Executive Committee at the time. As a
result the policy was instigated that AAA authors would be requested to make
data available for published studies if that data was not already in the
public realm. It is now somewhat common for authors to make private data
available, but nothing much seems to come of this in accountics science due
to lack of incentives to perform replications.
The R&R macroeconomic study that commenced this thread should have been
replicated early on because it was known from the beginning that it would
probably affect real world policies and decisions. Very few accountics
science studies are of such importance in the accounting profession. Put
another way, accountics science studies seldom provide evidence that is not
already known in the profession.
For example, finance professor Eric Lie at the University of Iowa won the
AAA's Notable Contributions to the Literature Award for his empirical study
of options back dating. This was a great accountics scuence contribution,
but by the time it was published it was widely known that corporate
executives were commonly back dating options for their compensation. The
rules against such backdating were already being changed.
What we would like from accountics science is replicated research that's
very interesting to the accounting profession because it reveals something
of importance to practitioners and standard setters that they don't already
know. Since the 1970s we've been waiting and waiting for this to happen in
accountics science. Sigh!
Respectfully,
Bob Jensen
"Excel Tip: Use Conditional Formatting to Identify Unlocked Cells," by
David Ringstrom, AccountingWeb, April 19, 2013 ---
http://www.accountingweb.com/article/excel-tip-use-conditional-formatting-identify-unlocked-cells/221617?source=technology
Russell Golden to Become the Next Chairman of the FASB
Financial Accounting Standards Board member Russell Golden will succeed Leslie
Seidman as chairman July 1, after Seidman's term ends. Golden joined the FASB as
a senior technical adviser in 2004 and rose through the ranks to become staff
technical director, then was appointed to the board in 2010
http://journalofaccountancy.com/News/20137845.htm
Russell Golden, whose technical expertise as a FASB
staff member led him to a spot on the standard-setting board in 2010, will
succeed Leslie Seidman as FASB’s chairman on July 1.
The Financial Accounting Foundation (FAF) announced
Golden’s appointment Tuesday. FAF Chairman Jeffrey Diermeier said in a news
release that Golden is the most qualified person for the role after a search
that included the evaluation of many strong candidates from a variety of
backgrounds.
“He will bring to his new position a deep
understanding of technical accounting issues informed by a broad
appreciation of the larger environment in which the FASB operates,”
Diermeier said.
Golden joined FASB’s staff in 2004 and worked a
total of six years in various staff positions before being appointed to the
board in 2010. He was reappointed to a second, five-year term in July 2012.
He served as FASB’s technical director from 2008 to
2010, overseeing staff work on standards-level projects, and chaired the
board’s Emerging Issues Task Force. Golden joined the FASB staff in 2004
after serving as a partner at Deloitte & Touche LLP in the National Office
Accounting Services department, where he provided accounting consultations
to partners and clients globally.
He previously held other positions within Deloitte
& Touche LLP. He earned his bachelor’s degree from Washington State
University and is a licensed CPA in the states of Washington and
Connecticut.
AICPA President and CEO Barry Melancon, CPA, CGMA,
said in a statement that the Institute is pleased with Golden’s selection.
”Russ has been a true thought leader,” Melancon
said, “and in his time with the FASB has demonstrated a total commitment to
improving financial reporting, which ultimately serves the public interest.
We congratulate Russ and look forward to working with him.”
Seidman’s term expires at the end of June. She has
served as FASB’s chairman since December 2010, and has been a member of the
board since July 2003.
The issues facing FASB as Golden prepares to take
over as chair include:
- Completing the standard-setting phase with the
issuance of a final standard on revenue recognition that is expected
within a few months in a convergence project with the International
Accounting Standards Board.
- Pushing forward with convergence projects on
leases, financial instruments, and insurance.
- Working with the new Private Company Council
as it debates possible GAAP exceptions and modifications for private
companies.
- Developing a disclosure framework that more
succinctly communicates relevant information to financial statement
users.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
April 26, 2013
Accounting Board Taps Chairman
by:
Michael Rapoport and Emily Chasan
Apr 24, 2013
Click here to view the full article on WSJ.com
TOPICS: Financial Accounting Standards Board
SUMMARY: Russell Golden was named chairman of the Financial
Accounting Standards Board.... [He] is currently a member of FASB...and
formerly was a...senior staffer." Prior to joining the FASB he was a partner
with Deloitte & Touche. He has accomplished these career milestones at only
42 years of age.
CLASSROOM APPLICATION: The article may be used in any class to
introduce the U.S. standards setting body, its structure, and its members.
QUESTIONS:
1. (Introductory) Who is the new chairman of the Financial
Accounting Standards Board (FASB)? Describe his professional background.
2. (Introductory) Why did the former chairwoman, Leslie Seidman,
step down from her role?
3. (Advanced) Access the FASB website at
www.fasb.org. Click on the
tab "About FASB," then on "Our People" on the left hand column. How many
board members are there? From what backgrounds do they come?
4. (Advanced) Click on the tab "Financial Accounting Foundation"
and then on the tab "About FAF." What is the FAF? How does this
organization's purpose lead it to have been the one to select the new FASB
chairman?
Reviewed By: Judy Beckman, University of Rhode Island
"Accounting Board Taps Chairman," by Michael Rapoport and Emily Chasan,
The Wall Street Journal, April 24, 2013 ---
http://online.wsj.com/article/SB10001424127887324235304578441071573710666.html?mod=djem_jiewr_AC_domainid
Russell Golden was named chairman of the Financial
Accounting Standards Board, putting him at the center of the debate about
how much the U.S. should change its accounting rules to reflect the
standards used in most other countries.
Mr. Golden is currently a member of FASB, which
sets accounting rules for U.S. companies, and formerly was a FASB senior
staffer. He will assume the chairman's post in July for a four-year term,
succeeding Leslie Seidman, who is stepping down because she has served 10
years on the board, the longest board rules permit.
"I'm just ecstatic about this," said Robert Herz, a
former FASB chairman who worked with Mr. Golden when he was on FASB's staff.
"He's extremely well-rounded and technically very good. He's got a lot of
common sense."
In a statement Tuesday, Mr. Golden said he was
"honored" to be chosen and that he would strive to put investors' needs
first and work to make financial reporting "as clear, transparent and useful
as possible."
Mr. Golden was appointed to the chairman's post by
the trustees of the Financial Accounting Foundation, which oversees and
finances FASB.
The biggest issue facing Mr. Golden, as it has been
for Ms. Seidman, is "convergence," the push to bring U.S. and global
accounting rules closer together. FASB and its global counterpart, the
International Accounting Standards Board, have been trying for years to
eliminate major differences between U.S. generally accepted accounting
principles, or GAAP, which U.S. companies follow, and International
Financial Reporting Standards, or IFRS, in use in most of the rest of the
world.
But those attempts have been marked by delays and
sometimes disagreements between the two rule-making bodies. Some of the key
projects on which the two boards are trying to agree, including new rules on
revenue recognition and lease accounting, still haven't been completed,
nearly two years after they were originally slated to be done. The
Securities and Exchange Commission has yet to make a decision on whether to
shift U.S. companies over to the global rules altogether.
In a conference call with reporters, Mr. Golden
said he was "committed to working through these issues to arrive at a
converged solution."
IASB Chairman Hans Hoogervorst said Mr. Golden is
"an excellent choice" who "commands great respect among all of our board
members."
Mr. Golden, 42 years old, has been a FASB member
since 2010 and before that had served on FASB's staff since 2004, including
two years as technical director, overseeing the staff's work on rule-making
projects. Before joining FASB, he was a partner at Deloitte & Touche LLP,
one of the Big Four accounting firms.
The foundation, aided by search firm SpencerStuart,
has been looking for a successor for Ms. Seidman since last fall. More than
100 candidates were considered, said Robert Stewart, a FASB spokesman.
Continued in article
The New Yorker:
From maids to roofers to drug dealers the underground economy resulted in an
estimated $2 Trillion (with a T) of underreported taxable income in 2012
Unemployment and Welfare Fraud
"The Underground Recovery," by James Surowiecki," The New Yorker,
April 29, 2013 ---
http://www.newyorker.com/talk/financial/2013/04/29/130429ta_talk_surowiecki
When we all finished filing our tax returns last
week, there was a little something missing: two trillion dollars. That’s how
much money Americans may have made in the past year that didn’t get reported
to the I.R.S., according to a recent study by the economist Edgar Feige,
who’s been investigating the so-called underground, or gray, economy for
thirty-five years. It’s a huge number: if the government managed to collect
taxes on all that income, the deficit would be trivial. This unreported
income is being earned, for the most part, not by drug dealers or Mob bosses
but by tens of millions of people with run-of-the-mill jobs—nannies,
barbers, Web-site designers, and construction workers—who are getting paid
off the books. Ordinary Americans have gone underground, and, as the
recovery continues to limp along, they seem to be doing it more and more.
Measuring an unreported economy is obviously
tricky. But look closely and you can see the traces of a booming informal
economy everywhere. As Feige said to me, “The best footprint left in the
sand by this economy that doesn’t want to be observed is the use of cash.”
His studies show that, while economists talk about the advent of a cashless
society, Americans still hold an enormous amount of cold, hard cash—as much
as seven hundred and fifty billion dollars. The percentage of Americans who
don’t use banks is surprisingly high, and on the rise. Off-the-books
activity also helps explain a mystery about the current economy: even though
the percentage of Americans officially working has dropped dramatically, and
even though household income is still well below what it was in 2007,
personal consumption is higher than it was before the recession, and retail
sales have been growing briskly (despite a dip in March). Bernard Baumohl,
an economist at the Economic Outlook Group, estimates that, based on
historical patterns, current retail sales are actually what you’d expect if
the unemployment rate were around five or six per cent, rather than the 7.6
per cent we’re stuck with. The difference, he argues, probably reflects
workers migrating into the shadow economy. “It’s typical that during
recessions people work on the side while collecting unemployment,” Baumohl
told me. “But the severity of the recession and the profound weakness of
this recovery may mean that a lot more people have entered the underground
economy, and have had to stay there longer.”
The increasing importance of the gray economy isn’t
only a reaction to the downturn: studies suggest that the sector has been
growing steadily over the years. In 1992, the I.R.S. estimated that the
government was losing $80 billion a year in income-tax revenue. Its estimate
for 2006 was $385 billion—almost five times as much (and still an
underestimate, according to Feige’s numbers). The U.S. is certainly a long
way from, say, Greece, where tax evasion is a national sport and the shadow
economy accounts for twenty-seven per cent of G.D.P. But the forces pushing
people to work off the books are powerful. Feige points to the growing
distrust of government as one important factor. The desire to avoid
licensing regulations, which force people to jump through elaborate hoops
just to get a job, is another. Most important, perhaps, are changes in the
way we work. As Baumohl put it, “For businesses, the calculus of hiring has
fundamentally changed.” Companies have got used to bringing people on as
needed and then dropping them when the job is over, and they save on
benefits and payroll taxes by treating even full-time employees as
independent contractors. Casual employment often becomes under-the-table
work; the arrangement has become a way of life in the construction industry.
In a recent California survey of three hundred thousand contractors,
two-thirds said they had no direct employees, meaning that they did not need
to pay workers’-compensation insurance or payroll taxes. In other words, for
lots of people off-the-books work is the only job available.
Sudhir Venkatesh, a sociologist at Columbia and the
author of a study of the underground economy, thinks that many workers,
particularly younger ones, have become comfortable with casual work
arrangements. “We have seen the rise of a new generation of people who are
much more used to doing things in a freelance way,” he said. “That makes
them more amenable to unregulated work. And they seem less concerned about
security, which they equate with rigidity.” The growing importance of
services in the economy is also crucial. Tutors, nannies, yoga teachers,
housecleaners, and the like are often paid in cash, which is hard for the
I.R.S. to track. In a 2006 study, the economist Catherine Haskins found that
between eighty and ninety-seven per cent of nannies were paid under the
table.
Continued in article
Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm
At Long Last
The FASB Proposes Taking Some Unrealized Fair Value Changes Out of Earnings and
Relegate them to OCI
From a Deloitte "Heads Up" on April 19, 2013
http://deloitte.wsj.com/cfo/2013/04/19/recognition-and-measurement-of-financial-instruments-fasb-amendments-to-proposed-asu/
. . .
Under the proposed ASU, the unconditional fair
value option for financial assets and financial liabilities in ASC 825³
would be replaced with a conditional fair value option that would be
available when:
—Financial assets are held and managed in a
hold-and-sell business model (i.e., otherwise accounted for at fair
value through other comprehensive income).
—An entity manages the net exposure for a group
of financial assets and financial liabilities on a fair value basis and
provides net exposure information to its management.
—A hybrid financial liability contains an
embedded derivative that significantly modifies its cash flows as long
as it is clear (with little or no analysis) that separation of the
embedded derivative is not precluded.
However, the ED notes that for financial assets and
financial liabilities outside the scope of the proposed ASU such as the
following, a fair value option would no longer be available:
a. Guarantees and other contingencies accounted
for in accordance with [ASC] 460, Guarantees, or contingencies accounted
for under [ASC] 450, Contingencies, that will not be within the scope of
the forthcoming proposed [ASU] on insurance contracts. The effective
date and transition provisions to eliminate the fair value optionfor
these items would be consistent with the guidance in the proposed [ASU]
on financial instruments.[⁵]
b. Rights and obligations under an insurance
contract and obligations under a warranty that currently are accounted
for under [ASC] 944, Financial Services—Insurance, or would be accounted
for in accordance with the forthcoming proposed [ASU] on insurance
contracts. . . .
c. Rights under a warranty that would be
accounted for in accordance with the guidance in the fourthcoming [ASU]
on revenue recognition. . . .
d. Written loan commitments accounted for in
accordance with the proposed [ASU] on financial instruments. . . .
e. Firm commitments that otherwise would not be
recognized at inception and that involve only financial instruments. . .
. The effective date and transition provisions for these items would be
consistent with the guidance in the proposed [ASU] on
financial instruments.[⁶]
Entities would cease using the fair value option
under ASC 825 for each of these instruments in accordance with the effective
date and transition method for each related project. For example, public
entities would no longer be able to apply the fair value option under ASC
825 to rights under a warranty accounted for in accordance with
the forthcoming final standard on revenue recognition for fiscal and interim
periods that begin on or after January 1, 2017.⁷ The revenue standard will
permit entities to apply the new guidance retrospectively or by using a
cumulative-effect approach.⁸ The FASB has not decided what the effective
dates will be for its forthcoming standard on insurance contracts or for the
proposed ASU.
Editor’s
Note: Replacing the unconditional fair value option with one
that can be applied only in limited circumstances reduces the number of
accounting choices for similar instruments and is expected to improve
comparability. Improving comparability is one of the stated objectives in
the proposed ASU. The ED does not propose eliminating the fair value option
under ASC 860-10-35 for servicing assets and servicing liabilities.
Jensen Comment
Guess we know how intermediate textbook authors will be spending their summer
breaks, especially those end-of-chapter materials and test banks.
Of course certain types of hedges (cash flow hedges and FX hedges) under FAS
133 recorded fair value changes to OCI to the extent that the hedges were
effective. Fair value hedges did do not use OCI.
Soon you won't have to be hedging to get OCI relief for unrealized fair value
changes in general.
Does this seem, at least in a way, how the FASB has come full circle from FAS
115?
Bob Jensen's threads on the controversies of fair value accounting ---
http://www.trinity.edu/rjensen/theory02.htm#FairValue
Non-governmental organization (NGO) ---
http://en.wikipedia.org/wiki/NGO
"Global NGOs Spend More on Accounting Than Multinationals," by Jeri
Eckhart Queenan, Harvard Business Review Blog, April 23, 2013 ---
Click Here
http://blogs.hbr.org/cs/2013/04/the_efficiency_trap_of_global.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Benchmark data isn't sexy stuff, but occasionally
the numbers reveal surprising findings. Who, for instance, would have
guessed that global NGOs spend nearly 80% more to track their finances and
employ nearly twice as many finance staff as comparable for-profit
multinationals?
This hardly seems right given that multinationals
are thought to be awash in money and NGOs have the image of cash-strapped,
waste averse organizations — which they are. But the data, gathered in our
new study "Stop
Starving Scale" and compared against benchmarks
from
APQC (American
Productivity & Quality Center), hint at a little-known story: most global
NGOs today struggle to master the complexities of managing efficient,
integrated operations in large part due to restrictions placed on them by
funders.
In that regard, NGOs find themselves facing the
same issues that vexed multinational corporations as they began to master
globalized operations several decades ago. While their missions couldn't be
more different, the organizational challenges are strikingly similar.
As globalization began to shift into high gear in
the 1980s, corporations grew by opening international outposts to access new
markets. But they soon realized that dotting the globe with factories and
staff led to fragmentation that begged for better integration and
coordination. In time, corporations learned to build the administrative and
technical infrastructure needed to manage their sprawling operations.
Today, NGOs are struggling to do the same — with
one key difference. Multinationals are masters of their own fate when it
comes to investing in people and infrastructure. By contrast, NGOs rely on
the generosity of funders who, for the most part, restrict their investments
to specific programs, leaving NGOs starved for general operating support.
Continued in article
"Fair-Value Rule (IFRS 13) Seeks Clearer M&A Deals: Measuring
fair value is more challenging than ever these days. But new IFRS reporting
standards could help bring more transparency to the process, the rule-makers
hope," by Kathleen Hoffelder, CFO.com, April 5, 2013 ---
http://www3.cfo.com/article/2013/4/gaap-ifrs_gaap-ifrs-13-dell-google-fair-value-measurement
In his desire
to take Dell private, billionaire founder and CEO Michael Dell
agreed in February to value his stake of more than 15%
in the company at a lower share price than other shareholders. Hoping that
would make the deal more attractive to potential suitors, he valued Dell at
$13.65 a share, while analysts and other private equity firms claimed it was
worth almost double that.
The Dell buyout saga shows how important measuring
fair value (the price at which an asset can be sold in current markets) is,
particularly for mergers and acquisition. And with
changes
in fair-value accounting going into
effect during the next financial reporting periods for most corporations,
CFOs and other senior executives will need to keep an even sharper focus on
it—whether for acquisitions, or simply to re-value land or property.
International Financial Reporting Standard No. 13,
or
IFRS 13, which gives guidance on how to measure an
asset’s fair value, went into effect on January 1. But firms are still in
the process of implementing the standard. Both the International Accounting
Standards Board (IASB) and Financial Accounting Standards Board (FASB)
issued IFRS 13 in 2011 to provide investors with an easier and more
consistent way to analyze corporate assets that would still be aligned with
U.S. generally accepted accounting principles (GAAP).
IFRS 13 applies to most corporations, explained
David Larsen, managing director of the alternative asset advisory practice
at Duff and Phelps. Speaking at a Duff and Phelps IFRS 13 webcast yesterday,
he said the standard comes into play for any company that must disclose
fair-value measurement for M&A activity, asset impairment, or activity
involving investment entities (units which obtain funds from investors in
exchange for investment management services), he said. “In many ways, that’s
almost everybody.”
Corporations must use fair-value measurement when
they initiate impairment testing (required evaluations
comparing an asset’s book value with its open-market value) under other
financial-reporting standards, including, for instance, those covering
Recognition and Measurement (IFRS 39), Financial Instruments (IFRS 9), and
Business Combinations (IFRS 3).
But not everyone is taking heed of some of the
biggest changes outlined in IFRS 13, such as those involving disclosure.
“The expansion of disclosures [about fair values] could be a new thing for
many; a lot of judgment goes into the disclosure area” said Larsen.
Specifically, corporations now must show more
support for the assumptions made on their fair-value measurement and,
particularly, more clarity in those assets that may be difficult to value.
Under the standard, which has been in development for at least eight years,
company's now must disclose fair values according to a three-level
hierarchy: for those assets in which quoted prices in active markets are
readily available (level 1); when that’s not available, corporations will
have to disclose fair values using inputs other than quoted prices included
within level 1 that are still observable (level 2); and if those aren't
available, they need to disclose fair value using inputs that still based on
market assumptions though they may be unobservable for the asset (level 3).
Disclosure also involves performing qualitative
sensitivity analysis (where a company provides a narrative
discussion if changing inputs would result in altermative assumptions about
fair value) and initiating a quantitative disclosure for Level 3 inputs in
addition to a quantitative one already in place in the regulation, according
to the webcast.
Continued in article
Jensen Comment
Note that valuing Michael Dell's stake in the company he founded is far more
difficult that estimating the fair value of assets on the balance sheet. The
reason is that many, many items of value such as human resources in his stake
are not even booked in the accounting ledgers because they are too difficult to
value ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes
Bob Jensen's threads on fair value ---
http://www.trinity.edu/rjensen/theory02.htm#FairValue
Question
What is the new acronym OIS in financial accounting?
The IASB and FASB hedge accounting standards are replete with references to
LIBOR as an interest rate underlying. LIBOR was never a risk-free underlying,
but it was assumed to come close until it was discovered that the big London
banks were fraudulently manipulating LIBOR. What has since been replacing LIBOR
as an underlying in derivative financial instruments contracts?
Answer
Overnight Indexed Swap (OIS) rates ---
http://en.wikipedia.org/wiki/Overnight_index_swap
Of course underlyings can still be the supposed risk-free U.S. Treasury ratea,
but these are pretty steady and close to zero these days since the Federal
Reserve is buying up treasury debt in its Quantitative Easing program that is
tantamount to printing dollars to pay government invoices for goods and services
and interest on legitimate government debt. Treasury rates will one day take an
abnormal jump when and if the Fed ever comes to its senses.
New Hedge Accounting Rules for IFRS
From IAS Plus on April 25, 2013
Deloitte observers at the IASB meeting currently held in London report
that the IASB has just voted on the way forward in the hedge accounting
project.
The IASB decided
with a majority of ten to six votes (official notification
outstanding) to follow the model suggested by EFRAG in its
letter dated 22 March 2013 (an option of
either following the current hedge accounting requirements until the
project on macro hedge accounting has been completed or of applying
IFRS 9). Furthermore, the IASB decided (12 – 4) that a re-exposure
will not be necessary.
More detailed
information will be available soon in the IAS Plus meeting notes
covering the current meeting.
Jensen Comment
If the IASB follows the FASB lead in posting most gains and losses from fair
value adjustments to OCI rather than current earnings, many of the hedge
accounting issues for cash flow and FX hedges will go away. Fair value hedges
will remain problematic since fair value hedges do not affect OCI under current
hedge accounting rules. For example, when inventory on hand is hedged for fair
value, current rules call for fair value of the inventory carrying amount during
the hedging period.
I've not seen where the IASB plans to follow the FASB lead in posting fair
value changes to OCI rather than current earnings. It will be a great day for
earnings change trackers when that happens.
Former FASB Chairman, Bob Herz, Speaks Out About Convergence, April
18, 2013
Companies and investors are weary of changes and distrust principles-based
standards
http://blogs.wsj.com/cfo/2013/04/18/former-fasb-chair-nobody-said-convergence-would-be-easy/
Evaluating Investment Risk
Video from the Stanford Graduate School of Business
http://www.youtube.com/watch?v=H7zePShLC5o&ct=t%28Stanford_Business_Re_Think_Issue_Eleven4_5_2013%29
Warren Buffett will agree with part of this but certainly not all of it given
his track record on beating the pants off mathematical hedging advocates like
accountics scientist Charles Lee.
If you really want to understand the problem you’re apparently wanting to
study, read about how Warren Buffett changed the whole outlook of a great
econometrics/mathematics researcher (Janet Tavkoli). I’ve mentioned this
fantastic book before --- Dear Mr.
Buffett. What opened her eyes is how Warren Buffet built his vast, vast
fortune exploiting the errors of the sophisticated mathematical model builders
when valuing derivatives (especially options) where he became the writer of
enormous option contracts (hundreds of millions of dollars per contract). Warren
Buffet dared to go where mathematical models could not or would not venture when
the real world became too complicated to model. Warren reads financial
statements better than most anybody else in the world and has a fantastic
ability to retain and process what he’s studied. It’s impossible to model his
mind.
I finally
grasped what Warren was saying. Warren has such a wide body of knowledge that he
does not need to rely on “systems.” . . . Warren’s vast knowledge of
corporations and their finances helps him identify derivatives opportunities,
too. He only participates in derivatives markets when Wall Street gets it wrong
and prices derivatives (with mathematical models) incorrectly. Warren tells
everyone that he only does certain derivatives transactions when they are
mispriced.
Wall Street derivatives traders
construct trading models with no clear idea of what they are doing. I know
investment bank modelers with advanced math and science degrees who have never
read the financial statements of the corporate credits they model. This is true
of some credit derivatives traders, too.
Janet Tavakoli, Dear Mr. Buffett,
Page 19
The Wall Street Journal increased the billing rate for me to
$26 per month. This is reasonable considering that this thick thing is delivered
to my mailbox six days each week.
However, if I choose only the digital electronic version with no hard copy
delivery, I only save $4 per month --- which is now a bummer price, especially
for students.
However, there is a simple way to read very current articles in the WSJ
electronically for free using Google Advanced Search using the "All the words"
search box ---
http://www.google.com/advanced_search .
Instructions are given at
http://www.businessinsider.com/how-to-read-the-wsj-for-free-online-2009-6
Thank you Chris Nolan for the heads up.
Those of you who have access to your campus library electronic databases can
probably access archived WSJ articles using database subscriptions paid for by
your college or university.
The New York Times has a different free-access policy. I think you get
something like 15 articles free per month. However, for me this seems to
increase if I change Web browsers --- say from Firefox to Internet Explorer.
Please don't ask me why this works or if it is totally ethical.
Students and faculty of a college might be able to able to have
free access to NYT archives using databases subscribed toy by their college. One
such database is IfnoTrac Newstands.
Academic Versus Political Reporting of Research: Percentage Columns
Versus Per Capita Columns ---
http://www.cs.trinity.edu/~rjensen/temp/TaxAirlineSeatCase.htm
by Bob Jensen, April 3, 2013
"The Happiest People Pursue the Most Difficult Problems," by Steven
Berglas, Harvard Business Review Blog, April 10, 2013 ---
http://blogs.hbr.org/cs/2013/04/if_youre_confident_about_compe.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Jensen Comment
Probably XXXXX University's top (tenured) mathematics research professor was
forced by the University enter into anger management counseling as a condition
to his reappointment. We had been good friends over the years, although I lost
touch with him since he changed universities.
The above article does explain why some accountics scientists are so unhappy
and defensive. They avoid the most difficult research problems of collecting
their own data in the real world. Instead they take the easy way out by mining
data in purchased databases.
This begs the question of why creativity in accounting research is a rare
event in terms of original inventions in the halls of our Academy ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Inventors
Why genius lies in the selection of what is worth
observing.
"The Art of Observation and How to Master the Crucial Difference Between
Observation and Intuition," by Maria Popova, Brain Pickings, March
29, 2013
http://www.brainpickings.org/index.php/2013/03/29/the-art-of-observation/
This selection has a number of historic photographs of well-known scientists ---
all women!
“In the field of observation,” legendary
disease prevention pioneer Louis Pasteur famously
proclaimed in 1854, “chance favors only the prepared mind.”
“Knowledge comes form noticing resemblances and recurrences in the events
that happen around us,” neuroscience godfather Wilfred Trotter
asserted. That keen observation is what transmutes information into
knowledge is indisputable — look no further than
Sherlock Holmes and his exquisite mindfulness
for a proof — but how, exactly, does one cultivate that critical faculty?
From
The Art of Scientific Investigation (public
library;
public domain) by Cambridge University
animal pathology professor W. I. B. Beveridge — the same
fantastic 1957 compendium that explored
the role of the intuition and imagination in science
and
how serendipity and “chance opportunism” fuel discovery
— comes a timeless meditation on the art of
observation, which he insists “is not passively watching but is an active
mental process,” and the importance of distinguishing it from what we call
intuition.
Though a number of celebrated minds
favored intuition over rationality, and even
Beveridge himself extolled
the merits of the intuitive in science,
he sides with modern-day admonitions about
our tendency to mislabel other cognitive processes as “intuition”
and advises:
It is important to realize that observation is
much more than merely seeing something; it also involves a mental
process. In all observations there are two elements : (a) the
sense-perceptual element (usually visual) and (b) the mental, which, as
we have seen, may be partly conscious and partly unconscious. Where the
sense-perceptual element is relatively unimportant, it is often
difficult to distinguish between an observation and an ordinary
intuition. For example, this sort of thing is usually referred to as an
observation: “I have noticed that I get hay fever whenever I go near
horses.” The hay fever and the horses are perfectly obvious, it is the
connection between the two that may require astuteness to notice at
first, and this is a mental process not distinguishable from an
intuition. Sometimes it is possible to draw a line between the noticing
and the intuition, e.g. Aristotle commented that on observing that the
bright side of the moon is always toward the sun, it may suddenly occur
to the observer that the explanation is that the moon shines by the
light of the sun.
For the practical applications of observation,
Beveridge turns to French physiologist Claude Bernard’s model, pointing out
the
connection-making necessary for creativity:
Claude Bernard distinguished two types of
observation: (a) spontaneous or passive observations which are
unexpected; and (b) induced or active observations which are
deliberately sought, usually on account of an hypothesis. … Effective
spontaneous observation involves firstly noticing some object or event.
The thing noticed will only become significant if the mind of the
observer either consciously or unconsciously relates it to some relevant
knowledge or past experience, or if in pondering on it subsequently he
arrives at some hypothesis. In the last section attention was called to
the fact that the mind is particularly sensitive to changes or
differences. This is of use in scientific observation, but what is more
important and more difficult is to observe (in this instance mainly a
mental process) resemblances or correlations between things that on the
surface appeared quite unrelated.
Echoing
Jean Jacques Rousseau’s timeless words that “real wisdom is not the
knowledge of everything, but the knowledge of which things in life are
necessary, which are less necessary, and which are completely unnecessary to
know” and
Noam Chomsky’s similar assertion centuries later, Beveridge cautions:
One cannot observe everything closely,
therefore one must discriminate and try to select the significant. When
practicing a branch of science, the ‘trained’ observer deliberately
looks for specific things which his training has taught him are
significant, but in research he often has to rely on his own
discrimination, guided only by his general scientific knowledge,
judgment and perhaps an hypothesis which he entertains.
Continued in article
Jensen Comment
This begs the question of why creativity in accounting research is a rare event
in terms of original inventions in the halls of our Academy ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Inventors
This is especially discouraging over the past five decades as accounting
research in our Academy became dominated by accountics scientists ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
We
close with a quotation from Scott McLemee demonstrating that what happened
among accountancy academics over the past four decades is not unlike what
happened in other academic disciplines that developed “internal dynamics of
esoteric disciplines,” communicating among themselves in loops detached from
their underlying professions. McLemee’s [2006] article stems from Bender
[1993].
“Knowledge and competence
increasingly developed out of the internal dynamics of esoteric disciplines
rather than within the context of shared perceptions of public needs,”
writes Bender. “This is not to say that professionalized disciplines or the
modern service professions that imitated them became socially irresponsible.
But their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with general
public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as there
always tends to be in accounts of the
shift from Gemeinschaft to
Gesellschaft.
Yet it is also clear that the transformation
from civic to disciplinary professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly confused.
The new professionalism also promised guarantees of competence —
certification — in an era when criteria of intellectual authority were vague
and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life, Bender
suggests that the process eventually went too far. “The risk now is
precisely the opposite,” he writes. “Academe is threatened by the twin
dangers of fossilization and scholasticism (of three types: tedium, high
tech, and radical chic). The agenda for the next decade, at least as I see
it, ought to be the opening up of the disciplines, the ventilating of
professional communities that have come to share too much and that have
become too self-referential.”
Peachtree Accounting has a short new name and huge new prices
"Sticker Shock Awaits Sage 50/Peachtree Payroll Service Users," by
David Ringstrom, AccountingWeb, April 16, 2013 ---
http://www.accountingweb.com/article/sticker-shock-awaits-sage-50peachtree-payroll-service-users/221587?source=technology
The 2014 version of Sage 50, formerly known as
Peachtree Accounting, is available for purchase now. As a result, certain
users who rely on the payroll subscription are going to experience sticker
shock in the near future. Historically, you could purchase a Sage
50/Peachtree Accounting product and pay an additional fee for the annual
payroll service that makes it easy to calculate withholding taxes. As long
as your accounting software was one of the three most recent versions, the
annual payroll service typically cost around $300/year. Such users are about
to see their annual costs increase by a factor of two, three, or even more.
For several years, Sage has offered an optional
Business Care program that entitled users to priority support and automatic
program upgrades. This program is now mandatory if you want to process
payroll in the software. The Sage Business Care program is being offered at
three levels:
Silver Gold Platinum
The Silver plan offers unlimited support, annual
product upgrades, and the Business Intelligence feature that allows you to
analyze your accounting data in Microsoft Excel. However, if you wish to
process payroll within Sage 50, you must sign up for the Gold or Platinum
programs. The Gold program allows you to process payroll for up to fifty
users, while the Platinum program offers unlimited payroll as well as
priority access to a dedicated support team that offers appointment
scheduling.
Business Care is an annual subscription, which
means that rather than buying the software and sitting out a couple of
upgrade cycles, you must continue your Business Care subscription year after
year in order to process payroll in Sage 50.
Sage doesn't disclose pricing for the Gold or
Platinum programs on its website, because the pricing varies based on which
version of Peachtree/Sage 50 you're currently using and the number of
simultaneous users you require. In general, the first year of business care
will be at a higher price, with savings each year for annual consecutive
renewals. As a point of reference, a Silver Business Care subscription for a
three-user license for Peachtree Complete Accounting is $669/year. This
doesn't include payroll, so it means your ongoing annual expense will likely
be at least $800/year, year-in, year-out, as opposed to the $300 or so that
you could formerly pay to add a payroll subscription.
Continued in article
There is a somewhat useful 2011 Peachtree versus Quickbooks site at
http://blog.softwareadvice.com/articles/accounting/peachtree-vs-quickbooks-1062211/
Pricing comparisons before April 2013 are probably out of date.
Bob Jensen's accounting software bookmarks ---
http://www.trinity.edu/rjensen/Bookbob1.htm#SoftwareAccounting
Accountics Scientists Aren't Going to Like This One
"Great Scientist ≠ Good at Math: E.O. Wilson shares a secret:
Discoveries emerge from ideas, not number-crunching," E.O. Wilson, The
Wall Street Journal, April 5, 2013 ---
http://online.wsj.com/article/SB10001424127887323611604578398943650327184.html
For many young people who aspire to be scientists,
the great bugbear is mathematics. Without advanced math, how can you do
serious work in the sciences? Well, I have a professional secret to share:
Many of the most successful scientists in the world today are mathematically
no more than semiliterate.
During my decades of teaching biology at Harvard, I
watched sadly as bright undergraduates turned away from the possibility of a
scientific career, fearing that, without strong math skills, they would
fail. This mistaken assumption has deprived science of an immeasurable
amount of sorely needed talent. It has created a hemorrhage of brain power
we need to stanch.
I speak as an authority on this subject because I
myself am an extreme case. Having spent my precollege years in relatively
poor Southern schools, I didn't take algebra until my freshman year at the
University of Alabama. I finally got around to calculus as a 32-year-old
tenured professor at Harvard, where I sat uncomfortably in classes with
undergraduate students only a bit more than half my age. A couple of them
were students in a course on evolutionary biology I was teaching. I
swallowed my pride and learned calculus.
I was never more than a C student while catching
up, but I was reassured by the discovery that superior mathematical ability
is similar to fluency in foreign languages. I might have become fluent with
more effort and sessions talking with the natives, but being swept up with
field and laboratory research, I advanced only by a small amount.
Fortunately, exceptional mathematical fluency is
required in only a few disciplines, such as particle physics, astrophysics
and information theory. Far more important throughout the rest of science is
the ability to form concepts, during which the researcher conjures images
and processes by intuition.
Everyone sometimes daydreams like a scientist.
Ramped up and disciplined, fantasies are the fountainhead of all creative
thinking. Newton dreamed, Darwin dreamed, you dream. The images evoked are
at first vague. They may shift in form and fade in and out. They grow a bit
firmer when sketched as diagrams on pads of paper, and they take on life as
real examples are sought and found.
Pioneers in science only rarely make discoveries by
extracting ideas from pure mathematics. Most of the stereotypical
photographs of scientists studying rows of equations on a blackboard are
instructors explaining discoveries already made. Real progress comes in the
field writing notes, at the office amid a litter of doodled paper, in the
hallway struggling to explain something to a friend, or eating lunch alone.
Eureka moments require hard work. And focus.
Ideas in science emerge most readily when some part
of the world is studied for its own sake. They follow from thorough,
well-organized knowledge of all that is known or can be imagined of real
entities and processes within that fragment of existence. When something new
is encountered, the follow-up steps usually require mathematical and
statistical methods to move the analysis forward. If that step proves too
technically difficult for the person who made the discovery, a mathematician
or statistician can be added as a collaborator.
In the late 1970s, I sat down with the mathematical
theorist George Oster to work out the principles of caste and the division
of labor in the social insects. I supplied the details of what had been
discovered in nature and the lab, and he used theorems and hypotheses from
his tool kit to capture these phenomena. Without such information, Mr. Oster
might have developed a general theory, but he would not have had any way to
deduce which of the possible permutations actually exist on earth.
Over the years, I have co-written many papers with
mathematicians and statisticians, so I can offer the following principle
with confidence. Call it Wilson's Principle No. 1: It is far easier for
scientists to acquire needed collaboration from mathematicians and
statisticians than it is for mathematicians and statisticians to find
scientists able to make use of their equations.
This imbalance is especially the case in biology,
where factors in a real-life phenomenon are often misunderstood or never
noticed in the first place. The annals of theoretical biology are clogged
with mathematical models that either can be safely ignored or, when tested,
fail. Possibly no more than 10% have any lasting value. Only those linked
solidly to knowledge of real living systems have much chance of being used.
If your level of mathematical competence is low,
plan to raise it, but meanwhile, know that you can do outstanding scientific
work with what you have. Think twice, though, about specializing in fields
that require a close alternation of experiment and quantitative analysis.
These include most of physics and chemistry, as well as a few specialties in
molecular biology.
Newton invented calculus in order to give substance
to his imagination. Darwin had little or no mathematical ability, but with
the masses of information he had accumulated, he was able to conceive a
process to which mathematics was later applied.
Continued in article
Jensen Comment
Thus far I've come up with two inventions plus one shared inventions by
accounting researchers in our Academy. Can anybody add to this list ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Inventors
Screencast ---
http://en.wikipedia.org/wiki/Screencast
I flipped my classrooms largely by preparing hundreds of short Camtasia
how-to video on technical aspects of my accounting theory and AIS courses ---
especially on technical aspects of FAS 133 and MS Access relational database
accounitng. My students just were not getting some of this technical I explained
in class, and I grew weary repeating the same material over and over and over
again in my office. The Camtasia videos were a huge relief to my students and
me. They could play each Camtasia video repeatedly until they mastered the
topic. I rarely had to explain those topics during office hours when Camtasia
explanations were available to students.
The Camtasia videos also meant I did not have to devote so much class time to
teaching technical procedures. This made more free time for class quizzes to
verify that students were really mastering those technical opics.
"Data on whether and how students watch screencasts," by Robert
Talbert, Chronicle of Higher Education, April 4, 2013 ---
Click Here
http://chronicle.com/blognetwork/castingoutnines/2013/04/04/data-on-whether-and-how-students-watch-screencasts/?cid=wc&utm_source=wc&utm_medium=en
Bob Jensen's screencasting helpers ---
http://www.trinity.edu/rjensen/HelpersVideos.htm
"Insider Trading or Lack of Transparency: Which is the Bigger Sin?" by
Anthony H. Catanach, Jr., Grumpy Old Accountants, August 12, 2013 ---
http://grumpyoldaccountants.com/blog/2013/4/12/insider-trading-or-lack-of-transparency-which-is-the-bigger-sin
Jensen Comment
I'm not sure we can answer this question out of context.
There's now a picture showing KPMG's Los Angeles audit partner in charge
(London) in a parking lot receiving an envelope filled with cash in in exchange
for one of his various insider tips.
"KPMG says fired a partner in Los Angeles for role in insider trading,"
Sakthi Prasad, Reuters, April 9, 2013 ---
http://www.reuters.com/article/2013/04/09/us-kpmg-partner-idUSBRE93803420130409
KPMG KPMG.UL said late on Monday it had fired a
senior partner in the accounting firm's Los Angeles office for allegedly
providing inside information to an unnamed third party, who then used that
information to trade in stocks of several West Coast companies.
KPMG, one of the "Big Four" accounting and audit
firms, said it has resigned as the auditor for two clients upon discovery of
the individual's action.
"We have informed those companies it is necessary
to withdraw our auditor reports. We have no reason to believe that the
financial statements of these companies have been materially misstated,"
KPMG spokesman Tim Connolly said in a statement.
KPMG did not name the client firms in its
statement. The firm also did not identify the West Coast companies whose
stocks were traded by the unnamed third party.
The accounting firm did not name the partner nor
did it say how it learned of the individual's alleged activity.
KPMG spokesman Tim Connolly declined to comment
beyond the statement when contacted by Reuters.
This hurt Francine a bit. She's seemingly gone easy on KPMG (compared to me)
over the years relative to her despised Deloitte.
"Another 'Rogue' Audit Partner; Another 'Duped' Audit Firm," by Francine
McKenna, Forbes, April 10, 2013 ---
http://www.forbes.com/sites/francinemckenna/2013/04/10/another-rogue-audit-partner-another-duped-audit-firm/
There are things you anticipate, worry about, know
will be troublesome once they happen. It’s safe to say global audit firm
KPMG wasn’t worrying it would someday hear the leader of its Los Angeles
audit practice was passing confidential client information to someone else
who then traded on it.
KPMG announced late Monday via press release that
the firm had “separated” a senior partner, one with a very visible role,
from the firm. The firm had” “been informed” about his “rogue” actions and
“regrets” the impact his actions may have had.
I was half-expecting, “He’s not our kind”.
That’s a lot of passive construction. Who informed
the firm about the illegal and unethical activity? The firm clearly did not
discover
Scott London’s betrayal on its own. If London was
not trading on the information himself, the anomalies wouldn’t show up in
the information he’s required to provide to the firm to prove his
independence from audit clients each year.
Deloitte wasn’t the one who discovered that its
Vice Chairman and
Chicago charity circuit regular
Tom Flanagan was trading on the inside information
of several Fortune 500 companies including
Berkshire Hathaway. In that case it was FINRA, the
securities self-regulatory organization, that saw trading activity by an
audit firm partner in a company with M&A activity.
When Deloitte tax partner
Arnie McClellan’s wife “eavesdropped” on her
husband’s phone calls where he discussed his client’s M&A targets and then
called her sister in London, Deloitte didn’t know until London authorities
called. McClellan’s wife said her husband was innocent and everyone believed
her. She did serve time for initially lying about her own involvement.
It wasn’t
Ernst & Young that uncovered tax partner James
Gansman passing M&A tips to his lover who, in
turn, passed them to hers. Gansman’s “swinging” partner ended up on an SEC
watch list and
Gansmen went to jail based on her testimony
against him. He did not profit from his breach of client confidentiality
other than in ways some men might prefer to the discounted watch, dinners,
and few thousand dollars Scott London, the KPMG partner we heard about
yesterday, says he received.
Surely more information will come out over the next
few week, from KPMG, from additional companies affected and from the media,
who will pursue this story like pit bulls. One reporter who emailed me
yesterday said these stories of have “legs”. Hubris, and stupidity in
unexpected places, are great media fodder.
KPMG said in its press release that the firm
resigned as auditor from two of London’s clients,
Herbalife and Skechers, although it did not name
them. He was the top partner on those audits. The time and money those
companies will have to spend to appoint a new auditor, re-audit years of
financial statements and fend off media attention will probably be
subsidized, one-way or another, by KPMG. In the Flanagan case,
Deloitte paid for the necessary independent investigations
to support the firm’s claim to clients that it was
still independent as an auditor. None of them – Berkshire Hathaway,
Walgreens, Sears Holdings among the victims – fired the firm.
The SEC and PCAOB did not fine or sanction
Deloitte or Ernst & Young in any of the cases.
But surely Scott London, KPMG’s “rogue”, had access
to confidential information about more clients of the firm than just the
ones he was directly responsible for. He was the partner in charge of the
audit practice for a huge market, Los Angeles. He has the right, and the
responsibility, to know about every interesting or problematic thing going
on at the audit clients in his practice group. He may be a “concurring” or
quality review partner on more companies’ audits and can “drop by” audit
committee and other client meetings on a relationship-building basis. The
exposure to KPMG and to the clients of this practice unit, and perhaps
others, may be larger than what’s been admitted by the firm so far.
Scott London is
making statements to the press. He’s wealthy
enough to afford a lawyer and PR – but obviously not wealthy enough to
resist the temptation of
a “discount” on a watch and a few bucks. (London
didn’t even get a watch. He got a discount. Looking for the tippee?
Go look for a prominent LA jeweler in financial trouble who’s too cheap to
pay well for stealing a man’s career, professional reputation and, possibly,
his freedom.)
My sources tell me KPMG is not paying for London’s
defense. Deloitte
sued Flanagan to assuage its clients. I would
expect that’s next. If KPMG’s
behavior during the 2005 tax shelter scandal is
any indication, Scott London will be completely abandoned, not just fired,
as long as he’s not needed to absolve the firm of any guilt or
accountability for his actions. KPMG has been “duped”, betrayed by its own,
and that’s a tragedy, for sure.
Continued in article
Bob Jensen's threads on the "Two Faces" of KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm
April 9, 2013 reply from Dennis Beresford
Bob, Maybe if the KPMG Los Angeles partner
ultimately is sentenced to 45 years in prison (such as Attica) it would
actually put an end to this kind of "white collar" crime.
Denny
April 10, 2013 reply from Bob Jensen
Hi Denny,It will never happen. The biggest problem with white collar
crime is that it pays even if you know you're going to get caught (at least
if you know the rudiments of hiding the loot off shore or with friends and
understand time value of money) ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
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]
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).
If you aren’t now, you will by
the time you finish the new Bebchuk and Fried paper on executive
compensation. They paint a fairly gloomy picture of managers exerting their
power to “extract rents and to camouflage the extent of their rent
extraction.” Rather than designed to solve agency cost problems, the paper
makes the case that executive pay can by an agency cost in and of itself.
Let’s hope things aren’t this bad.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=364220
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]
Teaching Case
From The Wall Street Journal Accounting Weekly Review on April 12, 2013
Trading Case Embroils KPMG
by:
Jean Eaglesham, Juliet Chung and Hannah Karp
Apr 10, 2013
Click here to view the full article on WSJ.com
TOPICS: Auditing, Auditor Changes, Auditor Independence, Insider
Trading
SUMMARY: Scott London was a partner at KPMG, in charge of the
audits of Herbalife Ltd. and Skechers USA Inc. Mr. London "admitted passing
on stock tips about clients to a friend who gave him cash and gifts...."
According to Mr. London's attorney, as quoted in the related article, after
making initial disclosures of inside information to a friend at his golf
club, "it wasn't until the second or third chat that he realized that
his...friend was trading on the information...."
CLASSROOM APPLICATION: The article may be used in an auditing or
ethics class to discuss 1) how ethical transgressions can develop from
friendly relationships and 2) an auditor's responsibility for independence
as a basis for providing an audit opinion on financial statements.
QUESTIONS:
1. (Advanced) What is insider information? How do auditors have
access to insider information as a regular matter in conducting business?
2. (Introductory) What is insider trading? In this scenario
involving KPMG Partner Scott London, who committed the illegal act of
insider trading?
3. (Advanced) How does an auditor's independence provide the basis
for issuing an opinion on a company's financial statements?
4. (Advanced) How did Mr. London's actions violate his auditor's
independence? What action was KPMG then obliged to take when it learned of
Mr. London's actions?
5. (Advanced) Why must Skechers and Herbalife find new auditors and
undertake its audits for the last 2 years all over again?
SMALL GROUP ASSIGNMENT:
Discuss in small groups the following questions 1. Suppose you are an
auditor working on an engagement for a publicly traded company and that a
friend asks you about your client. How would you respond to the query?
Should your response differ depending on whether you believe your friend
might trade stocks based on the information? 2. What could Mr. Scott London
have done differently once he realized his friend had made stock trades
based on their conversations while golfing?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Golf Pal Chats Led to Probes
by Hannah Karp and Jean Eaglesham
Apr 10, 2013
Page: A2
"Trading Case Embroils KPMG," by Jean Eaglesham, Juliet Chung and Hannah
Karp, The Wall Street Journal, April 10, 2013 ---
http://online.wsj.com/article/SB10001424127887323550604578411812224197182.html?mod=djem_jiewr_AC_domainid
A former KPMG LLP partner admitted passing on stock
tips about clients to a friend who gave him cash and gifts, in a scandal
that led the big accounting firm to resign as auditor for two companies.
Scott London, the partner in charge of audits of
Herbalife Ltd. HLF +2.90% and Skechers USA Inc. SKX +1.69% until KPMG fired
him last week, told The Wall Street Journal Tuesday that "I regret my
actions in leaking nonpublic data to a third party."
Mr. London said his leaks "started a few years
back," adding that KPMG bore "no responsibility" for his actions.
"What I have done was wrong and against everything"
he believed in, said Mr. London, who was based in Los Angeles for the
accounting firm. More
Golf Pal Chats Led to Probes For New Auditor, a
'War Zone' Analyst Downgrades Herbalife Shareholder Isn't Spooked Heard on
the Street: Looking for KPMG's Mystery Man Herbalife Doesn't Expect NYSE
Delisting After KPMG Resignation Statements: Herbalife | Skechers How Your
Accountant Quits
The Federal Bureau of Investigation and the
Securities and Exchange Commission are looking into allegations of insider
trading in the shares of certain KPMG clients, said people familiar with
those probes.
The investigations are the latest sign of
authorities' efforts to crack down on insider trading. They are a fresh
black eye for a Big Four accounting firm, following widespread criticism by
regulators and investors of audit firms' failure to flag problems at large
banks and securities firms in the years leading up to the financial crisis.
In resigning the two audit accounts, KPMG said it
was withdrawing its blessing on the financial statements of Herbalife, a
nutrition company, for the past three years and of Skechers, a shoe company,
for the past two. KPMG stressed, however, that it had no reason to believe
there were any errors in the companies' books. Both companies said they are
moving to find new auditors.
Herbalife has been in the middle of a tug of war
between hedge-fund manager William Ackman—who has questioned the company's
business model and bet on its stock to fall—and Herbalife investors Carl
Icahn and Daniel Loeb. Herbalife shares fell 3.8% Tuesday, while Skechers
shares rose 2%.
Neither KPMG nor Mr. London named the recipient of
Mr. London's tips. The recipient isn't associated with a hedge fund or other
professional investor, said one person familiar with the matter.
Mr. London said he didn't pass any documents but
spoke to the person by phone. He said he gave the person "no real
significant information—usually 'they're doing well, or they're not doing
well.' " The person "traded on the information, but…I am not aware of how
much he profited," Mr. London said.
Mr. London said the person gave him a discount on a
watch, bought him dinners from time to time and "on a couple of occasions"
gave him $1,000 to $2,000 in cash.
Harland W. Braun, a lawyer for Mr. London, had a
somewhat higher estimate of how much Mr. London received.
His client hasn't reached a deal to settle any
allegations that may result, the lawyer said. He described Mr. London as
trying to minimize the possible damage caused by his actions to KPMG as well
as help the authorities.
KPMG doesn't expect the events to lead to its
resigning from any additional audit engagements, according to a person
familiar with the firm's thinking. The Skechers and Herbalife accounts are
the only ones in which Mr. London was the partner in charge of the audit,
this person said.
Allegations that audit partners have exploited
confidential client information haven't happened often, say legal experts.
"Audit partners obviously have access to potential insider information, by
the nature of their job," said Howard Schiffman, a partner at law firm
Schulte Roth & Zabel LLP and a former SEC trial attorney. "However, we've
not seen a large number of enforcement actions in this area, particularly
involving the major accounting firms."
One exception to this general rule: Thomas P.
Flanagan, a former Deloitte & Touche LLP partner in Chicago, was sentenced
last year to 21 months in prison after he pleaded guilty to securities
fraud. Authorities said Mr. Flanagan made $430,000 in illegal profits by
trading on information about Deloitte clients such as Best Buy Co., BBY
-2.86% Walgreen Co., WAG +1.16% Sears Holdings Corp. SHLD -0.63% and
Motorola Inc.
U.S. companies and audit firms typically don't
identify the individual partners who supervise each audit. Mr. London wasn't
named in Herbalife or Skechers filings as the KPMG partner in charge of
their outside audits. A 2011 proposal from the government's audit-industry
regulator would require such partners to be identified. Some other countries
already have such a requirement.
In this case, the alleged insider trading was
detected by federal investigators, rather than the audit firm, according to
people familiar with the matter. KPMG appears confident its systems weren't
to blame, said one of those people.
Skechers said in a statement it was informed that
its lead audit partner from KPMG was under federal investigation for
allegedly providing nonpublic information about clients, including Skechers,
to a third party "in exchange for money."
David Weinberg, chief financial officer of Skechers,
said he wasn't told what information about Skechers was allegedly divulged,
or to whom. KPMG has been Skechers's auditor since before 1999, the year it
went public, and Mr. London audited Skechers for two multiyear stretches,
according to Mr. Weinberg, who recalls having dinner with Mr. London on
several occasions.
"He was one of the last guys I would ever suspect
of doing this," said Mr. Weinberg.
The need for firms such as Skechers and Herbalife
to have a new firm re-audit financial statements "is not trivial in terms of
time and expense and disruption," said Joseph Carcello, an accounting
professor at the University of Tennessee.
Continued in article
Did KPMG violate the SOX audit partner rotation rule (not to be confused with
audit firm rotation where there is no rule)?
"Scott London Subverted Sarbanes-Oxley: Big Four Mock Audit Partner Rotation,"
by Francine McKenna, re:TheAuditor, April 22, 2013 ---
http://retheauditors.com/2013/04/22/scott-london-subverted-sarbanes-oxley-big-four-mock-audit-partner-rotation/
. . .
I wrote today in Forbes about a small little thing
I noticed in one of the first stories about Scott London. As I tried to
research and write about it, I waited for someone else to pick up on it. (No
one else did.) I’ve been busy the last couple of weeks since the KPMG press
release about Scott London’s breach of client confidentiality hit the wires
on April 8 but I researched the issue and called KPMG and Skechers and
waited.
There’s one small detail that came out early,
mentioned in The
Financial Times by Kara Scannell and Dan McCrum
when they interviewed
Skecher’s CFO David Weinberg, that matters a lot to the current debate
in the U.S. and U.K regarding audit firm rotation and the compromise
rules for lead partner rotation on audit engagements.
Mr London
had worked on Skechers’ audits in seven or eight of the last 13 years,
said Mr Weinberg, returning after a five-year rotation away two or three
years ago. He said that he had worked with him regularly, and
never had questions about his work or integrity: “not even the
slightest”, he said.
The rest of the column goes on to explain that
London seems to have subverted the intent of
Sarbanes-Oxley Section 203
that requires lead engagement partner rotation off engagements to promote
objectivity, independence and professional skepticism. But he’s not alone.
The more I looked into this the more I realized it’s probably pretty common
in the firms. After ten plus years of Sarbanes-Oxley, we’ve probably got
quite a few of these roll off, roll back on partners out there. An
early draft of a paper by four academics,
including former PCAOB academic fellow Brian Daughtery, says almost everyone
does it.
Assignments for the lead
engagement partner, concurring partner, and other senior
members of the audit team are planned well in advance of
required rotation so members are not rotated simultaneously.
Some firms have policies that specify the qualifications of
the partner assigned to client engagements. Depending on the
engagement, regional or national office approval may be
required on partner assignments. One OMP indicated firm
policy does not allow a partner to be a concurring partner
before being a lead partner. Another indicated his
international firm now has a policy that does not allow
partners to ever return to a former public client unless the
national office agrees to make an exception based on
extenuating circumstances.
An important element of
mitigating the negative aspects of rotation is ensuring
partners are properly trained. One OMP noted the path to
partnership is now approximately 13-15 years, primarily
driven by the complexity of GAAP. Another noted many senior
managers rotate to larger practice offices or the national
office for training before standing for partnership.
But…
By the time the
Daugherty/Dickins/Hatfield/Higgs paper was published in 2012,
Brian Daugherty told me that none of the Big Four
audit firms prohibited a partner from returning to a former public
client as lead engagement partner. None, that he became aware of during
the research, prohibit the audit partner from acting as an
advisory/consulting partner before, after, or during the cooling off
period as lead audit engagement partner or as concurring/quality
partner. One firm that did forbid partners to return to a lead audit
engagement partner role after a rotation off, except on an exception
basis, dropped the prohibition before the paper was published.
Despite being very open and chatty with the press
about the London incident – looks like KPMG fed
a positive story to the WSJ about all they are
doing to review internal policies - KPMG did not want to give me exact dates
of London’s assignments on Skechers and what he did during his roll-off.
Neither did Skecher’s CFO.
Did London act as concurring or quality review
partner during those five years? Even worse, did London act as Advisory
partner, responsible for increasing non-audit tax and consulting fees at
Skechers like Deloitte’s
Tom Flanagan did at the Fortune 500 clients he
traded illegally on?
Skechers spent $351,000 for “All Other”
services with KPMG between 2003 and 2008. Given the Sarbanes-Oxley
prohibitions against an auditor providing services other than tax and
“audit related” this seems odd. The explanation? ”These are fees for
other permissible work performed by KPMG LLP that does not meet the
other category descriptions.” Translated, that means, “We don’t think we
have to explain it you.”
Skechers paid KPMG an awful lot, too, for tax
services compared to its audit fee, $4, 512,000 over the ten year period
2002-2011, or 34% of total audit fees for the same period of
$13,129,000. In 2004, Skechers paid KPMG approximately $680,000 for
acquisition due diligence services, categorized as “audit related” when
due diligence services are prohibited consulting services by an auditor
unless they’re tax-related.
There’s more at Forbes,
KPMG’s Inside Trader: What The Auditor, and Skechers, Don’t Want To Talk
About. You might be asking, though, how can we as
investors know if the Big Four are complying with the audit partner rotation
law? Who checks to see that they are following any of these laws Congress
makes that are supposed to make us believe that auditors are back on the
job, looking out for shareholders after Enron?
We can’t.
If an audit firm violates the rule, we’ll probably
find out about it only if something worse happens that causes that
information to be disclosed. The audit firms know which partners are
assigned to clients, audit and non-audit. They have to know to manage their
business as well as insure compliance in case that audit is selected for
inspection. Public companies and their Audit Committees know who is assigned
to their engagements. Rarely do the firms and their clients volunteer
information about tenure on engagement unless there’s a lawsuit, or if
feelings are hurt such as in the Skecher’s case. The Skecher CFO’s
disclosures to the FT about Scott London’s tenure on the engagement are
unusual since there’s been no lawsuit.
Continued in article
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's threads on professionalism in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Bob Jensen's threads on KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm
Francine's Not Going to Like This (time and time again audit firms dodge the
bullet)
"Deloitte Not Liable For Mortgage Execs' Fraud, 9th Circ. Says," by
Sindhu Sundar, Law360, April 22, 2013
http://www.law360.com/securities/articles/434838/deloitte-not-liable-for-mortgage-execs-fraud-9th-circ-says
Deloitte & Touche LLP on Monday dodged claims that
it allowed insiders at USA Commercial Mortgage Co. to steal from the
now-bankrupt mortgage company and defraud investors when the Ninth Circuit
affirmed a lower court ruling for the auditing giant.
A three-judge panel affirmed a summary judgment
ruling for the mortgage company’s erstwhile external auditor, ruling that
the lower court was correct to file that under the Nevada’s so-called sole
actor rule, only the mortgage company is at fault for the fraud of its
owners CEO...
The full articles from Law360 are not free (except for a free trial)
Bob Jensen's threads on Deloitte are at
http://www.trinity.edu/rjensen/Fraud001.htm
"Deloitte Achieves Another Unflattering Milestone in Audit Quality," by
Caleb Newquist, Going Concern, July 16, 2012 ---
http://goingconcern.com/post/deloitte-achieves-another-unflattering-milestone-audit-quality
PCAOB "Time Bomb" says Bloomberg's Jonathon Weil
"Bigger, Stronger, Faster: The PCAOB After The Supreme Court Ruling," by
Francine McKenna, re:TheAuditors, June 26, 2012 ---
http://retheauditors.com/2010/06/26/bigger-stronger-faster-the-pcaob-after-the-supreme-court-ruling/
Francine wishing that the courts would
bring Deloitte to its knees (litigation, Bear Sterns, JP Morgan, audit,
auditing, Deloitte, lawsuits, Independence, Litigation, PCAOB)
Bob Jensen's threads on auditing professionalism and independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Question
What is the monumental difference between the Countrywide “Hustle” fraud
versus the far worse Bob JeSunTrust “Shortcut” fraud?
Hint:
After receiving credible whistleblower evidence, it appear that the former SEC
Director may have fumbled the ball in both case in a way that made the Madoff
whistle blower SEC fumble look like small change.
"Note to New S.E.C. Chief: The Clock Is Ticking," by Gretchen
Morganson. The New York Times, April 13, 2013 ---
http://www.nytimes.com/2013/04/14/business/dear-sec-chief-clock-is-ticking-on-mortgage-cases.html?ref=business&_r=1&
Bob Jensen's threads on the subprime mortgage sleaze ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
The Only School of Accountancy in Texas and One of 40 Schools of
Accounting With AACSB Separate Accounting Accreditation
Texas Tech's Rawls College of Business will debut the School of Accounting on
Aug. 15. It will be the only school in Texas with its own accounting program and
one of 40 schools in the U.S. with accreditation from the Association to Advance
Collegiate Schools of Business.
Bloomberg, April 19, 2013
http://www.businessweek.com/articles/2013-04-19/texas-gets-its-first-accounting-school
Texas Tech’s Rawls College of Business will become
the only school in Texas to have its own accounting school.
The accounting program includes nearly 500 graduate
and undergraduate students, most of them enrolled in a five-year program
leading to an M.S. degree. On Aug. 15, it will become the School of
Accounting, one of only about 40 such schools in the nation with separate
accreditation in accounting from the Association to Advance Collegiate
Schools of Business (AACSB), says Robert Ricketts, the school’s director.
The main benefit, aside from bragging rights, will
likely be an elevated academic profile for the program. As the only
accounting school in the state, the program is expected to attract students
and recruiters from outside the Dallas-Fort Worth area, Ricketts says. The
program boasts 100 percent placement for graduates for the last 10 years,
with about 85 percent landing jobs at Big Four accounting firms, but
relatively few end up outside Texas, he added.
Continued in article
Schools AACSB Accredited in Accounting- ordered by name ---
https://www.aacsb.net/eweb/DynamicPage.aspx?Site=AACSB&WebKey=4BA8CA9A-7CE1-4E7A-9863-2F3D02F27D23
Teaching Case from The Wall Street Journal Accounting Weekly Review on
April 19, 2013
Auditors Should Open the Books
by:
Helen Thomas
Apr 17, 2013
Click here to view the full article on WSJ.com
TOPICS: Audit Quality, Audit Report, Auditing, Financial Statements
SUMMARY: The author discusses the form of audit reports as "an
anodyne, one-page report, telling investors virtually nothing they didn't
already know" and characterizes the audit process as a "pass/fail system," a
concept with which students should be able to connect. Citing, for example,
the lack of change in audit reports of banks bailed out during the financial
crisis, the author proposes a more informative audit report that will help
financial statement users assess the quality of financial reporting.
Auditors, not surprisingly, do not want the litigation risks associated with
this proposed system.
CLASSROOM APPLICATION: The article may be used to broaden students'
thinking on the role and composition of the audit report.
QUESTIONS:
1. (Introductory) Summarize the main points in the article about
proposed changes to audit reports.
2. (Introductory) What are auditors concerns with changing audit
reports as proposed in this article?
3. (Advanced) When this author references the "pass/fail system,"
what audit activity is she talking about?
4. (Advanced) The author notes that "...while audit fees increased
by 60%, the missive to investors from 2008 to 2010 remained identical" for a
bank that received U.S. government bailout funds during the financial
crisis. Briefly state a description of the financial crisis and the need for
the U.S. government to provide "bailout funds" to banks.
5. (Introductory) What is the problem if the audit report on this
bank's financial statements remained the same across this time period of the
financial crisis and recovery (2008 to 2010)?
6. (Advanced) In the U.K., KPMG faces a possible inquiry into its
audit of the bank HBOS related to to the bank's loan loss provisions. What
are provisions for loan losses? What was wrong with the provisions reported
in the bank's financial statements?
7. (Advanced) Refer back again to the concern with the bank that
received U.S. bailout funds. Should audit fees be related to the content of
the report(s) issued by auditors? Explain.
8. (Introductory) According to the article, how can changing the
way auditors report on financial statements help a user to understand the
quality of the financial reporting itself?
Reviewed By: Judy Beckman, University of Rhode Island
"Auditors Should Open the Books," by Helen Thomas, The Wall Street
Journal, April 17, 2013 ---
http://online.wsj.com/article/SB10001424127887324345804578426580783731080.html?mod=djem_jiewr_AC_domainid
Number crunchers need to open up.
For a profession intimately involved in providing
information, auditors are an uncommunicative bunch. Accountants' work is
condensed into an anodyne, one-page report, telling investors virtually
nothing they didn't already know. The pass/fail system—stating whether
financial statements are fairly presented—offers no insight into judgments
or concerns, or crucially where accountants and managers disagreed. Audits
have been impenetrable black boxes for too long.
Revelations last week that a KPMG audit partner
passed stock tips to a friend are embarrassing for the industry but have
also refocused attention on auditors and what they produce. That said, it
was the financial crisis that provided the real impetus for change.
Pension fund Calpers, in postcrisis discussions
with the U.S. Public Company Accounting Oversight Board, pointed to a bank
that received government bailout funds, noting that—while audit fees
increased by 60%—the missive to investors from 2008 to 2010 remained
identical.
In the U.K., KPMG faces a possible inquiry into its
examination of HBOS over what appears to be egregious underprovisioning for
loan losses before the bank's collapse. The U.K.'s financial regulator last
year suggested that the firm had urged a more-prudent approach in the face
of management's sunny optimism. Investors, however, were left in the dark.
Changes are under way, but moving at far too slow
and uncertain a pace. In Europe, proposals have veered into ludicrous levels
of prescription, suggesting a report of no more than 10,000 characters but
requesting the names of the entire audit team. The PCAOB two years ago
floated alternatives, including an Auditor's Discussion and Analysis of
significant issues, with its chairman last month arguing that a different
form of report could "redirect the auditor's mind-set from meeting minimum
criteria to identifying key insights…that will help a user understand the
quality of financial reporting."
Thus far, the U.K. has backed additional disclosure
from board audit committees and is considering introducing a discussion of
risks into the report itself. More insipid boilerplate or reams of
meaningless information help no one. The hope is that additional commentary
becomes a yardstick upon which boards and investors can judge audit quality.
Central to the debate is who should keep
shareholders informed of audit issues: the board or the number crunchers.
The easy answer: both. Investors want to hear from the accountants regarding
the nitty-gritty of their work. The board can rightly add their view of the
issues, as well as explaining steps taken to ensure a robust and independent
process. Litigation is one concern, particularly in the U.S., where
accountants fear more disclosure will lay them open to lawsuits while some
worry that a more discursive style will let firms wriggle off the legal
hook.
Continued in article
Jensen Comment
Presumably this would not apply to CPA firms that do not perform audits. Public
disclosure becomes a bit more personal in small firms such as those that only
have one owner.
Bob Jensen's threads on audit firm professionalism ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Question
What is the difference between traditional competency-based course credits and
"decoupled" competency-based course credits?
Answer
In traditional competency-based systems an instructor either does not assign
course grades or does so based solely on examinations that cannot be linked to
particular students in a way where knowing a student can affect the final grade.
Course grades are generally not influenced by class discussions (onsite or in
online chat rooms), homework, term papers, course projects, team performance,
etc. In many instances the instructors do not even prepare the examinations that
determine competency-based grades.
Western Governors University ---
http://en.wikipedia.org/wiki/Western_Governors_University
WGU was one of the universities in modern times (since 1997) to offer fully
accredited online courses using a competency-based grading system. However,
students must participate in WGU courses and do class assignments for courses before
they can take the competency-based examinations.
Southern New Hampshire University (a private onsite university that is not
funded by the State of New Hampshire) ---
http://en.wikipedia.org/wiki/Southern_New_Hampshire_University
In "decoupled" course credit systems, a university that usually offers
competency-based courses where class attendance or online course participation
is not required. Students can learn the material from any sources, including
free online learning modules, before signing up to take the competency-based
examinations. Sometimes more than one "progress" competency-based examination
may be required. But no particular course is required before taking any
competency-based examination.
Decoupled systems become a lot like the Uniform CPA Examination where there
are multiple parts of the examination that may be passed in stages or passed in
one computer-based sitting.
Southern New Hampshire University (a private onsite university that is not
funded by the State of New Hampshire) ---
http://en.wikipedia.org/wiki/Southern_New_Hampshire_University
SNHU claims to be the first university to decouple courses from
competency-based examinations. However, I'm not certain that this claim is true
since the University of Wisconsin System may have been the first to offer some
decoupled competency-based degree programs..The University of Akron now has some
similar alternatives.
Wisconsin System's Competency-Based Degrees as of November 28, 2012
---
http://www.wisconsin.edu/news/2012/r121128.htm
"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
It is expected that students seeking decoupled competency-based credits will
sign up for learning modules from various free learning systems.
Listing of Sites for Free Courses and Learning Modules (unlike certificates,
transferrable credits are never free) ---
http://www.opencolleges.edu.au/informed/features/free-online-courses-50-sites-to-get-educated-for-free/
"Competency-Based Education Advances With U.S. Approval of Program,"
by Marc Parry, Chronicle of Higher Education, April 18, 2013 ---
Click Here
http://chronicle.com/blogs/wiredcampus/u-s-education-department-gives-a-boost-to-competency-based-education/43439?cid=wc&utm_source=wc&utm_medium=en
Last month the U.S. Education Department sent a
message to colleges: Financial aid may be awarded
based on students’ mastery of “competencies” rather than their accumulation
of credits. That has major ramifications for institutions hoping to create
new education models that don’t revolve around the amount of time that
students spend in class.
Now one of those models has cleared a major hurdle.
The Education Department has approved the eligibility of Southern New
Hampshire University to receive federal financial aid for students enrolled
in a new, self-paced online program called College
for America, the private, nonprofit
university has announced.
Southern New Hampshire bills its College for
America program as “the first degree program to completely decouple from the
credit hour.” Unlike the typical experience in which students advance by
completing semester-long, multicredit courses, students in College for
America have no courses or traditional professors. These working-adult
students make progress toward an associate degree by demonstrating mastery
of 120 competencies. Competencies are phrased as “can do” statements, such
as “can use logic, reasoning, and analysis to address a business problem” or
“can analyze works of art in terms of their historical and cultural
contexts.”
Students show mastery of skills by completing
tasks. In one task, for example, students are asked to study potential works
of art for a museum exhibit about the changing portrayal of human bodies
throughout history. To guide the students, Southern New Hampshire points
them to a series of free online resources, such as
“Smarthistory” videos presented by Khan Academy.
Students must summarize what they’ve found by creating a PowerPoint
presentation that could be delivered to a museum director.
Completed tasks are shipped out for evaluation to a
pool of part-time adjunct professors, who quickly assess the work and help
students understand what they need to do to improve. Southern New Hampshire
also assigns “coaches” to students to help them establish their goals and
pace. In addition, the university asks students to pick someone they know as
an “accountability partner” who checks in with them and nudges them along.
Students gain access to the program through their
employers. Several companies have set up partnerships with Southern New
Hampshire to date, including Anthem Blue Cross Blue Shield and ConAgra
Foods.
The Education Department is grappling with how to
promote innovation while preventing financial-aid abuses. Southern New
Hampshire, whose $2,500-a-year program was established last year with
support from the Bill & Melinda Gates Foundation, has served as a guinea pig
in that process. But other institutions are lining up behind it, hoping to
obtain financial aid for programs that don’t hinge on credit hours.
Continued in article
Jensen Comment
In many ways this USNH program reduces the costs of student admission and of
offering remedial programs to get students up to speed to enroll in USNH courses
on campus.
But there are enormous drawbacks
In some courses the most important learning comes from student interactions,
team projects, and most importantly case discussions. In the Harvard Business
School, master case teachers often cannot predict the serendipitous way each
class will proceed since the way it proceeds often depends upon comments made in
class by students. In some courses the most important learning takes place in
research projects. How do you have a competency-based speech course?
Time and time again, CPA firms have learned that the best employees are not
always medal winners on the CPA examination. For example, years and years ago a
medal winner on occasion only took correspondence courses. And in some of those
instances the medal winner did not perform well on the job in part because the
interactive and team skills were lacking that in most instances are part of
onsite and online education.
Note that distance education courses that are well done require student
interactions and often team projects. It is not necessary to acquire such skills
face-to-face. It is necessary, however, to require such interactions in a great
distance education course.
A USNH College for America accounting graduate may not be allowed to sit for
the CPA examination in some states, especially Texas. Texas requires a least 15
credits be taken onsite face-to-face in traditional courses on campus. Actually
I cannot find where an accounting degree is even available from the USNH College
for America degree programs.
Before you read the article below you may want to scan the classic Baruch
Lecture by Bob Elliott at
http://www.baruch.cuny.edu/library/alumni/online_exhibits/digital/saxe/saxe_1998/elliott_98.htm
"Corporate Reporting Needs a Reboot," by Paul Druckman, Harvard
Business Review Blog, April 17, 2013 ---
Click Here
http://blogs.hbr.org/cs/2013/04/corporate_reporting_needs_a_re.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
There is a clamor of voices demanding the
rebooting of capitalism, from academics (such as Michael Porter) and
politicians (like Al Gore) to investors (such as CalPERS) and Occupy's
street activists.
The common thread is that today's model of
capitalism overemphasizes short-term financial data and neglects
information that gets at the true sources of sustainable value creation
— things like innovation, brand equity, customer loyalty, and key
stakeholder relationships. Corporate reporting today emphasizes
compliance, boilerplate and legalese. As a result, we have a massive
glut of filings, press releases, analyst reports and articles focused on
financial data. The system has lost sight of the point of reporting: to
give companies access to financial capital by communicating their value
to investors.
The consequence of the systemic failure of this
lopsided model is that companies focus on short-term financial
performance — because that is what they believe investors are interested
in — to the detriment of long-term value creation. Investors, meanwhile,
compensate for the lack of knowledge about issues central to longer term
value by pricing in a risk premium. This can result in market valuations
that do not reflect the fundamental performance or prospects of the
business, leading to a misallocation of capital and reduced visibility
for investors, reinforcing short-term decision-making. And it is
business that pays the price through more expensive capital, while
furthering a flawed model of capitalism.
Fortunately, there is a better way to
communicate about the sources of value creation: integrated reporting.
Such reporting integrates material information about a firm's financial
performance with information on sustainability performance and
intangibles such as intellectual and human capital.
From the investor standpoint, integrated
reporting provides insights about a firm's business model, strategy,
risk, performance and prospects that are simply not available under the
current reporting model. It therefore supports investor decision-making
by providing a more complete basis for dialogue with the company's board
and an assessment of present and future value. This benefits not only
the investor, but also investors' beneficiaries and the broader economy
by providing a platform that encourages financial stability. Companies
such as Danone, SAP, AkzoNobel and Unilever are already pushing the
boundaries on their corporate reporting in this direction.
This week, the International Integrated
Reporting Council (of which I am the chief executive) launched the
consulting draft of integrated reporting framework.
Over the next ninety days, the IIRC is seeking
feedback on the draft from companies, investor groups, reporting
standards organizations, accounting bodies and regulators — anybody who
has a stake in seeing the transformation of corporate reporting.
The framework differs from standard financial
reporting in a number of ways:
- It provides guidance on reporting that
goes beyond simply conveying past performance in order to help
investors understand how value is created (or destroyed) in the
company, given its business model and its strategies, risks and
opportunities.
- It acknowledges that financial capital is
not the only asset in a business that drives value creation;
instead, a business must report on the interaction of six different
types of capital: financial, manufactured, intellectual, human,
social and relationship, and natural.
- It demands that reporting go beyond being
simply a mash-up of a firm's existing reports, or a forced
combination of the financial and sustainability reports. Instead, it
is a concise report that concentrates on material issues — those
relevant to investors — that affect the firm's strategy and future
orientation.
Despite the evidence of green shoots
representing a new pathway for corporate reporting, I don't believe that
true integrated reporting exists anywhere just yet. However, the new
framework gets us closer to that goal.
While all this makes me hopeful for the future
of corporate reporting, one dark cloud hangs over my outlook: US
companies are lagging their European, Asian and Latin American
counterparts in moving towards an integrated reporting model. Of course,
we have great examples of US companies, such as Coca Cola, Prudential
Finance and Clorox, joining around ninety global companies in IIRC's
pilot program right now, alongside dozens of investors. But my concern
is that there are deep-rooted reasons why the US environment may stifle
innovation in corporate reporting.
One is that companies hesitate to make
statements about anticipated future performance because they fear
litigation. But there are other reasons too. Many see reporting as a
compliance issue — if it's not legislated, then don't bother. And some
will only move on this when they believe the majority of investors want
this sort of information.
The danger for US firms who lag in adopting
integrated reporting is twofold: not only will their investors lack
complete information about their performance, but they also will lose
out on the integrated thinking that integrated reporting drives: it
reduces barriers between functional silos, aligns data systems and
processes, and encourages a culture that focuses on the full spectrum of
value drivers. This is all about innovation, and I am saddened to think
that US companies, some of the world's most innovative businesses in
their own right, might be held back because they are stuck in an
out-of-date reporting model.
If integrated reporting can play its role in
better corporate performance, holistic investor engagement and the
proliferation of a longer-term model of capitalism, it will not have
come a moment too soon.
Jensen Comment
I really hate being a luddite, but if corporate reporting is to be expanded to
cover the entire ballpark as suggested in the above article, then don't look for
the accounting profession to carry the ball into the new territories of
corporate reporting.
In fairness, Paul Druckman did not propose that the accounting profession
expand to cover these new corporate reporting territories. But in this era of
rebranding of PwC and other multinational CPA firms to offer expertise in
non-accounting areas it's tempting to think CPA firms can rebrand in corporate
reporting of "brand equity, customer loyalty, and key
stakeholder relationships."
In the accounting profession we've been through this before. The AICPA even
proposed a new professional designation that became the joke of the 20th Century
---- the professional certification of a Cognitor (later changed to XYZ).
http://www.journalofaccountancy.com/Issues/2001/Oct/TheXyzCredential
Also see
http://www.journalofaccountancy.com/Issues/2001/May/CpasSpeakUpOnNewGlobalCredential
Accountants are educated and trained to do what they learn in accounting
education programs. They are generally not trained to become experts in "innovation,
brand equity, customer loyalty, and key stakeholder relationships."
Unless they have a lot more education and training outside accountancy they are
not IT experts or valuation experts.
This takes me
back to the days when Bob Elliott, eventually as President of the AICPA, was
proposing great changes in the profession, including SysTrust, WebTrust,
Eldercare Assurance, etc. For years I used Bob’s AICPA/KPMG videos as starting
points for discussion in my accounting theory course. Bob relied heavily on the
analogy of why the railroads that did not adapt to innovations in transportation
such as Interstate Highways and Jet Airliners went downhill and not uphill. The
railroads simply gave up new opportunities to startup professions rather than
adapt from railroading to transportation.
Bob’s underlying
assumption was that CPA firms could extend assurance services to non-traditional
areas (where they were not experts but could hire new kinds of experts) by
leveraging the public image of accountants as having high integrity and
professional responsibility. That public image was destroyed by the many
auditing scandals, notably Enron and the implosion of Andersen, that surfaced in
the late 1990s and beyond ---
http://www.trinity.edu/rjensen/Fraud001.htm
This is a 1998 lecture
given by Bob Eliott before his world (the lofty public perception of CPA firm
integrity) collapsed ---
http://www.baruch.cuny.edu/library/alumni/online_exhibits/digital/saxe/saxe_1998/elliott_98.htm
The AICPA
commenced initiatives on such things as Systrust. To my knowledge most of these
initiatives bit the dust, although some CPA firms might be making money by
assuring Eldercare services.
The counter
argument to Bob Elliot’s initiatives is that CPA firms had no comparative
advantages in expertise in their new ventures just as railroads had few
comparative advantages in trucking and airline transportation industries,
although the concept of piggy backing of truck trailers eventually caught on.
I still have
copies of Bob’s great VCR tapes, but I doubt that these have ever been
digitized. Bob could sell refrigerators to Eskimos.
Collateralized Debt Obligation ---
http://en.wikipedia.org/wiki/Collateralized_debt_obligation
"CDOs Are Back: Will They Lead to Another Financial Crisis?"
Knowledge@wharton, April 10, 2013 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=3230
Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster: The Formula That Killed Wall Street ---
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Link forwarded by Jim Mahar ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html
Some highlights:
"For five years, Li's formula, known as a
Gaussian copula function, looked like an unambiguously positive
breakthrough, a piece of financial technology that allowed hugely
complex risks to be modeled with more ease and accuracy than ever
before. With his brilliant spark of mathematical legerdemain, Li made it
possible for traders to sell vast quantities of new securities,
expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond
investors and Wall Street banks to ratings agencies and regulators. And
it became so deeply entrenched—and was making people so much money—that
warnings about its limitations were largely ignored.
Then the model fell apart." The article goes on to show that correlations
are at the heart of the problem.
"The reason that ratings agencies and investors
felt so safe with the triple-A tranches was that they believed there was
no way hundreds of homeowners would all default on their loans at the
same time. One person might lose his job, another might fall ill. But
those are individual calamities that don't affect the mortgage pool much
as a whole: Everybody else is still making their payments on time.
But not all calamities are individual, and
tranching still hadn't solved all the problems of mortgage-pool risk.
Some things, like falling house prices, affect a large number of people
at once. If home values in your neighborhood decline and you lose some
of your equity, there's a good chance your neighbors will lose theirs as
well. If, as a result, you default on your mortgage, there's a higher
probability they will default, too. That's called correlation—the degree
to which one variable moves in line with another—and measuring it is an
important part of determining how risky mortgage bonds are."
I would highly recommend reading the entire thing that gets much more
involved with the
actual formula etc.
The
“math error” might truly be have been an error or it might have simply been a
gamble with what was perceived as miniscule odds of total market failure.
Something similar happened in the case of the trillion-dollar disastrous 1993
collapse of Long Term Capital Management formed by Nobel Prize winning
economists and their doctoral students who took similar gambles that ignored the
“miniscule odds” of world market collapse -- -
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM
The rhetorical question is whether the failure is ignorance in model building or
risk taking using the model?
Also see
"In Plato's Cave: Mathematical models are a
powerful way of predicting financial markets. But they are fallible" The
Economist, January 24, 2009, pp. 10-14 ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Wall Street’s Math Wizards Forgot a Few Variables
What wasn’t recognized was the importance of a
different species of risk — liquidity risk,” Stephen Figlewski, a professor of
finance at the Leonard N. Stern School of Business at New York University, told
The Times. “When trust in counterparties is lost, and markets freeze up so there
are no prices,” he said, it “really showed how different the real world was from
our models.
DealBook, The New York Times, September 14, 2009 ---
http://dealbook.blogs.nytimes.com/2009/09/14/wall-streets-math-wizards-forgot-a-few-variables/
Bob Jensen's threads on CDOs ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Teaching Case
From The Wall Street Journal Accounting Weekly Review on April 12, 2013
Silicon Valley's Mouthwatering Tax Break
by:
Mark Maremont
Apr 07, 2013
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Compensation, Personal Taxation, Taxes
SUMMARY: Yahoo! Chief Executive Marissa Mayer instituted free meals
at Yahoo last year when she took charge. Free meals are commonplace at other
Silicon Valley high tech firms and Ms. Mayer stated, on an investor
conference call, that "free food was among the cultural changes intended to
make 'Yahoo the absolute best place to work. And if you're that, I think
attracting talent comes reasonably easily.'" If free food is offered as a
perk to attract talent, then it should be taxed to the recipient as income.
But Silicon Valley firms seem not to have been treating this benefit as a
perk. The companies take the stand that meals may remain untaxed under the
argument that "they are served for a 'noncompensatory' reason for the
'convenience of the employer.'" "...Lawyers argue that some technology firms
could qualify, in part because free food encourages longer work hours and is
a crucial part of Silicon Valley's collaborative culture. [However,] the IRS
often takes a dim view of such claims during routine audits of companies,
said...a Washington, D.C., employment-tax attorney...."
CLASSROOM APPLICATION: The article may be used in either corporate
or personal tax classes covering taxable benefits and the IRS approach of
penalizing companies through audits for not reporting the perks as income.
QUESTIONS:
1. (Introductory) According to tax law, what is compensation to
employees? How might free meals available at Silicon Valley high tech firms
be considered compensation to employees?
2. (Advanced) What description made by the CEO of Yahoo, Marissa
Mayer, is indicative of free meals being considered compensation to
employees?
3. (Advanced) If these free meals are considered to be
compensation, how must the compensation be reported to the IRS? Who is
responsible for paying the income tax? (Hint: the related video helps with a
practical example on this issue.)
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Explained: Is Your Lunch a Taxable Event
by Mark Maremont
Apr 07, 2013
Online Exclusive
"Silicon Valley's Mouthwatering Tax Break," by Mark Maremont, The
Wall Street Journal, April 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324050304578408461566171752.html?mod=djem_jiewr_AC_domainid
When outsiders visit Silicon Valley, the first
thing they often notice is the food: Cafeterias brimming with free gourmet
meals and snacks offered to employees of Google Inc., GOOG +0.03% Facebook
Inc. FB +1.60% and other technology firms.
But not all is as it seems in the buffet line.
There is growing controversy among tax experts about how to treat these
coveted freebies. The Internal Revenue Service also has been focusing on the
topic, according to attorneys who practice in the area, examining whether
the free food is a fringe benefit on which employees should pay additional
tax.
Tax rules around fringe benefits are complex, but
in general they categorize meals regularly provided by an employer as a
taxable perk, similar to personal use of a company car. That leads several
tax experts to wonder if some companies providing free food may be skirting
the rules.
"I clearly think it ought to be taxable income,"
said Martin J. McMahon, Jr., a tax-law professor at the University of
Florida, who argues that in most cases the meals are really part of a
compensation package.
Other lawyers point to an exception that allows
meals to remain untaxed if they are served for a "noncompensatory" reason
for the "convenience of the employer." The exception generally has been
applied to workers in remote locations or in professions where reasonable
lunch breaks aren't feasible. But these lawyers argue that some technology
firms could qualify, in part because free food encourages longer work hours
and is a crucial part of Silicon Valley's collaborative culture.
The IRS often takes a dim view of such claims
during routine audits of companies, said Thomas M. Cryan, Jr., a Washington,
D.C., employment-tax attorney at Buchanan Ingersoll & Rooney PC "If they're
in there auditing, and you're not taxing the meals, they're going to
challenge you on it," he said. "I have worked on audits for large tech
companies in Silicon Valley on this exact issue," he added, but declined to
name the clients.
Mr. Cryan said employers generally settle, then
come up with a fair-market value for the free meals, which they include in
employees' future paycheck stubs. In those cases, he said, companies often
ensure their employees don't lose out, by giving them extra pay to cover
their larger tax bills.
An IRS spokesman declined to comment.
Google has more than 120 cafes world-wide serving
over 50,000 meals a day, according to its website, which says the aim is to
foster collaboration and healthy eating. A spokeswoman declined to comment
on the tax treatment of employee meals. Several former employees who
recently left Google said the company didn't include the value of the meals
in their paystubs or in W-2 tax statements.
A Facebook spokesman said: "We believe we are
compliant with the law."
Technically, any unpaid back taxes would be owed by
individual employees. In practice, tax lawyers say, the IRS tries to dun the
employer for failing to withhold taxes on the meals' collective value.
Although collectively hundreds of millions of
dollars in taxes could be involved, some experts say the more significant
issue is fairness. If some employers are allowed to offer tax-free perks,
they argue, that puts other employers and employees at a disadvantage, and
if left unchecked could spread.
"I buy my lunch with after-tax dollars," said Mr.
McMahon, the University of Florida professor. "And I have to pay taxes to
support free meals for those Google employees."
Still, an IRS crackdown could raise hackles in the
influential technology industry, and generate concerns that the federal
government is interfering—for relative pocket change—with a culture that has
made Silicon Valley a world leader.
"There are real benefits for knowledge workers in
having unplanned, face to face interaction," and free food helps facilitate
that, said Victor Fleischer, a tax-law professor at the University of
Colorado, who argues that aggressive enforcement of tax laws might be poor
public policy in this case.
Although some employers long have been providing
free lunches for their executives or even ordinary workers, Silicon Valley
has taken the practice to a new level.
A Gourmet magazine article last year raved about
the "mouthwatering free food" at Google's headquarters in Mountain View,
Calif. The article cited dishes such as porcini-encrusted grass-fed beef and
noted that nearly half the produce was organic.
What would a food tax on Google's meals look like
for the average employee? Assuming a fair-market value of between $8 and $10
per meal, a Googler chowing down two squares a day could get dinged for
taxes on an extra $4,000 to $5,000 a year.
Facebook's headquarters in nearby Menlo Park,
Calif., has two main cafes, plus a barbecue shack, a pizza shop, a burrito
bar, and a 50s-style burger joint. Recent menu options at Facebook's Café
Epic, which dishes up free food from morning until night, included spicy
she-crab soup and grilled steak with chimichurri sauce.
Both Twitter Inc. and Zynga Inc. ZNGA -1.16% offer
three free meals a day in their San Francisco offices. A Zynga spokeswoman
had no comment, and a Twitter spokesman confirmed the free meals policy but
otherwise didn't comment.
Tax experts say companies should be careful how
they describe the free-meals perk, lest they imply that compensation or
recruiting is the real aim, not employer convenience.
Continued in article
FASB Codification Amendments
From Ernst & Young on April 13, 2013 ---
Click Here
http://www.pwc.com/us/en/cfodirect/publications/in-brief/2013-20-fasb-exposes-consequential-amendments-for-classification-and-measurement-of-financial-instruments.jhtml?display=/us/en/cfodirect/publications/in-brief&j=103333&e=rjensen@trinity.edu&l=319824_HTML&u=5525071&mid=7002454&jb=0
On April 12, the FASB issued an exposure draft of
consequential amendments to the Accounting Standards Codification (ASC) that
would result from its financial instruments classification and measurement
proposal. The new exposure draft serves as a companion document to the
FASB's proposal issued on February 14, 2013 (see
In brief 2013-08, FASB proposes a new model for classification and
measurement of financial instruments).
"Nate Silver Gets Real About Big Data," by Matt Asay, ReadWriteWeb,
March 29, 2013 ---
http://readwrite.com/2013/03/29/nate-silver-gets-real-about-big-data
Jensen Comment
This is a message that accountics scientists don't want to hear about.
"How Non-Scientific Granulation Can
Improve Scientific Accountics"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf
By Bob Jensen
This essay takes off from the following quotation:
A recent accountics science study suggests
that audit firm scandal with respect to someone else's audit may be a reason
for changing auditors.
"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J.
Skinner and Suraj Srinivasan, The Accounting Review, September 2012,
Vol. 87, No. 5, pp. 1737-1765.
Our conclusions are subject to
two caveats. First, we find that clients switched away from ChuoAoyama in
large numbers in Spring 2006, just after Japanese regulators announced the
two-month suspension and PwC formed Aarata. While we interpret these events
as being a clear and undeniable signal of audit-quality problems at
ChuoAoyama, we cannot know for sure what drove these switches
(emphasis added).
It is possible that the suspension caused firms to switch auditors for
reasons unrelated to audit quality. Second, our analysis presumes that audit
quality is important to Japanese companies. While we believe this to be the
case, especially over the past two decades as Japanese capital markets have
evolved to be more like their Western counterparts,
it is possible that audit quality is, in general, less
important in Japan
(emphasis added)
.
Added Flexibility in 2013 AACSB Standards? Is it really so?
I thought the AACSB had already gone about as far as possible to make
accreditation standards extremely over the past two decades when the AACSB opted
for "mission driven" standards rather than rather uniform former business school
standards.
The AACSB also became more flexible when it expanded "terminally qualified"
faculty to include non-Ph.D professionally qualified (PQ) faculty, In addition
it adopted a "bridging program" for allowing faculty with non-business Ph.D.
degrees (such as education and engineering doctorates) to be academically
qualified (AQ).
To my knowledge, however, the AACSB is still largely a guild of traditional
university business deans that resists accreditation of non-traditional business
schools such as AACSB accreditation of a corporate MBA program (e.g., a Deloitte
University business program) or AACSB accreditation of a for-profit business
program (e.g., the University of Phoenix which has the largest business
education program in North America). .
Have any non-traditional business schools ever been
AACSB-accredited in North America?
I don't think the AACSB has ever accredited a distance education program that
does not have an onsite campus for students.
Have any business education programs without an onsite
campus ever been
AACSB-accredited in North America?
The standards are already somewhat different for "foreign business schools"
(outside the USA and Canada) where the AACSB has been trying to capture more of
the prestigious business schools in nations other than the USA and Canada,
including some corporate for-profit MBA programs in Europe that probably
would not be accredited if they were in North America.
"Business-School Accreditor Approves New, More-Flexible Standards," by
Katherine Mangan, Chronicle of Higher Education, April 9, 2013 ---
http://chronicle.com/article/Business-School-Accreditor/138447/
Business schools would have more flexibility to
innovate but would be under more pressure to differentiate themselves under
new accrediting standards approved on Monday by AACSB International: the
Association to Advance Collegiate Schools of Business.
The
changes, which follow two years of review by a
committee of business deans that consulted with educators and employers
worldwide, were unanimously approved during the association's annual
meeting, in Chicago.
The updates—the first since 2003—come at a time of
rapid growth in the number of foreign business schools, with varying
structures and rigor, that are seeking accreditation from AACSB. The
association, which now accredits 672 institutions in nearly 50 countries and
territories, must balance calls for more flexibility with concerns by some
members in the United States that changing its standards could water down
quality and
compromise the AACSB brand.
Jan R. Williams, a former dean of the University of
Tennessee at Knoxville's College of Business Administration, was one of
several panelists who described the updated standards during a Webcast on
Tuesday. While they will open the door for more schools to qualify for
accreditation, he maintained, the process won't be less rigorous.
"Flexibility doesn't mean easier," said Mr.
Williams. "It simply means the standards are more adaptable to schools in
different countries with different cultures," as well as those in the United
States with different missions, he said.
'A Jack of All
Trades'
John Fernandes, president of AACSB, said in an
interview on Tuesday that schools would have to do a better job of carving
out those missions. "The days of being a jack of all trades and master of
none are over," he said.
The new standards, whittled down to 15 from a list
of 21, emphasize innovation, impact, and engagement. They try to make
business education more relevant to the changing needs of students and
employers, in part by acknowledging the growing interest in online learning.
The standards also seek to measure the influence
each business school has on its graduates and on society, an approach that
may require a closer look at factors such as graduation rates, placement
success, and the impact of faculty research.
Among other changes, the new standards:
- Broaden the definition of a school's mission
to include what is distinctive about it; what impact it will have on
students, businesses, and society; and the opportunities it offers for
innovation.
- Refocus a prior intellectual-contribution
standard away from counting journal articles and toward encouraging work
that affects the theory, practice, or teaching of business and
management.
- Encourage more integration of academic
research and business practice.
The standards will continue to give schools leeway
to hire faculty members with expertise in business, not necessarily business
education. A shortage of faculty members with doctorates makes recruiting
difficult and expensive, and forces many schools to hire more practitioners
and scholars from other fields. Practitioners bring real-world experience
that can make curricula more relevant to business needs, the panelists
pointed out.
Continued in article
Also see
http://www.businessweek.com/articles/2013-04-09/b-schools-to-see-sweeping-new-accreditation-standards
Note that the AACSB has never accredited Ph.D. programs. I don't think that this
2013 revision of the standards brings in doctoral program accreditation. In
North America, however, most traditional universities require that AQ faculty
have doctoral degrees from universities having AACSB accredited undergraduate
and masters programs. An exception exists for a bridging program where a CPA
with a Ph.D. in History from Princeton University can be counted as AQ even
though Princeton has no accredited AACSB programs.
Jensen Comment
Refocusing on "intellectual-contribution standard away
from counting journal articles" is fine for professionally qualified
faculty (such as CPAs without doctoral degrees) not on a tenure track.
However, getting PQ faculty on a tenure track is not really within the
jurisdiction of the AACSB. Each college and university sets its own criteria for
tenure, and the powerful humanities and science divisions are generally very
protective of that Ph.D. criterion as well as a journal counting criterion.
The higher-level college-wide Promotion and Tenure (P&T) committees already
sigh when comparing a chemistry tenure candidate having 23 refereed journal
publications with a business school candidate having eight refereed
journal publications.
Like it or not P&T committees are not going to abandon counting such
publications no matter what the AACSB allows for accreditation.
Having said this, I'm all in favor of giving more P&T credit to refereed
practitioner journals that are highly respected in the profession even if
accountics science professors hold their noses.
Big Four Responds to UK Competition Commission: the Big Fear is
Required Audit Firm Rotation
"Big Four find Competition Commission audit conclusions lacking," by Richard
Crump, AccountancyAge, April 8, 2013 ---
http://www.accountancyage.com/aa/news/2259801/big-four-find-competition-commission-audit-conclusions-lacking
THE BIG FOUR have delivered a scathing response to
claims they are failing shareholders and that their dominance of the
statutory audit market leads to higher prices, lower quality and less
innovation for companies.
In February, the Competition Commissions delivered
the provisional findings of its investigation into the Big Four's control of
the FTSE 350 audit market. It found that the high cost of switching auditor,
difficulty comparing alternative auditors, experience and reputational
barriers for mid-tier firms were stifling competition and damaging the
market.
In response to its findings, the Big Four audit
firms - PwC, Ernst & Young, KPMG and Deloitte - have criticised the basis of
the watchdog's conclusions as "flawed", "unsound" and based on selective
evidence.
PwC raised "fundamental concerns" about the
commission's "flawed approach to the evidence, which shows serious failures
of due process in the evaluation of primary facts".
The Commission accused auditors of focusing on
satisfying management interests over those of shareholders - a conclusion
that PwC claims is "flawed by false certainty".
"The conclusion is based on an underlying
assumption that because financial directors (FDs) are influential in the
appointment of an auditor (where the Commission fails to give sufficient
weight to evidence concerning the role of the audit committee), audit firms
will act contrary to their duties to shareholders in order to satisfy the
FD," PwC said.
According to Ernst & Young, there is "no reasonable
basis" for the Commission's conclusion there are significant, persistent and
widespread concerns regarding the quality of audits delivered to FTSE 350.
Continued in article
Bob Jensen's threads on auditing professionalism and independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Enterprise Resource Planning (ERP) ---
http://en.wikipedia.org/wiki/Enterprise_resource_planning
"Kentucky Moves 173 School Districts to Cloud-Based ERP," by Leila
Meyer, T.H.E. Journal, April 4, 2013 ---
http://thejournal.com/articles/2013/04/04/kentucky-moves-173-school-districts-to-cloud-based-erp.aspx?=THENU
Bob Jensen's threads on Tools and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm
"When Can I Rollover My 401(k) Retirement Plan?,"
by Laura Adams, Money Girl, April 24, 2013 ---
https://mail.google.com/mail/u/0/?shva=1#inbox/13e42c96e585c939
My employer discontinued our 401(k) plan. Do I have
to wait until I leave the company to roll it over into a Roth IRA or can I
do it now?
A. In general, you can't take money out of a 401(k)
until one of the following situations occurs:
- You reach age 59½ You have a financial
hardship
- You die or become disabled
- You are terminated from employment
- The plan terminates and no successive
retirement plan is established by your employer
So, if your employer doesn't intend to replace your
401(k) with another qualified retirement plan, then you're allowed to do a
rollover while you're still employed. But you can't move pre-tax 401(k)
funds directly into an after-tax Roth IRA.
"6 Retirement Accounts You Should Know
About (Part2)," by Laura Adams, Money Girl, April 23, 2013, Episode
311 ---
http://moneygirl.quickanddirtytips.com/retirement-plan-types-pt2.aspx
Frontline broadcast on "The Retirement
Gamble," April 23, 2013 ---
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
For details see
http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/the-retirement-gamble-facing-us-all/
If you’ve been watching any commercial television
lately, you are well aware that the financial services industry is very busy
running expensive ads imploring us to worry about our retirement futures.
Open a new account today, they say.
They are not wrong that we should be doing
something: America is facing a retirement crisis. One in three Americans has
no retirement savings at all. One in two reports that they can’t save
enough. On top of that, we are living longer, and health care costs, as we
all know, are increasing.
But, as I found when investigating the retirement
planning and mutual funds industries in The Retirement Gamble, which airs
tonight on FRONTLINE, those advertisements are imploring us to start saving
for one simple reason. Retirement is big business — and very profitable. It
doesn’t take a genius to figure out that the more we save into the
industry’s financial products, the more money they make in fees and
commissions trading our hard-earned cash. And as long as they don’t run away
with our money or invest it in a Ponzi scheme, they have little in the way
of accountability to us when something goes wrong. And even then it can be
hard to fight back.
Big banks, brokerages, insurance companies and
other financial service providers operate under something called a
suitability standard — which says they don’t have to give you the best
advice, just advice that isn’t too egregiously terrible.
Let’s say you sit down with an adviser at your
brokerage or bank and ask for some advice on how you should allocate your
retirement savings, or which funds you might want to choose for your IRA.
You’ll get lots of advice, but chances are it won’t
be worth much. Eighty five percent of all financial advisers and financial
planners are really just brokers or salesman. Their incentive is to sell you
a product that makes them a higher commission, not necessarily a product
that maximizes your chances of saving more. Only 15 percent of advisers are
“fiduciaries” — advisers who by law must operate with your best interests in
mind.
Last year, the Obama administration proposed a rule
to mandate that all financial advisers, financial planners and other
assorted financial wizards would have to adopt a fiduciary standard when it
came to employee retirement accounts such as your 401(k) or IRA account. The
financial services industry, which today manages something upwards of $10
trillion of our retirement nest eggs, thought this was a bad idea and pushed
back hard. Scores of their protest letters poured into the U.S. Labor
Department, the branch of our government responsible for regulating employee
retirement accounts.
Congress, too, was hit with a furious lobbying
campaign. This would be way too expensive, the industry said; if we have to
provide such a standard of service, we will either have to pack up and find
another business line, or have to pass the increased costs on to our
customers. The Obama administration pulled their proposal last fall.
How would a new fiduciary rule change things?
Chances are you would be sold less expensive products, not only in your IRA
accounts but inside your company 401(k) as well. It’s all about fees. While
reporting on retirement plans for FRONTLINE, nothing has been more
surprising to me than the corrosive effect of fees on our retirement
savings.
It’s this simple: Fund fees can erode as much as
half or more of your prospective gains.
For the sake of dramatizing the point, John Bogle,
founder of Vanguard, the world’s largest mutual fund company and pioneer of
low-cost index funds, gave me a startling example while we were filming.
Assume you are invested in a mutual fund, he says, with a gross return of 7
percent, but that the mutual fund charges you an annual fee of 2 percent.
Over a 50-year investing lifetime, that little 2
percent fee will erode 63 percent of what you would have had. As Bogle puts
it, “the tyranny of compounding costs” is overwhelming.
In short, fees matter. So what can you do? You
aren’t going to find a fund that invests your money for free, but experts
say you can come close by buying index funds. Their fees can be a tenth of
what the average mutual funds charges. And over time, in bull and bear
markets, on average, index funds perform better than their more expensive
actively managed fund cousins. This is no secret to anyone who is paying
attention.
So why aren’t our trusted financial advisers and
those ads telling us to buy index funds? Why do some 401(k) plans not even
offer them on their menus?
It’s because even though an index fund might be a
better option for you and me, a broker operating under a suitability
standard has no incentive to sell it to us. He or she will make higher
commissions from options that have higher fees.
Sadly, a recent AARP study reported that 70 percent
of mutual fund savers were not even aware that they were paying any fees at
all.
Continued in article
Dan Stone's summary of the above Frontline
show:
Enjoyed it though didn't
find much new here. Basic messages:
1. index funds are cheaper and, in the long run, preferred (Jack Bogle)
2. managed funds are a scam to generate fees for the mutual fund industry
(which some would certainly debate)
3. most Americans don't have enough for retirement
4. mutual funds make it hard to determine their fees
5. the financial services industry, through massive donations, prevents any
attempts to increase transparency in the financial services industry.
I've bought Pound Foolish, after hearing an interview with its author, but
haven't
started reading it yet
(http://www.amazon.com/Pound-Foolish-Exposing-
Personal-Industry/dp/1591844894)
Dan Stone
Bob Jensen's personal finance helpers
(but not his advice which is free and not worth the money) ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
Remember that my financial advice is free and probably not
worth the money. After selling the family farm in Iowa and my home in San
Antonio, most of my liquid savings are invested in an enormous Vanguard
Long-Term "Guaranteed" Tax Exempt Fund.
"Apocalypse, Not Now, for Municipal Bonds," by Randall W. Forsyth, Barron's,
April 23, 2013 ---
http://online.barrons.com/article/SB50001424052748703889404578438641361922074.html?mod=BOL_da_udwsd#articleTabs_article%3D0
$573.2 million in Munis defaulted in 2013 (0.6% of the $3.7 trillion
outstanding) .
My investment returns were very satisfactory and stable throughout the economic
crisis that sent stocks soaring.
At my age I care more about steady annual tax-exempt cash flows rather than
valuation ups and downs and hyper inflation risk.
When I need cash for something big like a new tractor I simply write a Vanguard
check. I love the liquidity of this fund.
Fortunately, however, my TIAA lifetime annuities cover virtually all of our
living expenses, including payments on a large mortgage.
I could write a Vanguard check to pay off the mortgage, but there are tax
advantages of not doing so unless unlikely tax reform clobbers tax exempt
interest income.
"Here's Why So Many Wealthy Athletes Wind Up Broke," by Claes Bell,
Business Insider, April 23, 2013 ---
http://www.businessinsider.com/4-money-lessons-from-broke-athletes-2013-4
. . .
Whether you're making $50,000 a year or $5 million,
poor tax planning, overspending and other common errors can trash your
finances, Dawson says. Here are four common money mistakes that typically
land athletes in trouble, and how you can avoid them.
Continued in article (Slide Show)
Before wasting money for investment advice, take advantage of free services
---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers
And don't end up an prison like Wesley Snipes who gambled with the IRS and lost.
Also carefully study the following:
Frontline broadcast on "The Retirement Gamble," April 23, 2013 ---
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
For details see
http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/the-retirement-gamble-facing-us
"Innovative Performance Metric or Marketing Spin?" by Anthony H.
Catanach Jr., Grumpy Old Accountants Blog, April 26, 2013 ---
http://grumpyoldaccountants.com/blog/2013/4/26/innovative-performance-metric-or-marketing-spin
Recently, two
Wall Street Journal (WSJ) articles caught my attention with
their reports of innovations in performance measurement.
Given the significant role that accounting and financial
reporting plays in evaluating performance, I just couldn’t
resist digging deeper into these claims. The result:
disappointment! There’s not even any creative accounting to
excite me. There is little new here for those of us versed
in traditional financial analysis…just some blatant
marketing spin.
The first piece titled
“Have
Investors Finally Cracked the Stock Picking Code?”
suggests that the “holy grail” for stock-picking may have
been found. What is it? Well, it’s simply a twist on two
very familiar ratios: gross profit percentage and return on
assets. The new measure is called “gross profitability” and
is touted as a measure of “quality.” The metric is nothing
more than a Company’s reported gross profit divided by total
assets. What does it do? Well, when used in conjunction
with other more traditional metrics (i.e., price to book),
it purportedly identifies companies with high future growth
potential. And here is what the researcher who came up with
this innovative metric concludes:
Continued in article
Jensen Comment
I think Warren Buffett has shown us time and time again that picking winners is
not so simple as this ---
http://en.wikipedia.org/wiki/Warren_Buffett
After all the years in which he wrote about California's high taxes of all
sorts, the TaxProf, Paul Caron, is moving from Ohio to California. This just
shows that if the total compensation package plus other factors are in place,
taxes alone do not trump those other factors ---
http://taxprof.typepad.com/
From the TaxProf Blog on April 24m 2013
Paul Caron Leaves Cincinnati for Pepperdine
After 23 years at the
University of
Cincinnati College of Law and the past four Spring semesters at
Pepperdine University
School of Law, I have accepted an offer to join
Pepperdine's tenured faculty beginning in the Fall 2013 semester.
My wife and I loved
our time in Cincinnati, as we launched our careers, raised our children, and
found our faith
there. We will be forever grateful that the University of Cincinnati College
of Law and the United States District Court for the Southern District of
Ohio took a chance on us 23 years ago.
Continued in article
Jensen Comment
Among other things, the campus of Pepperdine University is one of the most
beautiful settings in the world.
I visit Paul's blog daily. He writes a lot about the troubles of law schools
these days.
Big Blue is Blue
From the CFO.com Morning Ledger on April 25, 2013
IBM chief delivers rebuke to employees. IBM CEO Virginia Rometty delivered
a companywide reprimand via an internal video, saying the company needed to
move faster and respond more quickly to customers, reports the WSJ’s
Spencer E. Ante. “Where we haven’t
transformed rapidly enough, we struggled,” Ms. Rometty said in the video.
“We have to step up with that and deal with that, and that is on all
levels.” In another sign of fallout from the last week’s poor earnings, IBM
reassigned one of its most senior executives—the head of the company’s
computer hardware business—following a sharp drop in first-quarter sales at
the unit.
From the CFO.com Morning Ledger on April 3, 2013
Iowa state auditor to head GASB
Iowa’s state
auditor has been named the new chairman of the Governmental Accounting
Standards Board — the panel that sets accounting rules for state and local
governments. David A. Vaudt has been Iowa’s elected auditor since 2003.
Before that, he worked in KPMG’s Des Moines office for 25 years, including
13 years as a partner, the WSJ notes.
Bob Jensen's threads on the sad state of governmental accounting and
accountability ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
From the CFO.com Morning Ledger on April 3, 2013
It’s
OK to tweet corporate disclosures. The SEC says that postings on
Facebook and
Twitter are just
as good as news releases and company websites — as long as the companies
have told investors which outlets they intend to use,
the WSJ reports. “You
won’t want to have a situation where access is restricted or where
shareholders don’t know that’s where they are supposed to go to get the
latest news,” said David Martin, a partner at Covington & Burling.
The
SEC decision was
prompted by Netflix
CEO Reed Hastings’s Facebook disclosure last summer, where he bragged that
the streaming-video company had topped one billion hours in a month for the
first time. That post sent the company’s shares soaring – and earned Mr.
Hastings and the company a Wells Notice.
The
SEC’s decision opens the door for all companies to get more social in their
disclosure practices, and it will likely help smaller companies who can’t
afford to issue scads of releases over wire services. But the biggest
immediate beneficiaries are Mr. Hastings and Netflix, says Monique Skruzny,
a partner with MBS Value Partners, an investor relations and consulting
firm. Even so, “it’s a very positive move,” she tells CFOJ. Ms. Skruzny’s
firm and others will need time to review the use of social media for
disclosure, and there will always be information that can’t or won’t be
disclosed on sites like Twitter. And for those who followed the saga of
former Francesca’s CFO Gene Morphis,
it may never be a good idea to tweet about your company.
"Should the SEC Permit Social Media Postings of Financial Information?"
by Accounting Professor Steven Mintz, Ethics Sage, April 15, 2013 ---
http://www.ethicssage.com/2013/04/should-the-sec-permit-social-media-postings-of-financial-information.html
From CFO.com Morning Ledger on April 11, 2013
President Obama is pushing to revamp the tax code as part of the budget
proposal he rolled out yesterday. The overall plan aims to curb the growth
of Social Security and Medicare and calls for about $1 trillion in tax
increases over 10 years, along with higher spending on programs like
education and transportation,
the WSJ notes. But it
also takes aim at the corporate tax burden. For the first time, the
president proposes segregating a set of revenue-raising provisions that
could be used to lower the corporate tax rate,
writes the Journal’s John D. McKinnon.
The provisions,
which Bloomberg says
would be funded largely with tax increases on U.S. companies' foreign
earnings, would generate about $100 billion over 10 years, enough to lower
the corporate rate by about one percentage point — not the seven points
sought by Obama or the 10 favored by House Republicans.
“This is a significant movement in the way they’re framing it,” said Drew
Lyon, an economist in the tax-policy group at PricewaterhouseCoopers. “It
really allows a discussion on corporate reform to move forward.” Still,
Republican leaders and business groups like the
U.S. Chamber of Commerce
and the Business Roundtable panned the plan, especially the proposed tax
hikes.
Getting any of this through Congress will be an uphill battle. A senior
administration official told McKinnon that an overhaul of the corporate tax
code is hard to do without considering the individual income tax code, and
an overhaul of the individual tax code is tough to contemplate except as
part of a broader deficit deal. But the president dug in his heels on
further compromise on his part, warning that the budget represents his
bottom-line offer. Any deal, he said, must not only replace the sequester
cuts, but also raise revenue from “the wealthiest individuals and biggest
corporations,”
the Washington Post notes.
The Treasury Department released the 256-page Green Book ---
http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf
Thank you Paul Caron for the summary
President's 2013 Proposed Budget:
- Reduce the value of certain tax expenditures to 28% for the top
three tax brackets ($529.3 billion tax increase over 10 years)
- Reform the U.S. international tax system ($157.4 billion tax
increase)
- Replace the current Consumer Price Index (CPI) with the chained CPI
for indexed tax provisions. ($100.0 billion tax increase)
- Repeal the Last-in, First-out (LIFO) accounting method ($80.0
billion tax increase)
- Increase tobacco taxes and index them to inflation ($78.1 billion
tax increase)
- Raise the estate tax rate to 45% and reduce the exclusion to $3.5
million ($71.7 billion tax increase)
- Enact a financial crisis responsibility fee ($59.3 billion)
- Enact a "Buffet Rule" 30% minimum tax on individuals with AGI above
$500,000 ($53.4 billion tax increase)
- Expand the Federal Unemployment Tax Act base ($51.5 billion tax
increase)
- Implement a program integrity statutory cap adjustment for tax
administration ($46.5 billion tax increase)
- Repeal oil & gas tax preferences ($40.7 billion tax increase)
- Mark-to-market financial derivatives ($18.9 billion tax increase)
- Tax carried interest as ordinary income ($15.1 billion tax increase)
- Enact life insurance tax increases ($11.6 billion tax increase)
- Index all tax renalties to inflation ($10.8 billion tax increase)
- Impose $3 million cap on retirement accounts ($9.3 billion tax
increase)
- Reclassify more workers as employees rather than as independent
contracts ($9.1 billion tax increase)
- Make the R&D Tax Credit permanent ($99.4 billion tax cut)
- Permanently extend the American Opportunity Tax Credit ($92.4
billion tax cut)
- Extend increased expensing for small businesses ($68.7 billion tax
cut)
- Permanently extend increased refundability of the child tax credit
($51.5 billion tax cut)
- Enact temporary 10% small business tax cut for new jobs/wage
increases ($25.8 billion tax cut)
- Enact green energy tax incentives ($23.7 billion tax cut)
- Permanently extend the Earned Income Tax Credit expansion ($17.8
billion tax cut)
- Enact automatic enrolling in IRAs ($17.6 billion tax cut)
- Enact incentives for investment in infrastructure ($17.4 billion tax
cut)
Jensen Comment
Instead of going down and dirty back room dealings with Congress, President
Obama tends fly back and forth across the nation with his teleprompter. This
might work for some gun control legislation that voters understand. It won't
work for tax reforms that are too complicated to explain to most voters.
Remember that among the 62 million voters who voted President Obama back into
office in 2012 ware 48 million food stamp recipients who probably do not have a
clue about corporate taxation.
"Should the SEC Permit Social Media Postings of Financial Information?"
by Accounting Professor Steven Mintz, Ethics Sage, April 15, 2013 ---
http://www.ethicssage.com/2013/04/should-the-sec-permit-social-media-postings-of-financial-information.html
From CFO.com Morning Ledger on April 11, 2013
Why you should stop using ROI
Companies that aim to maximize their ROI tend to under-invest,
under-innovate and leave value on the table,
writes Bennett Stewart,
CEO of EVA Dimensions, in this guest column. To maximize ROI, managers will
size projects to just where the forecast return peaks when they should
continue expanding the planned scale so long as the
incremental return exceeds the cost of
the incremental capital. Instead, CFOs should focus on their firms’ profit
less a capital charge, or economic value added. ROI brings capital into the
management equation by division, and EVA by subtraction – by turning the
balance sheet into a charge to profit, just like any other operating cost.
EVA is additive where ROI is not. Add a good enough investment to a great
business and EVA is greater still. Add a low margin business to a strong
one, and EVA increases so long as the cost of capital is covered.
evaDimensions ---
http://www.evadimensions.com/
Bob Jensen's threads on ROI are at
http://www.trinity.edu/rjensen/roi.htm
Made in the USA: Renaissance in US Manufacturing (But Not Jobs So
Much)
From the Barry Ritholtz Blog on April 12, 2013
http://www.ritholtz.com/blog/2013/04/manufacturing-returns-to-usa/
Fascinating cover story in Time magazine about the
renaissance in US Manufacturing.
What is so interesting about this is while new
businesses are being created, the amount and kinds of jobs that go with this
are very different than what the manufacturing sector produced in the past.
Some takeaways from the article:
• Post-recession, U.S. manufacturing growth is
outpacing other advanced nations;
• 500,000 manufacturing jobs created in the USA
over the past three years;
• U.S. factories access to cheap energy, (oil
and gas from the shale boom) means cheaper costs versus
expensive overseas Oil and costly shipping prices.
• Energy- and resource-intensive industries
(chemicals, wood products, heavy machinery and appliances) do better,
powered by that cheaper homegrown energy.
• New made-in-America economics is centered
largely on cutting-edge technologies (3D printing, specialized metals,
robotics and bioengineering);
• New US factories are “superautomated”
and heavily roboticized;
• Employees typically are required to have
computer skills and specialized training; Minimum of two-year tech
degree, which is likely to rise to four-year degree (eventually);
More machines and fewer workers is the future of
manufacturing in the USA. But looking only at factories misses some of the
new jobs that are related to these industries. Many of the jobs created are
outside the factory floors — R&D, support services, software engineers, data
scientists, user-experience designers, transportation & shipping, etc.
Perhaps this helps to explain why every $1 of
manufacturing activity returns $1.48 to the economy.
Here is an excerpt:
“Today’s U.S. factories aren’t the noisy places
where your grandfather knocked in four bolts a minute for eight hours a
day. Dungarees and lunch pails are out; computer skills and specialized
training are in, since the new made-in-America economics is centered
largely on cutting-edge technologies. The trick for U.S. companies is to
develop new manufacturing techniques ahead of global competitors and
then use them to produce goods more efficiently on superautomated
factory floors. These factories of the future have more machines and
fewer workers—and those workers must be able to master the machines.
Many new manufacturing jobs require at least a two-year tech degree to
complement artisan skills such as welding and milling. The bar will only
get higher. Some experts believe it won’t be too long before employers
expect a four-year degree—a job qualification that will eventually be
required in many other places around the world too.
Understanding this new look is critical if the
U.S. wants to nurture manufacturing and grow jobs. There are
implications for educators (who must ensure that future workers have the
right skills) as well as policymakers (who may have to set new
educational standards). “Manufacturing is coming back, but it’s evolving
into a very different type of animal than the one most people recognize
today,” says James Manyika, a director at McKinsey Global Institute who
specializes in global high tech. “We’re going to see new jobs, but
nowhere near the number some people expect, especially in the short
term.”
If the U.S. can get this right, though, the
payoff will be tremendous. Labor statistics actually shortchange the
importance of manufacturing because they mainly count jobs inside
factories, and related positions in, say, Ford’s marketing department or
at small businesses doing industrial design or creating software for big
exporters don’t get tallied. Yet those jobs wouldn’t exist but for the
big factories. The official figure for U.S. manufacturing employment,
9%, belies the importance of the sector for the overall economy.
Manufacturing represents a whopping 67% of private-sector R&D spending
as well as 30% of the country’s productivity growth. Every $1 of
manufacturing activity returns $1.48 to the economy. “The ability to
make things is fundamental to the ability to innovate things over the
long term,” says Willy Shih, a Harvard Business School professor and
co-author of Producing Prosperity: Why America Needs a Manufacturing
Renaissance. “When you give up making products, you lose a lot of the
added value.” In other words, what you make makes you.”
The full article is well worth your time to read . . . ---
Source:
Made in the USA ---
http://www.time.com/time/magazine/article/0,9171,2140793,00.html
Rana Foroohar and Bill Saporito
Time, April 2013
http://business.time.com/2013/04/11/how-made-in-the-usa-is-making-a-comeback/
Sometime soon we may reduce Direct Labor Cost to a footnote in cost
accounting textbooks
"Baxter: The Blue-Collar Robot: Rethink Robotics’ new creation is easy to
interact with, but the innovations behind the robot show just how hard it is to
get along with people," by Will Knight, MIT's Technology Review, April
23, 2013 ---
Click Here
http://www.technologyreview.com/featuredstory/513746/baxter-the-blue-collar-robot/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130425
Robotics Displacing Labor Even in Higher Education
"The New Industrial Revolution," by Jeffrey R. Young, Chronicle of Higher
Education's Chronicle Review, March 25, 2013 ---
http://chronicle.com/article/The-New-Industrial-Revolution/138015/?cid=cr&utm_source=cr&utm_medium=en
"Rethink Robotics invented a $22,000 humanoid (i.e. trainable) robot that
competes with low-wage workers," by Antonio Regalado, MIT's Technology
Review, January 16, 2013 ---
Click Here
http://www.technologyreview.com/news/509296/small-factories-give-baxter-the-robot-a-cautious-once-over/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130116
"Rise of the Robots," by Paul Krugman, The New York Times,
December 8, 2012 ---
http://krugman.blogs.nytimes.com/2012/12/08/rise-of-the-robots/
¶Catherine Rampell and Nick Wingfield write
about the
growing evidence for “reshoring” of manufacturing
to the United States. They cite several reasons: rising wages in Asia; lower
energy costs here; higher transportation costs. In a
followup piece, however, Rampell cites another
factor: robots.
¶The most valuable part of each
computer, a motherboard loaded with microprocessors and memory, is
already largely made with robots, according to my colleague Quentin
Hardy. People do things like fitting in batteries and snapping on
screens.
¶As more
robots are built, largely by other robots, “assembly can be done here as
well as anywhere else,” said Rob Enderle, an analyst based in San Jose,
Calif., who has been following the computer electronics industry for a
quarter-century. “That will replace most of the workers, though you will
need a few people to manage the robots.”
¶Robots mean that labor costs don’t
matter much, so you might as well locate in advanced countries with
large markets and good infrastructure (which may soon not include us, but
that’s another issue). On the other hand, it’s not good news for workers!
¶This is an
old concern in economics; it’s “capital-biased technological change”, which
tends to shift the distribution of income away from workers to the owners of
capital.
¶Twenty years
ago, when I was writing about globalization and inequality, capital bias
didn’t look like a big issue; the major changes in income distribution had
been among workers (when you include hedge fund managers and CEOs among the
workers), rather than between labor and capital. So the academic literature
focused almost exclusively on “skill bias”, supposedly explaining the rising
college premium.
¶But
the college premium hasn’t risen for a while.
What has happened, on the other hand, is a notable shift in income away from
labor:.
"Harley Goes Lean to Build Hogs," by James R. Hagerty, The Wall
Street Journal, September 22, 2012 ---
http://professional.wsj.com/article/SB10000872396390443720204578004164199848452.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj
If the global economy slips into a deep slump,
American manufacturers including motorcycle maker Harley-Davidson Inc. that
have embraced flexible production face less risk of veering into a ditch.
Until recently, the company's sprawling factory
here had a lack of automation that made it an industrial museum. Now,
production that once was scattered among 41 buildings is consolidated into
one brightly lighted facility where robots do more heavy lifting. The number
of hourly workers, about 1,000, is half the level of three years ago and
more than 100 of those workers are "casual" employees who come and go as
needed.
All the jobs are not going to Asia, They're going to Hal ---
http://en.wikipedia.org/wiki/2001_Space_Oddessey
"When Machines Do Your Job: Researcher Andrew McAfee says advances in
computing and artificial intelligence could create a more unequal society,"
by Antonio Regalado, MIT's Technology Review, July 11, 2012 ---
http://www.technologyreview.com/news/428429/when-machines-do-your-job/
"Raytheon's Missiles Are Now Made by Robots," by Ashlee Vance,
Bloomberg Business Week, December 11, 2012 ---
http://www.businessweek.com/articles/2012-12-11/raytheons-missiles-now-made-by-robots
A World Without Work," by Dana Rousmaniere, Harvard Business Review
Blog, January 27, 2013 ---
Click Here
http://blogs.hbr.org/morning-advantage/2013/01/morning-advantage-a-world-with.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Walter E. Williams ---
http://en.wikipedia.org/wiki/Walter_E._Williams
"Black Unemployment," by Walter E. Williams, Townhall, April
10, 2013 ---
http://townhall.com/columnists/walterewilliams/2013/04/10/black-unemployment-n1561096?utm_source=thdaily&utm_medium=email&utm_campaign=nl
Question
What tax breaks are the most valuable to USA corporations?
Answer
From the GAO as reported by TaxProf (Paul Caron) on April 16, 2013 ---
http://taxprof.typepad.com/
Sadly, the FASB loves (sort of in 4-3 voting) that controversial
dual-recognition model for lease accounting
"FASB lease proposal moves forward despite dissenting views," by Ken
Tysiac, Journal of Accountancy, April 10, 2013 ---
http://journalofaccountancy.com/News/20137752.htm
Jensen Comment
This is disappointing since I think many, many operating lease contracts will
simply be rewritten to circumvent the new standard:
A Dual Model for Lease Accounting:
Redrawing the Lines Into a Brick Wall of Forecasted Lease Renewal
Controversy
http://www.cs.trinity.edu/~rjensen/temp/LeaseAccounting.htm
Bob Jensen's threads on lease accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Leases
In
"Fighting Fraud," a new video created by the Center for Audit Quality (CAQ),
external auditor Ledger Lines asks, "What makes an honest Joe become a
fraudster?"
Conditions may exist that lead Joe to commit financial reporting fraud,
but as the video demonstrates, there are ways to mitigate those
conditions and lower the risk of financial reporting fraud. In the new
video, the members of the System of Investor Protection - Ledger Audit
Committee Chair Indy Pendent, CFO Lotta Charts, Internal Auditor Ida
Figures, and Regulator Johnny Law - are back to show how they contribute
to the effort. "Fighting Fraud" is the fourth episode in the CAQ's
series of videos designed to inform investors and the general public
about the people, laws, and requirements that make sure the financial
reporting process protects investors' interests.
"Financial reporting fraud has a profound
negative impact on investors' confidence in public companies and the
capital markets," said CAQ Executive Director Cindy Fornelli. "The CAQ's
new video explains how members of the system of investor protection work
to mitigate the conditions that can lead to fraud and protect investors
by working to ensure the integrity of financial information released by
public companies."
The video explains the responsibilities
of audit committee members, financial executives, internal auditors, and
external auditors to lower the risk of financial reporting fraud. Lotta
Charts helps set a strong and ethical tone at the top of the company.
Ledger Lines must exercise professional skepticism when assessing audit
evidence. Indy Pendent oversees the financial reporting process and
makes sure that whistleblower reports on financial reporting fraud are
carefully evaluated. Ida Figures assesses the company's fraud risk
management and testing controls to see if they work as intended.
"Fighting Fraud" follows previous
episodes in the video series, including "The System of Investor
Protection," "The Financial Statement Audit," and "The Audit Committee."
All four videos are available free of charge on
CAQForInvestors.org. They also are available
on the CAQ's YouTube channel as well as on Facebook and Twitter.
The new video also is an important
contribution to financial reporting fraud deterrence and detection
resources and can be accessed on
www.AntiFraudCollaboration.com, the website
for the CAQ's collaboration with the National Association of Corporate
Directors, The Institute of Internal Auditors, and Financial Executives
International.
Source: Center for Audit Quality
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Remember those tiresome and frequent adds on television from "The Scooter
Store"
"Scooter Store Files For Bankruptcy After Overbilling Medicare At Least
$47 Million," by Laura Northrup, Consumerist, April 15, 2013 ---
http://consumerist.com/2013/04/15/scooter-store-files-for-bankruptcy-after-fbi-raid-and-medicare-fraud-allegations/
If you watch daytime TV or have been stuck watching
daytime TV while visiting your parents, surely you’re familiar with The
Scooter Store. The power wheelchair vendor has had some trouble lately,
including accusations of Medicare and Medicaid fraud, a raid by the FBI, and
even a lawsuit from the company’s hometown, of New Braunfels, Texas. The
company laid off most of its employees, and plans to deal directly with
health care providers, rather than blanketing the airwaves and selling
directly to consumers.
Those investigations came after a
a scathing investigative piece by CBS News about the company.
(Warning: the video at that link plays automatically.) Former salesmen and
doctors who prescribed chairs in the past explained the company’s tactics:
contact doctors’ offices incessantly to wear them down and convince them to
prescribe scooters and power chairs whether the patient really needed one or
not, and to depend on bureaucratic incompetence and error to get them
approved by Medicare and Medicaid.
That got the attention of the federal government,
and led to a raid by the Federal Bureau of Investigation. The company’s CEO
insists that The Scooter Store itself wasn’t accused of fraud. Just
a few weeks later, the company
furloughed all employees, then permanently laid off about 1,000.
An independent audit found that the company had
overbilled Medicare and Medicaid somewhere between $46.8 million and $87.7
million. The company had agreed to pay back $19.5 million. The Centers for
Medicare and Medicaid Services is one of the largest creditors listed in the
company’s bankruptcy petition, which details about $50 million in debt.
Just a few short years ago, in 2009, the city of
New Braunfels gave the Scooter Store economic development money to convert a
former Kroger store into their sparkling new headquarters. On Friday,
the city filed a lawsuit to to get $2.6 million of that money back.
Continued in article
Jensen Comment
Milking Medicare and Medicaid seems to be the rule rather than the exception.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Tell Me It Isn't So!
"Enron's Jeff Skilling Could Get Early Release From Prison," CNBC, April
4, 2013 ---
http://www.cnbc.com/id/100615931
Bob Jensen's threads on the Enron and WorldCom frauds ---
http://www.trinity.edu/rjensen/FraudEnron.htm
Joe Hoyle has a question for you?
"I HAVE A QUESTION FOR YOU," by Joe Hoyle, Teaching Blog, April 27,
2013 ---
http://joehoyle-teaching.blogspot.com/2013/04/i-have-question-for-you.html
Jensen Comment
I would never ask such a question about the entries in my three blogs, because
faithful followers would have to sift through over 50,000 postings in my three
blogs that are also posted in various places in my massive Website. Joe has only
166 postings to sift through which is a much more manageable task. But sifting
through my postings for likes and dislikes is out of the question even for me
---
http://www.trinity.edu/rjensen/threads.htm
This is not to imply that my stuff has been better or worse than that of my good
friend Joe. It's simply a fact that I'm a more active blogger and Web site
manager.
I also have over 31,000 postings to the AECM and nearly 18,000 postings and
comments on the AAA Commons. Obviously searching for "favorites" is out of the
question. My postings have covered the waterfront for education technology to
learning theory to nearly all accounting topics.
I do have some early-on postings that I'm very proud of in the early stages
of my blog. I was one of the early writers who tried to dispel the myth that
online courses needed to be less interactive and intense with individual
students. When done "optimally" the communications between a student and an
instructor and other students in an online course are more intense than any
onsite course. Of course, online courses are not always conducted with such
intensity just as onsite courses vary to a tremendous extent in terms of
interactions of students and instructors.
But when it comes down to identify the real game changers arising from my
postings I can hardly take credit for most of the game changers since in most
of my postings I'm mostly referencing and quoting articles. I have to give
others most of the credit for seminal ideas. In most ways I'm more of a scout
for new inventions than an inventor. I like to think I've been a pretty good
scout.
What I enjoy most are the debates with such writers as Tom Selling, Stever
Kachelmeier, Richard Sansing, Paul Williams, Patricia Walters, and many, many
others. I've learned immensely from these scholars and hope I returned something
of value to them.
Although I'm a bit more active as a blogger after my retirement from teaching
in 2006, I want to stress that I was nearly as active since the late 1980s when
commenced to blog more and more and then more and more. My point is that
bloggers need not be retired just to make blogging contributions just like Joe
Hoyle is not yet retired and makes many valuable contributions to our craft.
Reply from Joe Hoyle on April 28, 2013
I bet you'd be surprised -- if you simply asked the
question "what have I ever said that you immediately remember," you'd get a
lot of interesting comments. People's memory serves as a pretty good filter.
Almost invariably when people write to me, they start off with "you once
said the following and it has stuck with me." And, it is often something
that wasn't all that important to me. But it clearly meant something to
them. I find that interesting with my students also -- years after they
graduate, they will tell me something that I said to them that impacted
their life and I won't even remember having said it.
That's one of the things that makes this teaching
job so interesting.
Joe
April 29, 2013 reply from Bob Jensen
Hi Joe,
Our styles tend to be different and are probably
not comparable. Your blog is more like a personal diary that discusses your
own feelings and beliefs and philosophy.
My postings are full of commentaries on what other
scholars and researchers have written. My style is more like a journal
referee commenting on an article at hand --- pointing out the good and the
bad aspects of the article.
You also focus mostly on your personal teaching
experiences. I cover more of the ball park --- fraud updates, audit
professionalism, communications from standard setters, education technology
(bright and dark sides), tools and tricks of the trade, learning theory,
accounting theory, and on and on and on.
I think we both provide a service to our
professions Joe. We just have different styles and scope of coverage.
Keep up the good work Joe. I still wish you would
join the AECM even as a lurker.
Keep up the good work Joe,
Bob Jensen
By the way, my answer to Joe Hoyle's question about his posting that I
like best is
"How You Test Is How They Will Learn," by Joe Hoyle, Teaching Blog,
January 31, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/01/how-you-test-is-how-they-will-learn.html
An example of a Website helper page that I take pride in is at
http://www.trinity.edu/rjensen/000aaa/thetools.htm
Bob Jensen's links to similar Website helper pages ---
http://www.trinity.edu/rjensen/threads.htm
My Outstanding Educator Award Speech ---
http://www.trinity.edu/rjensen/000aaa/AAAaward_files/AAAaward02.htm
"WHAT MAKES GREAT TEACHERS GREAT?" by Joe Hoyle, Teaching Blog, April
16, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/04/what-makes-great-teachers-great.html
. . .
Great teachers seem to possess most of the
following qualities:
(1) Love of Their Subject. They love what they
teach. That love is obvious and contagious, often rubbing off on students.
Many of their students say, for example, “I really didn’t like history until
I took his class. Now I love it.”
(2) Vibrant. They are enthusiastic and energetic.
Their classes are vibrant and lively, usually punctuated with regular
give-and-take with students. Here the teaching process is a two-way street.
(3) Up-to-date. Great teachers have complete
command of their subject based on current scholarship, and they know how to
present it in organized and understandable ways. There are no yellowed or
dog- eared lecture notes in their classes. If they teach in technical
fields, they stay up-to-date with constantly changing technology.
(4) Creative. They are creative and help students
look at things from different perspectives. They challenge assumptions and
help students learn how to think analytically and critically, and to see
things in a different light. Virginia’s Standard of Learning testing
requirements stifle creative teaching in public schools, according to many
critics. A former high school principal, however, told me that the great
teachers he knows have adapted to the SOLs and still do a superb job in the
classroom.
(5) Demanding. Great teachers usually are not easy
teachers. They keep their students on their toes and do not pander to them.
Yet they attempt to bring out the best in their students without badgering
or humiliating them.
(6) Relevancy. They have the ability to make their
subject relevant so that students can see a connection to their own lives
and the world around them.
(7) Trust. Their credibility is unquestioned, and
they are trusted by their students, who sense that the teacher is honest,
forthright and fair.
Continued in article
Jensen Comment
I find that the above criteria can be repackaged in various ways. For example,
the KPMG Foundation has been striving now for over 25 years to provide
significant financial support to minorities in accounting doctoral programs and
has been doing a great job in a selected subset of accounting doctoral programs.
One of the main purpose is to provide minority role models.
I don't know quite how to define a great role model for teachers because
there are so many different types of great role models. Great role models all
seem to have a passion for teaching and sufficient expertise for the levels of
their courses.
What needs to be expanded by Joe is the fact that the "great teachers" are
not always a very popular teachers. Conversely, the "most popular" teachers are
not necessarily great teachers. Some teachers appear to be popular just because
they are almost certain to raise a student's grade point average. Sometimes
they've popular because they cover so little material and skip over the hard
stuff. Students love being entertained by humor, learning games such as Monopoly
or Jeopardy, etc.
Students like to be spoon fed and often give teachers high ratings simply
because these teachers make the textbook seem easy. A great teacher may instead
make the textbook seem superficial or lacking in modules that great teachers
think are vital to the course. Or a great teacher may critically evaluate a
textbook module to provide students with illustrations of critical thinking.
Somewhat neglected here is education versus teaching.
It is possible to be a great educator without necessarily being a great teacher.
These days I like to think of myself as an educator even though I no longer
teach. There are various ways of being a great educator. One way is by making
very current learning materials available and making them easy to find --- such
as on a Website. I would like to give more credit to professors have tremendous
open access Websites. I don't find many terrific Websites among accounting
educators and researchers.
Some educators are great because they provide the world with outstanding
textbooks, including those great end-of-chapter materials. In many instances
textbook writers are highly rewarded financially, but certainly not in all cases
--- especially in small market specialties.
Some great educators lead great teachers and help to bring the resources that
make programs great.
Some great educators challenge great teachers, great researchers, and other
educators. For example, some bloggers do a terrific job challenging recent
research journal articles and published teaching cases.
I think sometimes great educators inspire critical thinking
even though they themselves may not be considered great teachers under the
criteria listed by Joe in the above article.
Such educators are seldom happy with materials great teachers
think are tremendous.
Teacher to Teacher: Critical Thinking in the College Classroom ---
http://www.utexas.edu/academic/ctl/criticalthinking/accessible.php?section=1
Why Critical Thinking is so Hard to Teach ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#CriticalThinking
April 16, 2013 reply from Joe Hoyle
Hi Bob --
I have no idea why the blog won't accept your comments. And, I'm
disappointed because I'd love to have your thoughts. They would add to the
site. I'm actually not very blog savvy and on these free sites there are no
live human beings to ask questions of. I seem to remember when I first
started that I had to have a Google account in order to register comments. I
had a gmail email address and so that password worked but that is only a
vague recollection. I'm a person who very much operates on a "need to know"
basis.
I enjoyed your comments below. I think we need more
opinions out there on education. I'm also troubled that it is so difficult
to identify who "great teachers" really are. I can't remember if I have ever
written this on the blog but I often say it when I give live presentations:
student evaluations are one of the worst things to ever happen to college
education. And that is because, as you say, "great teacher" and favorite
teacher have become "intertwined concepts."
How do you determine greatness in teachers? Any way
that i can come up with another person could easily take apart. I have one
pet method. I don't know if you ever look at Rate My Professor.com. Okay,
for the most part it is a bunch of baloney. However, my theory is that the
best teachers are the ones who have the largest spread between "quality" and
"easiness." A 5 and a 5 is an extremely easy teacher who is popular and
funny and a 1 and a 1 is a tough teacher who isn't very clear. But a 5 and a
1 is doing something right - high quality and extreme toughness. Now, I will
warn you that I probably like that one measure because I do well on it.
Soooo, are we just drawn to evaluation techniques that put us in the best
possible light? That might be the one thing that is really true.
I suspect that the best way to evaluate great
teaching is to give students some type of course evaluation 3 years after
they graduate. They have a better perspective. But again, I'm sure someone
else can tell me why that is complete nonsense.
Thanks for congratulations on the innovation award.
You know the best part of that. They give me a 75 minute slot to talk to
people. Of course, as you might guess, it is on Wednesday at 2:00 when most
people have left or headed to Disney Land but that will still give me a
chance to meet some new people and make some new teaching friends. The only
real way to get better as a teacher is to have some thoughtful conversations
and I can always use more friends to talk with.
Keep up the good work. We need more folks like you.
Hope to see you in August -- grab me and we'll have a drink together and
figure out what great teaching really means.
Joe
April 17, 2013 reply from Bob Jensen
Hi Joe,
I probably go to RateMyProfessor.com more than any other accounting
professor --- mostly out of curiosity but sometimes with purpose. I'm often
seeking evidence about teachers who try to indoctrinate more than they
educate:
"Noam Chomsky Spells Out the Purpose of Education," by Josh Jones, Open
Culture, November 2012 ---
http://www.openculture.com/2012/11/noam_chomsky_spells_out_the_purpose_of_education.html
I never even look at the numerical scores on RMP because the sample
respondents are self selecting.
I find the subjective comments sometimes revealing about such things as
easiness, course requirements, mood swings, and bias.
I have great difficulty distinguishing between popularity versus teaching
greatness. Sometimes students praise things that do not make great teaching
in my opinion. Sometimes they criticize things that do not detract from
teaching greatness in my opinion.
When I was a department chair I had an intermediate teacher who was not
at all great in the classroom. But she spent 6-8 hours each day helping
students in her office. In this she excelled. So I consider her a great
teacher having passion, dedication, and respect from her students concerning
what they learned.
But 6-8 hours in the office does not make all teachers great. In some
cases students may grow angry over having to spend so much time outside the
classroom when great teachers would make better use of class time.
I'm actually a great fan of the BAM pedagogy that most students hate.
Students probably learn the most while hating their teachers the most ---
http://www.trinity.edu/rjensen/265wp.htm
I think the BAM teachers who can pull this off are probably the greatest
teachers and the most hated teachers in higher education --- keeping in mind
that students probably only have time for one BAM course per term.
There's no magic formula for teaching greatness and no single role model.
In any case keep up the good work Joe.
My one wish from you is that you would become more active on the AECM.
There is so much you could add to our debates.
Respectfully,
Bob Jensen
Does anybody out there have feedback regarding this in-home tutoring service
(includes accounting with pictures of the tutors)?
If I were to seek out tutoring I would first look at the many free tutorials
on almost any topic (including advanced topics like hedge accounting) on
YouTube. These vary in quality and do not push to learn like in-home tutors can
possibly push to learn.
It's a little like learning to play the piano. Sure there are tutorials on
YouTube for learning how to play the piano. However, an in-home piano teacher
may be more effective and more expensive.
VarsityTutors
Private In-Home Tutoring
April 15, 2013 message from Jennifer Thomas
Hi Robert,
My name is Jennifer Thomas, and I work for Varsity Tutors. We have
recently launched a powerful new academic resource: a comprehensive suite of
completely free practice tests, flashcards, and questions of the day for
standardized tests and academic subjects of all levels:
www.varsitytutors.com/practice-tests
We noticed that you offer assistance to your students in locating
resources to help them with courses and tests. Would you please consider
also adding our free practice test webpage to your list of resources?
If you would like any further information in order to consider listing
us, please let me know. Attached is an overview highlighting all the
features of our online testing tools. Again, our free practice test resource
can be found here:
www.varsitytutors.com/practice-tests.
Thank you very much for your time and I hope that you'll take advantage
of this great free resource!
Regards,
Jennifer Thomas
Question
Do accounting professors know more about inflation index calculations than the
voting public?
First note that in order to be deceptive the government took food and fuel
out of the inflation index so that price changes for retired people that buy
food and fuel are deceived by why their so-called Social Security adjustments
are much less than if food and fuel price changes were factored into their
inflation adjustments.
Here we go again with another round of deception.
"The Obama Price Index ," The Wall Street Journal, April
10, 2013 ---
http://online.wsj.com/article/SB10001424127887324695104578414891693238684.html?mod=djemEditorialPage_h
President Obama is said to be trying to lure
Republicans into another grand bargain by including a proposal in his 2014
budget that would slightly slow the growth of Social Security and other
federal benefits. But he's also telling the Democrats going bonkers about
slashing Social Security not to worry, the cuts aren't drastic and barely
noticeable.
It's the Schrödinger's cat of entitlement reform.
Both his political postures can't be true at once, and no points awarded for
guessing what the details reveal.
Mr. Obama is proposing that Congress replace the
conventional consumer price index with a more accurate measure of inflation
known as "chain-weighted CPI," or chain CPI. This alternative measure of
purchasing power takes into account how consumers change their buying habits
over time as prices change. When oranges cost more, for example, people buy
fewer oranges and eat more apples instead.
If such "substitution effects" don't sound like
much of a concession to Republicans or much for Democrats to get mad about,
well, chain CPI is one of those Beltway specials—a proposal everyone can
support because it gouges both sides.
Over the last decade or so, chain CPI has grown
about a quarter of a percentage point slower than the normal index. Plugging
the new measure into the Social Security formula means that the program's
cost of living adjustments wouldn't increase as fast. The same applies to
other federal assistance programs like food stamps, federal pensions and
refundable tax credits. In total, chain CPI would reduce federal spending by
$216 billion over 10 years, according to the Congressional Budget Office.
Chain CPI would also raise $123 billion in new revenue, because the annual
income amounts for the tax brackets would rise more slowly as well.
Chain CPI is a useful technocratic correction. The
Social Security formula wasn't written with a finger of light on stone
tablets, and in any case who's in favor of inaccurately measuring inflation?
Well, it seems Mr. Obama is. It turns out that his
budget doesn't accept chain CPI for everyone. Instead it modifies the
modification of inflation with (still undefined) "protections for the very
elderly and others who rely on Social Security for long periods of time, and
only applies the change to non-means-tested benefit programs." His version
reduces the deficit $230 billion—$100 billion of it tax increases—not CBO's
$339 billion.
So Mr. Obama's olive branch would accurately
measure inflation for some people, but then continue to inaccurately measure
inflation for the people he thinks are more deserving of larger government
transfers. These exceptions are meant to placate the liberals who want to
expand Social Security, but means-testing chain CPI defeats the alleged
purpose of the change. Why not just go all the way and invent a new measure
called Obama CPI?
Governmental accounting in general is all done with smoke and mirrors ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Credit Default Swaps (CDS) ---
http://en.wikipedia.org/wiki/Credit_default_swap
"Global Financial Stability Report: Old Risks, New Challenges"
International Monetary Fund
April 2013
http://www.docstoc.com/docs/154106200/IMF Report
The Global Financial Stability Report (GFSR)
assesses key risks facing the global financial system. In normal times, the
report seeks to play a role in preventing crises by highlighting policies
that may mitigate systemic risks, thereby contributing to global financial
stability and the sustained economic growth of the IMF’s member countries.
Risks to financial stability have declined since the October 2012 GFSR,
providing support to the economy and prompting a rally in risk assets. These
favorable conditions reflect a combination of deeper policy commitments,
renewed monetary stimulus, and continued liquidity support. The current
report analyzes the key challenges facing financial and nonfinancial firms
as they continue to repair their balance sheets and unwind debt overhangs.
The report also takes a closer look at the sovereign credit default swaps
market to determine its usefulness and its susceptibility to speculative
excesses. Lastly, the report examines the issue of unconventional monetary
policy (“MP-plus”) and its potential side effects, and suggests the use of
macroprudential policies, as needed, to lessen vulnerabilities, allowing
country authorities to continue using MP-plus to support growth while
protecting financial stability.
The analysis in this report has been coordinated by
the Monetary and Capital Markets (MCM) Department under the general
direction of José Viñals, Financial Counsellor and Director. The project has
been directed by Jan Brockmeijer and Robert Sheehy, both Deputy Directors;
Peter Dattels and Laura Kodres, Assistant Directors; and Matthew Jones,
Advisor. It has benefited from comments and suggestions from the senior
staff in the MCM department.
Individual contributors to the report are: Ali Al-Eyd,
Sergei Antoshin, Serkan Arslanalp, Craig Botham, Jorge A. Chan-Lau, Yingyuan
Chen, Ken Chikada, Julian Chow, Nehad Chowdhury, Sean Craig, Reinout De
Bock, Jennifer Elliott, Michaela Erbenova, Jeanne Gobat, Brenda González-Hermosillo,
Dale Gray, Sanjay Hazarika, Heiko Hesse, Changchun Hua, Anna Ilyina, Tommaso
Mancini-Griffoli, S. Erik Oppers, Bradley Jones, Marcel Kasumovich, William
Kerry, John Kiff, Frederic Lambert, Rebecca McCaughrin, Peter Lindner, André
Meier, Paul Mills, Nada Oulidi, Hiroko Oura, Evan Papageorgiou, Vladimir
Pillonca, Jaume Puig, Jochen Schmittmann, Miguel Segoviano, Jongsoon Shin,
Stephen Smith, Nobuyasu Sugimoto, Narayan Suryakumar, Takahiro Tsuda,
Kenichi Ueda, Nico Valckx, and Chris Walker. Martin Edmonds, Mustafa Jamal,
Oksana Khadarina, and Yoon Sook Kim provided analytical support. Gerald
Gloria, Nirmaleen Jayawardane, Juan Rigat, Adriana Rota, and Ramanjeet Singh
were responsible for word processing. Eugenio Cerutti, Ali Sharifkhani, and
Hui Tong provided database and programming support. Joanne Johnson and Gregg
Forte of the External Relations Department edited the manuscript and the
External Relations Department coordinated production of the publication.
This particular issue draws, in part, on a series
of discussions with banks, clearing organizations, securities firms, asset
management companies, hedge funds, standards setters, financial consultants,
pension funds, central banks, national treasuries, and academic researchers.
The report reflects information available up to April 2, 2013.
The report benefited from comments and suggestions
from staff in other IMF departments, as well as from Executive Directors
following their discussion of the Global Financial Stability Report on April
1, 2013. However, the analysis and policy considerations are those of the
contributing staff and should not be attributed to the Executive Directors,
their national authorities, or the IMF.
Jensen Comment
Note that much of this report deals with the state of Credit Default Swaps.
Bob Jensen’s threads on the CDO and CDS scandals ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Teaching Case from The Wall Street Journal Accounting Weekly Review on
April 5, 2013
Tesla Sees First-Ever Quarterly Profit
by:
Mike Ramsey and Tess Stynes
Apr 02, 2013
Click here to view the full article on WSJ.com
TOPICS: Corporate Taxes, Earnings Forecasts, Revenue Forecast,
Revenue Recognition
SUMMARY: "Tesla Motors Inc. said it would report a first-quarter
profit, sending the luxury electric-car maker's shares surging 16% on
Monday." The article notes that the company recognizes revenue when cars are
delivered--no surprise there but the company takes a $5,000 for each car
ordered that becomes nonrefundable as soon as the customer selects
specifications. The company also earns a significant portion of its revenues
from sales of pollution control tax credits issued by the state of
California and by the U.S. Federal government.
CLASSROOM APPLICATION: Questions lead students to the Form 8-K
filing specifically discussing management guidance about soon-to-be released
earnings and to the 2012 Form 10-K for revenue recognition policies.
QUESTIONS:
1. (Introductory) What product does Tesla Motors manufacture?
Identify your source for information about the company.
2. (Introductory) What milestone did Tesla Motors reach during the
first quarter of 2013? How did the market react to this news? Do you think
this is likely to be an overreaction? Explain your answer.
3. (Advanced) When does Tesla record revenue from its sales of
automobiles? Why do you think this accounting policy is mentioned--is there
anything unusual about the timing of recognition? To help answer this
question, you may access the Tesla Motors annual report for 2012 filed on
Form 10-K and available on the SEC web site at
http://www.sec.gov/cgi-bin/viewer?action=view&cik=1318605&accession_number=0001193125-13-096241&xbrl_type=v#
Click on Notes to Financial Statements and then Reservation Payments on the
left hand side of the page.
4. (Advanced) Access the company's Filing on Form 8-K--dated March
30, 2013, and filed on April 1, 2013--on which this article is based,
available on the SEC's web site at
http://www.sec.gov/Archives/edgar/data/1318605/000119312513135229/d514482dex991.htm
What is the basis for the improved financial performance to be reported for
the upcoming quarter?
5. (Advanced) The 8-K filing contains the words, "as a result,
Tesla is amending its Q1 guidance to full profitability, both GAAP and
non-GAAP." What is management guidance? What are GAAP earnings versus
non-GAAP earnings?
6. (Introductory) Why do you think that management reported this
guidance as soon as the number of vehicles sold indicated that the company
would do better than break-even? Why not just wait until the quarterly
report for the 3 months ended March 31, 2013, is reported very soon?
7. (Advanced) What are pollution tax credits? What is the
significance of this portion of the company's operations? Hint: to
understand the company's earning and sale of California state and U.S.
Federal pollution control credits, return to the Form 10-K and review the
Summary of Significant Accounting Policies related to revenue recognition.
Reviewed By: Judy Beckman, University of Rhode Island
"Tesla Sees First-Ever Quarterly Profit," by: Mike Ramsey and Tess Stynes,
The Wall Street Journal, April 2, 2013 ---
http://online.wsj.com/article/SB10001424127887323611604578396313231119032.html
Tesla Motors Inc. TSLA -0.90% said it would report
a first-quarter profit, sending the luxury electric-car maker's shares
surging 16% on Monday.
The Palo Alto, Calif., maker of $70,000 vehicles
lifted its forecast for the quarter after delivering more Model S electric
vehicles than it previously forecast. Tesla has a backlog of 15,000 orders
and books revenue for the vehicles as soon as they are shipped to customers.
The company, which has reported a loss every
quarter since it went public in 2010, said its Model S deliveries reached
more than 4,750 vehicles in the first quarter, compared with Tesla's
February outlook for 4,500 cars.
In 4 p.m. Nasdaq Stock Market NDAQ +0.47% trading,
Tesla shares finished up $6.04 at $43.93. Corporate Intelligence
Tesla Says It Will Turn a Profit, No Fooling
Analysts polled by Thomson Reuters had projected a
first-quarter loss of seven cents a share for Tesla.
The disclosure, made late Sunday, came a few days
after Chief Executive Officer Elon Musk had used Twitter to foreshadow news
coming from the Silicon Valley car maker.
"I am incredibly proud of the Tesla team for their
outstanding work. There have been many car startups over the past several
decades, but profitability is what makes a company real. Tesla is here to
stay and keep fighting for the electric car revolution," Mr. Musk said in a
statement.
A Tesla representative said the profit forecast
wasn't the big announcement that Mr. Musk alluded to, and later added the
company would make an announcement on Tuesday.
In a message posted last week on Twitter, Mr. Musk
said a "really exciting" bit of news was to come and that he was going to
"put my money where my mouth is in v[ery] major way." He later said he had
to delay the announcement so as not to create any end-of-quarter
distractions.
The profit forecast for Tesla comes at a critical
time as investors had been waiting to see if the company could ever move
beyond the startup stage in an industry where even long-established giants
have struggled to compete.
Tesla also said it would no longer offer the
40-kilowatt-hour battery pack with the Model S. That option, which allowed
buyers to buy a car that cost around $60,000, is being discontinued because
of lack of demand. The smaller battery pack offered an estimated range of
160 miles, compared with 230 miles for the 60 kWh version.
The 60 kWh Model S, the next largest battery size,
starts at just under $70,000. Buyers may be eligible for a $7,500 federal
tax credit for a vehicle's purchase.
Tesla said it would give customers who ordered the
smaller pack a 60 kWh model, but limit its range electronically, unless they
choose to pay for the upgrade.
Tesla last month said in regulatory filings that it
shortened its $465 million loan term by nearly five years.
Last year, the company booked $40.5 million for
selling pollution tax credits to other auto makers, an amount that equaled
almost 10% of its total annual revenue. Higher sales this year would
generate more credits and could be a significant source of earnings.
Continued in article
Also see the take on this topic in MIT's Technology Review
"Why Tesla Survived and Fisker Won’t," by Kevin Bullis, MIT's Technology
Review, April 4, 2013 ---
http://www.technologyreview.com/news/513151/why-tesla-survived-and-fisker-wont/
Jensen Comment
Two things that really bug me about virtually all articles about electric cars.
- The articles never discuss the cost to the car owner and the costs to
society for recharging the batteries. A considerable amount of electricity
is required to recharge the Tesla and Fisker cars. But the articles never
investigate those costs.
- The Teslas and Fisker electric cars are probably the worst decisions in
terms of cost per mile after the luxury-car purchase prices and recharging
power bills are spread over the miles driven.
It's important the companies like Tesla are continuing to conduct R&D, but
don't expect the buyers of such cars in the near future to be buying them
because of what they save relative to conventional cars.
The Japanese are getting out of all-electric cars until they make more sense
to the general public. Much of their hopes ride on fuel cell discoveries of the
future --- especially hydrogen fuel cells.
"7 states where residents don't pay income tax," NBC News,
March 31, 2013 ---
http://www.nbcnews.com/business/7-states-where-residents-dont-pay-income-tax-1C9085090?ocid=twitter
Jensen Comment
New Hampshire is not on the list even though it does not tax wages, salaries,
retirement incomes, tips, etc. But it has a somewhat nuisance "Interest and
Dividends Tax" beyond an exemption threshold that, if I'm not mistaken, is
$5,000. It does not tax such items that are buried in retirement income. I let
Turbo Tax compute the amount I owe without paying too much attention to details.
But New Hampshire more significantly has no sales tax such that
residents of states like Texas, Florida, Nevada, South Dakota, Washington, and
Wyoming with sales taxes may not come out as far ahead as they think relative to
New Hampshire.
The above article has some interesting details that are worth noting. For
example, tax collections and spending per capita are listed for the seven states
featured in the article.
What states have no individual or corporate income taxes?
Hint: Antelope run free even if they own corporations.
April 3, 2013 message from Neal Hannon
There is a wealth of accounting hidden just below
the surface in XBRL. In my latest article published today on the Hitachi
blog
http://bit.ly/10yJMLf I explore how to use free
XBRL online software tools to find answers to today's financial accounting
questions. Zane's ASKaRef tool is briefly reviewed in the article. I also
feature FASB's Louis Matherne talking about implementation guides. Enjoy!
"Say It With Me: Correlation ≠ Causation," by Invictus, Ritholtz
Blog, March 31, 2013 ---
http://www.ritholtz.com/blog/2013/03/say-it-with-me-correlation-%E2%89%A0-causation/
Jensen Comment
In his liberal zeal Barry Ritholtz commits the same misleading cherry picking
analysis while pointing a finger at conservatives. For example, when it
comes to blaming climate instead of state income taxes for flows of businesses
to blue states from red states Barry selectively cherry picks "climate" data in
his table. Granted that his "cold" red-state places the average temperatures are
really lower in Cleveland, Detroit, Buffalo, Providence, and Rochester.
But why did Barry selectively leave out average temperatures in most cities
in California where some city migrations to blue state cities have been as much
or more than from the five red-state cities above? California is
complicated, however, because it is one of the more conservative states in terms
of worker unemployment compensation taxes and benefits.
Why did he not analyze why Indiana is stealing jobs from Illinois or why
high-tax Illinois is heavily subsidizing large employers like Caterpillar and
Sears to stay in Illinois?
Obviously correlation is not causation, but don't suggest this too loudly to
referees of The Accounting Review ---
An enormous problem with accountics science, and finance in general, is
that these sciences largely confine themselves to databases where it's only
possible to establish correlations and not causes, because zero causal
information is contained in the big databases they purchase rather than collect
themselves ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf
A factor to consider is quality of the work force apart from climate and income
taxes. For example, Boston is a city that has not suffered nearly as badly as
most other red-state cities losing jobs to blue-state cities. One reason is the
historic highest quality universities and technical schools in the Boston
metropolitan area. High tech firms seek out Boston in great measure because
there are skilled workers not available in many of the blue-state cities.
The fact is that business migration is caused by a number of interactive
factors including tax incentives and climate but not limited to such factors.
High tax states in cold climates offset such barriers with subsidies (tax
credits, free land, zero-interest lending, etc.).
Also not mentioned by Barry is the one-ton gorilla of union activism,
especially in red-states. If Wisconsin, Maine, Massachusetts, Michigan, and
Illinois dropped state income taxes they still might not steal a whopping number
jobs from Texas apart from climate and tax considerations. This purportedly why
militant unions are loosing some, certainly not all, their political clout in
states like Wisconsin and Michigan.
Derek Jeter ---
http://en.wikipedia.org/wiki/Derek_Jeter
Derek Jeter establishes Florida residency to avoid N.Y. taxes ---
Click Here
http://www.smartbrief.com/news/cpa/storyDetails.jsp?issueid=4C242192-DF4A-4AC8-A117-83A8E669BF92©id=7130F57E-86D4-4407-89A2-DD8BABDD1CD5&sid=a2a2cb80-d593-4abd-a32d-06da951fad0a&brief=cpa
"Five Really Dumb Money Moves You've Got to Avoid (Jensen does not
agree)," by Brett Arends, The Wall Street Journal, March 31, 2013 ---
http://online.wsj.com/article/SB10001424127887324789504578384610026843812.html
1. Reaching for yield
2. Going into the poor house to send Junior to a country-club college
3. Owning stock in your employer
4. Taking Social Security too early
5. Buying long-term bonds
You know the smartest things to do with your money.
But what are the worst moves? What should you avoid?
Weirdly enough, they are things that a surprising
number of people are still doing—even though they probably know, in their
heart of hearts, how foolish they really are.
Any list is going to be incomplete. But here are
five to avoid.
1. Reaching for yield
What this country needs is a good 5% certificate of
deposit. Instead the collapse in interest rates, and the Federal Reserve's
policy of keeping them down for as long as possible, is driving people
crazy—especially people who need to generate income from their investments.
In these circumstances, people start to do really
foolish things in the desperate hunt for higher interest rates. That
includes taking on crazy amounts of risk, or investing in complex products
they don't understand, in the hope of higher yields. The Fed is producing a
bull market in scams, Ponzi schemes and associated rackets.
The Securities and Exchange Commission recently
warned about an epidemic of bogus high-yield "corporate promissory notes"
being marketed to investors by scam artists.
The Wall Street Journal's Jason Zweig highlighted
the woes of those sold complex "reverse convertibles," a legal but
complicated product with embedded risks. Eric Lewis, chief investment
officer of Bedrock Capital Management in Los Altos, Calif., suggests that if
you can't explain an investment to a friend, including what might go wrong,
you should think twice.
A high-yield bond fund such as the iShares High
Yield Corporate Bond exchange-traded fund (HYG), which lends money to risky
companies, sports a yield of about 5%. That's the maximum yield you can earn
without taking on much more risk.
2. Going into the poor house to send Junior to a
country-club college
Over the past 40 years, the cost of tuition and
fees at a private university has tripled—after accounting for inflation. The
cost of a public university has quadrupled.
The cost of getting a bachelor's degree has become
a scandal in this country. Students spend $160,000 on a four-year degree and
the results are too often questionable.
Financial planners strongly advise parents against
plundering their own retirement savings, which they are likely to need, to
pay for this.
Admittedly, a degree has become a protection
racket—you can't get a job without one, but there are fewer jobs for those
with them. But the smart move for the budget-constrained is to get a
bachelor's degree at a public university. The tuition and fees average less
than $9,000 a year instead of $30,000 at a private college.
3. Owning stock in your employer
This is one of the silliest and riskiest moves any
investor can make. If the company hits trouble, you get whacked twice. You
can lose your job and your savings—all in one fell swoop. Ask anyone who
worked for Enron…or Lehman Brothers.
The law, amazingly, actually encourages this crazy
move. While employers' 401(k) plans are subject to punitive regulations,
lest they allow you to take on too much "risk," employers are allowed to
offer their own stock among the investment options. Many do.
The Employee Benefit Research Institute says that
the percentage of 401(k) assets held in employers' stock has been halved
since 2000, but the numbers are still alarming. Furthermore, it's the
youngest workers—those best able to take a gamble—who are shunning their
employers' company stock.
At companies where the 401(k) plan offers the
option, workers aged 40 or over typically hold about 20% of their entire
401(k) account in the company's stock, according to EBRI data. Crazy.
4. Taking Social Security too early
If you can afford to delay taking your Social
Security retirement benefit, do.
Someone earning $50,000 a year who starts claiming
Social Security as soon as he or she is able, age 62, will typically collect
a monthly check of about $1,000, according to the Social Security
Administration. If they wait until they are 70, that amount would double.
Taking Social Security too early, or without
thinking through the consequences, is one of the biggest financial blunders
people can make—roughly on a par with buying tech stocks in 2000 or a Las
Vegas condo in 2006. The lure of getting money early can blind people to the
big cost down the road.
(Many retirees may not have much of a choice. Hard
labor at low pay over a lifetime takes its toll on a person. Also, many
companies all but force older workers into early retirements.)
In any case, it doesn't take more than just a few
years before the total money accrued with the higher, later benefits
surpasses the total earned starting at the earlier retirement age.
But that understates the bigger issue. Social
Security is insurance. For many retirees, the big risk isn't that they will
run out of money before they turn 70, but after 85. According to the Centers
for Disease Control, more than half of women currently age 65 will live to
85 or longer, and three out of eight men.
David Blanchett, head of retirement research for
financial research firm Morningstar, says it makes sense for women, married
couples and those with good health to wait longer for a bigger paycheck.
5. Buying long-term bonds
A surprising number of people still subscribe to
the flawed and circular argument that bonds, including long-term government
bonds, are "safe." In reality, bonds—especially long-term government
bonds—are the rare example of a bubble that has been explicitly declared.
Continued in article
Jensen Comment
Owning stock in your employer ---
In some cases Arends is overly influenced by outliers like Enron. For example,
owning stock in your employer after the fact was unfortunate if your employer
went bankrupt. However, I don't think many employees of Apple, Microsoft,
Intel, GE, Exxon, etc. made bad decisions by owning stock in their employers.
You should, however, have some diversification in your portfolio.
Spending Too Much on an Expensive Private School
I agree with Arends about spending too much for your kid to go to an expensive
private university like Northwestern as an undergraduate, including
private universities that are not in the Ivy League. If your kid is a great
student who can compete in places like Ohio State University, Texas A&M, the
University of Illinois, Texas Tech, UC Berkeley, etc. --- save your own money
and minimize student loans until your high-performing child is ready for a
very elite graduate school. Then spend as much as you can and fill in with
student loans for this child to go to an elite graduate school like Harvard,
Chicago, Wharton, Dartmouth, Stanford, Northwestern, USC, etc.
I think you should invest in your promising college senior now rather
than before or save it up for her or him when you die at age 88 and the "kid" is
66 years of age.
If your high school senior is less likely to perform well in an
undergraduate college program at a reputable and competitive state university,
then think about coming up with what it takes to get into the best undergraduate
private school you can afford (with student loans) since grades are easier to
obtain in nearly all of those private colleges and universities ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GamingForGrades
Of course if having your high school graduate
interacting with certain religion-affiliated college students is most important
to you, then by all means spend more on that private religious college. I can
see why a devout Mormon family would shoot for Brigham Young University or a
strong Catholic family might shoot for a quality Catholic college. I can
understand when a Jewish family prefers Brandeis University. There are many,
many college students who meet and marry shortly after graduating from college.
I agree about taking Social Security early ---
don't do it unless you're a multimillionaire.
I don't agree with avoiding long-term bonds in all cases ---
Much depends upon your age and the types of bonds. As you grow older and have a
relatively large nest egg, you become less worried about inflation. For example,
suppose you are getting a divorce in 2013 from a spouse who is the primary bread
winner as a professor. If you are 42 years old and receive half of the TIAA-CREF
accumulation in the divorce settlement, avoid the buying lifetime fixed annuity
options in TIAA. Inflation will eat you alive if you live beyond your life
expectancy (now over 80 for a man or a woman).
On the otherhand, if you're 67 years old at the time of the divorce
settlement, inflation becomes somewhat less of a concern. Much depends upon your
health and other sources of income such as prospects of remarriage.
When I retired in 2006 I purchased lifetime fixed annuities for my wife and
myself. And then I put nearly all of our remaining discretionary savings into an
insured long-term tax-exempt bond fund from Vanguard. I've not regretted these
decisions for an instant since I retired. Both of these investments weathered
the 2007 economic crash like the Rock of Gibraltar. Returns from our lifetime
annuities will never vary, although our fixed annuity returns negotiated in 2006
are higher than can be negotiate from TIAA in 2013. Thank the Quantitative
Easing policy of the Fed for the unfortunate low interest rate alternatives on
safe lifetime savings.
Returns in our long-term tax exempt bond fund remain relatively high because
this is a long-term bond fund. Inflation would kill us if we were
younger. But since we are both over seventy years of age, we're less worried
about inflation and enjoy our comfortable-living monthly cash flows that are tax
exempt. I don't much care how the values of our shares in the tax-exempt fund
fluctuate since I don't intend to cash in on anything except parts of the annual
cash yield on those shares.
My point is that all investors should not avoid long-term bond funds as
Arends advises. Only some, primarily younger investors, should maybe ipso
facto avoid such long-term bond funds. But keep in mind that bond prices in
general are negatively correlated with interest rates. When interest rates are
very low, like now, bond prices are relatively high. Arends has a point here!
The bond prices were better in 2006 when I retired, but things become confounded
by risk.
Tax exempt bonds in general are higher risk than AAA corporate bonds, which
is why I prefer to invest in a very huge and diversified fund of tax exempt
bonds that can weather the storm of unavoidable bankruptcies in some
municipalities and school districts. There is also some risk that tax reform
will reduce some of the benefits of tax exempt investments. For example, the
degree of tax exemption might eventually be tied to adjusted gross income such
that there's tax reform risk of having a very, very high proportion of your
annual income being tax exempt.
Reaching for yield is probably a bad choice ---
unless you either are well protected against inflation in other parts or your
portfolio or put those cash earnings to work into some very promising
investments. For example, if you're land poor because you own real estate that
significantly takes as much or more for property taxes than it pays in cash
annually then I say go for some yield in your portfolio. Your real estate will
most likely counter inflation over the long haul so you need not deprive
yourself of the cash needed to pay your property taxes and some first-class
accommodations on cruises to scenic places.
"A More Complicated — and More Dangerous — Fear," by jcoumarianos,
Institutional Imperative, March 30, 2013 ---
http://www.institutionalimperative.com/2013/03/30/a-more-subtle-and-more-dangerous-fear/
When people talk about “fear and greed” in the
markets, they usually mean fear of loss by “fear.” However, often a stronger
fear is fear is missing upside. Listen to
Jeremy Grantham talk about how many clients he
lost in the late 1990s for his conservative posture, or note that
Steve Romick lost 90%
of his investors during the same period for his, and you’ll understand that
more subtle, but no less insidious, portfolio-damaging, fear. This is a kind
of strange fear mixed with, not opposed to, greed.
It turns out, investors tolerate losses reasonably
well as long as everyone else is losing. It’s kind of the investment version
of misery loves company. Lose your clients’ money when everyone else is
losing, and you’ll very likely keep your job. Lag a roaring market, however,
and you’ll get dropped in a hurry.
This weekend the WSJ has
a story about a couple, both physicians, who have
re-entered the market after losing half their savings in the crash of
2008-2009, and parking their money in a bank account until now. The article
notes
[t]his week, as the Dow Jones Industrial
Average and Standard and Poor’s 500-stock index pushed to record highs,
Ms. White and her husband hired a financial adviser and took the plunge
back into the market.
The following graph shows what the physician couple
missed by selling stock and moving to a bank account at the market’s nadir.
Continued in article
April 9, 2013 message from Ruth Bender
I thoughts some of you might be interested in some of the material below,
which comes from a Symposium from the UK’s Higher Education Academy.
The site is
http://blogs.heacademy.ac.uk/social-sciences/2013/03/21/teaching-developments-in-finance-and-accounting/
Regards
Ruth
______________________________
Dr Ruth Bender
Reader in Corporate Financial Strategy
Cranfield School of Management
Tel:
+44 (0) 1234 751122 ext 3183
http://www.cranfield.ac.uk/som
www.Twitter.com/Ruth999
Winchester Business School hosted the first symposium of the Higher
Education Academy’s Social Science Workshop series on teaching developments
in finance and accounting. It consisted of three sessions each considering
the findings of three HEA funded projects completed by University of
Winchester academics and aimed at providing best practice guidelines for
dissemination across the sector.
Best practice in Using Simulation Games in Finance Education aimed
to obtain a snapshot of current usage of finance related simulation games in
UK higher education, investigating the curriculum design issues involved,
identifying any barriers to simulation use and how they may be overcome. The
report gives an overview of key finance simulations for classroom use and
provides a best practice guideline on how to best select, set-up, use and
assess performance on financial simulation games for either undergraduate or
postgraduate finance modules.
This report is available via:
www.heacademy.ac.uk/assets/documents/disciplines/social-sciences/Blog/simulations_finance.pdf
Best practice in Teaching Ethics in UK Accounting Programmes
project aimed to develop a best practice guideline document on
the teaching of ethics in accounting education. The report reviews the
literature on teaching ethics in business and accounting with a particular
focus on evidence of good practice, what should be taught, how it should be
taught (methods, approach, as stand-alone or embedded, etc), expected
learning outcomes, and means to assess learning. The report presents a
snapshot of current practice in teaching ethics in Accountancy programmes in
the UK, including curriculum content, methods of teaching, where it is
placed in the curriculum, and means of assessing learning outcomes. The
report investigates the curriculum design issues involved in the embedding
ethics education into the Accountancy curriculum and how to address these
issues. This report is available via:
www.heacademy.ac.uk//assets/documents/disciplines/social-sciences/Blog/Ethics_in_accounting_report.pdf
Obtaining a snapshot of current usage of ICT for assessment and feedback
on undergraduate accounting modules in UK higher education was the aim of
the Best practice in the use of ICT for Assessment
and Feedback project. The report identifies the
barriers and problems with the use of ICT for assessment and feedback and
how they may be overcome, investigates students’ perceptions and attitude to
the use of ICT for assessment and feedback using a case study approach and
provides a best practice guideline document on how to use ICT for assessment
and feedback on accounting modules at undergraduate level. This report is
available via:
www.heacademy.ac.uk/assets/documents/disciplines/social-sciences/Blog/ict_in_assessmentandfeedback.pdf
Presentations
Siew Min (Amy) Tan and Neil Marriott presented their work on the use of
simulations to teach finance (presentation can be accessed via
www.heacademy.ac.uk/assets/documents/disciplines/social-sciences/Blog/MarriotandTan.ppt)
Paul Jennings discussed the integration of ethics into undergraduate
accounting programmes (presentation can be accessed via
www.heacademy.ac.uk/assets/documents/disciplines/social-sciences/Blog/Teaching_Ethics_Accounting.pdf
)
Lim Keong Teoh and Pru Marriott disseminated their work relating to
on-line assessment and feedback in accounting (presentation can be accessed
via
www.heacademy.ac.uk/assets/documents/disciplines/social-sciences/Blog/MarriottandTeoh.ppt)
The event was organised and hosted by Pru Marriott, Head of Department of
Accounting, Economics and Finance, who was delighted to see over 40
delegates from across the UK and Ireland including academics from Exeter,
Loughborough, Royal Holloway, Sheffield, Southampton and Waterford come to
listen to the innovative pedagogic work of colleagues from her department.
Pru was also pleased to see representatives from three of the UK’s
professional accounting bodies indicating that the research has wide appeal
and is of relevance to both academics and practitioners.
Lyn Vos, HEA Discipline Lead for Accounting and Finance, was very
impressed with the level of attendance and indicated the need for more
events in these areas.
Pru and Lim’s work was recently published in the December edition of
Accounting Education: an international journal, the official journal of
the International Association for Accounting Education and Research based in
New York. Amy, Neil and Paul intend to submit their work to forthcoming
specialist academic conferences and journals.
Discussion
The authors are keen to develop their research and would welcome
comments, suggestions or possible collaboration opportunities with academics
across the UK.
Ruth
Bob Jensen's threads on education technology ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm
City Government Fraud and Incompetence: The Rule Rather Than the
Exception
"Stockton, CA Filing Bankruptcy," by Ann-Marie Murrell, Townhall,
April 2, 2013 ---
http://finance.townhall.com/columnists/ann-mariemurrell/2013/04/02/way-to-go-unions--stockton-ca-filing-bankruptcy-n1555096?utm_source=thdaily&utm_medium=email&utm_campaign=nl
. . .
“In the 1990s,” Miller said, “Stockton granted its
employees some of the most generous and unsustainable labor contracts in the
State of California... Safety employees could now retire at the age of
50...Many safety retirees today earn 90 to 100 percent of what they made
when they were still on the job.”
Miller also talked about the city granting things
like “unlimited vacation and sick time” that could be “cashed out when an
employee retired” and “Lamborghini” style health plans.
Other outrageous expenditures have been coming out
of Stockton for years. From
StocktonFireFacts.com, here are the top 10 boondoggles:
1. City Council spent $48 Million to
purchase a new City Hall building for itself. That’s just the
purchase price and the cost to pay Wall Street to BORROW the money necessary
for the new governmental palace. The total cost of the building after all
the interest is calculated? We don’t know and the City Council never asked.
City Hall Report & Bond Documents
2. $33 Million settlement with Howard
Jarivs Taxpayers Association due to the City illegally using Water Utility
fees to fund the construction of the Stockton Events Center.
• City
Repayment Schedule?•
Stockton Record Article
3. $22 million sunk into money losing
Downtown Marina and has racked up $700,000 in annual operating cost losses.
During the height of a City budget crisis, the Stockton City
Council sunk $22 million into building a new downtown marina and then due to
underestimating the costs, needed to add another $2.3 million to the bill.
City bureaucrats estimated that the marina would lose $100,000 a year. The
actual figure has balloned to $700,000 in losses a year.
Rising tide of red ink | Recordnet.com
Dry Dock Expenditure
4. Paid $1.25 million over the
independent appraisal value for a piece of property owned by a former
councilmember. The site was supposed to be used for a new fire
station, which even the Stockton Fire Department stated it didn’t want. The
Stockton Record’s Editorial Board urged the Council to reject the deal,
stating, “the city shouldn’t be dopey. It should pay no more than the
appraised value.” Unfortunately, Dopey won at that Council meeting. The
Council this year scrapped plans for the fire station, meaning that $2.75
million taxpayer funds have been wasted.
You can view the property here.
• Stockton ponders $2.75M land deal highlighted?•
White editorial?•
Council slashes program funding | Recordnet.com
5. $4 million legal settlement because
the City failed to maintain our sewer system, causing too many sewage spills
and violating the Federal Clean Water Act.
• Cal Tax Article?•
Stockton to Pay $4 Million in Sewer Spill Settlement?•
California Sportfishing Protection Alliance Settlement
6. $7 million loss at entertainment
venues (Stockton Arena, Stockton Ballpark, Bob Hope Theater, etc.)
subsidized by the City General Fund—which pays for firefighters and
police officers
•
Stockton Venue continue a troubling trading for taxpayers | Recordnet.com
7. $25,000 to clean up elephant dung
at the Stockton Arena.We’d write more, but why?
• Cal Tax Article
8. $205,000 settlement for City’s
failure to meet Americans with Disabilities Act requirements within the
city. Note that in addition to the settlement, money needed to be
spent to bring facilities into compliance. We do not have that total
•
ADA Settlement Agreement
9. $200,000 settlement with the
Building Industry Association of the Delta due to City improperly using
development fees to pay for General Fund services.
•
BIA Settlements?•
BIA Settlements article
10. $400,000 settlement with the San
Joaquin Hotel & Motel Property Owner’s Association for devaluing property
prior to the City attempting to purchase them.
None of this is anything new, and sadly none of it
is surprising. For years now, California’s state priorities have been all
about satisfying unions and union workers at the expense of students and
taxpayers. Of course, anyone who regularly listens to KFI’s
Jon and Ken Show in
Los Angeles knew this was going to happen, and the only real
surprise is that more California cities haven’t already gone belly-up.
However, Stockton probably won’t be alone for very long; many are predicting
that other cities have been waiting for someone to be the first ‘fall guy’
and more bankruptcy proceedings will almost certainly follow suit.
The thing Stockton (and Bell and others) never seem
to figure out is that promising insane, out-of-control “forever pensions” to
anyone who works in a public capacity is impossible to maintain. You’d also
think that parents of public school students would be a little curious as to
why they
have had to dip into their own pockets to buy
things like books and lab equipment when the average (union) California
teacher makes around $83,000 (total compensation, according to
Salary.com)
Continued in article
Jensen Comment
The sad thing is nobody will be held accountable for this fraud. Sadly such
frauds became the rule rather than the exception in city governments across the
USA where kickbacks are a way of doing business.
The Sad State of Government Accounting and Accountability ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Question
Does a half gallon of milk cost society $200 when externalities are partly taken
into account?
Or is the net benefit $$500 per carton when externalities are fully taken into
account?
"Financial Accounting’s Relevance Lost," by Tom Selling, The
Accounting Onion, March 31, 2013 ---
http://accountingonion.com/2013/03/financial-accountings-relevance-lost.html
. . .
But, more to the point, the above statement from
Brooks struck the nerve that got my accounting juices flowing. Double-entry
accounting was a great technological advancement when it was conceived
however many centuries ago that was. Further advances in technology have
reduced costs associated with financial reporting, but other costs have
increased because needed ‘rationalization of social institutions’ has been
hindered by “dysfunctional political squabbles.”
For example, in her popular book on the history of
accounting, Jane Gleesen-White cited research claiming that when
externalities are taken fully into account, McDonald’s consumes $200 worth
of resources in order to produce one Big Mac.
Yikes! I know what your thinking — two hundred
bucks? Let’s just say that the full, full cost of a Big Mac is merely $10.
That’s still an astounding number. Accounting by the Corporation is not
the Same as Accounting for the Corporation Although the problem of
accounting for externalities has always existed, it had been less
significant than a flea on a horse’s hindquarter until about one hundred
years ago. That corporations—a social institution designed to promote
large-scale investments—would consume so much without accounting for that
consumption is surely an unintended consequence of its establishment in the
law. When resource consumption is portrayed by financial reporting standards
as if it were free—or merely under-costed—corporate decision makers will
inevitably find value-creating projects from the corporation’s standpoint,
even when aggregate costs exceed aggregate benefits.
I’m sure everything I have written to this point
has been a huge understatement; yet no accounting standard setting body has
ever seriously considered any of this. The implicit reasoning goes something
like this: it’s not our job. Accounting standards are largely the creature
of the federal securities laws; which are intended to prevent public
companies from misleading its investors, and to provide information that
puts investors on a level-playing field with respect to available
information. As long as investors get adequate information to value a
company, and not be mislead by unscrupulous management, then let the chips
fall where they may. It is simply not in the job description of the standard
setter to prevent the application of accounting standards to make kings
while destroying families, much less soil the air we breathe, or determine
where the Atlantic Ocean stops and New Jersey begins (a tip of the hat to
Gail Collins for that bit of imagery). I’ll be the first to admit that the
problem of adequately accounting for externalities is hard. My grad school
advisor, the late Tom Burns, once remarked that defining the entity of
account—roughly speaking, drawing the line between events that affect the
corporation and everything else—is the thorniest problem in accounting. I
suppose I should summon up some empathy for accounting standards setters who
haven’t even paid lip service to this problem—but I can’t. I can’t, because
accounting standards setters are richly paid, and they serve at the pleasure
of oligarchs, who require that more attention is paid to their predilections
and ideologies than to the plausibly deniable costs of mis-pricing
resources. We can all recite the litany of problems that have occurred in
our generation alone, and precisely identify who has benefitted while most
everyone else has lost: treating stock options granted to employees as if
there is no cost to other shareholders; not recognizing the implications on
pension plans (private and governmental) when assets fail to grow as hoped;
or misrepresenting the economics of banks and the loans they make. Trust me,
I can think of many more.
Jensen Comment
There are two major defects of bookkeeping in both socialist and capitalists
enterprises.
- We don't know how to book many types of "assets" and "expenses" of the
enterprise such as the value of unbooked human resources and externalities
such as the impact of the enterprise's operations on other segments of
society such as the cost of air pollution on the health and life expectancy
of people downwind of a manufacturing plant. Air pollution, water pollution,
etc. are expenses just cannot be measured because the impacts are so
widespread and undertain with primary and higher order effects that just
cannot be measured.
- We don't know how to book many types of "liabilities" and "revenues" of
the enterprise such as unknown health hazards (at the time of production) of
products and services and the unknown values of research and development
discoveries at the time they are discovered.
Tom mentions that a Big Mac might cost $200 in terms of societal direct costs
plus externalities. But nearly everything else humans eat costs much more in
externalities. Since dairy cows pollute the air and water about the same as beef
cows, perhaps a carton of mild also costs $200. An ear of corn might cost $100.
A bowl of oatmeal might cost $150.
But this ignores the societal benefits of eating. Because our children get
oatmeal, corn, Big Macs, etc. they grow and mature to produce a lifetime of
labor to society such that their net benefits of societal revenues may exceed
societal costs by $1 million or more dollars.
It is naive to blame all externalities on business/capitalism since we know
that in any type of economy there are costs of survival, costs of corruption,
etc.
Tom picks on the faults of IASB and FASB accounting standard setters. But in
terms of accounting and accountability standards I contend that there are even
bigger faults in the setting of accountability standards in the public sector
where worldwide corruption is rampant.
Having said this, I might add that financial accounting reports are lost a
lot of their predictive power?
"Investors Beware: Corporate Financial Statements Decline in Predictive
Value ," by Bill Snyder, Stanford Graduate School of Business, March 22,
2013 ---
Click Here
http://www.gsb.stanford.edu/news/research/investors-beware-corporate-financial-statements-decline-predictive-value?utm_source=Stanford+Business+Re%3AThink&utm_campaign=eeb27543e5-Stanford_Business_Re_Think_Issue_Ten3_22_2013&utm_medium=email&ct=t%28Stanford_Business_Re_Think_Issue_Ten3_22_2013%29
Over time, financial statements of public
corporations show more losses, intangibles, and earnings restatements, which
lower their value for predicting corporate bankruptcies.
Corporate bankruptcies, like earthquakes, are rare
events. But when they do occur, says
Maureen
F. McNichols of Stanford's Graduate School of
Business, the results can be financially devastating for investors and other
stakeholders.
An important role of financial statement
information is to permit investors to assess the likely timing and amount of
future cash flows. Recent research by McNichols and coauthors examines the
usefulness of financial statement and market data for investors who want to
ascertain the likelihood of bankruptcy. The results of that research are not
completely reassuring.
The authors — McNichols, Marriner S. Eccles
Professor of Public and Private Management;
William
H. Beaver, Joan E. Horngren Professor of
Accounting, Emeritus, at the Graduate School of Business; and
Maria Correia,
assistant professor of accounting at the London Business School — examined
40 years of financial data garnered from thousands of public corporations.
They analyzed key financial ratios, such as return on assets and leverage,
reported in filings to the
U.S. Securities and Exchange Commission, and market-related data such as
market capitalization and stock returns. Over the period they examined —
1962 to 2002 — the data became significantly less useful in predicting
bankruptcy. "Investors should be concerned and aware of this when they
assess bankruptcy risk," McNichols says.
A professor of accounting, McNichols is quick to add that financial
statement data are still highly relevant. Of the firms she and her
colleagues studied, about 1% fell into bankruptcy, and despite the
deterioration in financial-statement usefulness, financial ratios and market
data are still important tools for predicting insolvency, she says.
Nonetheless, the results are concerning enough that McNichols believes
that regulators and standards setters such as the U.S. Securities and
Exchange Commission and the
Financial Accounting
Standards Board should be aware of this issue.
Three major factors muddy the waters for investors
attempting to predict bankruptcy, the researchers found:
- Over the sample period, there is increasing
evidence that management exercises discretion over financial reporting,
and that there have been increasing numbers of restatements because the
financial statements were materially misleading. "Our findings indicate
that the manipulation of reported results gives a misleading impression
of profitability and reduces investors' ability to predict bankruptcy,"
notes Correia. For example, firms recognizing revenue ahead of schedule
or fraudulently may appear profitable. As a result, the bankruptcy
prediction model is much less likely to classify bankrupt firms that
also restated earnings accurately, assigning lower risk due to their
overstated earnings.
- Many firms, particularly the technology
companies listed on the
NASDAQ exchange,
are heavy spenders on research and development. R&D in itself is
certainly not a cause for concern, but because this "intangible" is not
recognized on the balance sheet, it makes various financial ratios and
data less useful.
- The frequency of firms reporting losses has
increased substantially over the past 40 years. Because predicting
future earnings for firms that suffer losses involves substantially
greater uncertainty than for firms that are profitable, the bankruptcy
prediction model is less likely to accurately classify loss firms that
will go bankrupt.
Consider a firm that suffers a loss. The fact that
it has lost money is obviously not good news, but in and of itself a loss
doesn't mean a company will go bankrupt. Losses complicate the financial
picture, the researchers found, because while firms reporting a loss are
more likely to go bankrupt on average, it is harder to predict which loss
firms will do so relative to firms earning a profit.
Continued in article
Jensen Comment
Until the 1990s net earnings showed a surprising predictive power in empirical
capital market studies. I say "surprising" in the sense that we all knew
historical cost earnings based upon many arbitrary assumptions in accrual
accounting such as depreciation, amortization, and bad debt estimation.
Although net earnings was never defined very well in the old days, the FASB
and IASB pretty well destroyed any remaining definition as fair value
accounting, goodwill impairment, and many other components of earnings took away
any remaining meaning of bottom-line net earnings. The biggest bomb, in my
opinion, was the combining of unrealized fair value changes with realized
revenues on contracts.
Solution 1
There are two solutions in my viewpoint. One is to require multi-column
reporting along the lines advocated in
"Academic Research and Standard-Setting: The Case of Other
Comprehensive Income," by Lynn L. Rees and Philip B. Shane, Accounting
Horizons, December 2012, Vol. 26, No. 4, pp. 789-815. ---
http://aaajournals.org/doi/full/10.2308/acch-50237
In particular note Table 2 at
http://www.cs.trinity.edu/~rjensen/temp/ReesShane2012Table3.jpg
Solution 2
The other solution is to stop reporting bottom line net earnings as reported in
http://www.trinity.edu/rjensen/Theory01.htm#ChangesOnTheWay
Solution 3
Pray hard that the IASB and FASB will one day define "net earnings" in a way
that it will have predictive value. That prayer has about as much hope as
praying for world peace or a balanced Federal Budget in Washington DC.
None of the above approaches necessarily will automatically improve the
predictive value of financial statements. Our hope is that in both solutions
financial analysts will be forced to perform deeper analysis rather than simply
track bottom line net earnings that has little, if any, predictive value after
the FASB and IASB screwed it up.
"
Ball and Brown and the Usefulness of EPS." by Robert Lipe,
FASRI, August 9, 2012 ---
http://www.fasri.net/index.php/2012/08/ball-and-brown-and-the-usefulness-of-eps/
At the AAA meeting in
DC, I attended a presidential address by Ray Ball and Phil Brown
regarding their seminal research paper (JAR 1968). They described the
motivation for their study as a test of existing scholarly research that
painted a dim picture of reported earnings. The earlier writers noted
that earnings were based on old information (historical cost) or, worse
yet, a mix of old and new information (mixed attributes). The early
articles concluded that earnings could not be informative, and therefore
major changes to accounting practice where necessary to correct the
problem.
Ball and Brown viewed
this literature as providing a testable hypothesis – market participants
should not be able to use earnings in a profitable manner. Stated
another way, knowing the amount of earnings that would be reported at
the end of the year with certainty could not be used to profitably trade
common stocks at the beginning of the year. Evidence to the contrary
would suggest the null that earnings are non-informative does not hold.
While the methods part
of the paper is probably difficult for recent accounting archivalists to
follow, Ball and Brown produce perhaps the single most famous graph in
the accounting literature. It shows stock returns trending up over the
year for companies that ultimately report increases in earnings and
trending down for companies that report decreases in earnings. Thus they
show that accounting numbers can be informative even if the aggregate
number is not computed using a single unified measurement approach
across transactions/events. Subsequent research would show that numbers
from the income statement have predictive ability for future earnings
and cash flows.
As I sat listening to
these two research icons, I could not help but think about some comments
I have heard recently from a few standard setters and practitioners.
Those individuals express contempt for EPS in a mixed attribute world.
They appear to wish they could jump in a time machine and eliminate per
share computations related to income. I readily admit that EPS does not
explain much of the variance in returns over periods of one year or less
( e.g., Lev, JAR 1989). However the link is clearly significant, and
over longer periods, the R2’s are quite high (Easton, Harris, and Ohlson,
JAE 1992). Can the standard setters make incremental improvements to
increase usefulness of EPS? I sure hope so, and maybe the recent paper
posted by Alex Milburn will help. But dismissing a reported number
because it is not derived from a single consistent measurement attribute
– be it fair value or historical cost – seems to revert back to pre-Ball
and Brown views that are rejected by years of research.
Jensen Comment
Given the balance sheet focus of the FASB and the IASB at the expense of the
income statement I don't see how net income or eps could be anything but
misleading to investors and financial analysts. The biggest hit, in my
opinion, is the way the FASB and IASB create earnings volatility not only
unrealized fair value changes but the utter fiction created by posting fair
value changes that will never ever be realized for held-to-maturity
investments and debt. This was not the case at the time of the seminal Ball
and Brown article. Those were olden days before accounting standards
injected huge doses of fair value fiction in eps numbers so beloved by
investors and analysts.
Sydney Finkelstein, the Steven Roth professor of management at the
Tuck School of Business at Dartmouth College, also pointed out that Bank of
America booked a $2.2 billion gain by increasing the value of Merrill
Lynch’s assets it acquired last quarter to prices that were higher than
Merrill kept them. “Although perfectly legal, this move is also perfectly
delusional, because some day soon these assets will be written down to their
fair value, and it won’t be pretty,” he said
"Bank Profits Appear Out of Thin Air ," by Andrew Ross
Sorkin, The New York Times, April 20, 2009 ---
http://www.nytimes.com/2009/04/21/business/21sorkin.html?_r=1&dbk
This is starting to feel
like amateur hour for aspiring magicians.
Another day, another
attempt by a Wall Street bank to pull a bunny out of the hat, showing
off an earnings report that it hopes will elicit oohs and aahs from the
market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of
America all tried to wow their audiences with what appeared to be —
presto! — better-than-expected numbers.
But in each case,
investors spotted the attempts at sleight of hand, and didn’t buy it for
a second.
With Goldman Sachs, the
disappearing month of December didn’t quite disappear (it changed its
reporting calendar, effectively erasing the impact of a $1.5 billion
loss that month); JPMorgan Chase reported a dazzling profit partly
because the price of its bonds dropped (theoretically, they could retire
them and buy them back at a cheaper price; that’s sort of like saying
you’re richer because the value of your home has dropped); Citigroup
pulled the same trick.
Bank of America sold its
shares in China Construction Bank to book a big one-time profit, but Ken
Lewis heralded the results as “a testament to the value and breadth of
the franchise.”
Sydney
Finkelstein, the Steven Roth professor of management at the Tuck School
of Business at Dartmouth College, also pointed out that Bank of America
booked a $2.2 billion gain by increasing the value of Merrill Lynch’s
assets it acquired last quarter to prices that were higher than Merrill
kept them.
“Although
perfectly legal, this move is also perfectly delusional, because some
day soon these assets will be written down to their fair value, and it
won’t be pretty,” he said.
Investors reacted by
throwing tomatoes. Bank of America’s stock plunged 24 percent, as did
other bank stocks. They’ve had enough.
Why can’t anybody read
the room here? After all the financial wizardry that got the country —
actually, the world — into trouble, why don’t these bankers give their
audience what it seems to crave? Perhaps a bit of simple math that could
fit on the back of an envelope, with no asterisks and no fine print,
might win cheers instead of jeers from the market.
What’s particularly
puzzling is why the banks don’t just try to make some money the
old-fashioned way. After all, earning it, if you could call it that, has
never been easier with a business model sponsored by the federal
government. That’s the one in which Uncle Sam and we taxpayers are
offering the banks dirt-cheap money, which they can turn around and lend
at much higher rates.
“If the federal
government let me borrow money at zero percent interest, and then lend
it out at 4 to 12 percent interest, even I could make a profit,” said
Professor Finkelstein of the Tuck School. “And if a college professor
can make money in banking in 2009, what should we expect from the highly
paid C.E.O.’s that populate corner offices?”
But maybe now the banks
are simply following the lead of Washington, which keeps trotting out
the latest idea for shoring up the financial system.
The latest big idea is
the so-called stress test that is being applied to the banks,
with results expected at the end of this month.
This is playing to a
tough crowd that long ago decided to stop suspending disbelief. If the
stress test is done honestly, it is impossible to believe that some
banks won’t fail. If no bank fails, then what’s the value of the stress
test? To tell us everything is fine, when people know it’s not?
“I can’t think of a
single, positive thing to say about the stress test concept — the
process by which it will be carried out, or outcome it will produce, no
matter what the outcome is,” Thomas K. Brown, an analyst at
Bankstocks.com, wrote. “Nothing good can come of this and, under
certain, non-far-fetched scenarios, it might end up making the banking
system’s problems worse.”
The results of the
stress test could lead to calls for capital for some of the banks. Citi
is mentioned most often as a candidate for more help, but there could be
others.
The expectation, before
Monday at least, was that the government would pump new money into the
banks that needed it most.
But that was before the
government reached into its bag of tricks again. Now Treasury, instead
of putting up new money, is considering swapping its preferred shares in
these banks for common shares.
The benefit to the bank
is that it will have more capital to meet its ratio requirements, and
therefore won’t have to pay a 5 percent dividend to the government. In
the case of Citi, that would save the bank hundreds of millions of
dollars a year.
And — ta da! — it will
miraculously stretch taxpayer dollars without spending a penny more.
Bob Jensen's threads on accounting theory ---
http://www.trinity.edu/rjensen/Theory01.htm
Bob Jensen's threads on controversies in the setting of accounting
standards ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
Bob Jensen's threads on controversies in the setting of accounting
standards ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
April 3, 2013 message from Bob
Jensen
- Hi Tom,
Although I'm inclined to agree
with you about the the decline in quality of financial reporting, but
I'm not as inclined to put as much blame on the accounting standards
setters. Perhaps we've just given standard setters an impossible job.
Much of the blame has to be
placed on the clients themselves along with their lawyers and
accountants who created contracts so filled with contingencies and
incomprehensible clauses that it's impossible to account for them, at
least in our overly simplistic double-entry system of accounting.
There were once thousands and
now ten thousands of types of complicated derivatives contracts,
financial structures, and collateralizations. We require accounting
systems to mark contracts to market when markets are thin and unstable
as morning dew on flower petals in a wind.
I think even you would be
overwhelmed if you were appointed to the IASB or IASB. I know that I
would be dumbfounded in less than a week.
As to externalities, I don't
think we will ever be able to measure the costs and benefits because of
the higher order interactions that befuddle even our best scientists. I
sit up here in the mountains and view first-hand what I think is global
warming. But the scientists who measure temperatures around the world
tell us that temperatures are declining rather than rising. There's ever
so much we don't understand in science, macroeconomics (where we are now
facing complexities we've never seen in the history of the world). and
financial risk contracting that the experts who write the contracts do
not understand.
We bookkeepers clomp around in
worlds where angels fear to tread. We can't even explain why financial
statements lost predictive ability since the 1970s.
Respectfully,
Bob Jensen
Teaching Case
From The Wall Street Journal Accounting Weekly Review on April 5, 2013
Regulators Let Big Banks Look Safer Than They Are
by:
Sheila Bair
Apr 02, 2013
Click here to view the full article on WSJ.com
TOPICS: Banking, Derivatives, Fair-Value Accounting Rules,
Investments, Regulation
SUMMARY: The point of this opinion page piece by the former
chairman of the FDIC is that "capital-ratio rules...[lead to the view that]
fully collateralized loans are considered riskier than derivatives
positions.... The recent Senate report on the J.P. Morgan Chase 'London
Whale' trading debacle revealed emails, telephone conversations and other
evidence of how Chase managers manipulated their internal risk models to
boost the bank's regulatory capital ratios.... [B]ecause regulators allow
banks to use a process called 'risk weighting,' [banks] raise their capital
ratios by characterizing the assets they hold as 'low risk.'" Ms. Bair goes
on to describe the process of asset measurement by comparing risk-weighted
to "accounting-based" assets.
CLASSROOM APPLICATION: The article may be used in a class when
introducing fair value disclosures, accounting for derivatives, financial
statement analysis for banking, or just the various asset valuation methods
that may be used as identified in the U.S. FASB's or IASB's Conceptual
Framework.
QUESTIONS:
1. (Introductory) Who is Sheila Bair? What is Ms. Bair's concern
with bank regulation and banks' capital ratios? In your answer, define the
latter term.
2. (Advanced) Define the contents of a bank's balance sheet:
identify major assets, major liabilities, and the types of capital, or
shareholders' equity you expect to see on a bank balance sheet.
3. (Advanced) "On average, the three big universal banking
companies (J.P. Morgan Chase, Bank of America and Citigroup) risk-weight
their assets at only 55% of their total assets. For every trillion dollars
in accounting assets, these megabanks calculate their capital ratio as if
the assets represented only $550 billion of risk." How is it possible that
total assets as reported in a bank balance sheet only contain risk
representing a little more than half of their reported amounts?
4. (Advanced) What are the different valuation methods that may be
used for a bank's assets-in fact, for any company's assets? Cite
authoritative literature from a conceptual framework discussing the use of
these valuation methods and the types of assets for which they should be
used.
5. (Advanced) What are the three levels of determining fair values
for which accounting standards require different types of disclosure? For
which of these categories of assets is Ms. Bair concerned about bank's risk
assessment? (Note that the bank regulatory capital requirements are
different from the accounting disclosure requirements for assets reported at
fair values.)
6. (Advanced) Refer to the related article. Who was the London
Whale and how did his and his manager's actions show that valuation models
can be manipulated?
7. (Advanced) Refer again to the London Whale. How do "capital
regulations create incentives for even legitimate models to be manipulated,"
as stated by Ms. Bair?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
JP Morgan 'Whale' Report Signals Deeper Problem
by Dan Fitzpatrick and Gregory Zuckerman
Jul 14, 2012
Online Exclusive
"Regulators Let Big Banks Look Safer Than They Are," by Sheila Bair, The
Wall Street Journal, April 2, 2013 ---
http://online.wsj.com/article/SB10001424127887323415304578370703145206368.html?mod=djem_jiewr_AC_domainid
The recent Senate report on the J.P. Morgan Chase
JPM +0.21% "London Whale" trading debacle revealed emails, telephone
conversations and other evidence of how Chase managers manipulated their
internal risk models to boost the bank's regulatory capital ratios. Risk
models are common and certainly not illegal. Nevertheless, their use in
bolstering a bank's capital ratios can give the public a false sense of
security about the stability of the nation's largest financial institutions.
Capital ratios (also called capital adequacy
ratios) reflect the percentage of a bank's assets that are funded with
equity and are a key barometer of the institution's financial strength—they
measure the bank's ability to absorb losses and still remain solvent. This
should be a simple measure, but it isn't. That's because regulators allow
banks to use a process called "risk weighting," which allows them to raise
their capital ratios by characterizing the assets they hold as "low risk."
For instance, as part of the Federal Reserve's
recent stress test, the Bank of America BAC +0.33% reported to the Federal
Reserve that its capital ratio is 11.4%. But that was a measure of the
bank's common equity as a percentage of the assets it holds as weighted by
their risk—which is much less than the value of these assets according to
accounting rules. Take out the risk-weighting adjustment, and its capital
ratio falls to 7.8%.
On average, the three big universal banking
companies (J.P. Morgan Chase, Bank of America and Citigroup C +0.75% )
risk-weight their assets at only 55% of their total assets. For every
trillion dollars in accounting assets, these megabanks calculate their
capital ratio as if the assets represented only $550 billion of risk.
As we learned during the 2008 financial crisis,
financial models can be unreliable. Their assumptions about the risk of
steep declines in housing prices were fatally flawed, causing catastrophic
drops in the value of mortgage-backed securities. And now the London Whale
episode has shown how capital regulations create incentives for even
legitimate models to be manipulated.
According to the evidence compiled by the Senate
Permanent Subcommittee on Investigations, the Chase staff was able to
magically cut the risks of the Whale's trades in half. Of course, they also
camouflaged the true dangers in those trades.
The ease with which models can be manipulated
results in wildly divergent risk-weightings among banks with similar
portfolios. Ironically, the government permits a bank to use its own
internal models to help determine the riskiness of assets, such as
securities and derivatives, which are held for trading—but not to determine
the riskiness of good old-fashioned loans. The risk weights of loans are
determined by regulation and generally subject to tougher capital treatment.
As a result, financial institutions with large trading books can have less
capital and still report higher capital ratios than traditional banks whose
portfolios consist primarily of loans.
Compare, for instance, the risk-based ratios of
Morgan Stanley, MS 0.00% an investment bank that has struggled since the
crisis, and U.S. Bancorp, USB 0.00% a traditional commercial lender that has
been one of the industry's best performers. According to the Fed's latest
stress test, Morgan Stanley reported a risk-based capital ratio of nearly
14%; take out the risk weighting and its ratio drops to 7%. USB has a
risk-based ratio of about 9%, virtually the same as its ratio on a non-risk
weighted basis.
In the U.S. and most other countries, banks can
also load up on their own country's government-backed debt and treat it as
having zero risk. Many banks in distressed European nations have
aggressively purchased their country's government debt to enhance their
risk-based capital ratios.
In addition, if a bank buys the debt of another
bank, it only needs to include 20% of the accounting value of those holdings
for determining its capital requirements—but it must include 100% of the
value of bonds of a commercial issuer. The rules governing capital ratios
treat Citibank's debt as having one-fifth the risk of IBM IBM -0.05% 's. In
a financial system that is already far too interconnected, it defies reason
that regulators give banks such strong capital incentives to invest in each
other.
Regulators need to use a simple, effective ratio as
the main determinant of a bank's capital strength and go back to the drawing
board on risk-weighting assets. It does make sense to look at the riskiness
of banks' assets in determining the adequacy of its capital. But the current
rules are upside down, providing more generous treatment of derivatives
trading than fully collateralized small-business lending.
The main argument megabanks advance against a tough
capital ratio is that it would force them to raise more capital and hurt the
economic recovery. But the megabanks aren't doing much new lending. Since
the crisis, they have piled up excess reserves and expanded their securities
and derivatives positions—where they get a capital break—while loans, which
are subject to tougher capital rules, have remained nearly flat.
Continued in article
After the Bailout the Banks are Still Hiding Debt and the
Auditors Acquiesce
"Major Banks Said to Cover Up Debt Levels," The New York Times via The
Wall Street Journal, April 9, 2010 ---
http://dealbook.blogs.nytimes.com/2010/04/09/major-banks-said-to-cover-debt-levels/?dlbk&emc=dlbk
Goldman Sachs,
Morgan Stanley, JPMorgan
Chase, Bank of America and
Citigroup are the big names among
18 banks revealed by data from the Federal Reserve
Bank of New York to be hiding their risk levels in
the past five quarters by lowering the amount of
leverage on the balance sheet before making it
available to the public, The Wall Street Journal
reported.
The Federal
Reserve’s data shows that, in the middle of
successive quarters, when debt levels are not in the
public domain, that banks would acknowledge debt
levels higher by an average of 42 percent, The
Journal says.
“You want your leverage to
look better at quarter-end than it actually was
during the quarter, to suggest that you’re taking
less risk,” William Tanona, a former Goldman analyst
and head of financial research in the United States
at Collins Stewart, told The
Journal.
The newspaper suggests this
practice is a symptom of the 2008 crisis in which
banks were harmed by their high levels of debt and
risk. The worry is that a bank displaying too much
risk might see its stocks and credit ratings suffer.
There is nothing illegal
about the practice, though it means that much of the
time investors can have little idea of the risks the
any bank is really taking.
Bob Jensen's threads on off-balance-sheet financing ---
http://www.trinity.edu/rjensen/Theory02.htm#OBSF2
From the CFO.com Morning Ledger on April 2, 2013
Former SEC chief lands new job. Less than four months after
stepping down as SEC chief, Mary Schapiro is joining a consulting firm —
Promontory Financial — that has built a reputation as a shadow regulator by
hiring scores of former government officials,
the WSJ’s Jean Eaglesham reports.
“In my case, there’s no revolving door…I won’t ever be
going back to government,” Ms. Schapiro said in an interview. She said she
won’t exploit her valuable Rolodex by lobbying on behalf of clients. And she
has agreed with Promontory to never appear before any federal agency on
behalf of a client.
Jensen Comment
Whew! I thought she might make big bucks lobbying for IFRS convergence. Yeah
Right!
From the CFO.com Morning Ledger on April 8, 2013
Tech companies’ food freebies stoke tax debate
The free meals that Silicon Valley companies like
Google and
Facebook dole out
to workers are fueling a growing debate about taxes. Tax rules around fringe
benefits are complex, but in general they categorize meals regularly
provided by an employer as a taxable perk, similar to personal use of a
company car. That leads several tax experts to wonder if some companies
providing free food may be skirting the rules,
writes the WSJ’s Mark Maremont.
Some lawyers point to an exception that allows meals
to remain untaxed if they are served for a “noncompensatory” reason for the
“convenience of the employer.” But the IRS often takes a dim view of such
claims during routine audits of companies, said Thomas M. Cryan, Jr., an
employment-tax attorney at Buchanan Ingersoll & Rooney. “If they’re in there
auditing, and you’re not taxing the meals, they’re going to challenge you on
it,” he said.
Jensen Comment
This begs the question of how to tax discounted food in company stores and
cafeterias. For example, Erika and I often eat at the Littleton Regional
Hospital because it has the best chef in this region --- the former head chef at
a luxury hotel in Northern Michigan and at a luxury resort in Vermont. Workers
in the hospital and medical office wings attached to the hospital get a 25%
discount relative to what Erika and I pay. I consider what Erika and I pay to be
about half of what we would pay in a fine local restaurant.
For example, a 10 oz. prime rib dinner with all the trimmings and dessert is
$8.95 and a fish and a chips huge dinner is $4.95. When you take 25% off of that
for medical workers, this is really a huge subsidy of about 75%.
We like the hospital food because the tremendous chef various the menu for
virtually foods of virtually all parts of the world. We generally take two
dinners home for the next day. It's much, much cheaper than buying the food and
preparing it at home. There's no beer or wine in the hospital cafeteria, but
there is also no tipping.
This is a question for AECM tax experts like Amy Donbar, Richard Sansing,
Elliot Kamlet, and Scott Bonacker.
Should the employees report what is tantamount to more than a 75% discount (in
terms of local restaurant prices for comparable meals) as a taxable benefit. To
complicate matters, eating at the hospital in some cases is "for the convenience
of the employer" for employees who often are limited to less than a half hour
for lunch such as when surgeries take longer than planned and subsequent
patients waiting in line must be expedited. In most instances, however, the
employees to get an hour for lunch --- which is more than enough time to dine
out for lunch since traffic and parking problems are virtually zero in these
boondocks.
Elliott answered that he thinks the customary discount that the hospital
allows is a 20% discount on the price to charged to non-employees.
We know some hospital workers who, like us, treat the noon meal at the cafeteria as
their main meal of the day. They often take dinners home for their family at
night.
Teaching Case
From The Wall Street Journal Accounting Weekly Review on April 12, 2013
Silicon Valley's Mouthwatering Tax Break
by:
Mark Maremont
Apr 07, 2013
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com ![WSJ Video]()
TOPICS: Compensation, Personal Taxation, Taxes
SUMMARY: Yahoo! Chief Executive Marissa Mayer instituted free meals
at Yahoo last year when she took charge. Free meals are commonplace at other
Silicon Valley high tech firms and Ms. Mayer stated, on an investor
conference call, that "free food was among the cultural changes intended to
make 'Yahoo the absolute best place to work. And if you're that, I think
attracting talent comes reasonably easily.'" If free food is offered as a
perk to attract talent, then it should be taxed to the recipient as income.
But Silicon Valley firms seem not to have been treating this benefit as a
perk. The companies take the stand that meals may remain untaxed under the
argument that "they are served for a 'noncompensatory' reason for the
'convenience of the employer.'" "...Lawyers argue that some technology firms
could qualify, in part because free food encourages longer work hours and is
a crucial part of Silicon Valley's collaborative culture. [However,] the IRS
often takes a dim view of such claims during routine audits of companies,
said...a Washington, D.C., employment-tax attorney...."
CLASSROOM APPLICATION: The article may be used in either corporate
or personal tax classes covering taxable benefits and the IRS approach of
penalizing companies through audits for not reporting the perks as income.
QUESTIONS:
1. (Introductory) According to tax law, what is compensation to
employees? How might free meals available at Silicon Valley high tech firms
be considered compensation to employees?
2. (Advanced) What description made by the CEO of Yahoo, Marissa
Mayer, is indicative of free meals being considered compensation to
employees?
3. (Advanced) If these free meals are considered to be
compensation, how must the compensation be reported to the IRS? Who is
responsible for paying the income tax? (Hint: the related video helps with a
practical example on this issue.)
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Explained: Is Your Lunch a Taxable Event
by Mark Maremont
Apr 07, 2013
Online Exclusive
"Silicon Valley's Mouthwatering Tax Break," by Mark Maremont, The
Wall Street Journal, April 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324050304578408461566171752.html?mod=djem_jiewr_AC_domainid
When outsiders visit Silicon Valley, the first
thing they often notice is the food: Cafeterias brimming with free gourmet
meals and snacks offered to employees of Google Inc., GOOG +0.03% Facebook
Inc. FB +1.60% and other technology firms.
But not all is as it seems in the buffet line.
There is growing controversy among tax experts about how to treat these
coveted freebies. The Internal Revenue Service also has been focusing on the
topic, according to attorneys who practice in the area, examining whether
the free food is a fringe benefit on which employees should pay additional
tax.
Tax rules around fringe benefits are complex, but
in general they categorize meals regularly provided by an employer as a
taxable perk, similar to personal use of a company car. That leads several
tax experts to wonder if some companies providing free food may be skirting
the rules.
"I clearly think it ought to be taxable income,"
said Martin J. McMahon, Jr., a tax-law professor at the University of
Florida, who argues that in most cases the meals are really part of a
compensation package.
Other lawyers point to an exception that allows
meals to remain untaxed if they are served for a "noncompensatory" reason
for the "convenience of the employer." The exception generally has been
applied to workers in remote locations or in professions where reasonable
lunch breaks aren't feasible. But these lawyers argue that some technology
firms could qualify, in part because free food encourages longer work hours
and is a crucial part of Silicon Valley's collaborative culture.
The IRS often takes a dim view of such claims
during routine audits of companies, said Thomas M. Cryan, Jr., a Washington,
D.C., employment-tax attorney at Buchanan Ingersoll & Rooney PC "If they're
in there auditing, and you're not taxing the meals, they're going to
challenge you on it," he said. "I have worked on audits for large tech
companies in Silicon Valley on this exact issue," he added, but declined to
name the clients.
Mr. Cryan said employers generally settle, then
come up with a fair-market value for the free meals, which they include in
employees' future paycheck stubs. In those cases, he said, companies often
ensure their employees don't lose out, by giving them extra pay to cover
their larger tax bills.
An IRS spokesman declined to comment.
Google has more than 120 cafes world-wide serving
over 50,000 meals a day, according to its website, which says the aim is to
foster collaboration and healthy eating. A spokeswoman declined to comment
on the tax treatment of employee meals. Several former employees who
recently left Google said the company didn't include the value of the meals
in their paystubs or in W-2 tax statements.
A Facebook spokesman said: "We believe we are
compliant with the law."
Technically, any unpaid back taxes would be owed by
individual employees. In practice, tax lawyers say, the IRS tries to dun the
employer for failing to withhold taxes on the meals' collective value.
Although collectively hundreds of millions of
dollars in taxes could be involved, some experts say the more significant
issue is fairness. If some employers are allowed to offer tax-free perks,
they argue, that puts other employers and employees at a disadvantage, and
if left unchecked could spread.
"I buy my lunch with after-tax dollars," said Mr.
McMahon, the University of Florida professor. "And I have to pay taxes to
support free meals for those Google employees."
Still, an IRS crackdown could raise hackles in the
influential technology industry, and generate concerns that the federal
government is interfering—for relative pocket change—with a culture that has
made Silicon Valley a world leader.
"There are real benefits for knowledge workers in
having unplanned, face to face interaction," and free food helps facilitate
that, said Victor Fleischer, a tax-law professor at the University of
Colorado, who argues that aggressive enforcement of tax laws might be poor
public policy in this case.
Although some employers long have been providing
free lunches for their executives or even ordinary workers, Silicon Valley
has taken the practice to a new level.
A Gourmet magazine article last year raved about
the "mouthwatering free food" at Google's headquarters in Mountain View,
Calif. The article cited dishes such as porcini-encrusted grass-fed beef and
noted that nearly half the produce was organic.
What would a food tax on Google's meals look like
for the average employee? Assuming a fair-market value of between $8 and $10
per meal, a Googler chowing down two squares a day could get dinged for
taxes on an extra $4,000 to $5,000 a year.
Facebook's headquarters in nearby Menlo Park,
Calif., has two main cafes, plus a barbecue shack, a pizza shop, a burrito
bar, and a 50s-style burger joint. Recent menu options at Facebook's Café
Epic, which dishes up free food from morning until night, included spicy
she-crab soup and grilled steak with chimichurri sauce.
Both Twitter Inc. and Zynga Inc. ZNGA -1.16% offer
three free meals a day in their San Francisco offices. A Zynga spokeswoman
had no comment, and a Twitter spokesman confirmed the free meals policy but
otherwise didn't comment.
Tax experts say companies should be careful how
they describe the free-meals perk, lest they imply that compensation or
recruiting is the real aim, not employer convenience.
Continued in article
"Ex-Goldman Trader Pleads Guilty to Fraud," by Chad Bray and Justin
Baer, The Wall Street Journal, April 3, 2013 ---
http://online.wsj.com/article/SB10001424127887324600704578400332210938670.html
In late 2007, with a seven-figure bonus and his
reputation at Goldman Sachs Group Inc. GS -2.28% on the line, Matthew Taylor
placed an $8.3 billion futures bet and hid it from his bosses. Now, he faces
a possible long prison sentence.
On Wednesday, Mr. Taylor pleaded guilty to a single
count of wire fraud for concealing the trades, which cost Goldman $118.4
million to unwind. He told a federal judge he made the big bets to boost his
reputation and bonus at the bank.
"I accumulated this trading position and concealed
it for the purpose of augmenting my reputation at Goldman and increasing my
performance-based compensation," Mr. Taylor said at a hearing in Manhattan
federal court on Wednesday. "I am truly sorry for my actions." Related
U.S. Attorney's Case Against Taylor Plea Agreement
CFTC Complaint Against Trader Taylor's Response to CFTC Complaint
Ex-Trader's Gambit Bites Goldman CFTC Charges Trader With Concealing $8.3
Billion Trade
Prosecutors recommended a sentencing-guidelines
range of two years and nine months to three years and five months in prison.
The range was based in part on Mr. Taylor's compensation for 2007—$150,000
in salary and an expected $1.6 million bonus—rather than the loss suffered
by Goldman.
But the judge in the case sent a signal that the
ex-trader might face an even stiffer sentence. U.S. District Judge William
Pauley III questioned why prosecutors, in negotiating a plea agreement,
didn't seek a longer potential sentence. "He cooked the books," the judge
said.
Sentencing is set for July 26.
Wednesday's plea is the latest twist in the case of
a young trader whose career went off track in the final days of 2007, just
as the securities industry was bracing for the looming crisis.
It also comes as time is running out for
prosecutors and regulators to bring actions related to the events that
occurred in the months leading up to and during the downturn.
Mr. Taylor attended high school in suburban Boston,
where his guidance counselor, Adelaide Greco, remembers him as the class
valedictorian once named "most likely to succeed." While enrolled at the
Massachusetts Institute of Technology, he returned to his high school to
talk to students about achieving one's dreams, Ms. Greco said. "Kids looked
up to him," she said.
From MIT, Mr. Taylor headed to Wall Street. He
worked for Morgan Stanley MS -2.72% from 2001 until 2005, then landed at
Goldman.
By November 2007, Mr. Taylor was an
equity-derivatives trader on Goldman's Capital Structure Franchise Trading
desk and had lost a "significant portion" of the trading profits he had
accumulated earlier that year, according to criminal charging documents
filed by prosecutors Wednesday.
Because of his lost profits and the general market
conditions, his supervisors ordered him to rein in the risks he was taking.
By December, they had told him his annual bonus would decline
"significantly," according to the document.
In mid-December, Mr. Taylor ratcheted up the size
of his bet on electronic futures contracts tied to the Standard & Poor's
500-Stock Index, accumulating a position with a face value of $8.3 billion.
That figure, court records show, exceeded the risk
limits for his entire desk at Goldman, a group of about 10 traders.
At the same time, Mr. Taylor also made false trade
entries that appeared to take the opposite side of that bet. The purpose,
according to court records: "to conceal and understate the true size" of his
long position on so-called S&P 500 E-mini futures.
Goldman fired Mr. Taylor on Dec. 21, 2007, for
"alleged conduct related to inappropriately large proprietary futures
positions in a firm trading account," the bank wrote in a filing submitted
to the Financial Industry Regulatory Authority, which oversees
broker-dealers.
Goldman agreed to pay $1.5 million in December to
settle civil charges by the CFTC that it failed to supervise Mr. Taylor. The
agency also said in its complaint against the bank that it wasn't fully
forthcoming with regulators when Mr. Taylor was fired. Goldman settled the
charges without admitting or denying wrongdoing.
The bank cooperated in the probe, according to a
person familiar with the investigation. "We are very disappointed by Mr.
Taylor's unauthorized conduct and betrayal of the firm's trust in him," a
Goldman spokeswoman said Wednesday.
The episode didn't bring an immediate end to Mr.
Taylor's Wall Street career. In March 2008, he returned to Morgan Stanley as
trader in the firm's equities division. He left Morgan Stanley a second time
last August, according to Finra.
Continued in article
"JPMorgan Chase, And Dimon, Starting To Sweat About Everything," by
Francine McKenna, re:TheAuditors, April 3, 2013 ---
http://retheauditors.com/2013/04/03/jpmorgan-chase-and-dimon-starting-to-sweat-about-everything/
Banking and investment banking have become rotten to the core ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"With Ron Johnson Out, What Should J.C. Penney Do Now?" by Rafi
Mohammed, Harvard Business Review Blog, April 9, 2013 ---
Click Here
http://blogs.hbr.org/cs/2013/04/now_what_should_jc_penney_do.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Jensen Comment
When I asked my wife that question she says the answer is simple --- bring back
that J.C. Penney catalog that was as thick as the Chicago telephone directory.
Before Jzock Pennea dropped this catalog she managed to be elected to its
Hall of Fame.
This morning we are going to St. Johnsbury, Vermont for one of Erika's
medical appointments. Afterwards Erika insists, as always, that we go to the
really nice J.C. Penney department store in St. J. Ibet 20 to 1 odds that we
will be the only shoppers in the store. All the Vermonters will be down in a New
Hampshire Wal-Mart trying to beat the Vermont sales tax.
Travelers Casualty Sues PwC for Negligence
Travelers Casualty and Surety Co. of America has sued
PricewaterhouseCoopers LLP in New Jersey on behalf of Alfa Wasserman Inc.,
claiming PwC should have uncovered chinks in the laboratory instrument maker's
accounting processes that enabled a nearly $880,000 embezzlement scheme ---
http://www.lexisnexis.com/community/insurancelaw/blogs/mealeysandlaw360/archive/2013/04/01/travelers-blames-pwc-for-embezzlement-scheme.aspx
Bob Jensen's threads on lawsuit woes of PwC are at
http://www.trinity.edu/rjensen/Fraud001.htm
"Wait Continues for Lease Accounting Clarity: CFOs have to wait longer for
an agreement on lease-accounting standards. But they may not mind the wait,
considering that more record-keeping may be on tap,". by Kathleen Hoffelder,
CFO.com ---
http://www3.cfo.com/article/2013/4/gaap-ifrs_lease-accounting-elfa-debt-covenant-issues-fasb-iasb
Jensen Comment
I don't think standard setters will ever resolve the problem of (operating)
lease accounting until they come to grips with how to account for renewal
options and probabilities.
Bob Jensen's threads on the lease accounting mess ---
http://www.trinity.edu/rjensen/Theory02.htm#Leases
Wunderbar: USA Auditors Don't Have a Monoply on Incompetence When
Valuting Derivative Financial Instruments
"German regulators probe Deutsche Bank accounting - sources," Fox Business,
April 4, 2013 ---
http://www.foxbusiness.com/news/2013/04/04/german-regulators-probe-deutsche-bank-accounting-sources/
"The Debt Bomb That Taxpayers Won't See Coming ," by Steven Malanga,
The Wall Street Journal, March 29, 2013 ---
http://online.wsj.com/article/SB10001424127887324077704578362101467799948.html
Earlier this month, the Securities and Exchange
Commission charged Illinois officials with making misleading statements to
bond investors about the state's pension system. The agency detailed a long
list of deceptive practices including failure to tell investors that the
system was so underfunded that it risked bankruptcy.
Illinois taxpayers, as well as the holders of its
debt, will ultimately bear the burden of the officials' misdeeds. But there
is nothing unique about the Prairie State. For years, elected officials in
states and municipalities across the country have been imprudently piling up
obligations that are imposing serious strains on budgets, prompting higher
taxes and cutbacks in services.
In January, city officials in Sacramento,
California's capital, reported the results of a study they had commissioned
on all the debt that the municipality had incurred. At a City Council
meeting that the Sacramento Bee reported as "sobering," the city manager
explained that Sacramento had racked up some $2 billion in obligations
(mostly pensions and retiree health care). All this for a municipality of
477,000 residents with an annual general fund budget of just $366 million.
Sacramento finances are already stretched—the city
has cut some 1,200 workers, or 20% of its workforce, in the past several
years. Servicing its debt in years to come will only add more woe,
especially given the intractability of public unions. The budget report
noted that "While reducing staff is clearly not the preferred method for
reducing costs, the city has a very limited ability to reduce the cost of
labor absent cooperation from the city's employee groups."
According to studies by the Pew Center on the
States, states and the biggest cities have made nearly three-quarters of a
trillion dollars in promises to pay for retiree health-care insurance. Yet
governments have set aside only about 5% of the money they'll need to pay
for these promises.
This year a Chicago city commission reported that
retiree health-care expenditures would soar from $109 million in this year's
budget to $541 million in a decade. After concluding that the expenditures
were unaffordable, one member of the commission proposed that retirees be
required to sign on to the Illinois Health Insurance Exchange being created
under President Obama's Affordable Care Act. Health insurance would be
cheaper if it is subsidized by the federal government.
A December report by the States Project, a joint
venture of Harvard's Institute of Politics and the University of
Pennsylvania's Fels Institute of Government, estimated that state and local
governments now owe in sum a staggering $7.3 trillion. Incredibly, the vast
majority of this debt has never been approved by taxpayers, who are often
unaware of the extent of their obligations.
Most state constitutions and many municipal
charters limit borrowing and mandate voter approval. No matter. Politicians
evade the limits, issuing billions of dollars in municipal offerings never
approved by voters, sometimes with disastrous consequences. Courts have
rubber-stamped many of these schemes.
The debt incurred by New Jersey for school projects
is a case in point. In 2001, legislators in Trenton hatched a scheme to
borrow a shocking $8.6 billion for refurbishing school buildings. The
reaction to their plan in the press and among taxpayer groups was so
negative that the politicians knew that voters would never approve it. So
the legislature created an independent borrowing authority. Since it, and
not taxpayers, would take on the debt, politicians claimed that there was no
need for voters' consent.
Taxpayer groups challenged the maneuver. The state
Supreme Court brushed aside their objections, arguing that there was already
precedent for such borrowing.
New Jersey's Schools Construction Corp. quickly
squandered half of the money on patronage and inefficient construction
practices, so in 2005 the state borrowed another $3.9 billion. All of the
debt is being repaid by taxpayers. The authority, which was dissolved
several years ago, had no revenues of its own.
Next door, in New York, a scant 5% of the Empire
State's $63 billion in outstanding debt has ever been authorized by voters,
according to the state comptroller. The rest has been engineered through
independent authorities such as the Transitional Finance Authority.
These authorities are designed to circumvent
voters. Of the seven bond offerings that have gone before New York voters in
the past 25 years, four have been defeated. But thanks to unsanctioned debt,
New Yorkers bear the second-highest per capita debt burden in the nation,
$3,258, according to a January report by the state comptroller. New Jersey
is No. 1, at $3,964.
To prevent the pile-up of hidden debt, taxpayers
need to spearhead a revolt that will narrow the ability of officials to
mortgage their future. Any such revolt will first of all seek an end to
government sponsored defined-benefit pension plans, through which
politicians promise benefits years hence to current employees in a manner
that potentially leaves taxpayers on the hook for unlimited liabilities.
Simpler, defined-contribution plans featuring individual retirement accounts
would make government pension systems less expensive and their accounting
more transparent.
Continued in article
Jensen Comment
I was wondering why my tax exempt bond fund keeps paying relatively high
interest rates each month. Yipes! Now I know.
"Former comptroller general urges fiscally responsible reforms," by
Ken Tysiac, Journal of Accountancy, October 6, 2012 ---
http://journalofaccountancy.com/News/20126578.htm
The sad state of governmental accounting: It's all done with smoke
and mirrors ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
"The Ethics of Profit Repatriation by U.S. Multinationals: U.S.
Companies Using Short-Term Loans to Avoid Taxes on Repatriated Cash," by
Steven Mintz, Ethics Sage, April 1, 2013 ---
http://www.ethicssage.com/2013/04/the-ethics-of-profit-repatriation-by-us-multinationals.html
I have previously blogged about the use of
transfer pricing techniques by U.S. companies to
shift profits away from the U.S., which has the highest corporate tax rate
(about 40%), to countries with lower tax rates such as Ireland (12.5%). As
long as profits made overseas are not repatriated back to the U.S., those
overseas profits remain untaxed by the IRS. Critics claim that a much lower
tax rate (say, 15-20%) would encourage U.S. companies to bring the profits
home in the form of investments and spur economic development and job
growth.
Other countries have come to realize their
corporate tax rates are too high. For example, Germany has reduced its rate
from a high of 45% in 2008 to 15% today. The UK has gradually lowered its
rate from 52% in 1981 to a projected 20% in 2015.
Repatriation is more than an economic issue; it has
ethical overtones. It also highlights a practice used by some U.S. companies
to skirt the repatriation law by taking the “trapped” overseas cash and
providing loans to their U.S. parent companies. Under U.S. tax rules, a
foreign subsidiary can lend funds to its parent without jeopardizing its
untaxed status. Here is how it works:
- The loans have to be short term and can remain
outstanding throughout a fiscal quarter as long as they don't cross
beyond its end. If they do cross a quarter, they can remain outstanding
for a total of 30 days. And that can be done for 60 days a year by any
one foreign unit.
- If the borrowing is carefully set up to comply
with IRS rules and U.S. auditing standards, the funds can be used over
and over without incurring taxes.
- Companies are not required to disclose these
moves, which makes it difficult to assess how many use them.
According to the
Wall Street Journal, Hewlett-Packard (H-P)
entities lent the parent about $6 billion in the year that ended in October
2010. For the 2011 fiscal year and through July 2012, the average
outstanding balance of the alternating loans was $1.6 billion.
The sums rivaled H-P's borrowings in the
commercial-paper market—the traditional source of big firms' day-to-day
funds. Those averaged $1.9 billion over the 2011-2012 period.
More details of H-P's transactions have emerged
since a 2012 hearing conducted by the U.S. Senate. The company said it told
the Senate panel it used the alternating loans for all but 85 days of the
2011 and 2012 fiscal years. In a 2008 internal presentation, H-P called the
loans "the most important source of U.S. liquidity for repurchases and
acquisitions."
H-P spokesman Michael Thacker says H-P has
"complied fully with all applicable provisions of the U.S. Internal Revenue
Code, and auditor Ernst & Young has consistently reviewed and approved the
accuracy of H-P's financials." The IRS has never raised concerns about the
loan programs, he adds.
American concerns have long argued they should be
allowed to bring back some of the estimated $1.7 trillion in profits they
hold at their foreign subsidiaries, saying the money could be put to use in
the U.S. The firms claim to be deterred by the huge tax liabilities they
would incur under current IRS tax rates.
The U.S. is the only major economy that taxes its
companies' overseas earnings. Those taxes aren't actually incurred until the
money is considered to have been transferred to the U.S. parent, giving
companies an incentive to maximize their earnings at foreign subsidiaries
and keep them there indefinitely.
People on both sides of the debate argue the system
doesn't work, creating perverse incentives that distort companies' balance
sheets and deprive the U.S. Treasury of tax revenue. The short-term loans to
avoid repatriation and taxes is the main example of the practice.
During the last Presidential election, business
interests called for a “tax holiday,” in which American corporations would
be allowed to transfer their foreign profits to their American bank accounts
at a tax rate under 6 percent for one year. Such a holiday would raise
revenues and create jobs in the U.S., according to the WinAmerica Campaign,
a coalition of companies including Apple, Google and Pfizer.
But the last time such a holiday was tried, in
2004, it raised less than $19 billion and did not substantially increase
jobs. Most of the repatriated profits went to corporate shareholders,
through dividends or stock repurchases.
Instead of a one-off holiday, some corporations —
Caterpillar and Kimberly Clark, for example — have called for a permanent
fix: a territorial system for taxing foreign corporate profits, as most
industrialized countries use. In a pure territorial system, the profits of
multinational companies based in the U.S. would be taxed only by the country
in which the profit is earned.
But none of our major trading partners takes a pure
territorial approach, for two good reasons. First, almost all countries
impose domestic taxes on “mobile” corporate income — for example, investment
interest or royalties that can easily be shifted from one country to
another. Second, many countries still collect taxes on foreign profits of
domestic corporations if those profits are earned in tax havens that collect
little or no taxes, like Bermuda and the Cayman Islands. These havens
violate the premise of the territorial system, which is that corporate
profits are taxed somewhere in the world at a reasonable rate.
Continued in article
Reporting Discontinued Operations
On April 2, 2013, the FASB issued a proposal that changes the criteria for
reporting discontinued operations. The proposal also enhances disclosure
requirements for discontinued operations and adds new disclosures for
individually material dispositions that do not qualify as discontinued
operations.
From PwC ---
Click Here
http://www.pwc.com/us/en/cfodirect/publications/in-brief/2013-18-fasb-issues-exposure-draft-on-reporting-discontinued-operations.jhtml?display=/us/en/cfodirect/publications/in-brief&j=93936&e=rjensen@trinity.edu&l=309364_HTML&u=5080218&mid=7002454&jb=0
"Groupon Revisited: New Mission, New Reporting Issues," Anthony H.
Catanach, Jr., Grumpy Old Accountants, March 29, 2013 ---
http://grumpyoldaccountants.com/blog/2013/3/29/groupon-revisited-new-mission-new-reporting-issues
Bob Jensen's threads on Groupon ---
http://www.trinity.edu/rjensen/Fraud001.htm
Do a word search for Groupon
"Federal Tax Crimes, 2013," by John A. Townsend , SSRN, February 5,
2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2212771
Abstract:
This is
the 2013 01 edition of the Federal Tax Crimes book that I started many years
ago for use in a Tax Fraud and Money Laundering course at the University of
Houston Law School. With some colleagues, we substantially revised that
earlier version into a separately targeted book, titled Tax Crimes published
by LEXIS-NEXIS. The full title of the LEXIS-NEXIS book is John Townsend,
Larry Campagna, Steve Johnson and Scott Schumacher, Tax Crimes (LEXIS-NEXIS
Graduate Tax Series 2008).
This pdf text offered here is a self-published version of my original text
that I have kept up since publication of the LEXIS-NEXIS book. The
LEXIS-NEXIS book is more suitable for students in a classroom setting and is
targeted specifically for graduate tax students. This pdf book I make
available here is not suitable for students in a class setting, but is more
suitable for lawyers in practice, covering far more topics and with far more
detail and footnotes that may be helpful to the busy practitioner. It cannot
be used fruitfully for the target audience of the LEXIS-NEXIS book.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
The Big Problem for MOOCs Visualized ---
https://mail.google.com/mail/u/0/?shva=1#inbox/13dca6e0fa137324
MOOCs — they’re getting a lot of hype, in part
because they promise so much, and in part because you hear about
students signing up for these courses in massive numbers. 60,000 signed
up for Duke’s Introduction to Astronomy on Coursera. 28,500 registered
for Introduction to Solid State Chemistry on edX. Impressive figures, to
be sure. But then the shine comes off a little when you consider that
3.5% and 1.7% of students completed these courses respectively. That’s
according to a
Visualization of MOOC Completion Rates
assembled by educational researcher
Katy Jordan,
using publicly available data. According to her
research, MOOCs have generated 50,000 enrollments on average, with the
typical completion rate hovering below 10%. Put it somewhere around
7.5%,
or 3,700 completions per 50,000
enrollments. If you click the image above, you can see interactive data
points for 27 courses.If you’re a
venture capitalist, you’re probably a little less wowed by 3,700
students taking a free course. And if you’re a university, you might be
underwhelmed by these figures too, seeing that the average MOOC costs
$15,000-$50,000, while professors
typically invest 100 hours in building a MOOC, and another 8-10 hours
per week teaching the massive course. And then
don’t forget the lousy
contract terms offered by MOOC providers like edX –
terms that make it hard to see how a university
will recoup anything on their MOOCs in the coming years.
Right now, universities are producing MOOCs
left and right, and it’s great deal for you, the students. (See
our list of 300 MOOCs.)
But I’ve been around universities long enough to know one thing — they
don’t shell out this much cash lightly. Nor do professors sink 100 hours
into creating courses that don’t count toward their required teaching
load. We’re in a honeymoon period, and, before it’s over, the raw number
of students completing a course will need to go up — way up. Remember,
the MOOC is free. But it’s the finishers who will
pay for certificates and
get placed into jobs for a fee. In short, it’s
the finishers who will create the major revenue streams that MOOC
creators and providers are relying on.
Jensen Comment
The above article brought to mind all the many, many books I checked out from
libraries or purchased that I must honestly say I did not finish. Unless there
are incentives to read to the end, we're a society of waders who stick our feet
into the waters without becoming fully submerged. A better phrase might be
"curiosity dabblers."
I think that signing up for a MOOC course in most instances is motivated by
curiosity much like checking out a book from the library just to "check it out."
The reasons we don't finish a book or a MOOC are many and varied.
For many of us leisure reading is motivated by little else other than
curiosity and leisure entertainment. Finishing a book or MOOC is not a
burning goal in life unless we are facing a competency-based examination
covering the entire book or MOOC.
Most of us underestimate how busy we will become before we finish a book
or a MOOC.
Most of us have to be very selective about where we devote our big sweat
concentrations in learning. Great learning, like great exercise/sex, cannot
be attained without deep, deep concentration and heavy sweating. Little bits
are fine and fun, but the great finishes take lots of sweat.
Most of us are easily bored.
Most of us are easily disappointed.
Most of us end our flight and get back home without quite finishing the
book that occupied our time while traveling.
Most of us in our senior years doze off without props/pokes to stay
awake. Reading is bad enough. Operas, long sermons, and lectures are deadly.
So are long drives --- which is why I prefer that Erika take the wheel when
our destination is more than 30 miles. She likes driving. I've always hated
driving like I hate other wastes of time. In my entire life I would never
have opted for a job that had a long commute. Traffic jams and long lines in
general drive me nuts.
Bob Jensen's threads on MOOCs, EdX, and MITx ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
"Students Avoid ‘Difficult’ Online
Courses, Study Finds," by Ann Schnoebelen, Chronicle of Higher Education,
April 26, 2013 ---
http://chronicle.com/blogs/wiredcampus/students-avoid-difficult-online-courses-study-finds/43603?cid=wc&utm_source=wc&utm_medium=en
Jensen Comment
Students just don't understand that when done correctly online courses can have
more rather than less interactions with the instructor and other students who
can help them. Of course, not all distance education courses are "done
correctly/" MOOC classes tend to be so huge that interactions are
minimized. MOOCs, however, often have some of the best lecturers in the world
and are sought after because they are free. MOOCs sometimes take advantage of
technology like screen cast videos that can be repeated over and over until
mastered. This is also the idea behind Khan Academy videos.
Bob Jensen's threads on distance education alternatives around the world
---
http://www.trinity.edu/rjensen/Crossborder.htm
Denny Beresford visited Joe with some interesting advice for accounting
students!
Watch for Anaheim Joe on August 7, 2013 at the AAA Meetings
"NICE NEWS (for Joe Hoyle) and GREAT STUDENT ADVICE (from Denny Beresford),"
by Joe Hoyle, Teaching Blog, April 4, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/04/nice-news-and-great-student-advice.html
I got the nicest email a few days ago from the
president of the American Accounting Association: “I am happy to give you
some great news: you have been selected as the recipient of the 2013
Innovation in Accounting Education award for your blog, Joe Hoyle: Teaching
-- Getting the Most From Your Students. The award was established to foster
innovation and improvement in accounting education through ‘significant
programmatic changes or a significant activity, concept, or set of
educational materials.’”
I was really thrilled.
As a result, I will make a 90 minute presentation
on August 7 at the AAA annual meeting in Anaheim. If you are going to be at
that conference, I hope you will stop by.
And, I want to thank everyone who reads this blog
for helping to spread the word. We have now had 78,000 page views over the
years and my guess is that most of those hits came from you guys telling
other folks about the blog. So I believe that the above award should be
shared with you. Thanks!!! **
For two days last week, Dennis Beresford – the
former chairman of the Financial Accounting Standards Board – was on our
campus. He gave talks and presentations to several hundred of our students
as well as over 100 members of the local accounting community. It was a
wonderful couple of days here at the University of Richmond.
At one presentation, a student in the audience
asked “What piece of advice would you give to us as college students?”
That was a very legitimate question to ask a person who has been so very
successful in the business world and as a college educator.
I did not try to write down every word that Mr.
Beresford said in response but I did love his answer and I want to
paraphrase it here. He paused for a moment and then talked about students
often being too interested in focusing on getting 120 hours of nothing but
accounting. He spoke about the importance of gaining a broader education and
coming to appreciate classes outside of accounting and business.
I wish I could have written down every word because
it was a great answer. I could not have agreed more to what he said. A
college education should be about creating a foundation for a thoughtful
life rather than a quest for a first job. Understanding accounting is, of
course, important but college needs to be about more than just making sure
the debits equal the credits. If that is all a person wants to learn, life
is going to be very dull.
After Mr. Beresford’s talk, I started thinking
about how to encourage my students to develop that kind of attitude. I
certainly want my students to learn lease accounting and pension accounting
but I also want them to appreciate art, literature, and the like. How do you
push a student to go outside of his or her comfort zone?
Luckily, registration for the fall semester is
coming up so the selection of courses is on everyone’s mind at the moment. I
quickly wrote a note to our seniors graduating in accounting and asked each
of them to hit reply and tell me the name of the best course they had ever
taken at the University of Richmond outside of the Robins Business School. I
explained what I wanted to do and asked them to identify that special,
non-business course.
Almost immediately, a long list of courses started
pouring into my email account. Several students listed multiple courses they
would recommend. I had not asked for any type of explanation but many of the
students wrote out glowing comments about a particular course and what they
had learned.
To me, the list was thoroughly fascinating
including such courses as Hebrew Prophets, Justice in Civil Society, The
Propaganda State, Minds and Machines, Leadership and Economic Policy, Thomas
Jefferson and Revolutionary American, Introduction to Film Studies, Civil
Rights and Civil Liberties, Lincoln, Saints and Sinners in Muslim
Literature, Elementary Symbolic Logic, Introduction to Environmental
Studies, and Global Women Writers.
The list was so interesting that I was ready to go
back to college and take many of the courses myself.
Continued in article
"A Nose for Honest Financial Statements," by David Albrecht, Summa,
April 1, 2013 ---
http://profalbrecht.wordpress.com/2013/04/01/a-nose-for-honest-financial-statements/
Pretending to be a shoeless and homeless bum is good business
"Bum given boots by kind-hearted cop is back to begging barefoot Panhandler
has '30 pairs of shoes'," by M.L. Nestel, Kevin Fasick, and Bob Fredericks,
The New York Post, March 26, 2016 ---
http://www.nypost.com/p/news/local/manhattan/kind_cop_bum_goes_from_gift_to_grift_93SD0wxjPPCxm7lzZ8vlwM
Jensen Comment
Reminds me of the time I followed a fashionably-dressed beautiful woman with two
small children through a payment line at a supermarket in San Antonio. She paid
for her groceries with food stamps and then a man helped her load the stash into
a shiny new Cadillac Escadade (starting around at over $60,000). I overheard her
children him "Daddy." My guess is that she had more than 50 pairs of shoes
stored at his magnificent house.
Why do any parents want to get married? The food stamp game can be played
better without getting married.
"Ten Reasons to Avoid a 30 Year Mortgage," by Roger Schlesinger,
Townhall, April 8, 2013 ---
http://townhall.com/columnists/rogerschlesinger/2013/04/08/ten-reasons-to-avoid-a-30-year-mortgage-n1560810?utm_source=thdaily&utm_medium=email&utm_campaign=nl
Jensen Comment
This article reaffirms my opinion that there are very few absolutes when it
comes to personal finance. Mr. Schlesinger provides some very good points for
some home owners in many economic circumstances.
But I don't think it applies to all home owners in all circumstances. It
applied to me for most of the four homes I owned in my younger years (not
counting my present home, my ocean cottage in Maine, or the home I inherited
from my parents in Iowa). In those instances
But I can think of economic circumstances where I think a 30-year mortgage
makes more sense.
Perhaps we can have some AECM debate on this topic.
Beneish M-Score Index for Fraud Detection and Portfolio Selection
April 5, 2013 message from Tom Selling
I'm writing some study materials for CFA Institute
and need to include one example of the Beneish fraud (M) score calculation.
I haven't run any numbers yet, but I was thinking of doing it for Dell —
both before its restatement of 2006 financials and on a restated basis.
Before I run the Dell numbers, I was wondering if
anyone had a better example, hopefully showing dramatic results for
illustrative purposes, that I should run?
Best, Tom
April 6, 2013 reply from Bob Jensen
Hi Tom,
Joe Wells discusses some of the history and details and provides some
warnings in a paper called "Irrational Ratios" ---
http://www.buec.udel.edu/jenkinsd/Articles/Irrational Ratios.htm
. . .
THE NUMBERS DON’T LIE
The most basic analytical techniques
(vertical, horizontal and ratio analyses) might have given the auditors for
ZZZZ Best some important clues. Since these techniques compare changes in
the numbers from year to year, they can point out significant discrepancies.
In the ZZZZ Best case, look at what a simple ratio analysis would have
revealed (see exhibit 1, below).
|
Exhibit 1:
Selected Ratios From ZZZZ Best |
| |
1985
|
1986 |
| Current ratio of
assets to liabilities |
36.552 |
.0977 |
|
Working capital: Total assets |
0.5851 |
(0.0080) |
| Collection ratio
|
N/A |
26.131 |
|
Asset turnover |
.144 |
1.041 |
| Debt to equity ratio
|
.017 |
1.486 |
|
Receivables turnover |
N/A |
6.984 |
| Times interest
earned |
N/A |
43.136 |
|
Cost of sales: Sales |
.465 |
.423 |
| Gross margin
percentage |
53.51% |
57.68% |
|
Return on equity |
183.75% |
46.58% |
|
These numbers make no sense at all—they are
all over the place. Particularly revealing are the current ratio and the
debt to equity and return on equity ratios. The current ratio shows a
company with no cash in 1986 despite record “revenues.” The 1986 debt to
equity ratio is up 8600% from the prior year; return on equity has dropped
by more than 75%. These are not indicators of a legitimate business.
A NEW (1999) APPROACH?
Since the ZZZZ Best case, there have been attempts to develop new
analytical techniques to better assist the auditor. In his 1999 article,
“The Detection of Earnings Manipulation,” (Financial Analysts Journal, Sep./
Oct.99), Messod D. Beneish—an associate professor at the Kelly School of
Business, Indiana University—researched the quantitative differences between
public companies that had committed financial statement manipulations and
those that had not.
Beneish theorized there may be up to five useful predictors of earnings
manipulation, which he defined as “an instance in which a company’s managers
violate generally accepted accounting principles (GAAP) to favorably
represent a company’s financial performance.” Beneish’s ratios, which he
labeled “indexes,” used figures he obtained from financial statements.
Continued in article
Joe goes on to explain the ratios that are instead used in the Benish
index.
You might find the following article to be more concise ---
http://articles.businessinsider.com/2011-05-24/markets/30078297_1_earnings-manipulation-financial-ratios-gmi
. . .
Does the Beneish M-Score work?
Beneish used all the companies in the Compustat database between
1982-1992. In his out of sample tests, Beneish found that he could correctly
identify 76% of manipulators, whilst only incorrectly identifying 17.5% of
non-manipulators. You can read the
Cornell University Enron paper referred to above here.
In a 2007 paper - The
Predictable Cost of Earnings Manipulation - Beneish examines the use of
the
M score as a stock selection technique (over the period 1993-2003). The
M-score strategy apparently generated a hedged return of nearly 14% per
annum. A subsequent paper titled quot;Identifying
Overvalued Equityquot; showed that an overvaluation score (O-Score)
combining proxies for earnings overstatement, merger activity, stock
issuance, and the manipulation of operating activities was able to identify
firms with one-year-ahead abnormal price declines averaging -27%.
The Source:
This is the link to the original paper on the
Detection of Earnings Manipulation - as well as to a subsequent paper by
Beneish -
The Relation between Accruals and the Probability of Earnings Manipulation.
Other Sources
Jensen Comment
I have not studied this literature enough to pass judgment and am glad to see
you delving into this model.
My reaction to any such models is to apply Darwin's Theory on Survival of the
Fittest. If the M-Score was really a great portfolio selection model I think
there would be more evidence of it catching on in the investment world.
If the M-Score was really a great fraud detection model I think the SEC and
FBI would be employing it widely today. I don't see any evidence of this, but
your contacts within the SEC are better than my contacts (virtually zero at this
point).
As the saying goes in biology, the proof is in what survives. It's probably
too early to write the M-Score off, but I'm not really optimistic. There are too
many important variables in both fraud detection and portfolio selection that
are not even disclosed in financial statements let alonge booked into the
ledger. Hence ratios derived from financial statements are limited at the
starting line.
I have my doubts about some of the components of this model. For example, are
receivables really a big deal at Dell? I've not looked at Dell's financial
statements, but I thought Dell generally collected the money before building
a customer's computer. Dell certainly had my money in the bank before
building my two fine computers.
One thing that fraudsters might keep in mind is the M-Score model when
working up their phony financial statements. ZZZZ Best could easily have
invented financial statements that had a pretty good M-Score if the M-Score had
been invented and was a big deal at the time.
Fraudsters are really clever at getting around barriers that stand in their
way. That's why most of them don't get caught at all or don't get caught until
after the damage is done.
"Earnings Manipulation and Expected Returns," by Messod Daniel Beneish,
Charles M.C. Lee, and D. Craig Nichols, SSRN, March 31, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2241717
Abstract:
An accounting-based earnings manipulation detection model has strong
out-of-sample power to predict cross-sectional returns. Companies with a
higher probability of manipulation (M-score) earn lower returns on every
decile portfolio sorted by size, book-to-market, momentum, accruals, and
short interest. The predictive power of M-score stems from its ability to
forecast changes in accruals and is most pronounced among low-accrual
(ostensibly “high-earnings-quality”) stocks. These findings support the
investment value of careful fundamental and forensic analyses of public
companies.
Keywords:
Equity Investments, Fundamental Analysis (Sector, Industry, Company),
Valuation of Individual Equity Securities, Company Analysis, Financial
Statement Analysis, Financial Reporting Quality, Aggressive Financial
Reporting Techniques
Jensen Comment
I still stand by my knee jerk reaction that any forecasting models using only
financial statement data are likely to have missing variable problems because
there are so many important variables not contained in the financial statements.
I would look first for missing variables affecting non-discretionary
accruals versus discretionary accruals.
And always keep in mind that correlation is not causation.
"How Non-Scientific Granulation Can Improve Scientific Accountics"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf
Hi again Tom,
One thing to think about is that Beneish developed his fraud detection
model before FAS 133 was being widely implemented in the USA. As a result it
is built financial statement manipulation before many firms shifted tactics
for managing earnings.
Among financial institutions and some corporations that newer way of
managing earnings is hanky pank in estimation fair values of derivative
financial instruments, hanky pank in estimating edge effectiveness, and
bending the hedge accounting rules such as taking hedge accounting on
oortfolio hedges that seldom qualify for hedge accounting. I don't see how
these newer types of earnings management ploys are captured in teh Beneish
M-Factor index.
For example, probably the largest earnings management fraud in history
was committed by Franklin Raines when he was CEO of the tirllion dollar
Fannie Mae. His tactics were all three of the above hanky pank ploys with
derivative financial instruments and hedge accounting. I should be recalled
that the earnings management was so blatant that KPMG was eventually fired
from what was probably its biggest audit client in history ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
As I recall Dell has been accused of some hanky pank accounting for
derivative financial instruments. I can't recall the citations of the top of
my head, but Dell is certainly a heavy player in hedge accounting ---
http://www.wikinvest.com/stock/Dell_%28DELL%29/Derivative_Instruments
I just cannot see how the M-Score will effective capture hanky pank
financial statement manipulation in fair value accounting in general and in
particular accounting for speculation and hedging under FAS 133 hanky pank.
Respectfully,
Bob Jensen
Dilbert: The Best Way to Evaluate a Fund ---
http://www.ritholtz.com/blog/2013/04/dilbert-the-best-way-to-evaluate-a-fund/
"Loan Accounting? The Public Can’t Handle the Truth!" by Tom Selling,
The Accounting Onion, April 18, 2013 ---
http://accountingonion.com/2013/04/loan-accounting-the-public-cant-handle-the-truth.html
Jensen Comment
Tom never mentions our prior threads on this subject on the
AEMC that dealt
with such things as difficulties in measuring fair values of troubled loans for
which there is no market such a the hog silage lagoon loans of Ole versus Sven.
He never mentions that the FDIC "stress tests" require granulation of details
about why Ole's loan is more troublesome than Sven's loan. An assumed market for
hog sewage lagoon loans does not drill (granulate) down as to why Ole's loan is
more troublesome than Sven's loan even though both loans are in default. The
FASB approach
allows for recognition of expected payback differences between the two hog
farmers. The FDIC, on the other hand, requires this type of information in
stress tests.
Tom implies that fair values of troubled loans are not disclosed unless they
are booked into the ledgers. He doesn't mention our
AECM debates
where I propose multi-column reporting with hard-to-estimate and volatile fair
values reported in an adjoining column.
He does not mention the volatility in earnings that results from fair value
bookings that are not realized and may never be realized.
Since we've been round and round previously I see no need to debate Tom's
version of "Truth" once again since he insists that fair values be booked rather
than simply reported in an adjoining column.
My answer on fair value accounting is and will remain that the best way to
report fair values and changes in
OCI are in
multiple columns of financial statements.
April 20, 2013 reply from Bob Jensen
Hi Patricia,
Some years back I wrote the following on the AECM ---
http://www.trinity.edu/rjensen/Theory02.htm
To my knowledge the first accountant to assert
that fair value accounting was "truth" to my knowledge was Kenneth
MacNeal. I've really enjoyed these intense
friendly debates about single-column versus multiple column financial
statements with Tom Selling and Patricia Walters on the AECM. But I
do not want to leave anybody with the impression that I'm an advocate of
historical costing balance sheets. I'm opposed to such balance
sheets for reasons never envisioned by current value reporting scholars
like Kenneth MacNeal, John Canning, Ray Chambers, Bob Sterling, Edgar
Edwards, Phillip Bell, and others. I merely advocate a historical cost
column in the balance sheet because I believe there is value added in
reporting net earnings based upon only legally realized revenues and
profits under the matching principle. I do think the historical cost
balance accounts are residuals of the realized revenue matching concept
that have enormous limitations in terms of evaluating financial
opportunities and risks.
The first scholar to ever associate exit value accounting to "Truth in
Accounting" to my knowledge was Kenneth MacNeal in the context of going
concern accounting (as opposed to personal financial statements and business
liquidation accounting). His 1939 book Truth in Accounting made a
strong case for exit value accounting.
Scholars Book reprinted MacNeal's classic 1939 Book (ISBN 0914348043 )
http://books.google.com/books/about/Truth_in_Accounting.html?id=zokDYAAACAAJ
Tom Selling on January 23, 2012 wrote the following ---
http://accountingonion.typepad.com/theaccountingonion/2012/01/
For nearly 100 years leading academics have
advocated some type of current cost or value replacement of the
historical cost basis of accounting. Historical cost never pretended, as
repeatedly noted by AC Littleton, to be valuation accounting. In 1929,
John Canning started the ball rolling for current (replacement) cost
accounting, which is sometimes called "entry value" accounting. In 1939,
Kenneth MacNeal commenced the ball rolling for exit value accounting
where buildings, vehicles, and factory machinery are valued at what they
can sell for, rather than amortized historical costs.
From an academic standpoint the literature on
value accounting has probably been more focused upon the bad features
(e.g., goodwill accounting) of historical cost accounting rather than on
convincing research that some type of "value" accounting justifies the
costs of preparation. The sermons on the evils of historical cost
accounting became less convincing as research emerged in the 1990s
showing that historical cost accounting really did have value for both
earnings and stock price forecasting.
John Canning's current (replacement) cost baton
has now been passed to Tom Selling. Like John Canning, Tom advocates
that business firms spend tens of billions of dollars annually shifting
from traditional historical cost reporting of operating assets to
replacement costs. The problem is that replacement cost advocates can
point to zero research convincing us that the benefits of such drastic
changes in financial statements justify the costs.
Entry (replacement) cost adjustments of historical costs advocated early
on in John Canning's famous doctoral dissertation really is not in
the realm of "fair value" accounting since it is really is only
cost-adjusted accounting complete with all the arbitrary accruals that exit
value theorists hate such as depreciation and amortization.
So let's return to exit value accounting and "Truth""
"Truth in Accounting: The Ordeal of Kenneth MacNeal," by S.A. Zeff,
The Accounting Review, July 1982.
MacNeal's book was controversial to say the least and was generally
not well received at first, although various scholars picked up the exit
valuation ball and ran with it in accounting theory. Highly notable were
Accounting Hall of Famers Ray Chambers, Bob Sterling, Edgar Edwards, and
Phillip Bell ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/
Some of MacNeal's deciples were thus inducted into the Hall of Fame whereas
he himself has been overlooked.
Shortly thereafter in 1939 Hall of Famers Bill Paton and A.C. Littleton
countered MacNeal in their 1940 defense of historical cost accounting on the
grounds that it was never intended to be valuation accounting. Rather it
focused more on the income statement and the Matching Principle were as a
result of double entry accounting the balance sheet was a secondary
accumulation of residuals. In fair value accounting the balance sheet is
primary and the income statement is an accumulation of residuals that
comingle realized transactions with unrealized changes in value.
http://www.trinity.edu/rjensen/theory01.htm#Paton
Whereas some fair value advocates claim that exit value accounting is the
only "truth" in accounting, other accounting theorists are more cautious
about throwing about the word "truth" --- especially in our Academy where
words like "truth" and "proof" are generally avoided outside the context of
explicit underlying assumptions that are almost always open to debate.
One of the most popular Excel
spreadsheets that Bob Jensen ever provided to his students ---
www.cs.trinity.edu/~rjensen/Excel/wtdcase2a.xls
I will close this tidbit with several articles that I think dispel the
notion that fair value accounting is "truth" outside certain concepts and
assumptions.
Article One (when "truth" is not in fair value earnings
Largely because fair value theorists cannot define net income on
anything other than cherry-picked Hicksian theory, the FASB and IASB
standard setters instead focus on the balance sheet where think they are
on more solid footing conceptualizing assets and liabilities. This,
however, is not without its troubles.
See
"The Asset and Liability View: What It Is and What It Is
Not—Implications for International Accounting Standard Setting from a
Theoretical Point of View"
Jens Wüstemann, University of Mannheim; Sonja Wüstemann, Goethe
University Frankfurt am Main
American Accounting Association Annual Meetings, August 4, 2010
http://aaahq.org/AM2010/display.cfm?Filename=SubID_2022.pdf&MIMEType=application%2Fpdf
I would like you, Tom, and Patricia to especially note the reference
to the "stewardship function" below in the context of historical cost
accounting.
ABSTRACT
In their current standard setting projects the FASB and the IASB
seek to enhance consistency in the application of accounting
standards and comparability of financial statements by fully
implementing the asset and liability view. However, neither in
standard setting nor in the accounting literature is there agreement
on what the asset and liability view constitutes. In this paper, we
show that the asset and liability view is compatible with different,
sometimes even opposing concepts, such as historical cost accounting
and fair value accounting, and thus cannot ensure internal
consistency on its own. By means of the example of revenue
recognition we point out the difficulty to determine the changes in
assets and liabilities that shall give rise to revenue. We argue
that the increase in assets that leads to revenue is the obtainment
of the right to consideration and thus should be focused on by the
Boards.
1. Introduction
A major aim of the FASB and
the IASB in their current standard setting projects is to achieve
internal consistency of the accounting regimes U.S. GAAP and IFRS (IASB
2008c, BC2.46; IASB 2008a, S3; IASB 2008d, par. 5; IASB 2009, p. 5).
One of the reasons for inconsistencies in present U.S. GAAP and IFRS
is that recognition and measurement principles and rules are
developed on the basis of two competing concepts − the asset and
liability view and the revenue and expense view (Wüstemann and
Wüstemann 2010).
Until the 1970s the so called
revenue and expense view had been prevailing in international
accounting standard setting. In the U.S. this view was introduced by
Paton and Littleton in the American Accounting Association Monograph
No. 3 in 1940 (Paton and Littleton 1940: 1956) and soon became the
state of the art in U.S. accounting theory and practice. Similar
developments took place in other countries, e.g. Germany, where
Schmalenbach (1919) was the main driver for the establishment of the
comparable ’dynamic accounting theory’
(Dynamische
Bilanztheorie)
According to the revenue and expense view the principal purpose of
accounting is to determine periodic net income as a measure of an
entity’s effectiveness in using inputs to obtain and sell output (stewardship
function) by recognising
revenue when it is earned or realised and by matching the related
costs with those revenues (FASB 1976, par. 38−42; Paton and
Littleton 1940: 1956, p. 10 et sqq.; see for the tradition of the
stewardship function Edwards, Dean and Clarke 2009). Some proponents
of the revenue and expense view see net income as an indicator of an
entity’s ‘usual, normal, or extended performance’ (‘earning power’)
(FASB 1976, par. 62) that may help users not only to assess
management’s performance but also to estimate the value of the firm
(Black 1980, p. 20; Breidleman 1973, p. 654). This requires
irregular and random events that distort net periodic profit, such
as the receipt of grants and losses from bad debt, to be smoothed
out (Beidleman 1973, p. 653 et sqq.; Bevis 1965: 1986, p. 104−107;
FASB 1976, par. 59; Schmalenbach 1919, p. 32−36). Under the revenue
and expense view the function of the balance sheet is to ‘store’
residuals resulting from the matching and allocation process; the
deferred debits and credits depicted in the balance sheet do not
necessarily represent resources and obligations (Paton and Littleton
1940: 1956, p. 72−74; Schmalenbach 1919, p. 26; Sprouse 1978, p.
68).
In
the 1970s the FASB realised that the key concepts under the revenue
and expense view − revenues and expenses − are not precisely
definable making earnings ‘unduly subject to the effects of personal
opinion about what earnings of an enterprise for a period should be’
(FASB 1976, par. 60). In order to limit arbitrary judgements and to
achieve a more consistent income determination the FASB decided to
shift the focus to the more robust concepts of assets and
liabilities and thus to the asset and liability view as evidenced by
the issuance of SFAC 3
Elements of
Financial Statements
(now SFAC 6) in 1980
(Storey 2003, p. 35 et sqq.; Miller 1990, p. 26 et seq.; see for a
similar development in Germany around the same time Moxter 1993).
The so called asset and liability view in the U.S. has its origins
in the Sprouse and Moonitz monograph that was published in 1962 as
part of the AICPA’s Accounting Research Studies.
Under this view all financial
statement elements are derived from the definitions of assets and
liabilities. Income resulting from changes in assets and liabilities
measures an entity’s increase in net assets (FASB 1976, par. 34;
Johnson 2004, p. 1; Ronen 2008, p. 184; Sprouse and Moonitz 1962,
par. 11, 46, 49). The asset and liability view can serve the purpose
to objectify income measurement by restricting recognition in the
balance sheet to those items that embody resources and obligations (Sprouse
1978, p. 70). Alternatively, the asset and liability view can be
adopted in order to inform users about future cash flows that are
expected to flow from an entity’s assets and liabilities, which are
supposed to help them in estimating firm value (Scott 1997, p.
159−162; Hitz 2007, p. 333 and 336−338).
Despite the declared shift
from the revenue and expense view to the asset and liability view in
the 1970s, certain U.S. standards and also the ‘older’ IFRS, for
example those on revenue recognition, still follow the revenue and
expense view (Ernst & Young 2009, p. 1558; Wüstemann and Kierzek
2005, p. 82 et seq.). In the beginning of the 21st century the FASB
and the IASB have begun several projects, above all the Conceptual
Framework Project, that shall lead to an all-embracing
implementation of the asset and liability view (Wüstemann and
Wüstemann 2010).
We observe that both in the
accounting literature and the standard setting processes, there is
confusion about the meaning and implications of the asset and
liability view, especially as regards the role of the realisation
principle and the matching principle as well as fair value
measurement (see literature review below). A second problem is that
the asset and liability view does not provide clear guidance on how
assets and liabilities shall be defined and which changes in assets
and liabilities shall give rise to income. The FASB and the IASB
have − up to now − been struggling with the problem of bringing
current revenue recognition guidance in conformity with the asset
and liability view for seven years. In December 2008, they finally
published a Discussion Paper ‘Preliminary Views on Revenue
Recognition in Contracts with Customers’, but the issuance of the
new standard is not yet foreseeable.
The aim of this paper is to
shed light on the conceptual underpinnings of the asset and
liability view, to clarify misunderstandings in the accounting
literature and standard setting about its meaning and to discuss
implications for international accounting standard setting. The
remainder is organised as follows: In the first part of the paper we
depict the different opinions that exist with regard to the asset
and liability view and then clarify the concept by defining
recognition and measurement principles as well as purposes of
financial statements that are compatible with this view.
Subsequently, we analyse in how far the asset and liability view is
implemented in present U.S. GAAP and IFRS and in which areas
accounting principles still exist that oppose the asset and
liability view. In the final part we point out the difficulty to
define assets and liabilities taking the current FASB’s and IASB’s
joint project on revenue recognition as an example and make
suggestions for improvement.
Continued in article
http://aaahq.org/AM2010/display.cfm?Filename=SubID_2022.pdf&MIMEType=application%2Fpdf
Conclusion
And after all these years of trying the standard setters have not yet
come up with standards that are very good for evaluating financial
performance of business firms, something that they are well aware of in
Australia ---
"GAAP Based Financial Reporting: Measurement and Business Performance"
---
Click Here
http://www.charteredaccountants.com.au/Industry-Topics/Reporting/Resources-and-toolkits/~/media/Files/Industry
topics/Reporting/Resources and
toolkits/Reports/GAAPbased_financial_reporting.ashx
I think the major problem, aside from the cost of generating more
relevant and reliable information, is that standards setters never look
beyond single-column financial statements that inevitably lead them to
horrid mixed model measurements that destroy aggregations into summary
measures like "Total Assets" and "Net Income." Bob Herz recommends doing
away with aggregating net income metrics. I recommend having multiple
columns and multiple net income aggregations.
See
http://www.trinity.edu/rjensen/theory02.htm#ChangesOnTheWay
Article Two (when "truth" is not in fair value earnings)
Spinning Debt Into Earnings With the Wave of a Fair Value
Accounting Wand
"Euro banks' £169bn in accounting alchemy," by: Lindsey White,
Financial Times Advisor, January 19, 2009 --- Click Here
European banks conjured more than £169bn of
debt into profit on their balance sheets in the third quarter of
2008, a leaked report shows.
Money Managementhas gained exclusive access
to a report from JP Morgan, surveying 43 western European banks.
It shows an exact breakdown of which banks
increased their asset values simply by reclassifying their holdings.
Germany is Europe's largest economy, and
was the first European nation to announce that it was in recession
in 2008. Based on an exchange rate of 1 Euro to £0.89, its two
largest banks, Deutsche Bank and Commerzbank, reclassified £22.2bn
and £39bn respectively.
At the same exchange rate, several major UK
banks also made the switch. RBS reclassified £27.1bn of assets, HBOS
reclassified £13.7bn, HSBC reclassified £7.6bn and Lloyds TSB
changed £3.2bn. A number of Nordic and Italian banks also switched
debts to become profits.
Banks are allowed to rearrange these
staggering debts thanks to an October 2008 amendment to an
International Accounting Standards law, IAS 39. Speaking to MM, IAS
board member Philippe Danjou said that the amendment was passed in
"record time".
The board received special permission to
bypass traditional due process, ushering through the amendment in a
matter of days, in order to allow banks to apply the changes to
their third quarter reports.
However, it is unclear how much choice the
board actually had in the matter.
IASB chairman Sir David Tweedie was
outspoken in his opposition to the change, publicly admitting that
he nearly resigned as a result of pressure from European politicians
to change the rules.
Danjou also admitted that he had mixed
views on the change, telling MM, "This is not the best way to
proceed. We had to do it. It's a one off event. I'd prefer to go
back to normal due process."
While he was reluctant to point fingers at
specific politicians, Danjou admitted that Europe's "largest
economies" were the most insistent on passing the change.
As at December 2008, no major French,
Portuguese, Spanish, Swiss or Irish banks had used the amendment.
BNP Paribas, Credit Agricole, Danske Bank,
Natixis and Societe Generale were expected to reclassify their
assets in the fourth quarter of 2008.
The amendment was passed to shore up bank
balance sheets and restore confidence in the midst of the current
credit crunch. But it remains to be seen whether reclassifying major
debts is an effective tactic.
"Because the market situation was unique,
events from the outside world forced us to react quickly," said
Danjou. "We do not wish to do it too often. It's risky, and things
can get missed."
Article Three (when amortized cost seems to more of the
"truth")
"Amortized Cost Accounting is “Fair” for Money Market Funds,"
U.S. Chamber of Commerce Center for Capital Markets Competitiveness,
Fall 2012
http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/Money-Market-Funds_FINAL.layout.pdf
Summary
Recent events have caused the
U.S. Securities and Exchange Commission (SEC) to rethink the
long-standing use of amortized cost by money market mutual funds in
valuing their investments in securities. This practice supports the
use of the stable net asset value (a “buck” a share) in trading
shares in such funds. Some critics have challenged this accounting
practice, arguing that it somehow misleads investors by obfuscating
changes in value or implicitly guaranteeing a stable share price.
This paper shows that the use
of amortized cost by money market mutual funds is supported by more
than 30 years of regulatory and accounting standard-setting
consideration. In addition, its use has been significantly
constrained through recent SEC actions that further ensure its
appropriate use. Accounting standard setters have accepted this
treatment as being in compliance with generally accepted accounting
principles (GAAP). Finally, available data indicate that amortized
cost does not differ materially from market value for investments
industry wide. In short, amortized cost is “fair” for money market
funds.
Background
Money
market mutual funds have been in the news a great deal recently as
the SEC first scheduled and then postponed a much-anticipated late
August vote to consider further tightening regulations on the
industry.1
Earlier,
Chairman Mary Schapiro had testified to Congress about her intention
to strengthen the SEC regulation of such funds, in light of issues
arising during the financial crisis of 2008 when one prominent fund
“broke the buck,” resulting in modest losses to its investors.
Sponsors of some other funds have sometimes provided financial
support to maintain stable net asset values. And certain funds
recently experienced heavy redemptions due to the downgrade of the
U.S. Treasury’s credit rating and the European banking crisis.
Money market funds
historically have priced their shares at $1, a practice that
facilitates their widespread use by corporate treasurers,
municipalities, individuals, and many others who seek the
convenience of low-risk, highly liquid investments. This $1 per
share pricing convention also conforms to the funds’ accounting for
their investments in short-term debt securities using amortized
cost. This method means that, in the absence of an event
jeopardizing the fund’s repayment expectation with respect to any
investment, the value at which these funds carry their investments
is the amount paid (cost) for the investments, which may include a
discount or premium to the face amount of the security. Any discount
or premium is recorded (amortized) as an adjustment of yield over
the life of the security, such that amortized cost equals the
principal value at maturity.
Some commentators have
criticized the use of this amortized cost methodology and argued for
its elimination. In a telling example of the passionate but
inaccurate attention being devoted to this issue, an editorial in
the June 10, 2012, Wall Street Journal described this
longstanding financial practice in a heavily regulated industry as
an “accounting fiction” and an “accounting gimmick.”
. . .
Reasoning for Use of Amortized Cost
The FASB has been considering
various aspects of the accounting for financial instruments for
approximately 25 years. During that time it has issued standards on
topics such as accounting for marketable securities, accounting for
derivative instruments and hedging, impairment, disclosure, and
others. Also, the FASB has issued standards or endorsed standards
issued by the AICPA of a specialized nature applying to certain
industry groups such as investment companies, insurance companies,
broker/dealers, and banks. Further, the FASB is presently involved
in a major project that has encompassed approximately the past 10
years, whereby it is endeavoring to conform its standards on
financial instruments to the related standards issued by the
International Accounting Standards Board. Aspects of that project
have stalled recently, and the two boards have reached different
conclusions on certain key issues. Other aspects of that project are
moving forward.
Over this 25-year period,
probably the most controversial aspect of the financial instruments
project has been to what extent those instruments should be carried
at market or fair value in financial statements rather than
historical cost. On several occasions the FASB has indicated a
strong preference for fair value as a general objective. But there
has been a great deal of opposition from many quarters, and the FASB
has tended to determine the appropriate measurement attribute for
particular instruments (fair value, amortized cost, etc.) in
different projects based on the facts and circumstances in each
case.
. . . (very long
passages from this 21-page article are not quoted here)
Conclusion
Accounting for investment
securities by money market mutual funds appropriately remains based
on amortized cost. The amortized cost method of accounting is
supported by the very short-term duration, high quality, and
hold-to-maturity nature of most of the investments held. The SEC’s
2010 rule changes have considerably strengthened the conditions
under which these policies are being applied. As a result of the
2010 SEC rule changes, funds now report the market value of each
investment in a monthly schedule submitted to the SEC that is then
made publicly available after 60 days. That provides additional
information for investors. And the FASB’s current thinking
articulates this accounting treatment as GAAP.
Jensen Comment
My main objection to booking fair values of HTM investments is that the
interim adjustments for fair values that will never be realized destroys
the income statement. Of course, the FASB and IASB have systematically
destroyed the concept of net earnings in many other standards to a point
where these standard setters can no longer even define net earnings.
Research Studies from the Chamber's Center for Capital Markets ---
http://www.centerforcapitalmarkets.com/resources/publications/
Article Four (a video)
Frank Partnoy and Lynn Turner contend that Wall
Street bank accounting is an exercise in writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be
Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!
"Report: Apple returned 8 million shoddy iPhones to Foxconn," by Simon
Sharwood, The Register, April 22, 2013 ---
http://www.theregister.co.uk/2013/04/22/apple_returns_iphones_to_foxconn/
. . .
With a cost to manufacture of $US200 apiece,
Foxconn is apparently preparing to take a hit of up to $1.6bn to cover the
cost of making replacement handsets. China Business suggests the cost of
making new iPhones represents further bad news, not a reason for Foxconn's
recently-revealed financial woes.
China Business is silent on which model of iPhone
failed Apple's quality tests. If it's the current iPhone 5, or the
still-on-sale 4S, the impact of eight million phones failing to appear would
punch a two-or-three-week hole in Apple's supply chain, an assertion we make
on the basis that the company says it sold 47.8m handsets in its last
quarter. That quarter included Christmas, so we can safely assume the
January-March quarter sees a little less handset-selling action.
If the botched phone is a
newer-and-as-yet-unreleased handset, it could be grounds for a delay in its
announcement or release.
"Why Baseball Seats Should be Priced like Airline Tickets," by Rafi
Mohammed, Harvard Business Review Blog, April 5, 2013 ---
Click Here
http://blogs.hbr.org/cs/2013/04/why_baseball_tickets_should_be.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
Jensen Comment
There are obvious similarities in pricing baseball seats and airplane seats. In
both instances most of the costs are fixed either for the season and/or for a
given episode (game or flight). Hotels and airlines now cooperate with online
services that sell vacant seats at bargain prices as the date of the episode
approaches. Perhaps airlines would also benefit from such pricings since empty
seats contribute zero toward fixed costs.
One difference is that many airline flights fly almost full at normal
pricing. This is especially the case on nearly all Southwest Airlines flights.
It is also the case for all airlines on their long routes such as between the
U.S. and Australia and the U.S. and parts of South America.
Another complication is that many flights from the boondocks to airport hubs
are merely legs of longer flights. Discounting merely one leg of a longer flight
may not entail all that much savings on total trip costs. Baseball games are not
legs to "trips" unless they are part of an entitle travel package that includes
airline tickets, hotel reservations, ground transportation, and games.
I once attended an accounting education technology conference at the
University of North Texas where one feature of the conference were bus tickets
that included seats to a Rangers night game.
A more exciting variation for airlines is seat pricing based upon the weight
of each passenger at the time of check in ---
http://www.cs.trinity.edu/~rjensen/temp/TaxAirlineSeatCase.htm
Samoa Airlines has already instigated this weigh in policy..
Humor for April 1-30, 2013
The 12 Funniest Google Searches Ever ---
http://www.businessinsider.com/best-google-search-results-ever-2013-4
The 40th President of the United States (Richard Prior) ---
http://www.youtube.com/watch_popup?v=-_cdbByTeNE
Tom Lehrer’s Mathematically and Scientifically Inclined Singing and
Songwriting, Animated ---
http://www.openculture.com/2013/04/tom_lehrer_math_animated.html
The Great Flydini (Steve Martin with Johnny Carson) ---
http://rubytooth.com/link/45516
Unusual Brass Band (Humor) ---
http://www.wimp.com/brassband/
Woman calls cops to report that kittens are having sex in her yard ---
http://now.msn.com/wisconsin-woman-calls-police-to-report-kittens-having-sex#scpshrtu
Bob Jensen probably blogs from his cottage bout as much as anybody in the
world blogs from a personal residence. At last another blogger, Robert Moran,
has shown Jensen how he can probably get a refund from the IRS rather than pay
all those taxes he's been sending off to Uncle Sam.
"'That Seems About Right,' Says Soon-To-Be-Audited Man," TheOnion,
April 2, 2013 ---
http://www.theonion.com/articles/that-seems-about-right-says-soontobeaudited-man,31898/?ref=auto
Forwarded by Gene and Joan
One day, shortly after joining the PGA tour in 1965, Lee Trevino, a
professional golfer and married man, was at his home in Dallas , Texas mowing
his front lawn, as he always did.
A lady driving by in a big, shiny Cadillac stopped in front of his house,
lowered the window and asked, Excuse me, do you speak English?"
Lee responded, Yes Ma'am, I do."
The lady then asked, What do you charge to do yard work?
Lee said, "Well, the lady in this house lets me sleep with her."
The lady hurriedly put the car into gear and sped off.
Forwarded by Gene and Joan
The toilet seat
was invented in
Minnesota, but
twenty years
later an Iowan
invented the
hole in it.
When Ole
accidentally
lost 50 cents in
the outhouse, he
immediately
threw in his
watch and
billfold. He
explained, 'I'm
not going down
dere yust for 50
cents.'
A Norwegian
appeared with
five other men
in a rape case
police line-up.
As the victim
entered the
room, the
Norwegian
blurted, 'Yep,
dat's her!'
A Swedish woman
competed with a
French woman and
an English woman
in the Breast
Stroke division
of an English
Channel swim
competition. The
French woman
came in first,
the English
woman second.
The Swede
reached shore
completely
exhausted. After
being revived
with blankets
and coffee, she
remarked, 'I
don't vant to
complain, but I
tink dose other
two girls used
der arms.'
Two Norwegians
from Minnesota
went fishing in
Canada and
returned with
only one fish..
'The way I
figger it, dat
fish cost us
$400' said the
first Norwegian
'Vell,' said the
other one, 'At
dat price it's a
good ting ve
didn't catch any
more.'
A Swede took a
trip to Fargo,
North Dakota .
While in a bar,
an Indian on the
next stool spoke
to him in a
friendly manner
...
'Look,' he said,
'let's have a
game if you
answer it, I'll
buy YOU a drink,
if you can't,
then you buy ME
one, Okay?'
'Ya, dat sounds
purty good,'
said the Swede.
The Indian said,
'My father and
my mother had
one child. It
wasn't my
brother. It
wasn't my
sister. Who was
it?'
The Swede
scratched his
head and finally
said, 'I give
up. Who vas it?'
'It was ME,'
chortled the
Indian. So the
Swede paid for
the drinks.
Back in Sioux
Falls the Swede
went into a bar
and spotted one
of his cronies,
'Sven,' he said,
'I got a game.
If you can
answer a
qvestion, I buy
you a drink. If
you can't, YOU
have to buy ME
vun. Fair
enough?'
'Fair enough,'
said Sven.
Okay....my
fadder and
mudder had vun
child. It vasn't
my brudder, It
vasn't my
sister, Who vas
it?'
'Search me, '
said Sven. 'I
give up. Who vas
it?'
'It vas some
Indian up in
Fargo, Nort
Dakoda.'
Ole and Lena
were getting on
in years. Ole
was 92 and Lena
was 89. One
evening they
were sitting on
the porch in
their rockers
and Ole reached
over and patted
Lena on her
knee. 'Lena ,
vat ever
happened tew our
sex relations?'
He asked.
'Vell, Ole, I
yust don't
know,' replied
Lena . 'I don't
tink ve even got
a card from dem
last Christmas.'
Ole bought Lena
a piano for her
birthday.. A few
weeks later,
Lars inquired
how she was
doing with it.
'Oh,' said Ole,
'I persvaded her
to svitch to a
clarinet.'
'Vell,' Ole
answered,
'because vith a
clarinet, she
can't sing.
The phone rings
in the middle of
the night when
Ole and Lena are
in bed and Ole
answers. 'Vell
how da hell
should I know,
dats two tousand
miles from here'
he says and
hangs up.
'Who vas dat?'
asks Lena .
'I donno, some
fool wanting to
know if da coast
vas clear.
On their
honeymoon trip
they were
nearing
Minneapolis when
Ole put his hand
on Lena 's knee.
Giggling, Lena
said, 'Ole, you
can go farther
dan dat if you
vant to.'
Forwarded by Gene and Joan
PONDERISMS (some things to think about)
1- I used to eat a lot of natural foods until I learned that most people die
of natural causes.
2- There are two kinds of pedestrians . . . The quick and the dead.
3- Life is sexually transmitted.
4- Healthy is merely the slowest possible rate at which one can die.
5- The only difference between a rut and a grave is the depth.
6- Health nuts are going to feel stupid someday, lying in hospitals dying of
nothing.
7- Have you noticed since everyone has a cell phone these days no one talks
about seeing UFOs like they used to?
8- Whenever I feel blue, I start breathing again.
9- All of us could take a lesson from the weather. It pays no attention to
criticism.
10- In the 60's, people took acid to make the world weird. Now the world is
weird and people take Prozac to make it normal.
11- How is it one careless match can start a forest fire, but it takes a
whole box to start a campfire?
12- Who was the first person to look at a cow and say, 'I think I'll squeeze
these dangly things and drink whatever comes out'? Hmmmmm, How about eggs ? . .
.
13- If Jimmy cracks corn and no one cares, why is there a song about him?
14- Why does your OB-GYN leave the room when you get undressed if they are
going to look up there anyway?
16- If corn oil is made from corn, and vegetable oil is made from vegetables,
then what is baby oil made from?
17- Do illiterate people get the full effect of Alphabet Soup?
18- Does pushing the elevator button more than once make it arrive faster?
19- Why doesn't glue stick to the inside of the bottle?
BEST
BAR JOKE....EVER (forwarded by Auntie Bev)
Guy goes
into a bar in Louisiana where there's a robot bartender!
The robot
says, "What will you have?"
The robot
brings back his drink and says to the man, "What's your IQ?"
The robot
then proceeds to talk about physics, space exploration and medical
technology.
The guy
leaves, . . . but he is curious . . . So he goes back into the bar.
The robot
bartender says, "What will you have?"
Again,
the robot brings the man his drink and says, "What's your IQ?"
The robot
then starts to talk about NASCAR, Budweiser, the Lions and
LSU.
The guy
leaves, but finds it very interesting, so he thinks he will try it
one more time. He goes back into the bar.
The robot
says, "What will you have?"
The guy
says, "Whiskey," and the robot brings him his whiskey.
The robot
then says, "What's your IQ?"
The guy
says, "Uh,about 50.
"The
robot leans in real close and says, "SO, . . . you people . . still
happy . . . with Bob Jensen's Tidbits?"
Humor Between April 1-30, 2013 ---
http://www.trinity.edu/rjensen/book13q2.htm#Humor04301
Humor Between March 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor033113
Humor Between February 1-28, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor022813
Humor Between January 1-31, 2013 ---
http://www.trinity.edu/rjensen/book13q1.htm#Humor013113
Humor Between December 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor123112
Humor Between November 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor113012
Humor Between October 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q4.htm#Humor103112
Humor Between September 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor093012
Humor Between August 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor083112
Humor Between July 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q3.htm#Humor073112
Humor Between June 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor063012
Humor Between May 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor053112
Humor Between April 1-30, 2012 ---
http://www.trinity.edu/rjensen/book12q2.htm#Humor043012
Humor Between March 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor033112
Humor Between February 1-29, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor022912
Humor Between January 1-31, 2012 ---
http://www.trinity.edu/rjensen/book12q1.htm#Humor013112
And that's
the way it was on April 30, 2013 with a little help from my friends.
Bob
Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Bob
Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Bob
Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
|
For an elaboration on the reasons you should join a ListServ (usually
for free) go to http://www.trinity.edu/rjensen/ListServRoles.htm |
|
AECM (Accounting Educators)
http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
|
|
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down)
CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access. |
|
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk
This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA. |
|
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation. |
|
Business Valuation Group
BusValGroup-subscribe@topica.com
This discussion group is headed by Randy Schostag
[RSchostag@BUSVALGROUP.COM] |
Concerns That Academic Accounting Research is Out of Touch With Reality
|
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of the
shift from Gemeinschaft to
Gesellschaft. Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting
Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool
Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free
(updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA
Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Bob Jensen's
Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
|
For an elaboration on the reasons you should join a ListServ (usually
for free) go to http://www.trinity.edu/rjensen/ListServRoles.htm |
|
AECM (Accounting Educators)
http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
etc
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
|
|
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down)
CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access. |
|
Yahoo (Practitioners)
http://groups.yahoo.com/group/xyztalk
This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA. |
|
AccountantsWorld
http://accountantsworld.com/forums/default.asp?scope=1
This site hosts various discussion groups on such topics as accounting
software, consulting, financial planning, fixed assets, payroll, human
resources, profit on the Internet, and taxation. |
|
Business Valuation Group
BusValGroup-subscribe@topica.com
This discussion group is headed by Randy Schostag
[RSchostag@BUSVALGROUP.COM] |
Concerns That Academic Accounting Research is Out of Touch With Reality
|
I think leading academic researchers avoid applied research for the
profession because making seminal and creative discoveries that
practitioners have not already discovered is enormously difficult.
Accounting academe is threatened by the
twin dangers of fossilization and scholasticism (of three types:
tedium, high tech, and radical chic)
From
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
“Knowledge and competence increasingly developed out of the internal
dynamics of esoteric disciplines rather than within the context of
shared perceptions of public needs,” writes Bender. “This is not to
say that professionalized disciplines or the modern service
professions that imitated them became socially irresponsible. But
their contributions to society began to flow from their own
self-definitions rather than from a reciprocal engagement with
general public discourse.”
Now, there is a definite note of sadness in Bender’s narrative – as
there always tends to be in accounts
of the
shift from Gemeinschaft to
Gesellschaft. Yet it is also
clear that the transformation from civic to disciplinary
professionalism was necessary.
“The new disciplines offered relatively precise subject matter and
procedures,” Bender concedes, “at a time when both were greatly
confused. The new professionalism also promised guarantees of
competence — certification — in an era when criteria of intellectual
authority were vague and professional performance was unreliable.”
But in the epilogue to Intellect and Public Life,
Bender suggests that the process eventually went too far.
“The risk now is precisely the opposite,” he writes. “Academe is
threatened by the twin dangers of fossilization and scholasticism
(of three types: tedium, high tech, and radical chic).
The agenda for the next decade, at least as I see it, ought to be
the opening up of the disciplines, the ventilating of professional
communities that have come to share too much and that have become
too self-referential.”
What went wrong in accounting/accountics research?
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong
|
Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites
---
http://www.trinity.edu/rjensen/AccountingNews.htm
Accounting
Professors Who Blog ---
http://www.trinity.edu/rjensen/ListservRoles.htm
Cool
Search Engines That Are Not Google ---
http://www.wired.com/epicenter/2009/06/coolsearchengines
Free
(updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
CPA
Examination ---
http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle ---
http://cpareviewforfree.com/
Bob Jensen's
Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm
Bob
Jensen's Homepage ---
http://www.trinity.edu/rjensen/
Bob
Jensen's Threads ---
http://www.trinity.edu/rjensen/threads.htm
Bob
Jensen's Blogs ---
http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called
New Bookmarks ---
http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called
Tidbits ---
http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called
Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures ---
http://www.trinity.edu/rjensen/resume.htm#Presentations
Free
Online Textbooks, Videos, and Tutorials ---
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private
Companies ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Health
Care News ---
http://www.trinity.edu/rjensen/Health.htm
Bob
Jensen's Resume ---
http://www.trinity.edu/rjensen/Resume.htm
574 Shields
Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm
Bob Jensen's Personal History in Pictures ---
http://www.cs.trinity.edu/~rjensen/PictureHistory/
Bob Jensen's Homepage ---
http://www.trinity.edu/rjensen/
