Accounting News Links ---
http://www.trinity.edu/rjensen/AccountingNews.htm

The new AAA Digital Library ---
http://aaajournals.org/

Issues and Resources from the AAA (Some New and Important Stuff) ---
http://aaahq.org/resources.cfm

AAA Newsroom ---
http://aaahq.org/newsroom.cfm

AAA Commons ---
http://commons.aaahq.org/pages/home

AAA Faculty Development ---
http://aaahq.org/facdev.cfm

AAA FAQs ---
http://aaahq.org/about/faq.htm

Listservs, Blogs, and Social Media ---
http://www.trinity.edu/rjensen/ListservRoles.htm

Accounting Career Helpers and Links ---
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

Bob Jensen's Helpers for Accounting Educators ---
http://www.trinity.edu/rjensen/Default3.htm

Free online courses, lectures, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Education Technology Links ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm

Tools and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

Bob Jensen's Threads (with many links to resources for educators) ---
http://www.trinity.edu/rjensen/threads.htm

U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/

Money Chart --- http://xkcd.com/980/huge/#x=-8064&y=-2880&z=4
Thank you George Wright for the heads up.

How Income Taxes Work (including history) --- http://money.howstuffworks.com/income-tax.htm

Why not start with the IRS? (The best government agency web site on the Internet) http://www.irs.gov/ 

IRS Site Map --- http://www.irs.gov/sitemap/index.html

FAQs and answers --- http://www.irs.gov/faqs/index.html

Taxpayer Advocate Service --- http://www.irs.gov/advocate/index.html

Forms and Publications, click on Forms and Publications

IRS Free File Options for Taxpayers Having Less Than $57,000 Adjusted Gross Income (AGI) ---
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=104

Free File Fillable Forms FAQs ---
http://www.irs.gov/efile/article/0,,id=226829,00.html

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

Hint:
If you plan to cheat, use TurboTax since our U.S. Treasury Secretary in charge of the IRS explained how to get away with cheating by using Turbo Tax ---
http://www.youtube.com/watch?v=eKVxGlkPRlo

Here's what happens if you don't use TurboTax

So why not the Turbo Tax Defense?
"Former Ohio State Bar President Gets One Year in Prison for Tax Fraud," by Paul Caron, Tax Prof Blog, January 19, 2012 ---
http://taxprof.typepad.com/

Leslie Hines, a former senior antitrust partner in Thompson Hine's Cleveland office, was sentenced Tuesday to serve a year and a day in prison in connection with his guilty plea on a federal tax fraud charge, according to a press release issued by the Justice Department.

Federal prosecutors had been seeking a sentence of up to 16 months in prison for Jacobs, who was charged last October with filing false tax returns and overstating his business expenses by more than $250,000.

According to court filings [PDF], Jacobs filed four federal income tax returns between 2004 and 2007 that inflated his business expenses by as little as $25,000 and as much as $94,000 in an effort to lower the taxable income he collected from his Thompson Hine partnership. Prosecutors said Jacobs's income in each of those years should have ranged from $633,303 to $759,973.

Jensen Comment
A better lawyer would've embezzled more than that from clients.
Even a lousy accountant could've fabricated expense receipts better than that.
Hence Mr. Hines should've been either an accountant or a better lawyer.

Better yet he should've used the TurboTax Defense that works for big crooks ---
Watch the video how how Mr. Hines should6ve proceeded ---
http://www.youtube.com/watch?v=eKVxGlkPRlo

January 24, 2012 heads up from Barry Rice

Video 1
TurboTax SnapTax Mobile App - File Taxes on Your Android and iPhone!
http://www.youtube.com/watch?v=M-VyLXLAipg

Video 2
SnapTax From TurboTax Will Let You File Your Taxes From Your iPhone ---
http://www.youtube.com/watch?v=4jQ2xLQvbio

Jensen Advice
I instead recommend:

IRS Free File Options for Taxpayers Having Less Than $57,000 Adjusted Gross Income (AGI) ---
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=104

Free File Fillable Forms FAQs ---
http://www.irs.gov/efile/article/0,,id=226829,00.html

Some of the following science tutorial links might be useful resources in accountancy PhD programs and PhD preparation programs such as the prep masters degree program at BYU that won an AAA Innovation in Accounting Education Award. These links are taken from the thousands of tutorial links at
http://www.trinity.edu/rjensen/Bookbob2.htm

Free online courses, lectures, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Big Brother Watch
"Hiding Income? Look Out, Here Comes the 1099-K What merchants need to know about a new form that requires payment processors to report transactions to the IRS," by Karen E. Klein, Bloomberg Business Week, January 24, 2012 ---
http://www.businessweek.com/small-business/hiding-income-look-out-here-comes-the-1099k-01242012.html

Starting this month, business owners will begin getting new tax forms issued by their credit-card and online-payment processors and intended to keep businesses from hiding income. The form, called 1099-K, will document all 2011 transactions processed for sellers with more than 200 transactions and $20,000 in annual gross receipts. The IRS estimates that 53 million forms will be issued by such processors as eBay, PayPal, and Amazon as well as credit-card companies, says Steven Aldrich, chief executive officer of Outright.com, which makes online bookkeeping applications for self-employed people and small business owners. Aldrich spoke with Smart Answers columnist Karen E. Klein about how small business owners should handle the new forms. Edited excerpts of their conversation follow.

The new 1099-K requirement was signed into law by President George W. Bush in 2008 but is just now taking effect. Why is the government mandating this?

Electronic payments are a growing part of our economy, but up to now they have not been officially reported to the IRS. People were on their scout’s honor to report this income. This new form is designed to help close the gap between what businesses and individuals owe the IRS and what they actually pay. It is expected to bring about $9.5 billion into the U.S. Treasury over 10 years by taxing revenue flowing through electronic networks.

That’s a big number.

It is a big number, but our concern is keeping the burden on small business low enough so they don’t lose their competitiveness and don’t have a big burden of extra time they have to put into dealing with this. All businesses will get these, not just small businesses, but larger businesses have got tax teams and people to handle these matters and small business people usually do not. Our concern is that small business owners could be distracted and worried when they get this form and not know what to do with it.

This is going out for the first time to individuals such as eBay and Etsy online sellers. Have they gotten any notice about the form?

The payment processors were required to obtain sellers’ tax identification numbers for these forms, so many of them sent out notices last year when they were verifying the information and making sure the right people got the right form.

What information will the form list?

It’s actually very simple. At the top is a box with your total gross revenue for the year, processed by PayPal or whichever payment processor you use. Beneath that box is a breakdown of revenue month by month.

How is that number going to be compared with what’s reported on an individual’s tax return?

The IRS will look at the gross sales amount reported on the 1099-K and compare it with the total gross receipts reported on an individual’s Schedule C. The amount on the tax return has to be at least as much as what’s reported on the 1099-K.

The interesting thing is that these amounts reported to the IRS are gross sales numbers. But businesses never actually make their gross sales because of refunds, frauds, exchanges, and returns. But none of those expenses are taken out of the gross sales amount.

And business owners don’t pay taxes on gross income, but on net income.

Exactly. So it will be incumbent on the business owner to take the gross amount reported on the 1099-K and capture all the transaction fees, charges, and returns, in addition to the other expenses of running their business, in their tax reporting.

Is that going to be a big burden for micro-businesses?

It’s not going to be a big deal if you have good record keeping. The problem is that most small business owners are still using paper and pencil and spreadsheets to track their business data. This reporting is really a clarion call to move those people into the digital age. Certainly, if you’re taking electronic payments, you need to move to a digital form of keeping your books.

Are there other pitfalls related to the 1099-K?

For service providers, like consultants, who are taking advantage of electronic payment systems, they might get a 1099-MISC for some part of their consulting revenue. But that income would also show up on the 1099-K if it was processed electronically. That could result in double counting that income, so that’s something to be very careful about, especially as more people in the service industry are starting to use services such as PayPal or mobile credit-card readers instead of taking cash or check payments.

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

"Note to a Former Student," by Joe Hoyle, January 21, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/01/note-to-former-student.html

Free CPA Review Courses and Practice Examinations (managed by Professor Joe Hoyle) --- http://cpareviewforfree.com/

Free accounting textbook from a generous accounting professor ---
http://www.ibtimes.com/prnews/20081218/ny-flat-world-knowldg.htm
Also see http://www.flatworldknowledge.com/Joe-Hoyle-Podcast 

"Ernst & Young: Named Top Employer In 2012 Stonewall Workplace Equality Index," by Erica deVry, Big4.com, January 20, 2012 ---
http://www.big4.com/ernst-young/eernst-young-named-top-employer-in-2012-stonewall-workplace-equality-index

The Stonewall Workplace Equality Index, which showcases the UK’s top 100 public and private sector employers for gay, lesbian, and bisexual staff, has named Ernst & Young Employer of the Year for 2012, climbing from third place last year. The firm also received top ranking in Stonewall’s inaugural ‘Global Best Practice Index’.

Commenting on Stonewall’s recognition, Harry Gaskell, Managing Partner for Advisory and Head of Diversity and Inclusiveness at Ernst & Young said:

“Being named the 2012 Employer of the Year is an achievement that we’re very proud of. I’m really happy with the great progress the firm has made since it first entered the Workplace Equality Index in 2005 and look forward to continuing to champion diversity and inclusiveness in 2012.”

Ernst & Young’s leading role in developing the concept of inclusive leadership, its sponsorship of National Student Pride, its engagement with clients about sexual orientation as a workplace issue, and strong leadership driven from the top are some of the progressive initiatives attributed to the firm’s success.

"Deloitte Given Perfect Rating on Human Rights Campaign Corporate Equality Index," by Kalen Smith, Big4.com, January 13, 2012 ---
http://www.big4.com/uncategorized/deloitte-given-perfect-rating-on-human-rights-campaign-corporate-equality-index

The Human Rights Campaign has named Deloitte one of the best places to work for the sixth year in a row. In their 2012 Corporate Equality Index, the HRC noted that it gave Deloitte a 100 percent rating.

Deloitte chief talent officer, Jennifer Steinmann, said that Deloitte is constantly working to provide a workplace that employees will be proud of. Steinmann said that they offer a culture that helps the LGBT community and encourages all of its employees to feel accepted.

Steinmann said that Deloitte offers a number of solutions to the variety of challenges they face as they strive to create an environment that increases employee morale and gives all employees the opportunity to thrive. Deloitte has used a number of Business Resource Groups to educate employees and offer them the resources they need to address the challenges they face in the workplace.

HRC is making its standards increasingly strict. Due to the changes in their eligibility standards, about 50 percent of companies have fallen off of the list. New standards include providing a culture for members of the LGBT community and promoting company citizenship.

Steinmann and other representatives at Deloitte state that they are proud of the fact that Deloitte has consistently earned this recognition since 2006.

Bob Jensen's threads on the best places to work are at
http://www.trinity.edu/rjensen/Bookbob1.htm#careers

Question
Does the Nortel scandal reaffirm the PCAOB implication that Deloitte is the worst of the Big Four auditing firms?

What happens when a company intentionally falsifies its restatements of financial statements to the tune of $1 billion?
"Nortel executives shifted accounting funds to achieve results," by Janet mcfarland, Globe and Mail, January 17, 2012 ---
http://www.theglobeandmail.com/report-on-business/nortel-executives-shifted-accounting-funds-to-achieve-results-crown/article2305453/

Nortel Networks Corp. executives knew as early as the fall of 2002 that they were facing losses in the first half of 2003, but manipulated accounting reserves to ensure a profit in the period so they could trigger their “return to profitability” bonus payments, a Toronto court heard Tuesday.

In his opening statement in the fraud trial of three former Nortel executives, Crown attorney Robert Hubbard said the executives even turned an unexpected profit into a loss in the final quarter of 2002 because it came too early to trigger their bonuses.

“Contrary to Nortel’s own policy for closing its books, senior executives solicited further [accounting] accruals from across the company to turn a profit into a loss,” Mr. Hubbard told Mr. Justice Frank Marrocco of the Ontario Superior Court.

Continued in article

Crown alleges Nortel CEO also falsified results restatement ---
http://www.theglobeandmail.com/report-on-business/crown-alleges-nortel-ceo-also-falsified-results-restatement/article2300479/

"Nortel's auditors flagged no fraud at company, defence lawyer says," The Canadian Press, January 19, 2012 ---
http://www.canadianbusiness.com/article/66615--nortel-s-auditors-flagged-no-fraud-at-company-defence-lawyer-says

Defence lawyers in the fraud trial of three former Nortel Networks executives say the company's independent auditors gave their stamp of approval to financial matters at Nortel.

The lawyers say that contradicts Crown allegations the men were conspiring to defraud the company by cooking its books and manipulating profit reports.

David Porter, counsel for Nortel's ex-CEO Frank Dunn, says accounting firm Deloitte and Touche closely and continuously reviewed and approved the finances of the fallen telecom equipment maker.

He says that external approval negates the Crown's allegations the accused oversaw a widespread scheme to falsify Nortel's records.

He says the kind of white collar crime ring described by the Crown would be unprecedented and would have to involve hundreds of accredited accountants at both Nortel and Deloitte.

Porter delivered opening arguments on behalf of all three accused as the court hears from the defence after a 2 1/2 day opening statement by the Crown.

Continued in article

Question
Does this reaffirm the PCAOB implication that Deloitte is the worst of the Big Four auditing firms?

Personally, I doubt it since all four auditing firms seem to be making a lot of mistakes lately.

"Deloitte Faulted by PCAOB Over Unresolved Audit Deficiencies," by Jesse Hamilton, Business Week,  October 17, 2011 ---
http://www.businessweek.com/news/2011-10-17/deloitte-faulted-by-pcaob-over-unresolved-audit-deficiencies.html

Deloitte & Touche LLP repeatedly failed to support assumptions in audits examined in a 2007 inspection, the Public Company Accounting Oversight Board said in the first public report of unresolved deficiencies involving one of the so-called Big Four accounting firms.

The firm’s quality controls and independence systems give “cause for concern,” the PCAOB said in its report, which was released today. The Washington-based nonprofit, created in 2002 to oversee audits of public companies after the collapses of Enron Corp. and WorldCom Inc., gives audit firms at least a year to fix deficiencies and only releases the reports in cases where auditors fail to make sufficient improvements.

“These deficiencies may result, in part, from a Firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis,” the PCAOB said in the Deloitte report, which didn’t name the clients involved in the cited audits.

The PCAOB in 2007 looked at Deloitte’s practices through inspections at the company’s New York headquarters and 18 other offices. The report made public today lays out instances in which the firm insufficiently weighed clients’ valuation of assets and income-tax assumptions. The watchdog also faulted Deloitte’s independence procedures, saying it “has no formal system in place to monitor the services its foreign affiliates actually perform.”

“In our drive for continuous improvement, we have been making a series of investments focused on strengthening and improving our practice,” Deloitte Chief Executive Officer Joe Echevarria said in a statement. Echevarria, who has been with the firm since 1978, was elected to the top job in April.

The disclosure isn’t a disciplinary action, said Colleen Brennan, a PCAOB spokeswoman. Dozens of smaller registered public accounting firms have had similar criticisms made public and have retained their registration, she said.

The 2007 Inspection Report is at http://pcaobus.org/Inspections/Reports/Documents/2008_Deloitte.pdf

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

"Fitch: Major Global Accounting Changes Hover as Standard-Setting Fatigue Sets In," Market Watch, January 18, 2012 ---
http://www.marketwatch.com/story/fitch-major-global-accounting-changes-hover-as-standard-setting-fatigue-sets-in-2012-01-18
Thank you Patricia Walters for the heads up.

Once you suck at rating bonds enough, obviously the next logical step is to start predicting the progress made by a couple of rulemaking bodies who have a solid track record of stretching out a timeline to nowhere:

Fitch Ratings expects the U.S. will still move forward with plans to incorporate International Financial Reporting Standards (IFRS) into U.S. GAAP, although in a prolonged, cautious and incremental way, according to a new report. Fitch believes a renewed emphasis on issuing converged, 'high quality' accounting standards and the need to re-expose updated proposals for comments has significantly slowed the completion of many accounting projects jointly initiated by FASB and the IASB. The major priority projects initially scheduled for a June 2011 completion are still at various stages of completion in 2012 and some will likely extend into 2013.

[via Fitch]

January 19, 2012 message from Pat Walters

Fitch Ratings has just issued its Global Accounting and Financial Reporting Outlook for 2012. Among other topics, the report summarizes the various approaches to incorporating IFRS into national standards and which option is the likely one for the SEC (and why) as well as what the SEC's options might be IF it decides to require or permit US companies to use IFRS.

This paper doesn't take a position about whether this is a good idea or not. It simply presents the options on the table, makes assessments as to the likelihood that one would be taken, and assesses the impacts of the various options.

I find the Fitch accounting reports to be well thought out and well written. They are certainly accessible to students.

The report also compares the three FASB models (current, 2010, revised/expected 2012) and IFRS 9 in a nice table.

On mandatory auditor rotation, the report concludes "The proposal stands moer of a change to become final in the E.U., while stiff resistance by accounting firms and issuers may prove to be too formidable for the proposal to become law in the U.S."

Enjoy,
Pat

 

January 19, 2012 reply from Bob Jensen

Hi Pat,

Thank you for this. I agree that it is a very good summary document and probably makes the best guess as the way "condorsement" will take place over many years to come.

See the attached table.

I'm bothered by the lack of definition "country-specific" in terms of condorsement. I assume the U.S. will be able to stay on LIFO since the U.S. Tax Code is obviously country specific.

But there's a huge gray zone that bothers me. For example consider embedded derivatives in financial instruments. IFRS 9 says to forget about hunting for embedded derivatives since they are ipso facto (ha ha)  insignificant. Since U.S. companies deal in possibly more financial instruments that the rest of the world combined, my prior experience with corporate executives who have made presentations in some of my hedge accounting dog and pony shows is that it is both common for financial instruments to have embedded derivatives and that the risk metrics in the embedded derivatives frequently differ from risk metrics in the host contracts.

If U.S. companies are in fact taking advantage of the IFRS 9 loophole to hide risk, does this make the issue "country specific??

The embedded derivatives way to hide risk is only one of many other possible "country specific" issues. Suppose U.S. companies begin taking misleading advantage of the softness of IFRS 9 in testing for hedge effectiveness. This is another huge loophole that will allow for hiding of risk if auditors go soft on client efforts to declare questionable hedges as effective.

Actually the list of gray areas can possibly go on infinitum in terms of what become "country specific" issues.

And worse, if there is too much condorsement on "country specific" issues departures of U.S. IFRS from London IFRS grows wider and wider and wider. This could become self-defeating in terms of the original intent of convergences.

And if such gray zone condorsement catches on with over 100 other nations who turn gooey on the way they define their "country specific" departures from IFRS, then we're back to another tower of Accountancy Babel.


It appears to me that the major goal of having one set of worldwide accounting standards always was and will forever be an impossible dream. But then again, those of us that have a knee-jerk hatred for monopoly power are greatly relieved.

Thanks again,
Bob Jensen

January 19, 2012 reply by Bob Jensen

Hi Saeed,

If the condorsement track is to be taken, there are two opposing alternatives that must also be resolved by the SEC?

Alternative 1
Is the fundamental basis of accounting to be IFRS with condorsement (country-specific) exceptions that are to be blended in piecemeal year after year ad infinitum? And if so, when will the foundational shift to IFRS take place?

Alternative 2
Is the fundamental basis of accounting to be the FASB Codification database with IFRS substitutions to take place piecemeal year after year ad infinitum? The issue of timing is less earth shaking in this latter alternative for clients, professors, and students.

The big international auditing firms and the AICPA prefer Alternative 1 since that alternative will abruptly lead to hundreds of millions of dollars more in up front revenues for IFRS client training courses, IFRS consulting, and IFRS study materials relative to Alternative 2. And there will be fewer differences accounting rules to contend with under Alternative 1 until the condorsement exceptions are blended in piecemeal over the years.

Client and security analyst positions on these alternatives are harder to predict and probably more varied. Alternative 2 will have many more delayed expenses in IFRS training and software conversions. But many of the clients want the marshmallow principles-based standards to get around the barbed wire of FASB rules based standards. SEC studies to date reveal that security analysts and investors probably favor the slower Alternative 2 track.

So we wait on pins and needles until the SEC can make up its mind!

We also wait on pins and needles until we get a working definition of "country-specific."

Respectfully,
Bob Jensen

Question
What is the most downloaded article published by the Journal of Accounting Research?

Answer
"International Accounting Standards and Accounting Quality," JAR, March 2008 ---
http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2008.00287.x/full

Most Cited
The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity
HOLLIS ASHBAUGH-SKAIFE, DANIEL W. COLLINS, WILLIAM R. KINNEY JR, RYAN LAFOND

A September 2007 version of this paper may be downloaded free from SSRN ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=688041

Abstract:     
We examine whether application of International Accounting Standards is associated with higher accounting quality. The application of IAS reflects the combined effects of features of the financial reporting system, including standards, their interpretation, enforcement, and litigation. We find that firms applying IAS from 21 countries generally evidence less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do a matched sample of firms applying non-US domestic standards. Differences in accounting quality between the two groups of firms in the period before the IAS firms adopt IAS do not account for the post-adoption differences. We also find that firms applying IAS generally evidence an improvement in accounting quality between the pre- and post-adoption periods. Although we cannot be sure that our findings are attributable to the change in the financial reporting system rather than to changes in firms' incentives and the economic environment, we include research design features to mitigate the effects of both.

Number of Pages in PDF File: 55

Keywords: IAS, IASB, International Accounting Standards, International Accounting Standards Board, International Financial Reporting Standards

Jensen Comment
This article was written before changes were made in both IASB and FASB standards. Some of these changes narrowed the differences between IASB and FASB standards. Others widened these differences, particularly in the area of accounting for derivative financial instruments and hedging.

January 29, 2012 reply from Jagdish Gangolly

This business of using "most accessed" index to measure anything, in my humble opinion, is meaningless. Given some time I could write a simple program to fool the site (just as a hacker a long time ago wrote a program to keep calling Jerry Falwell's donation hotline, and Rev. Falwell was stuck with al the phone bills).

Besides, I am not sure downloads means much these days. My own hard disk is cluttered with thousands of papers I downloaded that I hoped to read before my time is up; cheap storage has made most of us academics good packrats.

I think it is a Wiley gimmick to draw attention to the journal, or a veiled attempt at advertising without appearing to have done so.

There are other measures if one wants to study the impact of publications, or measure the productivity of scholars. Here are a few (by no means a comprehensive list):

1. Erdos number (or its cousin, the Kevin Bacon number) http://en.wikipedia.org/wiki/Erd%C5%91s_number    www.oakland.edu/enp 

Measures structural relationships in the network. In my view it is a very parochial measure.

(You can find your own Erdos number starting at http://academic.research.microsoft.com/ . I tried looking for mine, with some trepidation. My Erdos number is 4, which is not bad at all for some one who was an accountant most of his career. ).

2. H-index (and its variants/relatives such as H-B index, Durfee square, and Eddington number:) http://en.wikipedia.org/wiki/Arthur_Stanley_Eddington#Eddington_number_.28cycling.29)
http://en.wikipedia.org/wiki/H-index  Measures impact as well as productivity 

However, this index too can be misleading. For example, the legendary French mathematician Evariste Galois had H-index of 2.

3. g-index http://en.wikipedia.org/wiki/G-index  Measures productivity only based on publications

This too can easily be gamed.

4. Impact factor ( http://en.wikipedia.org/wiki/Impact_factor ) which is based on the average number of citations per paper. This is a crummy measure because the average cites per paper is known to be not normally distributed (so arithmetic mean is a meaningless measure). Its distribution is called Bradford distribution, which is an example of power law distribution.

Most journals are measured by impact factors. So there is a tendency to fiddle with things to make one look good (a la El Naschie). In 2007, the journal "Folia Phoniatrica et Logopaedica" . fed up with its low impact factor (0.66) published an editorial citing ALL papers that it had published the previous 2 years. Their impact factor rose to 1.44 (See the Wikipedia article on impact factor). They were the Enron of academic publishing, and paid dearly; they were excluded in the Journal Citation Reports the following year.

Jagdish

Jagdish S. Gangolly
Department of Informatics
College of Computing & Information
State University of New York at Albany
Harriman Campus, Building 7A, Suite 220 Albany, NY 12222
Phone: 518-956-8251, Fax: 518-956-8247

 

Foreign Currency FX Converter --- http://www.xe.com/ucc/ 
Live Currency Converter --- http://www.livecurrencyconverter.com/
Also see http://www.oanda.com/currency/converter/

Affinity Fraud --- http://en.wikipedia.org/wiki/Affinity_fraud

Ponzi Fraud --- http://en.wikipedia.org/wiki/Ponzi_scheme

"Fleecing the flock The big business of swindling people who trust you," The Economist, January 28, 2012 ---
http://www.economist.com/node/21543526

WITH a nudge from their pastor, the 25,000 members of the New Birth Missionary Baptist Church near Atlanta opened their hearts, and their wallets, to Ephren Taylor. And why not, given his glittering credentials? Mr Taylor billed himself as the youngest black chief executive of a publicly traded company in American history. He had appeared on NPR and CNN. He had given a talk on socially conscious investing at the Democratic National Convention. Snoop Dogg, a rapper, had tapped him to manage a charitable endowment.

So when Mr Taylor’s “Wealth Tour Live” seminars came to town, faithful ears opened wide. Eddie Long, the mega-church’s leader, introduced Mr Taylor at one event with the words: “[God] wants you to be a mover and shaker…to finance you well to do His will.” Mr Taylor offered “low-risk investment with high performances”, chosen with guidance from God.

Divine inspiration, alas, has given way to legal tribulation. For many investors, the 20% guaranteed returns proved illusory. Mr Taylor (whereabouts unknown) stands accused of fraud in a number of lawsuits. Bishop Long, a co-defendant, has urged Mr Taylor to “do the right thing” and cover any losses. The charges are not the first blot on the minister’s reputation: last year he settled for an estimated $15m-25m claims that he had coerced young men into oral sex.

An essential element of Mr Taylor’s approach was to make those he targeted want to invest in him personally, says Cathy Lerman, a lawyer representing some of the victims. “He was a master of creating a marketing presence. He would say: ‘If you want to check me out, just Google me.’” He had no problem convincing them that he was an ordained minister, even though he had no formal seminary training, according to court documents.

It will take time to gauge the full extent of the losses, not least because it will require untangling a web of companies, some of them shells. Victims, many of whom entrusted their life savings to Mr Taylor, are still coming forward. Some call him “the black Bernie Madoff”.

Let us prey

Mr Madoff, whose victims lost perhaps $20 billion, perpetrated the largest “affinity fraud” ever. The term refers to scams in which the perpetrator uses personal contacts to swindle a specific group, such as a church congregation, a rotary club, a professional circle or an ethnic community. Once the scammer gains their trust, his scam spreads like smallpox. Most affinity frauds are Ponzi schemes, in which money from new investors is used to repay old ones, or is siphoned off by the promoters.

The Madoff fraud fed on multiple affinity circles: wealthy Jews in Florida and Israel, country-club types and European old money, lured with help from marketers running “feeder” funds. The next-largest alleged investment fraud of recent years, the $7 billion collapse of Allen Stanford’s empire, also concerned specific groups, including the Latin American and Libyan diasporas and Southern Baptists. Mr Stanford’s trial began on January 23rd. He denies wrongdoing.

Beneath the mega-scams swirls a mass of smaller cons, spanning the world. Any close-knit community can be a target. Last August a South Korean pastor was indicted for misappropriating 2.4 billion Korean won ($2.3m) that the faithful had handed over to set up a Christian bank. In Britain, Kevin Foster’s KF Concept targeted the former coal-mining towns of South Wales, bilking more than 8,000 victims with the help of glitzy roadshows.

Continued in article

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

Affinity fraud in some respects is related to audit firm fraud and negligence. When the audit firms are the largest international accounting firms we tend to trust their names and logos, sometimes at our own peril ---
http://www.trinity.edu/rjensen/Fraud001.htm

Question
Will the largest auditing firms ever really honor the spirit of their repeated pledges of independence?
Why do they keep pushing toward the edge of the cliff known as audit firm rotation?

"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

Last fall, we reported that KPMG had issued an internal preservation notice to its employees in regards to "General Electric's Loan Staff Arrangements." As you may remember, this arrangement consisted of KPMG employees being loaned to GE to help supplement the work of the world's best tax law firm. Oh, and KPMG is the auditor for GE. Last year, Francine McKenna reported that this sketchy arrangement included KPMG employees, "having GE email addresses, are supervised by GE managers – there is no KPMG manager or partner on premises – and have access to GE employee facilities." In short, she wrote, "KPMG should know better" than try to pull this type of stunt on the PCAOB.

This morning, McKenna reports on the latest development on this little arrangement:

KPMG will no longer loan tax professionals to GE during busy season, according to a source close to the situation. KPMG was billing an extra $8-10 million, over and above the audit each year, for the service. It looks like a regulator got to both KPMG and GE, but quietly. I doubt we’ll ever see a public sanction or fine from the PCAOB or the SEC for KPMG. 

It's not immediately clear when the arrangement ended but I can't imagine any of the staff being too broken up about this. The partners, on the other hand...well, yeah, that's $10 million in fees that will probably go away. If you ever worked under this arrangement or have worked for another client under something similar, email us your story and any background you might have.

Continued in article

"KPMG Nixes GE Loaned Tax Staff Engagement," by Francine McKenna, re:TheAuditors, January 26, 2012 ---
http://retheauditors.com/2012/01/26/kpmg-nixes-ge-loaned-tax-staff-engagement/

KPMG will no longer loan tax professionals to GE during busy season, according to a source close to the situation. KPMG was billing an extra $8-10 million, over and above the audit each year, for the service.

Loaning, assigning, or “seconding” tax or any “bookkeeping” staff to an audit client is prohibited by the Sarbanes-Oxley Act of 2002 and by regulations that precede Sarbanes-Oxley. It looks like a regulator got to both KPMG and GE, but quietly. I doubt we’ll ever see a public sanction or fine from the PCAOB or the SEC for KPMG.

My story exposing this prohibited activity by an auditor for an audit client was published in Forbes last March.

KPMG has been GE’s auditor for more than 100 years. Former SEC Chief Accountant Lynn Turner was surprised and quite angered at my revelation. In addition, Turner commented in his newsletter on an email I received from the Carpenters Pension Fund after my column appeared at Forbes.com. The pension fund sought to hold GE and KPMG accountable for auditor independence and have a discussion at the annual meeting about auditor rotation. They were blocked by GE and the SEC:

Continued in article

Jensen Comment
Recall that KPMG paid the largest fine ($456 million) in the history of accounting firms for selling phony tax shelters and pledged to cut back on tax consulting that tainted appearances of the firm's auditing independence.

Another KPMG defendant pleads guilty of selling KPMG's bogus tax shelters
One of the five remaining defendants in the government's high-profile tax-shelter case against former KPMG LLP employees is expected to plead guilty ahead of a criminal trial set to begin in October, according to a person familiar with the situation. The defendant, David Amir Makov, is expected to enter his guilty plea in federal court in Manhattan this week, this person said. It is unclear how Mr. Makov's guilty plea will affect the trial for the remaining four defendants. Mr. Makov's plea deal with federal prosecutors was reported yesterday by the New York Times. A spokeswoman for the U.S. attorney in the Southern District of New York, which is overseeing the case, declined to comment. An attorney for Mr. Makov couldn't be reached. Mr. Makov would be the second person to plead guilty in the case. He is one of two people who didn't work at KPMG, but his guilty plea should give the government's case a boost. Federal prosecutors indicted 19 individuals on tax-fraud charges in 2005 for their roles in the sale and marketing of bogus shelters . . . KPMG admitted to criminal wrongdoing but avoided indictment that could have put the tax giant out of business. Instead, the firm reached a deferred-prosecution agreement that included a $456 million penalty. Last week, the federal court in Manhattan received $150,000 from Mr. Makov as part of a bail modification agreement that allows him to travel to Israel. 
Paul Davies, "KPMG Defendant to Plead Guilty," The Wall Street Journal, August 21, 2007; Page A11 --- Click Here

Jensen Comment
The criminal case fell apart for complicated reasons, but that did not exonerate KPMG as a firm nor return its $456 million settlement reached with the IRS.

Out of the crooked timber of humanity, no straight thing was ever made. -
Immanuel Kant

Apple Outsources Most of Its Manufacturing to Foreign Factories, Some of Which Are Disgraces to Humanity
"The Cost of Doing Business: Foxconn, Apple and the Fate of the Modern Worker," by Dan Rowinski, ReadWriteWeb, January 27, 2012 ---
http://www.readwriteweb.com/archives/the_cost_of_doing_business.php

Ours is an imperfect society. The nature of our reality, our desires and our need to possess, while maintaining a façade of moral righteousness, puts us at odds with the reality that exists within the systems we have created.

In recent days, the character of our era of consumerism has been put in question. We want what is new, shiny, fashionable. We want it now. With this desire we turn our heads from the consequences it takes to produce our toys, our symbols of status. When The New York Times reports that our gadgets are made in Chinese factories where working conditions can be horrendous, we express outrage and tweet the article from our iPads. The culture we have created comes with the cost of doing business.

The Conditions at Foxconn

The conditions at Chinese factories that make our gadgets can be deplorable. Workers often live in crowded dorms, work more than 60 hours a week, are punished with physical labor and withholding of wages, according to The New York Times report on conditions at Foxconn, which makes Apple's iPhones, iPad and iPods. In a response to the article, Apple CEO Tim Cook sent an email to Apple employees and the company released a "Supplier Responsibility Report." This is not a discussion solely about Apple though. Apple is the most valuable company in the world, so it naturally faces the most scrutiny. Other device makers, such as Dell, Nokia, Motorola and Hewlett-Packard, are clients of Foxconn as well.

Apple and Foxconn are just two examples in a larger system. Companies have to weigh the cost and benefits of the manufacturing process. This is not a new dilemma but is a matter of fact within the economy created by the Industrial Revolution. Nor is this quandary solely a matter of high tech devices. Companies like Nike have been cited in the past for the conditions at their manufacturing plants in Asia. How much do you really want to know about the synthetic polymer that is the backbone of much of the world's textile industry? What about the bread you eat, the TV you watch, the socks you wear?

Framing the Utilitarian vs. Deontological Conversation

"The mere knowledge of a fact is pale; but when you come to realize your fact, it takes on color. It is all the difference between hearing of a man being stabbed in the heart, and seeing it done." - Mark Twain

Continued in article

Bob Jensen's threads on the dark side of technology are at
http://www.trinity.edu/rjensen/000aaa/theworry.htm

Oh No! Firefox is (now was) my favorite browser on my old XP computer that is still my favorite computer
Firefox Support Ending for Windows 2000, Windows XP Pre-SP2 ---
http://www.readwriteweb.com/hack/2012/01/firefox-support-ending-for-win.php

I have a new Windows 7 machine, but mostly I use it for radio!

Do you still have to be a techie who knows how to fool with the Windows Registry to get a fixed menu bar with Internet Explorer 9?

"A Perspective on the Joint IASB/FASB Exposure Draft on Accounting for Leases," by the  American Accounting Association's Financial Accounting Standards Committee (AAA FASC):  Yuri Biondi et al., Accounting Horizons, December 2011, pp. 861-877

. . .

CONCLUSION

The committee members are in agreement about the importance of lease accounting for users of financial statements. Overall, we are pleased to see that this exposure draft introduces the “right-of-use” model, rather than the ownership model, which has worked so poorly in practice. Unfortunately, current lease accounting is plagued by loopholes, transaction structuring, and other actions by management to circumvent the intent of the standard. Preventing all transaction structuring is of course a difficult endeavor. The ED makes a good effort at dealing with the current problems of lease accounting, but some big loopholes (concerning especially scope, SPE and intragroup operations, definition of lease term, discounting, and executory contracts for services) remain that need to be closed off. With regard to revaluation, we prefer the current FASB approach (impairment testing), but are opposed to fair value assessments and reassessments that create structuring opportunities.

The ED as currently specified is not ready for use and needs significant modification. In response to comments from this committee and others, the FASB/IASB have held a number of re-deliberation meetings in 2011 and directed staff to re-examine several issues. Key focus has been on the scope and definition of a lease, measurement of contingent rentals, renewal options, revaluations, the discount rate to be used, lack of consistency between the lessor and lessee accounting, and consistency with current revenue recognition and financial statement presentation projects.

As of March 27, 2011 (see IASB 2011), the FASB/IASB have affirmed the scope and definitions used in the lease ED, the need to distinguish a lease from a service contract, the need to separate lease and non-lease components of a contract, and to have two types of leases called finance leases (current IASB terminology) and other than finance leases (like current operating leases in U.S. GAAP). Additional clarification has been issued about the discount rate to be used by the lessor and lessee (the rate charged by the lessor to the lessee) though this is complicated because the lessor's rate may not be known by the lessee. Additional guidance has also been issued to count a renewal option in the lease term “when there is a significant economic incentive for an entity to exercise an option to extend the lease.” The need to align this standard with the revenue recognition, consolidation, and financial statement presentation projects indicate that the board has continued need for re-deliberation, and is struggling to construct a lease standard that will achieve consistent and comparable financial reporting.

Yuri Biondi (principle author), Robert J. Bloomfield, Jonathan C. Glover, Karim Jamal, James A. Ohlson, Stephen H. Penman, Eiko Tsujiyama, and T. Jeffrey Wilks

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

The author of this particular case study is surprising at first blush.

But then the acronym ABC appears over and over.

ABC Costing --- http://en.wikipedia.org/wiki/Activity-based_costing

"Case Study: When to Drop an Unprofitable Customer," Harvard Business Review Blog, January 25, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/01/case_study_when_to_drop_an_unp.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you'd like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and email address.

As Tommy Bamford and Jane Oldenburg drove into the visitor section of Westmid Builders' car park, Jane pointed out the man they had come to see: Steve Houghton, Westmid's purchasing executive. He was in front of the headquarters building, waving a greeting. Jane waved back to her friend, whom she had known for decades, but Tommy scowled. He wasn't looking forward to this visit. "Oh, come on," Jane said, nudging him. "Look how friendly he is."

Tommy was a director and Jane was the Midlands regional sales manager for Egan & Sons, a supplier of doors and staircases to Westmid for 63 years. The two executives had to pause before crossing the gravel road that ran through Westmid's grounds, because of the steady stream of trucks traveling to and from construction sites around Birmingham and all the way to London. Despite the heavy traffic that April morning, Tommy knew that Westmid was hurting from the economic downturn in the UK. The company was building only half as many housing units this year as it had during recent boom times. With the steep falloff, Westmid was no longer Egan's biggest customer, but it still retained considerable clout. Too much clout.

"I'm flattered by such an august delegation," Steve said. "Shall we start with a tour?" Jane, a tiny and exuberant blonde with a boy's haircut, happily agreed. She had been here many times, of course, but Tommy was not a regular. Steve chatted away as he shuttled them in a little electric vehicle past warehouses and outbuildings.

Jane had promised Tommy that a visit to Westmid would change his view of the company. But he could not shake his newfound awareness of the amount of money Egan was losing with Westmid — the account's ratio of operating income to sales was a negative 28%. The two companies had enjoyed a smooth relationship for decades, but Tommy strongly believed the time had come to terminate it.

Steve kept glancing at Tommy during the tour. "You look pale," Steve said at one point. "I hope my driving isn't making you queasy."

"That's quite all right," Tommy said. "I've got a strong stomach."

The Power of Customer Costing

Egan & Sons, founded in Birmingham in 1908, was hardly a sleepy company. With three efficient plants staffed by 3,000 employees, it had reinvented itself to become an innovative manufacturer of modular steel staircases and fiberglass doors. Its accounting system, however, remained simple and traditional. The weaknesses became apparent only in the mid-2000s, when Chinese companies began to encroach on Egan's low end, severely undermining profitability.

With careful study, Tommy had figured out that the company's costing system had made it blind to its own operations: It allocated factory overhead to products as a percentage markup over direct labor costs, and corporate overhead as a percentage of sales. Thus, the company could not accurately identify its costs for serving individual customers or for designing and producing all the new products it had recently brought to the marketplace. The lack of traceability and transparency extended to the costs for specialized equipment that was used only for particular products or customers.

Tommy, an avid reader of the business literature, wanted Egan to adopt an activity-based costing, or ABC, approach. Enlisting several younger financial managers, he made the case to the executive director, Wilfred Hammond, who approved the hiring of a consultant with extensive experience in ABC. Tommy and the consultant assembled a team that began by identifying the costs associated with each customer order — starting from bidding, through raw-materials purchasing, production, and delivery, and culminating with invoicing and collection.

With 6,000 SKUs and 2,500 customers, the team had to crunch reams of data, but the basic ABC process was straightforward: Calculate the hourly (capacity) cost of the resources that performed each sales, production, administrative, storage, and distribution process and the time that each order required at each stage. Before long, the team could pinpoint the cost of every process performed for every customer and could trace revenue deductions — discounts, allowances, promotions, and returns — back to individual customers. These deductions, which totaled 12% of sales, had previously been collapsed into a single line item in the P&L for each customer.

At one point, Hammond had grilled Tommy about why the project was taking so long and costing so much. Tommy responded that the time and care were critical to producing valid, defensible numbers from which he could initiate candid discussions with the least profitable customers. Tommy also hoped to identify Egan's most profitable customers so that sales managers might extend and deepen relationships with them.

The Art and Science of Rationalizing

It took four months for the ABC project's initial findings to emerge. And they were shocking: Just 1% of Egan's SKUs accounted for 100% of its operating profits. The most profitable 20% generated more than double that amount, but the extra gains were canceled out by the company's unprofitable products, which generated losses equivalent to 120% of profits. The customer story was similar: The most profitable 1% of accounts generated 100% of profits, and the top 10% accounted for nearly double that amount. The remaining 90% of customers were either break-even or a drag on the bottom line.

So Hammond formed a management team to take action on the large number of unprofitable products and customers. At a "SKU rationalization meeting," the team classified its money-losing SKUs into four action categories: drop, reprice, redesign, or take no action (for products that had been ordered by important customers or were unprofitable only because of internal process inefficiencies). The company soon had a plan to eliminate or modify nearly half of its 6,000 SKUs.

Tommy chaired a subsequent "customer rationalization meeting," which he hoped would yield a similar consensus: that Egan should sever ties with its loss-making customers — especially the least profitable 1%, among them Westmid, whose accumulated losses cost Egan 40% of the company's profits.

Hammond was traveling and unable to attend the meeting, so Jane had monopolized it. "Customers aren't SKUs — they're relationships," she'd declared. "Some of these accounts are new ones with a huge upside. Do we really want to cut them off? And Westmid — sure, it's been tough going with them for the past few years, but things are starting to improve. And look at our history together: 63 years! They've been hugely profitable for us in good times, and they've stuck with us when lots of other customers have turned to China. We can't just cut them off based on a cost-accounting report."

Continued in article

Bob Jensen's threads on managerial and cost accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting

Frequent Flier Program --- http://en.wikipedia.org/wiki/Frequent-flyer_program

“Citibank deems frequent-flier miles taxable, but does the IRS?” by David Lazarus, Los Angeles Times, January 24, 2012 ---
http://www.latimes.com/business/la-fi-lazarus-20120124,0,1228880.column

Frequent-flier miles clearly have value — why else would people want them? But do they also represent taxable income?

Citibank seems to think so. It's sending tax forms to people who received thousands of miles as a reward for opening a checking or savings account. Those forms value each mile at about 2.5 cents and list the total dollar amount as miscellaneous income.

This is news to tax pros.

"I've been practicing for 25 years and I've never had an instance where miles have been treated as taxable," said Gregg Wind, a West Los Angeles certified public accountant.

But he said that because Citi is reporting this as people's income to the Internal Revenue Service, customers may be on the hook for paying the taxes. "Otherwise," Wind said, "your chances of being audited could go up."

As tax time rolls around, the question of whether airline miles are a form of income is something that potentially affects millions of people. Miles are one of the most common rewards doled out by credit card issuers.

Larry Fechter, 66, of Palm Springs was among numerous Citi customers who received a Form 1099 in recent days. He opened a checking and a savings account with the bank last summer after being promised 25,000 American Airlines miles.

"The mileage was a very strong inducement," Fechter told me.

He said there was nothing in the original sales pitch that warned of the tax consequences of accepting the miles. As such, Fechter said it was a big surprise to get the form in the mail informing him that he has to pay taxes on $645 worth of miles.

If he were in the 28% tax bracket, that would mean a payment of $180.60 owed to Uncle Sam.

Adding insult to injury, Fechter said, his new Citi accounts paid less than $4 in interest on the cash he'd deposited.

"I'm shocked that they want me to pay taxes for mileage points," he said. "I've never had to do that before with any company I've done business with."

And there's a good reason for that. In 2002, the IRS issued a policy brief noting that because there are "numerous technical and administrative issues" relating to miles, such as how they're valued and used, the agency "has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles."

"Consistent with prior practice," it said, "the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel."

In other words, the tax man won't come after you for undeclared miles.

Or will he?

Catherine Pulley, a Citi spokeswoman, cited the 2012 instructions for Form 1099-MISC, which state that income tax must be paid if at least $600 in "prizes and awards" is received.

"The Internal Revenue Code recognizes rewards as taxable income," she said. "This recognition by the Internal Revenue Code is disclosed to customers prior to their election to participate in the promotion."

Not so much, actually. Buried in the fine print of Citi's letter offering the frequent-flier miles, it says only that "customer is responsible for taxes, if any." That's not quite the same as saying Citi will be ratting you out to the IRS for receiving hundreds of dollars in miscellaneous income.

So where does the IRS stand on all this? I found the tax agency surprisingly reticent on the matter of miles.

An IRS spokeswoman told me only that the 2002 policy brief "still stands." She declined to comment on how this squares with the prizes-and-awards provision of Form 1099, or what taxpayers should do in light of Citi's reporting their airline miles as income.

Wind, the accountant, was stunned by Citi's defense of reporting miles as taxable income. He said he couldn't think of any instance in which miles would be given out except as a prize or award.

"This opens up the notion that all miles are taxable," Wind said.

It does. And it's insufficient for the IRS to avoid taking a stand and to say only that it won't go after people for failing to declare their frequent-flier miles.

At the very least, the tax agency needs to clarify what happens when, as in this case, a business declares your miles as income paid to you. What happens if you don't do likewise?

As I say, this potentially affects millions of people — virtually anyone with airline miles. It'd be nice to know where we all stand.

Jensen Comment
I searched for “frequent flier miles” in the IRS Website and found no hits of relevance on this issue.

There are some huge issues to consider here. If frequent flier miles are to be taxable, are they to be taxed when awarded or when they are used in lieu of cash for airline tickets? It would seem that when the taxpayer is a cash basis taxpayer, it would only make sense to tax them if and when they are redeemed. Otherwise it would be a complete mess to have to apply for refunds for miles that expire unredeemed.

This opens Pandora’s Box to other types of redemptions. For example, every time I pay a Holiday Inn bill I get Priority Club redemption points. However, there are conditions on these points. Firstly, I have to have enough points for a free night. Secondly, some deals require that I pay for additional nights at a hotel in order to redeem my points for one free night. How can such points be “valued” for tax purposes?

How do airlines recognize revenue for frequent flyer miles? Which specific accounting rules apply?
http://answers.yahoo.com/question/index?qid=20080407083708AAR4zFl

How do airlines account for the liability for frequent flier miles?
United Airlines May 9, 2007
http://www.wikinvest.com/stock/United_Airlines_%28UAUA%29/Frequent_Flyer_Accounting

Frequent Flyer Accounting.   In accordance with fresh-start reporting, the Company revalued its frequent flyer obligation to estimated fair value at the Effective Date, which resulted in a $2.4 billion increase to the frequent flyer obligation. The Successor Company also has elected to change its accounting policy for its Mileage Plus frequent flyer program to a deferred revenue model. The Company believes that accounting for frequent flyer miles using a deferred revenue model is preferable, as it establishes a consistent valuation methodology for both miles earned by frequent flyers and miles sold to non-airline business partners.

 

Before the Effective Date, the Predecessor Company had used the historical industry practice of accounting for frequent flyer miles earned on United flights on an incremental cost basis as an accrued liability and as advertising expense, while miles sold to non-airline business partners were accounted for on a deferred revenue basis. As of the Effective Date, the deferred revenue value of all frequent flyer miles are measured using equivalent ticket value as described below, and all associated adjustments are made to passenger revenues.

The deferred revenue measurement method used to record fair value of the frequent flyer obligation on and after the Effective Date was to allocate an equivalent weighted-average ticket value to each outstanding mile, based upon projected redemption patterns for available award choices when such miles are consumed. Such value was estimated assuming redemptions on both United and other participating carriers in the Mileage Plus program, and by estimating the relative proportions of awards to be redeemed by class of service within broad geographic regions of the Company’s operations, including North America, Atlantic, Pacific and Latin America.

 

Under the new method of accounting adopted for this program at the Effective Date, the Company reduced operating revenue by approximately $158 million more in the eleven months ended December 31, 2006 to account for the effects of the program as compared to the reduction in revenues that would have been recognized using the Predecessor Company’s accounting method. The Company’s new accounting policy does not continue the use of the former incremental cost method, which impacted revenues and advertising expense under that prior policy. Assuming the use of the Predecessor Company’s accounting for this program, for the eleven months ended December 31, 2006, the Company estimates that it would have recorded approximately $27 million of additional advertising expense.

The estimation of the fair value of each award mile requires the use of several significant assumptions, for which significant management judgment is required. For example, management must estimate how many miles are projected to be redeemed on United, versus on other airline partners. Since the equivalent ticket value of miles redeemed on United and on other carriers can vary greatly, this assumption can materially affect the calculation of the weighted-average ticket value from period to period.

Management must also estimate the expected redemption patterns of Mileage Plus customers, who have a number of different award choices when redeeming their miles, each of which can have materially different estimated fair values. Such choices include different classes of service (first, business and several coach award levels), as well as different flight itineraries, such as domestic and international routings, and different itineraries within domestic and international regions of United’s and other participating carriers’ flight networks. Customer redemption patterns may also be influenced by program changes, which occur from time to time and introduce new award choices, or make material changes to the terms of existing award choices. Management must often estimate the probable impact of such program changes on future customer behavior using limited data, which requires the use of significant judgment. Management uses historical customer redemption patterns as the best single indicator of future redemption behavior in making its estimates, but changes in customer mileage redemption behavior to patterns which are not consistent with historical behavior can result in material changes to deferred revenue balances, and to recognized revenue.

Management’s estimate of the expected breakage of miles as of the fresh-start date, and for recognition of breakage post-emergence, also requires significant management judgment. For customer accounts which are inactive for a period of 36 consecutive months, it has been United’s policy to cancel all miles contained in those accounts at the end of the 36 month period of inactivity. In early 2007, the Company announced that it is reducing the expiration period from 36 months to 18 months effective December 31, 2007. Under its deferred revenue accounting policy effective in 2006, the Company recognized revenue from breakage of miles by amortizing such estimated breakage over the 36 month expiration period. However, current and future changes to program rules, such as the recent change in the expiration period, and program redemption opportunities can significantly alter customer behavior from historical patterns with respect to inactive accounts. Such changes may result in material changes to the deferred revenue balance, as well as recognized revenues from the program. A hypothetical 1% change in the Company’s estimated breakage rate, estimated at 14% annually as of December 31, 2006, has approximately an $18 million effect on the liability.

At December 31, 2006, the Company’s outstanding number of miles was approximately 508.8 billion. The Company estimates that approximately 438.3 billion of these miles will ultimately be redeemed based on assumptions as of December 31, 2006 and, accordingly, has recorded deferred revenue of $3.7 billion. A hypothetical 1% change in the Company’s outstanding number of miles or the weighted-average ticket value has approximately a $42 million effect on the liability. These assumptions do not include the impact of reducing the expiration period from 36 months to 18 months.

 

From The Wall Street Journal Accounting Weekly Review on December 8, 2006

TITLE: Making Use of Frequent-Flier Miles Gets Harder
REPORTER: Scott McCartney
DATE: Dec 05, 2006
PAGE: D5
LINK: http://online.wsj.com/article/SB116528094651740654.html?mod=djem_jiewr_ac 
TOPICS: Accounting, Auditing

SUMMARY: The Department of Transportation (DOT) has undertaken audit procedures on airlines to review how they are "living up to their 1999 'Customer Service Commitment.'" This document was written when "airlines were under pressure from Congress and consumers for lousy service and long delays" in order to "stave off new legislation regulating their business." The airlines also report little about the frequent flier mile plans they offer, and particularly focus only on the financial aspects of these plans in their annual reports and SEC filings, rather than, say, information about ease of redeeming miles in which customers may be particularly interested.

QUESTIONS:
1.) What information do airlines provide about frequent flier mileage offerings and redemptions in their annual reports and SEC filings?

2.) Why is this information important for financial statement users? In your answer, describe your understanding of the business model and accounting for frequent flier miles, based on the description in the article.

3.) Why did the Department of Transportation (DOT) undertake a review of airline practices? What type of audit would you say that the DOT performed?

4.) What audit procedures did the airlines abandon due to financial exigencies? What was the result of abandoning these audit procedures? In your answer, describe the incentives provided by the act of undertaking audit procedures on operational efficiencies and effectiveness.

Reviewed By: Judy Beckman, University of Rhode Island

"Making Use of Frequent-Flier Miles Gets Harder Falling Redemption Rate Is One of Many Service Issues, Government Report Find," by Scott McCartney, The Wall Street Journal, December 5, 2006; Page D5 --- http://online.wsj.com/article/SB116528094651740654.html?mod=djem_jiewr_ac

Which airline is the most accommodating when it comes to letting consumers cash in frequent-flier mileage awards? It's hard to know, a new government report says, because airlines disclose so little information.

One thing is clear: Over the past four years, the percentage of travelers cashing in frequent-flier award tickets has declined at four of the five biggest airlines, even though miles accumulated by consumers have increased.

The Department of Transportation's inspector general went back and checked how airlines were living up to their 1999 "Customer Service Commitment." Back then, airlines were under pressure from Congress and consumers for lousy service and long delays, and they promised reform to stave off new legislation regulating their business.

Seven years later, Inspector General Calvin L. Scovel III found that under financial pressure, many airlines quit auditing or quality control checks on their own customer service, leading to service deterioration. Airlines don't provide enough training for employees who assist passengers with disabilities, the investigation found, and don't always follow rules when handling passengers who get bumped from flights.

And as travelers have long complained, government auditors studying 15 carriers at 17 airports found airline employees often don't provide timely and accurate information on flight delays and their causes, and don't give consumers straightforward information about frequent-flier award redemptions.

"They can do better and must do better, and if they don't do better, Congress has authority to wield a big stick," said U.S. Rep John Mica, the outgoing chairman of the House Aviation Subcommittee who requested the inspector general's customer-service investigation. He said he's eager to hear the airline industry's response before making final judgments, but the report card gives airlines only "average to poor grades in a range of areas that need improvement."

Since airlines are returning to profitability and aggressively raising fares, there's more attention being paid to customer-service issues. Delays have increased; baggage handling worsened. As traffic has rebounded, airlines still under financial pressure because of high oil prices may not have adequate staff to live up to the promises they made on customer service.

The report called on the DOT to "strengthen its oversight and enforcement of air-traveler consumer-protection rules" and urged airlines to get back on the stick for customer service. The inspector general also reminded consumers that since airlines incorporated the customer-service commitment into their "contract of carriage" -- the legal rules governing tickets -- carriers can be sued for not living up to their customer-service commitment.

The industry says it is paying attention. The inspector general's Nov. 21 report "is a good report card for reminding us where we need to improve," said David Castelveter, a spokesman for the Air Transport Association, the industry's lobbying group, which coordinated the "Customer Service Commitment." Airlines will "react accordingly," he said.

One of the stickiest areas is frequent-flier redemptions because airlines are loath to release detailed information about their programs, considering it crucial competitive information. Frequent-flier programs have become big money-makers for airlines since they sell so many miles in advance to credit-card companies, merchants, charities and others. That allows them to pocket cash years in advance of a ticket, then incur very little expense when consumers eventually redeem the miles, if they ever do.

In 1999, airlines pledged to publish "annual reports" on frequent-flier redemptions. But at most carriers, the disclosure didn't change at all. Today, as then, carriers typically bury numbers deep in filings with the Securities and Exchange Commission and report only the number of awards issued, the estimated liability they have for the cost of awards earned but not yet redeemed and the number of awards as a percentage either of passengers or passenger miles traveled.

The inspector general said the hard-to-find information has only "marginal value to the consumer for purposes of determining which frequent-flier program best meets their need."

What you'd really want to know is which airline makes it easiest to get an award, particularly the cheapest domestic coach ticket, typically 25,000 miles, which is the most popular award. But airlines don't disclose how many awards are at the lowest level, and how many consumers have to pay double miles or so for a premium award of an "unrestricted" coach ticket.

The award market follows ticket prices and availability, so recent years have seen an increase in the price people have to pay to get the awards they want, and less availability of award seats, particularly at the cheapest level, because some airlines have cut capacity and demand for travel has been strong. Add in the flood of miles airlines are issuing, and the value of a frequent-flier mile has declined sharply.

The inspector general's report compares award-redemption rates at big airlines over the past four years and found a relatively steady drop at four carriers: UAL Corp.'s United Airlines, Continental Airlines Inc., AMR Corp.'s American Airlines and Northwest Airlines Corp. US Airways Group Inc. actually saw higher rates of redemption in 2005 than in 2002, and Delta Air Lines Inc. was unchanged. Both Delta and US Airways had higher redemption rates than competitors.

to claim short-trip tickets, adding more seats to award inventory this fall and offering a new credit card with easier redemption features. Northwest said its numbers have remained relatively consistent -- roughly one in every 12 seats is a reward seat.

Other airlines said declining redemption rates result from factors including an increase in paying customers, fuller planes and shifts in airline capacity. American says the number of awards it has issued has remained fairly constant, and while the number of passengers it carries has climbed, its seat capacity hasn't. In addition, several airlines said customer preferences like using miles for first-class upgrades or hoarding miles longer to land big international trips can affect the redemption rate. "Reward traffic does not spool up and absorb capacity increases as fast as revenue traffic does," said a Continental spokesman.

Those numbers don't include awards that their customers redeem on partner airlines, so some of the decline could be attributable to an increase in consumers' opting to grab award seats on foreign airlines or other partners, says frequent-flier expert Randy Petersen. American, for example, does disclose more redemption data on its Web site and showed that last year, it issued more than 955,000 awards for travel on its partners, compared with the 2.6 million used on American and American Eagle flights.

"The data can be misleading," said Mr. Petersen, founder of InsideFlyer.com. He'd like to see more data, including numbers on how many customers made requests but couldn't find seats.

But further disclosure is unlikely to happen unless the government forces it. "Left to their own devices," said Tim Winship, publisher of FrequentFlier.com, "I see no reason to expect airlines to step up and disclose more."

PwC Settles for a hefty $41.9 million for "overbilling"
PricewaterhouseCoopers LLP agreed to pay $41.9 million to settle charges it overbilled government agencies for travel expenses, the Justice Department said. The department alleged the company failed to disclose rebates it received from credit-card companies, airlines, hotels and rental-car agencies and didn't reduce reimbursement claims accordingly. PricewaterhouseCoopers didn't admit to any wrongdoing and said the policy that gave rise to the matter was changed in 2001. In late 2003, PricewaterhouseCoopers settled its share of a class-action lawsuit filed in state court in Arkansas that accused the company of overbilling corporate clients for travel-related expenses.
"Pricewaterhouse Settles Charges," The Wall Street Journal, July 12, 2005; Page C12 --- http://online.wsj.com/article/0,,SB112111341898682519,00.html?mod=todays_us_money_and_investing
Jensen Comment:  PwC is not the only large firm of keeping travel rebates secret from clients.  You can read more about this question of ethics below.

While many filings in the Texarkana case are under seal, one internal PricewaterhouseCoopers document from October 1999 estimated the firm's annual credits from travel rebates at $45 million, mostly from postflight rebates on airline tickets. As an example, the court record contains a December 1999 contract under which Budget Rent A Car Corp. agreed to pay PricewaterhouseCoopers a rebate equal to 3% of all rental revenue that Budget received from the firm, if annual sales to PricewaterhouseCoopers topped $15 million. The plaintiff in the Texarkana case has alleged that some of the firms' airline rebates topped 40% of the plane tickets' purchase prices.
Jonathon Weil, The Wall Street Journal, September 23, 2003 --- http://online.wsj.com/article/0,,SB106452493527358700,00.html?mod=todays%255Fus%255Fmoneyfront%255Fhs 

Note from Bob Jensen: This is a classic problem of ethics. The issue is not so much what the largest accounting firms are/were doing before they got caught (I guess most have stopped doing it now).  It’s more of a matter of keeping it secret from their clients, potential clients, and the public in general.  For example, many (most) of us get frequent flier miles when we bill our airline tickets to universities and other organizations that pay our air fares.  However, it's no big secret that we get those frequent flier miles.  Some of us also get credit card rebates if we pay with credit cards such as Discover Card.  This is a bit more of a gray area, but if the price is the same no matter how we pay the bill, I guess we can hold our head high and declare that we are not ripping off anybody as long a another form of payment would not reduce the bill.  However, what the large accounting firms have been doing around the world for travel billings is a much more controversial matter of ethics.   The above article notes how the Justice Department is investigating this rip off (my words) in more than just one of the large accounting firms.  What gets me about the above revelation of the magnitude of this scheme is the hypocritical aspect in which large accounting firms are now preaching virtue but still show signs of practicing vice after all the scandals.  Sometimes it seems they are not really listening to Art Wyatt's advice quoted above.

Question
When is the last time you ever heard of taxes being lower in Massachusetts, New York, and California?
Thank you Paul Caron for the heads up.

"NFL Final Four: Boston, New York, and San Francisco Trump Baltimore in Lower Taxes," by Steve H. Hanke and Stephen J.K. Walters, The Wall Street Journal, January 21, 2012 ---
http://online.wsj.com/article/SB10001424052970204468004577167283166176946.html?KEYWORDS=nfl

This Sunday's NFL championship games have it all: future Hall-of-Famers in abundance, jet-fueled offenses, bone-crushing defenses, and even a pair of coaches vying to bring a sibling rivalry to Super Bowl Sunday in two weeks.

And if you're a fan of cities more than their sports teams, you know that these games feature genuine superstars: Boston, New York and San Francisco are magnets to residents and employers, engines of prosperity, and league leaders on any quality-of-life measure.

Then there's our hometown. Baltimore is in need of a strategy for urban revival—the type of elixir that turned the other three cities around.

Some historical perspective is in order. Three decades ago, none of these cities worked very well and all were losing residents. Between 1950 and 1980, New York's population declined 10%, San Francisco's 12%, Baltimore's 17% and Boston's an astounding 30%.

These losses were accompanied by steady erosion of each city's job base, rising crime, declining school quality, and a sense that cities themselves might be passé. Many embraced the notion that the post-World War II exodus from core cities was a result of racism (fueling "white flight") or Americans' unfortunate taste for detached homes and expansive lawns.

Then, around 1980, some cities that had been in decline enjoyed dramatic reversals of fortune. Between 1980 and 2010, Boston's population grew 10%, New York's 16%, and San Francisco's 19%. But Baltimore continued its descent, losing another 21% of its residents.

Did those in turnaround cities magically discover the virtues of racial diversity or high-density living? Or did their leaders heed the lessons of previous decades and correct policy errors that had contributed to urban decay?

Neither. There was no sudden change in the cultures of the cities that would become superstars, and no real awareness among their governing elites that they were doing anything wrong. But their most damaging policy reflexes were, in fact, altered—against their will.

All these cities had long pursued progressive political agendas with pride. But the problem with redistributive policies at the local level is that the donor classes might move out as fast as beneficiary classes move in—or, as the population figures cited earlier show, even faster. Robin Hood may seem a heroic figure, but once his rich victims flee Nottingham, even that city's poor might question his effectiveness. Related Video

Steve Hanke on why New York, Boston, and San Francisco are flourishing while Baltimore is languishing.

San Francisco and Boston were rescued from their folly by statewide tax revolts. California's Prop 13, passed in 1978, capped property taxes in that state at 1%—which slashed San Francisco's rate by almost two-thirds. Massachusetts followed suit in 1980 with Prop 2½, which mandated that municipalities could not increase their total property tax receipts by more than 2.5% annually. New York City taxpayers did not revolt, but state legislators rationalized the Big Apple's chaotic property tax system in 1981; it now enjoys property tax rates that average about one-third of those in its surrounding suburbs (though its other taxes are certainly punishing).

While no single factor explains any city's destiny, it is not a mere coincidence that Boston, New York and San Francisco reversed their declines at the exact moment they became favorable environments for private investment in residential and business capital.

Every time a city raises the tax rate on residential and business property, its owners suffer a capital loss (which economists refer to as "tax capitalization"). In effect, tax hikes are incremental expropriations; owners flee not just because of short-term wealth losses but in fear of future damage to their property rights. Tax caps not only improve the immediate cash flow on investments in real property but—perhaps more important—secure it against further expropriations.

Baltimore has blithely ignored basic property-rights theory. When high property taxes chased many residents and business owners to the suburbs, the city raised rates further. When grandiose slum-clearance and transit plans destabilized neighborhoods, Baltimore's one-party establishment arranged eminent-domain seizures and pushed even more "big footprint" renewal projects.

The results leave no doubt about which strategy is more effective. Baltimore's real, median household income has been stagnant for the last three decades. New York's has risen 22% while Boston's and San Francisco's have soared by half. Baltimore's 2009 homicide rate was 4.7 times Boston's and 6.7 times New York's and San Francisco's.

Even Baltimore's sports facilities, which many assume have contributed mightily to our mythical renaissance, carry a lesson. Boston, New York and San Francisco have all declined to build their football teams new, lavish, government-financed stadiums within city limits. They've nevertheless thrived.

Maryland taxpayers, on the other hand, gifted Baltimore wonderful football and baseball stadiums near our Inner Harbor, on the theory that "stimulating" downtown development would be a game-changer that inevitably spread prosperity throughout the city. They're still hoping for that change.

In this, Baltimore is no different from other cities wedded to policies that repel investment. All try to make up for this deficiency via capital allocation by government—and all show disappointing results. As this weekend's championship cities demonstrate, greater respect for private capital and some protections for the property rights of its owners can have miraculous effects. Someday, even Baltimore might call that play.

Jensen Comment
But when you compare states rather than cities, people and businesses are exiting Taxachusetts, New York, and California to states having lower taxes. For example, many very wealthy people (like Mitt Romney) now reside in New Hampshire and commute or telecommute to Boston. Similarly, some wealthy people live in Delaware and commute and telecommute to New York and Baltimore. They have to pay state taxes on earned income within a state, but for very wealthy people earned income is generally less than investment income such as income from tax exempt bonds. The retired Barnie Frank, who is now quite wealthy, admits that a major portion of his investment portfolio is in Mass. municipal bonds that are tax exempt in his federal and state returns.

My good friend Bob Anthony, now deceased, made a lot of money on textbook royalties and investment income. It didn't take much imagination to figure out one of the major reasons he made New Hampshire his home state even when he was on the full-time  faculty of Harvard University for most of his career. I'm not a wealthy man, but with my more modest savings in retirement it also does not take a lot of imagination to figure out why I chose to retire in New Hampshire rather than other states I considered such as the coast of Maine, the lakes of northern Minnesota and Wisconsin, or wonderful retirement places in northern California. The runner up retirement choice for me was the Nevada shores of Lake Tahoe, but real estate prices were too steep for me in that vicinity.

"States Where People Pay the Most (and Least) in Taxes," by Charles B. Stockdale, Michael B. Sauter, Douglas A. McIntyre, Yahoo Finance, July 21, 2011 ---
http://finance.yahoo.com/taxes/article/113173/states-pay-most-least-taxes-247wallst

Bob Jensen's threads on taxation are at
http://www.trinity.edu/rjensen/BookBob1.htm#010304Taxation

Marginal Tax Rates Around the World --- http://www.econlib.org/library/Enc/MarginalTaxRates.html

"How Much the Rich Pay Mitt Romney, the 1% and taxes," The Wall Street Journal, January 20, 2012 ---
http://online.wsj.com/article/SB10001424052970204555904577168683705018156.html?mod=djemEditorialPage_t

Mitt Romney's disclosure this week that his effective federal tax rate is "probably closer to the 15% rate than anything" has created the predictable political uproar. The White House and its media allies figure they've now got their stereotype of the Monopoly man, albeit without his cane and top hat, who they can crush in their planned class-warfare campaign.

We're not sure if facts will matter in this cacophony, but someone should at least try to introduce a little reality into the debate, especially since Mr. Romney seems so unprepared to make the case.

Start with the fact that, like Warren Buffett, Mr. Romney said he makes most of his money from investments, not wages or salary. Thus his income is really taxed twice: once at the corporate tax rate of 35%, then again at a 15% tax rate when it is passed through to him as dividends or via capital gains from the sale of stock.

All income from businesses is eventually passed through to the owners, so to ignore business taxes creates a statistical illusion that makes it appear that the rich pay less than they really do. By this logic, if the corporate tax rate were raised to, say, 60% from today's 35% and the dividend and capital gains tax were cut to zero, it would appear that business owners were getting away with paying no federal tax at all.

This all-too-conveniently confuses the incidence of a tax with the burden of a tax. The marginal tax rate on every additional dollar of capital gains and dividend income from corporate profits can reach as high as 44.75% at the federal level (assuming a company pays the 35% top corporate rate), not 15%.

The Congressional Budget Office recently examined the distribution of federal taxes on various income groups. The report was ballyhooed by liberals as proof of rising income inequality, but that argument is for another day. What everyone has ignored is what CBO found about the relative taxes paid by different groups. And, lo, the rich pay more, which is probably why the press didn't report it.

The nearby table from the CBO report shows that in 2007 the average income tax rate paid by the 1% was 18.8%, compared to 4.2% for Americans in a broadly defined middle class from the 21st to 80th income percentiles. The poorest 20% on average paid a net negative income-tax rate of 5.6% because of the checks they receive for tax credits that are "refundable." These are essentially transfer payments redistributing income from the rich and middle class to the poor.

As for all federal taxes, CBO found that in 2007 the top 1% paid an average rate of a little under 30%, compared to 15.1% for middle-income earners. In calculating this overall tax burden, CBO takes account of payroll taxes, which moves the rate of the lowest 20% of earners into positive territory at 4.7%. CBO also apportions to individuals who are shareholders the tax that corporations pay on corporate profits.

Continued in article

"Why Americans think the tax rate is high when it is not," The Economic Times ---
http://economictimes.indiatimes.com/news/international-business/why-americans-think-the-tax-rate-is-high-when-it-is-not/articleshow/11568197.cms

When people heard that Mitt Romney's federal income tax rate was about 15 per cent, the immediate reaction of many was to assume that their own tax rate was higher. The top marginal rate is 35 per cent, after all, and the marginal rate on a couple with $70,000 in taxable income is 25 per cent.

 

But the truth is that most households probably pay a lower rate than Romney. It is impossible to know for sure, given that he has yet to release his tax return. What is clear, though, is that a large majority of US households - about two out of three - pays less than 15 per cent of income to the federal government, through either income taxes or payroll taxes.

 

This disconnect between what we pay and what we think we pay is nothing less than one of the country's biggest economic problems.

 

Many Americans see themselves as struggling under the weight of a heavy tax burden (partly for the understandable reason that wage growth has been so weak). Yet taxes in the United States are quite low today, compared with past years or those in other countries. Most important, US taxes are not sufficient to pay for the programs that many people want, like Medicare, Social Security, road construction and education subsidies.

 

What does this combination create? An enormous long-term budget deficit.

 

Together, all federal taxes equaled 14.4 per cent of the nation's economic output last year, the lowest level since 1950. Add state and local taxes, and the share nearly doubles, to about 27 per cent, according to the Tax Policy Center in Washington - still lower than at almost any other point in the past 40 years.

 

As the economy recovers and incomes rise, tax payments will increase somewhat. But they will not keep pace with projected spending, in the form of Medicare, Medicaid and Social Security. And total taxes at current rates would still make up a smaller share of the economy than in virtually any other rich country - not just European nations but also Australia, Canada, Israel and New Zealand.

 

Obviously, tax increases are not the only way to solve the deficit. Spending cuts can, too. But so far, at least, many voters seem to prefer small, symbolic cuts, like those to foreign aid. Substantial cuts - be they the changes to Medicare that President Barack Obama included in his health care bill or the Medicare overhaul that Republicans prefer - tend to be politically unpopular.

 

Since the late 1970s, just before the modern tax-cutting push began, total federal tax rates have fallen for every income group. The payroll tax has risen, but declines in the income tax have more than made up for those increases. Nearly half the population now pays no federal income tax.

 

Most households pay less than 15 per cent of their income to the federal government because of tax breaks, like the exclusion for health insurance, and because marginal rates apply to only a small part of a taxpayer's income. On the first $70,000 of a couple's taxable income, the total federal income tax rate is only 13.8 per cent.

 

That said, taxes have fallen the most for the very affluent. Romney and his father - George W. Romney, the former automobile executive, Michigan governor and presidential candidate - do a nice job of illustrating the change.

Continued in article

Jensen Comment
Of course rich and poor alike pay other taxes such as taxes at the fuel pump and payroll deduction taxes if those ever come back (which seems increasingly unlikely in our political dogfight). And there are serious ways to be mislead by media-alleged tax rates. For example, do you compute the tax rate that you're paying now on your own tax return on the basis of full gross income versus adjusted gross income after exclusions and deferrals for such thinks as interest on municipal bonds, 401-K deferrals, and other tax breaks in the current tax rules? Chances are if you divide your 2011 what you pay in 2011 federal income taxes by the full "gross" income you will find that you're paying 10% or less.

Rich people take greater advantages of such tax law provisions such as exemption of interest on municipal and school bonds. But in a sense they are paying a virtual tax on those exemptions since municipal and school bonds have lower interest returns and/or more default risk. Hence computing the marginal rate that rich people pay in taxes becomes more complicated than you will ever learn from watching MSNBC or reading the New York Times.

I think the rich should be taxed at higher rates through a tougher alternative minimum tax rather than increases in the capital gains tax. The AMT has a less direct impact on starving risk and venture capital relative to increases in the capital gains tax. Increases in the capital gains tax simply put make it less profitable to risk savings for investments in new startup businesses and expansion of small businesses.

Low capital gains taxes give some relief to investors for holding on to long-term investments over periods of inflation. If capital gains rates are increased they should be offset with inflation index adjustments much like we see in certain types of investments like U.S. Treasury Inflation Protected  Securities (TIPS) investments ---
http://www.investopedia.com/terms/t/tips.asp
Also see inflation index bond --- http://en.wikipedia.org/wiki/Inflation-indexed_bond

Bob Jensen's helpers for taxpayers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Tax Decision Case
From The Wall Street Journal Accounting Weekly Review on January 20, 2012

Most ETFs Are Tax-Smart. But Others...
by: Ari I. Weinberg
Jan 09, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Capital Gains, Taxation

SUMMARY: The article describes an ETF's structure, how investor transactions affect taxation of other invested individuals, and how ETF managers can vary behaviors to be more or less tax efficient in their operations. It is part of the WSJ's "Investing in Funds: A Quarterly Analysis, January 2012."

CLASSROOM APPLICATION: The article is useful in classes covering personal taxation or financial planning.

QUESTIONS: 
1. (Introductory) What is the difference between a mutual fund and an exchange traded fund (ETF)? In your answer, include a definition of each of these types of funds then make the comparison between the two.

2. (Introductory) How do changes in funds' investment portfolios result in taxable gains to investors?

3. (Advanced) How can investor requests for redemptions result in taxable gains (or deductible losses) for all investors in that mutual fund? How does the difference identified in answer to question 1 above mean that ETFs can avoid generating these tax implications for investors?

4. (Advanced) In what ways are some ETFs less tax efficient than other ETFs? How could you determine an ETF's history in this matter?

5. (Advanced) Overall, why does an investor care about taxable distributions from an investment before selling that investment himself or herself?

6. (Advanced) What is the purpose of Forms K-1 and 1099? What is the difference between the two forms? Which of these forms does the article's author believe a taxpayer/investor would prefer to receive from an ETF?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Most ETFs Are Tax-Smart. But Others... ," by: Ari I. Weinberg, The Wall Street Journal, January 9, 2012 ---
http://online.wsj.com/article/SB10001424052970203893404577098661198194858.html?mod=djem_jiewr_AC_domainid

Exchange-traded funds are hardly the magic models of tax efficiency that some advisers or fund sponsors would like investors to believe. But generally, they are at least as good at minimizing tax pain for stock investors as index funds, the most tax-efficient type of mutual fund.

Here's a closer look at the tax advantages of ETFs and the limits of those benefits, particularly when investing in assets other than stocks. How does ETF structure affect taxes?

The vast majority of ETFs are regulated as traditional mutual funds under the Investment Company Act of 1940, and most are similar to conventional index funds in that they buy and hold the components of a market benchmark. The difference is that unlike their mutual-fund cousins, ETFs trade like stocks. As long as the indexes they are tracking don't see big changes in their components, ETFs, like index funds, rarely have to make portfolio changes.

Avoiding such changes helps limit realized capital gains that might have to be distributed to investors.

But there is a significant difference in how ETFs operate compared with mutual funds that also helps with tax efficiency. When a traditional mutual fund receives cash from investors, it issues fund shares and buys a representative set of its portfolio investments. When investors redeem, the fund delivers cash and may have to sell underlying investments, which can result in capital gains that are subject to tax. [NEEDillonline] David Plunkert

With ETFs, ordinary investors buy and sell ETF shares from other investors, not from the fund itself. Meanwhile, ETF shares are created and redeemed in so-called in-kind transactions with big institutional investors: To receive ETF shares, market makers, known as authorized participants, deliver the underlying securities (or a representative basket) to the fund manager. And when they redeem ETF shares, they are handed securities rather than cash, which often eliminates the need for the fund to take gains. What's the impact of ordinary investors' buying shares from each other?

With this design, buying and selling by one investor doesn't result in tax consequences for the rest of the fund because the ETF doesn't have to sell securities to pay off departing investors. ETFs allow investors to be "isolated from the actions of other investors," says Ryan Issakainen, ETF strategist for ETF sponsor First Trust Advisors LP. And, because the cost of trading is borne by the individual investor, securities-transaction costs for the fund itself are low. How do in-kind transactions affect a fund's tax efficiency?

They allow ETF managers to make tax-wise decisions about which securities to distribute and whether to sell securities or distribute them in-kind.

In industry parlance, ETFs can internalize losses and externalize gains. That is, when an index change requires an ETF to get rid of a stock that has fallen in price since purchase, the fund can make the sale on the open market, collect the cash and take the capital loss on its books. If the fund is looking at a winning trade, the bias is to pass that stock out in an in-kind redemption—taking its low cost basis out with it, as well as any potential capital-gains tax bill.

Continued in article

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

"Marquet Embezzlement Report Reveals Continued High Rate Of Employee Theft For 2011 - Vermont tops list of highest risk states," Market Watch, January 17, 2012 ---
http://www.marketwatch.com/story/marquet-embezzlement-report-reveals-continued-high-rate-of-employee-theft-for-2011-2012-01-17
Thank you Caleb Newquist for the heads up.

Marquet International Ltd. announced today that it has released The 2011 Marquet Report On Embezzlement -- its annual study of major embezzlement cases in the United States. The study examined 473 major embezzlement cases active in the US in 2011 -- those with more than $100,000 in reported losses. The 2011 Marquet Report On Embezzlement examined several broad categories related to the white collar fraud phenomenon of employee theft, including:

-- Characteristics of the Schemes

-- Characteristics of the Perpetrators

-- Characteristics of the Victim Organizations

-- Judicial Consequences

Some noteworthy findings from the 2011 study include:

-- The number of major embezzlements dropped only a slight 2% from 2010;

-- Vermont topped the list of states with highest risk for loss due to embezzlement in 2011. Vermont was followed by Connecticut, Pennsylvania, Montana, Virginia, Iowa and Idaho;

-- In 2011, non-profits, including religious organizations, experienced the most embezzlement cases of all industry categories, behind only financial institutions;

-- The average loss was about $750,000 for 2011;

-- The most common embezzlement scheme in 2011 involved the forgery or unauthorized issuance of company checks;

-- Nearly three-quarters of the incidents in 2011 were committed by employees who held finance & accounting positions;

-- The average scheme lasted nearly 5 years;

-- Gambling continues to appear to be a motivating factor in some embezzlement cases; and,

-- Nearly two-thirds of all incidents involved female perpetrators in 2011.

"Unfortunately, 2011 was another banner year for employee theft in the United States, experiencing only a slight drop in frequency from the frenetic pace set in 2010," said Christopher T. Marquet, CEO of Marquet International. "Employee theft is not going away any time soon." The study also reported some conclusions Marquet has derived by combining the data from past four years:

-- Perpetrators typically begin their embezzlement schemes in their early 40s;

-- By a significant margin, embezzlers are most likely to be individuals who hold financial positions within organizations;

-- The Financial Services industry suffers the greatest losses from major embezzlements;

-- Vermont, Virginia and Florida are among the states with the highest risk for loss due to embezzlement;

-- Women are more likely to embezzle on a large scale than men;

-- Men embezzle significantly more than women per scheme;

-- Gambling is a clear motivating factor in driving some major embezzlement cases; and,

-- Only about 5 percent of major embezzlers have a prior criminal history.

Continued in article

Jensen Comment
Vermonters avoid the highest taxes among states by not reporting embezzlement income.

New Hampshirers avoid taxes by voting for 300+ state legislators with only a one-word vocabulary --- "No!"

Mainers avoid taxes by going on tax free welfare.

"Welfare recipients outnumber taxpayers:  That's the situation Maine faces, and perhaps other states as well," Charleston Daily Mail, December 21, 2011 ---
http://www.dailymail.com/Opinion/Editorials/201112220151

Paul LePage, the Republican governor of Maine, mentioned an uncomfortable truth in a radio address this month: Maine has more welfare recipients than income tax payers.

Democrats challenged the accuracy of this assertion.

The Bangor Daily News fact-checked LePage and discovered that 445,074 Mainers paid state income tax, while 453,194 received some sort of state aid.

In Maine, Medicaid, welfare, food stamps and subsidies for education have a combined enrollment of 660,000.

Adjusting for overlap reduces the number to 453,194 - or 8,120 more people on state assistance than there are state income taxpayers in Maine.

What is situation in West Virginia?

Nationally, only 53 percent of the nation lives in a household that pays federal income tax.

While just about every worker has taxes withheld, many people have the entire amount refunded at tax time. With child tax credits and earned income tax credits, some people get more money from filing a return than they paid in.

But 30 percent of Americans live in households that receive some sort of public assistance that is means tested, meaning a person must have an income low enough to qualify for the aid.

Another depressing thought is that nearly half the "taxpayers" in the United States pay no federal or state income taxes.

To the Point: PCAOB seeks comment on expanded audit committee communication

The Public Company Accounting Oversight Board (PCAOB) is seeking comment on a proposal that would require auditors to modify and expand their communications with audit committees beyond what the PCAOB and the Securities and Exchange Commission currently require.

Our To the Point publication summarizes the proposal and provides some questions for audit committees to consider in commenting to the PCAOB.
http://www.ey.com/Publication/vwLUAssets/TothePoint_EE0897_ACCommunication_19January2012/%24FILE/TothePoint_EE0897_ACCommunication_19January2012.pdf

New York's CPA Examination Performance
Once again those high SAT/ACT/GMAT scores tell a familiar tale ---
http://goingconcern.com/post/last-here-are-top-and-bottom-cpa-exam-performers-among-new-york-schools

"Five things accounting educators need to know," CPA Success, January 6, 2012 ---
http://www.cpasuccess.com/2012/01/top-five-things-accounting-educators-need-to-know.html
Thank you Tom Hood for the heads up.

Five things accounting educators need to know

1. The top trends facing the CPA profession (almost none are technical).
2. The profession has a vision (and students like it).
3. There are more career opportunities than just the Big Four (business and industry, not-for-profits, government, and 40,000 firms).
4. Students want to understand the expectations and realities of the workplace.
5. Data (XBRL) is the new plastics -- career advice for students and young professionals.

This post is for our accounting educators who are responsible for laying a strong foundation for the CPA profession's future, and it is no easy job!

Today I am delivering a keynote on the latest issues facing the CPA profession at our annual educator's conference while attending the CPA-SEA (State CPA Society Executives) meeting with the AICPA senior leadership at our annual mid-winter meeting. Thanks to video and webcasting capabilities, I can actually be in two places at one time!

My presentation is not the typical PIU (professional issues update). This one is about the future -- the future of the CPA profession and the top trends identified by the CPA Horizons 2025 Project.

Here are some resources:

• The CPA Horizons 2025 Report (downloadable), which captures the major trends and what CPAs should be thinking about.
• The in-person Future Forum process designed and facilitated by MACPA's Business Learning Institute.
• Perspectives from educators, young professionals, students, and CPAs in short video interviews.
• Background and research from the AICPA and leading futurists about future trends.
• Our whitepaper from our Leadership Academy about what leadership in the CPA profession will look like in 2023.

Here are three videos you may want to use in the classroom for talking about the future of the CPA profession:

• AICPA's Global Forces Video -- the short trip to the future based on the research from AICPA.
• Futurist David Pearce Snyder talking about the future, change, and the future CPA.
• The Future Forum video -- giving insights from grassroots particpants.
• Interview with Steve King of Emergent Research, who was lead futurist for Intuit's 2020 Project.

Downloadable documents you can use in class:

• The PIU slidedeck from our 2012 Educator's Conference.
• Our young professionals' whitepaper on leadership in the future.
• The CPA Horizons 2025 project on a page.
• The CPA Vision 2011 on a page.
• The CPA Horizons 2025 report.
• The CPA Vision 2011 report.

 So for all you accounting educators, this post is for you.

Accounting professors avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals

Many practitioners are now lurkers on the AECM, including some from each of the Big Four who frequently send me private messages but do not want their messages forwarded in their own names.

I think there are many ways for getting practitioners more involved in academic research.

A consideration in this "debate" about top accountics science research journal refereeing is the inbreeding that has taken in a very large stable of referees that virtually excludes practitioners. Ostensibly this is because practitioners more often than not cannot read the requisite equations in submitted manuscripts. But I often suspect that this is also because of fear about questions and objections that practitioner scholars might raise in the refereeing process.

Sets of accountics science referees are very inbred largely because editors do not invite practitioner "evaluators" into the gene pool. Think of how things might've been different if practitioner scholars suggested more ideas to accountics science authors and, horrors, demanded something that some submissions be more relevant to the professions.

The argument that practitioners cannot read all the requisite equations in some AAA journals like TAR is a hollow argument to me. Scholarly practitioners can penetrate the professional value of most articles that contain equations.

The problem is that scholarly practitioners are usually very busy professionals who hesitate to giving free time pro bono to AAA journal refereeing. To get more practitioners into the refereeing process it will take appeals (pressures?) from their supervisors.

One thing the largest accounting firm CEOs want is great relations with the AAA, which is often the reason they help fund many AAA programs, meetings, and publications. What it will take to get more practitioner scholars on AAA journal editorial boards is an appeal from the Executive Committee of the AAA to the CEOs of accounting firms and some leading corporations to encourage their leading employee scholars to volunteer to be on editorial boards of AAA journals.

This is what it will take to diversify the gene pool of AAA journal editorial boards.

And I can hear accountics scientists groaning already at this idea. Many of them shake in fear that practitioners will have a say in judging the relevance of their research. The best accountics science researchers, however, have no such fears and have confidence that their research is relevant to the profession of accountancy.

Bob Jensen

January 22, 2012 reply from Jagdish Gangolly

Bob,

In the early days, there was a thriving collaboration between the accountants in practice and academicians, accounting or otherwise. A classic example is the cllaborative work of Kenneth Stringer (Deloitte) and Professor Frederick F. Stephan of Princeton University Institute for Advanced Study that led to the development of what is today called dollar-unit sampling, which implements a procedure that does not depend on assumptions of normal approximation of sampling distribution and yet provides "a reasonable inference of population error when al items in the sample are error free" (See http://www.nap.edu/openbook.php?record_id=1363&page=9; the US National Academy Commission on Physical Sciences, Mathematics, and Applications was alerted to the possibility of such applications not by academic accountants but by an IRS employee!). This glorious tradition of practitioners contributing to the academia was continued in: Leslie, Donald A., Albert D. Teitlebaum, and Rodney J. Anderson, DOLLAR-UNIT SAMPLING: A PRACTICAL GUIDE FOR AUDITORS (1979) (Teitelbaum is a statistician at McGill, Leslie and Anderson are practitioners.

Somewhere along the way, we lost our way and accounting academia became insular, almost xenophobic, introverted (except for Economics and Finance), and regimented philosophically.

If the practitioners can not understand the equations, then the fault lies in US academicians and not practice. If Einstein could explain the complexities of relativity in terms that even a high school student can understand, and JBS Haldane could explain the marvelous complexities of genetics and evolution that even uneducated working classes in England in the thirties could understand, there is no reason that we academicians can not make simple equations used in most accounting journals intelligible to educated intelligent practitioners of accounting. Parsimony is a very good idea when it comes to the use of mathematics in a field like accounting. Mathematics should not be used like the lamppost that a drunk leans on for support.

Let alone the practitioners, it would not be a bad idea to have some grandmas on the panel of reviewers for submissions.

Jagdish

Bob Jensen's threads on
Accounting professors avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

Tax Analysts society names as its 2011 Person of the Year
Grover Norquist, head of Americans for Tax Reform, and notes the other individuals who were considered for the title ---
http://taxprof.typepad.com/files/tax-notes-1.pdf

Financial Instruments:  Perhaps auditing courses could make use of some of the IAASB resources in
International Auditing Practice Note (IAPN) 1000, Special Considerations in Auditing Financial Instruments
|http://www.ifac.org/publications-resources/international-auditing-practice-note-iapn-1000-special-considerations-auditin

"IFAC Offers Alerts on Tough Audit Issues," by Tammy Whitehouse, Compliance Week, December 29, 2011 ---
http://www.complianceweek.com/ifac-offers-alerts-on-tough-audit-issues/article/221235/

Guidance emerging from the International Federation of Accountants might prove useful even in the United States in the coming weeks as companies close the books on 2011 and plan for the year ahead.

IFAC's International Auditing and Assurance Standards Board has issued a practice note on special considerations that should be taken into account when auditing financial instruments. The alert, titled International Auditing Practice Note 1000, provide some practical assistance to auditors when dealing with valuation and other issues related to financial statement assertions, a touchy and complex area in any entity's financial statements in light of economic pressures and an increasing focus on fair value.

According to IAASB Chairman Arnold Schilder, the practice note can help auditors understand the nature of and risks associated with financial instruments as well as the different valuation techniques and types of controls entities may use in relation to them. The guidance also highlights audit considerations that should be taken into account throughout the audit process. IAASB Technical Director James Gunn said through a statement that the exercise of developing the guidance was informative even to the board, which will further inform the board's work as it develops future auditing standards.

In a separate release, IFAC's Professional Accountants in Business Committee has proposed some best practices guidance on evaluating and improving internal controls to help organizations benchmark their work in maintaining effective controls. The committee says the guidance is intended to be useful to any organization, regardless of the internal control framework it uses, to help deal with internal control issues that are often problematic because of poor design or implementation.

Vincent Topoff, the committee's senior technical manager, says the guidance would be meaningful even to U.S. companies where internal controls are more closely scrutinized because it was developed in part by U.S. experts who have spent many years working to improve internal controls. “Together, they have identified in this guidance those areas where the application of good practice guidance often goes wrong,” he says. “This guidance considers the areas organizations need to continuously improve and the issues they need to address.” The guidance is not meant to replace any existing framework that is in use, he says.

Finally, the IAASB also refreshed its warnings to auditors to keep economic conditions and pressures in mind as they consider whether disclosures are adequate and whether there is reason to doubt an entity can continue as a going concern. Companies continue to face volatility in capital markets and exposure to debt in distressed countries, leading to uncertainty that puts pressure on cash flow and access to credit, the board advises. Those factors complicate the audit process, and therefore must be considered closely, the board says.

Continued in artilce

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

Bob Jensen's threads on Tools and Tricks of the Trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm

The sad part about going into business apart from writing books is that having such a huge vested interest in that business creates moral hazard in terms of independence as on of the leading personal finance commentators in the world. The champion of the poor and troubled may be trying to increase her 1% at the expense of the poor and troubled.

Suze Orman --- http://en.wikipedia.org/wiki/Suze_Orman

"Suze Orman, Debit-Card Dealer:  The money guru introduces her first financial product—and vexes some fans," by Karen Weise, Bloomberg Business Week, January 19, 2012 ---
http://www.businessweek.com/magazine/suze-orman-debitcard-dealer-01182012.html

“I love you!” a woman yells as personal finance guru Suze Orman enters the drab conference room at a Barnes & Noble (BKS) in suburban New Jersey. Fans cheer and clap while a man in the front row tears up from excitement. Orman is here to preach the tough-love brand of financial advice that she’s been peddling for more than a decade through nine bestselling books, a highly rated CNBC show, and regular appearances on the old Oprah Winfrey Show. “You have got to be the masters of your own financial future,” she tells the 200-strong crowd. While the event coincides with a new paperback edition of her 10th book, The Money Class, that’s not the main focus of her talk. “You need more than books,” she says. “Now you need the tools.”

Orman has a particular tool in mind. Just a few days earlier she introduced her first financial product: a prepaid debit card emblazoned with her name. She sees her Approved Card as an alternative way for people who are fed up with—or don’t have—traditional checking accounts and credit cards to manage their cash. And if the most ambitious part of her plan succeeds, the card may eventually help users improve their credit scores.

Orman’s Approved Card, issued by Wilmington (Del.)-based Bancorp Bank (TBBK), is in part designed to play the role of pestering mom. The basics are simple: People use electronic transfers or cash to load money onto their cards, then use them like regular debit cards, buying groceries or shopping online. The Orman touch comes in such features as automatic text message alerts sent to mobile phones that note the balance remaining on the card after each purchase. The card’s website has Orman issuing such sharply worded reminders as, “Before you make a purchase, you’d better be able to afford it—do you hear me?!”

Prepaid cards are the fastest-growing payment method, Federal Reserve data show. In 2010 people used them for $65 billion in transactions, compared with $48 billion in 2009, the industry newsletter Nilson Report says. Part of the cards’ appeal is that you can’t get into debt with them. “I think it’s a good idea to have a prepaid card rather than going out willy-nilly with a credit card,” says Glinda Kidd at the book signing.

Still, prepaid cards often come loaded with fees—and Orman’s is no exception. It has a standard $3 monthly charge. While there’s no cost to reload the card with direct deposits or automatic transfers from a checking account, people must pay up to $4.95 to put cash on the card at Western Union (WU) or MoneyGram (MGI) locations. And if they load with cash rather than electronically, all ATM withdrawals cost $2. One free call to a customer service rep is included each month; extra calls are $2 each.

“What people don’t understand is the cost to do business,” says Orman in an interview. “If I could have given this to you for free, I would have.” Orman, who says she invested $1 million in the venture, declines to discuss how much money she might make from it. And she vows to train customers to keep their costs down. In videos on the card’s website, she explains the fees, warning that people who load their cards electronically can get cash from one of the 35,000 ATMs in the Allpoint network for free but will incur a $2 charge for using other ATMs—plus whatever fee the ATM operator imposes. “Why would you want to waste money like that?” she says in the video. “Don’t be lazy, and go to an Allpoint ATM.”

Orman says if she finds people are incurring fees to put cash on the card, only to spend another $2 to get cash at an ATM, she will ask them to turn in their plastic. If you’re going to squander money that way, “just keep it in cash! You don’t need the damn card,” she tells the audience at the book signing.

Michael Collins, an assistant professor at the University of Wisconsin who studies the financial decision-making of low-income families, says people will eventually figure out the costs of any product. “The question is how long will it take” and how much in fees they will have racked up by then, he says. Collins adds that if Orman’s messages help people control their spending impulses, the card could be beneficial: “Anything that gets people to think harder about their financial security and take some responsibility is a good thing.”

Some personal finance bloggers have complained about the fees and charged that Orman is using her influence to bilk her fans. On Twitter, the Blog Finanza website said: “You are taking your authority figure to make a $$ from your audience. #DENIED”—echoing a catchphrase from Orman’s TV show. Others, such as MSNBC.com consumer finance columnist Herb Weisbaum, said many people would be better served by building their credit immediately with a secured credit card.

Orman dismisses the criticisms, saying the card reflects her understanding of people’s financial habits and needs. “I am the personal financial expert of the world,” she says. “I know what I am talking about.” Publicly, Orman lashed out on Twitter against the naysayers, calling them “small thinkers,” “idiots,” and “Suze haters.” After New York Times personal finance columnist Ron Lieber and others protested the harsh words, she issued a blanket apology: “For anyone I called an idiot, I too am sorry.”

Continued in article

"Does Suze Orman's Prepaid Debit Card Make Sense for You?" by Sarah Gilbert, Get Rich Slowly, January 17, 2012 ---
http://www.getrichslowly.org/blog/2012/01/17/does-suze-ormans-prepaid-debit-card-make-sense-for-you/?WT.qs_osrc=fxb-48064510

Suze Orman is famous for her personal, easy-to-digest, and friendly personal finance advice. Many of us less famous (far less famous, in the case of this writer) finance writers admire her general approach, which boils down to “spend less than you earn.” Who can argue with that? So imagine my amazement at the news this week that Suze will be offering a branded prepaid debit card.

Prepaid debit cards have a star-crossed reputation
You know about branded prepaid debit cards, but they're usually not connected with individuals known for their sensible finance advice. Think Russell Simmons. Think the Kardashians. See? Sample words and phrases from our collective wisdom on those topics include “skeptical” and “reprehensible” and “urge to scream” and “hit cash-strapped consumers over the head with nickel-and-dime charges.”

Suze Orman is famous for her personal, easy-to-digest, and friendly personal finance advice. Many of us less famous (far less famous, in the case of this writer) finance writers admire her general approach, which boils down to “spend less than you earn.” Who can argue with that? So imagine my amazement at the news this week that Suze will be offering a branded prepaid debit card.

Prepaid debit cards have a star-crossed reputation You know about branded prepaid debit cards, but they're usually not connected with individuals known for their sensible finance advice. Think Russell Simmons. Think the Kardashians. See? Sample words and phrases from our collective wisdom on those topics include “skeptical” and “reprehensible” and “urge to scream” and “hit cash-strapped consumers over the head with nickel-and-dime charges.”

The biggest problems with prepaid debit cards are, really, threefold:

While they are cards that are available to consumers with bad credit, they don't help consumers build credit, though they are advertised as doing so (any help would be mild at best - the reporting they do is only to smaller credit reporting agencies, not the “big three” that man the velvet rope for most consumer debt in America). They're punishingly expensive and seem more directed toward association with the personality branding the card than any financial benefit. Russell's “Rush” Card costs between $4 and $15 upfront, with $10 monthly fees and $1 per-transaction fees. They're accused of using celebrities to take advantage of both the hopes and difficult situations of the “unbanked,” mostly-lower-class, often minority consumers whose financial situation is so bad that banks won't take the risk of giving them checking accounts.

Suze Orman wants to make a difference (but, is it a fool's errand?) Orman has a different idea. She, too, wants to convince the unbanked to use her prepaid debit card, but she wants to charge less. Her “Approved Card” is far cheaper than Rush or the K thingy - only $3 to purchase the card and a $3 monthly fee. ATM transactions from the Allpoint network (found in 7-Eleven, Costco, Kroger, CVS, and Walgreens) are $2 per withdrawal, and point of sale transactions, such as purchases at the grocery store or coffee shop or online, are free. Balance inquiries and some declined transactions are $1 , but it's free to be declined at the register for a regular PIN/signature transaction. Many of these transactions, especially ATM withdrawals, are free for 30 days with a direct deposit or bank transfer into the Approved Card account, making them a great product for customers with some sort of automatically-deposited income (even, for instance, unemployment).

Notably, electronic debit bill paying is free. Many competing products charge for this service, from $1 to $3 per transaction, and it's the service that customers without a regular bank account need. Often, discounts and special deals are available to customers who allow vendors to debit their account each month.

The great credit score kerfuffle
The concept that sells many prepaid debit cards - the quasi-justification for how expensive they are - is that they might help in the quest to raise a credit score. If a credit score is low enough so that a mainstream bank isn't part of your personal finance portfolio, can a prepaid debit card even help? Probably not.

The problem that Suze Orman has mentioned in public statements about the Approved Card is that credit bureaus, beyond even knowing about the transactions made by the millions of unbanked consumers, don't care about sensible use of money. They just care about sensible use of credit. A New York Times piece quotes Orman as saying, “There is something radically wrong here. We are rewarding people for having credit and punishing people who pay in cash. I want to change that paradigm.”

Wanting to change credit score calculation is easy. Changing is hard.
Orman has done the near-impossible and convinced TransUnion, one of the big three credit bureaus, to collect the data about spending habits from her customers. But what that will do to credit scores is another thing entirely. The answer, probably, is nothing.

The problem that Suze Orman has mentioned in public statements about the Approved Card is that credit bureaus, beyond even knowing about the transactions made by the millions of unbanked consumers, don't care about sensible use of money. They just care about sensible use of credit. A New York Times piece quotes Orman as saying, “There is something radically wrong here. We are rewarding people for having credit and punishing people who pay in cash. I want to change that paradigm.”

Wanting to change credit score calculation is easy. Changing is hard.
Orman has done the near-impossible and convinced TransUnion, one of the big three credit bureaus, to collect the data about spending habits from her customers. But what that will do to credit scores is another thing entirely. The answer, probably, is nothing.

The problem is that TransUnion has only been persuaded to evaluate the data Orman will collect with her Approved Card; it has not promised to include that in credit reports nor in the calculation of scores. If, after two years, it finds the data meaningful, it's still unlikely to have much of an effect on the resultant calculations. Responsible use of a prepaid debit card, after all, hasn't had much impact on the financial institutions that sponsor the card - in this case, Orman's own company - so the patterns of data don't have much meaning.

What kind of debit card use could demonstrate the sort of behavior creditors want to see, such as:

• On-time delivery of minimum payments
• A history of purchasing high-value assets and then paying them off quickly
• Regular income and a comfortable ratio of debt-to-income

These all can be shown far more reliably through existing reporting. A consumer who pays rent on time each month in cash won't differ, to the eyes of TransUnion, from a consumer who pays rent on time each month by automatic debit from her Approved Card. Similarly, failing to overdraw an Approved Card account (that is impossible to overdraw from, except perhaps for a few $1/$2 ATM transaction declined fees) is very different from failing to overdraw a bank account.

Why would you use a prepaid debit card?
There are two groups of people I can see benefiting from using a prepaid debit card, as well as one group I would caution to avoid it. All of them could achieve higher credit scores, but not in the way you think. Let me explain.

Continued in article

Jensen Comment
The sad part about going into business apart from writing books is that having such a huge vested interest in that business creates moral hazard in terms of independence as on of the leading personal finance commentators in the world. The champion of the poor and troubled may be trying to increase her 1% at the expense of the poor and troubled.

Bob Jensen's personal finance helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

"Feed the Pig: Great Time to Save Money [INFOGRAPHIC]," AICPA, January 2012 ---
http://blog.aicpa.org/2012/01/feed-the-pig-great-time-to-save-money-infographic.html

Jensen Comment
I know that the AICPA's "pig" depicts a piggie bank, but I still think "Feed the Pig" is a bad name for a personal finance helper site. A better name would be "Feed Your Piggie Bank: Helpers for Saving and Investment"

"My Financial Mis-Education," by Lee Bessette, Inside Higher Ed, January 16, 2012 ---
http://www.insidehighered.com/blogs/my-financial-mis-education

Jensen Comment
This reminds me of when I gave my daughter a credit card (the billings came to me) when she left home as a first-year student at the University of Texas. As I recall I did say this card was for "emergencies," but then she started discovering all sorts of emergencies to the tune of nearly $1,000 per month even though I was directly paying for her tuition, room and board, car insurance, etc. One type of "emergency" was rather amusing until I put an end to such amusement. At Christmas time she lavished me with rather expensive gifts that, of course, she'd charged on her credit card.

"Five Deadly Business Sins:  Two avoidable mistakes were enough to trip up Eastman Kodak, once one of America's mightiest companies," by Rick Wartzman, Bloomberg Business Week, January 13, 2012 ---
http://www.businessweek.com/management/five-deadly-business-sins-01132012.html

Just how lethal are Peter Drucker’s “five deadly business sins”? You might ask Eastman Kodak (EK), which has committed at least a couple of them and now finds itself on the verge of bankruptcy.

Word emerged last week that Kodak, founded in 1892 and for many decades widely celebrated as one of the world’s greatest companies, may soon file for Chapter 11 protection if it can’t raise enough cash by selling off pieces of its patent portfolio. The news was a sharp reminder of how incredibly challenging it is to sustain any organization, even the most iconic.

How did it come to this? In certain respects, Kodak has been on the defensive since it began facing heightened competition from its arch rival Fuji (8278:JP) some 30 years ago. But fundamentally the company has slipped because it fell prey to two of what Drucker identified in a 1993 essay as a quintet of “avoidable mistakes that will harm the mightiest business.”

The first is a preoccupation with high profit margins. The second: “slaughtering tomorrow’s opportunity on the altar of yesterday.” (The three other deadly business sins, according to Drucker, are “mispricing a new product by charging ‘what the market will bear’; “cost-driven pricing” in which you merely add up your expenses and then stick a profit margin on top—a subject I’ve explored previously; and “feeding problems” while “starving opportunities.”

Continued in article

Answer
It is much like a make versus buy decision. As an illustration, the "replacement cost" of a computer is the price one would pay for a computer in the market to replace an existing computer. That presumably includes the mark up profits of vendors in the supply chain. The "factor replacement cost" excludes such mark up profits to the extent possible by estimating what it would cost in the "transformation process" to purchase the components for transformation of those components into a computer. The "factor replacement cost" adds in labor and manufacturing overhead. It excludes vendor profits in the computer supply chain but not necessarily vendor profits in the purchase price of components. It becomes very complicated in practice, however, because computer vendors do such things as include warranty costs in the pricing of computers. Assembled computers in house probably have no such warranties. A more detailed account of factor replacement costing is provided in Chapters 3 and 4 of Edwards and Bell.
Edgar O. Edwards and Philip W. Bell, The Theory and Measurement of Business Income (Berkeley:  University of California Press, 1961).

Of course this does not solve the fundamental problem of replacement cost accounting that arises when there are no current assets or component parts of assets that map directly into older assets still being used by the company. For example, old computers and parts for those computers are probably no longer available. Newer computers have many more enhancements that make them virtually impossible to compare with older computers such using prices of current computers is a huge stretch when estimating replacement costs of older computers that, for example, may not even have had the ability to connect to local networks and the Internet.

Zeff writes as follows on Page 623:

Edwards and Bell, in their provocative volume, propound a measure called "business profit," which is predicated on what might be termed "factor replacement cost." "Business profit" is the sum of (1) the excess of current revenues over the factor replacement cost of that portion of assets that can be said to have expired currently, and (2) the enhancement during the current period of the factor replacement cost.

Advantages and disadvantages of replacement cost (entry value, current cost) accounting are discussed in greater detail are listed below.

Advantages of Entry Value (Current Cost, Replacement Cost) Accounting

·     Conforms to capital maintenance theory that argues in favor of matching current revenues with what the current costs are of generating those revenues. For example, if historical cost depreciation is $100 and current cost depreciation is $120, current cost theory argues that an excess of $20 may be wrongly classified as profit and distributed as a dividend. When it comes time to replace the asset, the firm may have mistakenly eaten its seed corn.

 

·     If the accurate replacement cost is known and can be matched with current selling prices, the problems of finding indices for price level adjustments are avoided.

 

·     Avoids to some extent booking the spread between selling price and the wholesale "cost" of an item. Recording a securities “inventory” or any other inventory at exit values rather than entry values tends to book unrealized sales profits before they’re actually earned. There may also be considerably variability in exit values vis-à-vis replacement costs.
 

Although I am not in general a current cost (replacement cost, entry-value) advocate, I think you and Tom are missing the main theory behind the passage of the now defunct FAS 33 that leaned toward replacement cost valuation as opposed to exit valuation.

The best illustration in favor of replacement cost accounting is the infamous Blue Book used by automobile and truck dealers that lists composite wholesale trading for each make and model of vehicle in recent years. The Blue Book illustration is relevant with respect to business equipment currently in use in a company since virtually all that equipment is now in the “used” category, although most of it will not have a complete Blue Book per se.

The theory of Blue Book pricing in accounting is that each used vehicle is unique to a point that exit valuation in particular instances is very difficult since no two used vehicles have the same exit value in a particular instances. But the Blue Book is a market-composite hundreds of dealer transactions of each make and model in recent months and years on the wholesale market.

Hence I don’t have any idea about what my 1999 Jeep Cherokee in particular is worth, and any exit value estimate of my vehicle is pretty much a wild guess relative to what it most likely would cost me to replace it with another 1999 Jeep Cherokee from a random sample selection among 2,000 Jeep dealers across the United States. I merely have to look up the Blue Book price and then estimate what the dealer charges as a mark up if I want to replace my 1999 Jeep Cherokee.

Since Blue Book pricing is based upon actual trades that take place, it’s far more reliable than exit value sticker prices of vehicles in the sales lots.

 Conclusion
It is sometimes the replacement market of actual transactions that makes a Blue Book composite replacement cost more reliable than an exit value estimate of what I will pay for a particular car from a particular dealer at retail. Of course this argument is not as crucial to financial assets and liabilities that are not as unique as a particular used vehicle. Replacement cost valuation for accounting becomes more defensible for non-financial assets.

Hi Tom,

My recent stay in the Concord Holiday Inn and your replies prompted me to write an online document called
"Holiday Inn Case Seeds and Questions About Tobin's Q"
Two Ideas for Hotel Replacement Cost Cases in Accounting"
http://www.cs.trinity.edu/~rjensen/temp/HolidayInnCaseSeeds.htm 
 

If you are willing to counter my arguments, I would really like to see why investors and creditors would be interested in the 2011 Replacement Cost financial statements for the Concord, NH and Brookline, MA Holiday Inn hotels. To me it seems that such statements would be more misleading than historical cost financial statements given the fact that neither historical costs nor replacement costs are valuation-based financial statements.

Thanks,
Bob

January 17, 2012 Update
 

Tom Selling has what I consider to be a much more reasonable posting on replacement costing:
"What I Mean by "Replacement Cost" is not Literally Replacement Cost," by Tom Selling, The Accounting Onion, January 17, 2012 --- Click Here
http://accountingonion.typepad.com/theaccountingonion/2012/01/what-i-mean-by-replacement-cost-is-not-literally-replacement-cost.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

Jensen Comment
His latest posting remains, however, disappointing to me in that he does not delve into how traditional replacement (current) cost accounting of operating assets like factories, stores, hotels, airliners, can be more misleading than helpful if it is not accompanied by traditional historical cost financial statements and possibly exit value statements (although exit value is not very relevant for going concerns with lots of synergy covariances of asset values "in use."

Some of his statements do not adequately stress that replacement cost accounting is not value accounting since it has identical accrual issues of depreciation, depletion, amortization, bad debt estimation, etc. that plagues historical cost accounting. For example, he states:

"First, replacement cost measures are the only possible way for accounting to reflect wealth invested by shareholders in an enterprise; and consequently, changes in invested wealth."
Tom Selling as cited above

Firstly, I almost always advise against sweeping generalization such as the "only possible way to reflect wealth invested by shareholders ..."
Such sweeping generalizations should be avoided in the Academy, especially when when our accounting history research literature is brimming articles from scholars who do not share Tom's view about replacement cost accounting (even in theory). Kenneth McNeal would not call replacement cost accounting "Truth in Accounting" or even being the best of asset measurement alternatives ---
http://www.trinity.edu/rjensen/Theory02.htm#BasesAccounting

Secondly, he still is speaking of "flowers in spring" to Julie Andrews without giving her the "show me" she's demanding. He still has not made a convincing case on how even his hybrid version of replacement cost accounting would be relevant to my two Holiday Inn case seeds at
http://www.cs.trinity.edu/~rjensen/temp/HolidayInnCaseSeeds.htm

To his credit, in his latest posting Tom does not mention Tobin's Q. Perhaps I convinced him that Tobin's Q is just not relevant to this analysis since the value of a firm is affected by so many factors other than items accountants book into the ledgers. I discuss this problem with Tobin's Q at
http://www.cs.trinity.edu/~rjensen/temp/HolidayInnCaseSeeds.htm

In any case I hope Tom will continue our debate on replacement costs. My challenge to him remains to take my two Holiday Inn case seeds and show how replacement cost measures are the only possible way for accounting to reflect wealth invested by shareholders in an enterprise; and consequently, changes in invested wealth" in these two hotels.

http://www.cs.trinity.edu/~rjensen/temp/HolidayInnCaseSeeds.htm

"FASB's impairment testing proposal deviates from IFRS," IAS Plus, January 26, 2012 ---
http://www.iasplus.com/index.htm

The United States Financial Accounting Standards Board (FASB) has published a proposal in which an entity testing indefinite-lived intangible assets for impairment would have the option of performing a qualitative assessment to determine whether it is more likely than not that the asset is impaired.

Under current US GAAP, assets with indefinite useful lives are similar to those under IAS 36 Impairment of Assets; they are reviewed at least annually for impairment. Under the proposal, certain assets such as trademarks, licenses and distribution rights could be exempt from this requirement, if the asset is determined to be more likely than not less than its fair value. In their proposal, the FASB acknowledges that this new guidance does not converge US GAAP and IFRS.

Click for:

• Proposal on the FASB website
• Press release on the FASB website
• Deloitte (United States) Heads Up newsletter on the proposed changes (107 KB)

Bob Jensen's threads on intangible assets are at
Intangibles and Contingencies:   Theory Disputes Focus Mainly on the Tip of the Iceberg
Go to http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

Ernst & Young
To the Point: FASB tries to simplify impairment test for indefinite-lived intangibles

Based on concerns raised by financial statement preparers about recurring costs and complexity of calculating the fair value of indefinite-lived assets for impairment testing, the FASB today issued a proposed ASU to simplify the impairment test. The proposal would give companies the option to perform a qualitative assessment (similar to the one introduced by ASU 2011-08 for goodwill) to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Comments are due by 24 April 2012.

The attached To the Point publication summarizes what you need to know about the proposal. It is also available online.
http://lyris.ey.com/t/584039/1613618/4093/0/

Bob Jensen's threads on intangibles ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

From Paul Caron's TaxProf Blog on January 26, 2012 ---
http://taxprof.typepad.com/

The Tax Foundation yesterday released the 2012 State Business Tax Climate Index (9th ed.) which ranks the fifty states according to five indices: corporate tax, individual income tax, sales tax, unemployment insurance tax, and property tax. Here are the ten states with the best and worst business tax climates:

1	Wyoming	41	Iowa
2	South Dakota	42	Maryland
3	Nevada	43	Wisconsin
4	Alaska	44	North Carolina
5	Florida	45	Minnesota
6	New Hampshire	46	Rhode Island
7	Washington	47	Vermont
8	Montana	48	California
9	Texas	49	New York
10	Utah	50	New Jersey

Interestingly, all ten of the states with the worst business tax climates voted for Barack Obama in the 2008 presidential election, and five of the ten states with the best business tax climates voted for John McCain (and eight of the ten voted for George Bush in 2004).

"States Where People Pay the Most (and Least) in Taxes," by Charles B. Stockdale, Michael B. Sauter, Douglas A. McIntyre, Yahoo Finance, July 21, 2011 ---
http://finance.yahoo.com/taxes/article/113173/states-pay-most-least-taxes-247wallst

Jensen Comment
But we're only operating in the narrow range of 6.3% (Alaska) to 12.2% (New Jersey) for state and local taxes, including property taxes. One would hope that, by adding to a state's tax burden, the quality of education would be the result of higher taxes. This, however, is not the case for most states. For example, South Dakota comes in at Rank 3 with a very low 7.6% tax burden and manages to have one of the very best K-12 rural and urban education systems among the 50 states. Unfortunately, this does not extend to higher education in South Dakota. New Jersey has the highest taxation rate of 12.2% but does not get a whole lot of K-12 bang for the buck in terms of education compared with the low taxation states of South Dakota, New Hampshire, and Tennessee.

The largest cities in the U.S. face the most daunting problems in K-12 education. Problems with rural versus urban may be greater than problems with high state taxation versus low state taxation. For example, rural New York has some very nice rural K-12 schools that exist apart from troubled NYC schools. On the other hand, rural Texas has some of the worst rural K-12 schools in the nation. Mississippi has some of the worst urban and rural schools in the nation, but Mississippi is neither a high nor a low taxation state total state and local taxation rankings. However, in terms of local property taxation, Mississippi has low property tax burdens. Quality of schools in rural communities correlates highly and negatively with degree of poverty in those communities. Quality of urban schools is more complicated. New York City and Chicago are quite wealthy and prosperous in ways that do not translate in to quality of K-12 inner city public schools. Minneapolis is less prosperous and wealthy but probably has somewhat better public schools. although in every large U.S. city the inner city schools are lower in quality than schools in their suburbs.

Bob Jensen's threads on taxation are at
http://www.trinity.edu/rjensen/BookBob1.htm#010304Taxation

From Ernst & Young on January 20, 2012

Financial reporting alert: Highly inflationary economies

The Center for Audit Quality (CAQ) SEC Regulations Committee’s International Practices Task Force (the Task Force) today posted highlights from its recently finalized 22 November 2011 discussions, which indicate that based on available economic data, the Belarus three-year cumulative inflation rate exceeded 100 percent as of 30 September 2011.

An economy whose cumulative inflation rate is 100 percent or more over a three-year period is highly inflationary for US GAAP reporting purposes. Generally, highly inflationary accounting is applied as of the first day of the reporting period immediately following the reporting period (including interim reporting periods) in which an economy is assessed to be highly inflationary. However, for reasons noted in the Task Force’s highlights, the SEC staff would not object to registrants treating the economy of Belarus as highly inflationary no later than the first reporting period beginning after 15 December 2011.

Separately, the SEC staff expects registrants to continue to treat the economies of the Democratic Republic of Congo and Venezuela as highly inflationary.

There may be other countries with cumulative inflation rates of 100 percent or more or that should be monitored that are not mentioned above because the sources used by the Task Force do not include inflation data for all countries. Accordingly, companies should closely monitor the inflation rates in economies in which they operate.

For further information, including SEC disclosure considerations related to the events in Belarus, see the Task Force Highlights Excerpt.
http://thecaq.org/iptf/pdfs/highlights/2011_November22_IPTF_JointMeetingHLs.pdf

One of the most popular Excel spreadsheets that Bob Jensen ever provided to his students ---
www.cs.trinity.edu/~rjensen/Excel/wtdcase2a.xls

Bob Jensen's threads on price-level adjustments ---
http://www.trinity.edu/rjensen/Theory02.htm#BasesAccounting

Bisk CPA Examination Review Sites
Bisk Education would like to provide you similar information with a link for our 2 accounting resources which are www.cpaexam.com and www.cpeasy.com

"Turning risk into advantage: A case study,"  by John Michael Farrell, KPMG Institute, June 20, 2011 ---
http://www.kpmginstitutes.com/404-institute/insights/2011/pdf/turning-risk-into-advantage-case-study.pdf
Thank you Jerry Trites for the heads up.

Building a Search Engine at Udacity ---
http://www.udacity.com/
Thank you Joe Hoyle for the heads ups

Learn programming in seven weeks. We'll teach you enough about computer science that you can build a web search engine like Google or Yahoo!

"So you want to learn to program?" by Robert Talbert, Chronicle of Higher Education, January 16, 2012 ---
http://chronicle.com/blognetwork/castingoutnines/2012/01/16/so-you-want-to-learn-to-program/?sid=wc&utm_source=wc&utm_medium=en

Jensen Comment
Having taught both Fortran and COBOL at one point in my career, I will pass on this opportunity to upgrade my programming skills. However, these sound like valuable free resources for the younger generation headed for college or that generation of unemployable history majors seeking new skills.

Bob Jensen's threads on Tools and Tricks of the Trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm

"Here Are the Colleges with the Best CPA Exam Performance," by  by Adrienne Gonzalz, Going Concern, January 9, 2012 ---
http://goingconcern.com/post/here-are-colleges-best-cpa-exam-performance

"And Now, We're Going to Judge Florida Colleges' Performance on the CPA Exam," by Adrienne Gonzalz, Going Concern, January 6, 2012 ---
http://goingconcern.com/post/and-now-were-going-judge-florida-colleges-performance-cpa-exam

Jensen Comment
I think Adrienne is running a series of tidbits on CPA examination performance by state --- starting with a previous article on California. This is can be a very misleading thing to do unless we're careful about how to mislead with statistics.

For example, Florida A&M is a predominantly African American university that annually comes out at or near the bottom on the CPA examination passage rate. Based upon my experience when I was across town at Florida State University, however, Florida A&M across town had a program that was not very well geared to CPA examination passage. At least in those days, Florida A&M was closely tied to large corporations like IBM and had quite a few practicum (internship) courses and managerial accounting courses in each student's curriculum. In other words, the goal from get go for an accounting major was corporate accounting and not CPA firm accounting. Hence an African American student bent on becoming a CPA would be advised to strongly consider one of the other top state universities in Florida. This may have changed over the years since I left Florida.

Also Florida A&M typically has a very small number of graduates sitting for the CPA examination. After leaving FSU I joined the faculty of Trinity University. Trinity is a small university (about 2,200 students) with a huge endowment that enables it to attract high SAT/ACT performing students, and the accounting program typically attracts some of the top students admitted to the university. However, Trinity's performance on the CPA examination is somewhat of a yo-yo. For example, last year Trinity scored 5th in the nation on the CPA examination. But there are years in which Trinity will perform much lower because the number of exam takers (sometimes less than ten) leads to all sorts of variability common in small samples in general.

There is also bias on examination performance in terms of admission standards vis-a-vis quality of teaching. We might assume that this year's top performing schools in California (US Berkeley) and Florida (UF in Gainesville) also had the best accounting teachers. This is ipso facto not necessarily true when the students are the top SAT/ACT accounting students in those states. The best teachers may actually be the ones who stretch the students further that have lower incoming credentials.

Top-performing accounting programs like Notre Dame, BYU, UC Berkeley, University of Texas, University of Michigan, University of Wisconsin, University of Tennessee, Texas A&M etc. are greatly challenged by having large numbers of accounting students. The challenge is how to keep upper division accounting classes relatively small with tightened budgets. Those schools with high SAT/ACT accounting majors might well consider the BYU approach of pushing more faculty resources into the upper division courses by teaching basic accounting via video courses that rarely meet in classrooms ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo

This BYU approach, however, probably will not work as well where accounting majors need more push, inspiration, and live teaching.

Bob Jensen's threads on Tricks and Tools of the Trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm

"Working In Word, Excel, PowerPoint on an iPad," by Walter S. Mossberg, The Wall Street Journal, January 12, 2012 ---
http://online.wsj.com/article/SB10001424052970203436904577154840906816210.html?mod=WSJ_Tech_RightMostPopular

Although Apple's popular iPad tablet has been able to replace laptops for many tasks, it isn't a big hit with folks who'd like to use it to create or edit long Microsoft Office documents.

While Microsoft has released a number of apps for the iPad, it hasn't yet released an iPad version of Office. There are a number of valuable apps that can create or edit Office documents, such as Quickoffice Pro, Documents To Go and the iPad version of Apple's own iWork suite. But their fidelity with Office documents created on a Windows PC or a Mac isn't perfect.

This week, Onlive Inc., in Palo Alto, Calif., is releasing an app that brings the full, genuine Windows versions of the key Office productivity apps—Word, Excel and PowerPoint—to the iPad. And it's free. These are the real programs. They look and work just like they do on a real Windows PC. They let you create or edit genuine Word documents, Excel spreadsheets and PowerPoint presentations.

I've been testing a pre-release version of this new app, called OnLive Desktop, which the company says will be available in the next few days in Apple's app store. More information is at desktop.onlive.com.

My verdict is that it works, but with some caveats, limitations and rough edges. Some of these downsides are inherent in the product, while others have to do with the mismatch between the iPad's touch interface and the fact that Office for Windows was primarily designed for a physical keyboard and mouse.

Creating or editing long documents on a tablet with a virtual on-screen keyboard is a chore, no matter what Office-type app you choose. So, although it isn't a requirement, I strongly recommend that users of OnLive Desktop employ one of the many add-on wireless keyboards for the iPad.

OnLive Desktop is a cloud-based app. That means it doesn't actually install Office on your iPad. It acts as a gateway to a remote server where Windows 7, and the three Office apps, are actually running. You create an account, sign in, and Windows pops up on your iPad, with icons allowing you to launch Word, Excel or PowerPoint. (There are also a few other, minor Windows programs included, like Notepad, Calculator and Paint.)

In my tests, the Office apps launched and worked smoothly and quickly, without any noticeable lag, despite the fact that they were operating remotely. Although this worked better for me on my fast home Internet connection, it also worked pretty well on a much slower hotel connection.

Like Office itself, the documents you create or modify don't live on the iPad. Instead, they go to a cloud-based repository, a sort of virtual hard disk. When you sign into OnLive Desktop, you see your documents in the standard Windows documents folder, which is actually on the remote server. The company says that this document storage won't be available until a few days after the app becomes available.

To get files into and out of OnLive Desktop, you log into a Web site on your PC or Mac, where you see all the documents you've saved to your cloud repository. You can use this Web site to upload and download files to your OnLive Desktop account. Any changes made will be automatically synced, the company says, though I wasn't able to test that capability in my pre-release version.

Because it's a cloud-based service, OnLive Desktop won't work offline, such as in planes without Wi-Fi. And it can be finicky about network speeds. It requires a wireless network with at least 1 megabit per second of download speed, and works best with at least 1.5 to 2.0 megabits. Many hotels have trouble delivering those speeds, and, in my tests, the app refused to start in a hotel twice, claiming insufficient network speed when the hotel Wi-Fi was overloaded.

The free version of the app has some other limitations. You get just 2 gigabytes of file storage, there's no Web browser or email program like Outlook included, and you can't install additional software. If many users are trying to log onto the OnLive Desktop servers at once, you may have to wait your turn to use Office.

In the coming weeks, the company plans to launch a Pro version, which will cost $10 a month. It will offer 50 GB of cloud document storage, "priority" access to the servers, a Web browser, and the ability to install some added programs. It will also allow you to collaborate on documents with other users, or even to chat with, and present material to, groups of other OnLive Desktop users.

The company also plans to offer OnLive Desktop on Android tablets, PCs and Macs, and iPhones.

In my tests, I was able to create documents on an iPad in each of the three cloud-based Office programs. I was able to download them to a computer, and alter them on both the iPad and computer. I was also able to upload files from the computer for use in OnLive Desktop.

OnLive Desktop can't use the iPad's built-in virtual keyboard, but it can use the virtual keyboard built into Windows 7 and Windows' limited touch features and handwriting recognition. As noted above, I recommend using a wireless physical keyboard. But even these aren't a perfect solution, because the ones that work with the iPad can't send common Windows keyboard commands to OnLive Desktop, so you wind up moving between the keyboard and the touch screen, which can be frustrating. And you can't use a mouse.

Another drawback is that OnLive Desktop is entirely isolated from the rest of the iPad. Unlike Office-compatible apps that install directly on the tablet, this cloud-based service can't, for instance, be used to open Office documents you receive via email on the iPad. And, at least at first, the only way you can get files into and out of OnLive Desktop is through its Web-accessible cloud-storage service. The free version has no email capability, and the app doesn't support common file-transfer services like Dropbox or SugarSync. The company says it hopes to add those.

OnLive Desktop competes not only with the iPad's Office clones, but with iPad apps that let you remotely access and control your own PCs and Macs, and thus use Office and other computer software on those.

Continued in article

Bob Jensen's threads in Tricks and Tools of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

"Flex or Break? Extensions in XBRL Disclosures to the SEC," Roger S. Debreceny, Stephanie M. Farewell, Maciej Piechocki, Carsten Felden, Andre Gräning, and Alessandro d'Eri, Accounting Horizons,  December 2011, pp.631-658

The Securities and Exchange Commission (SEC) has adopted the eXtensible Business Reporting Language (XBRL) in a multi-year program to enhance the functionality of the Commission's EDGAR database. Filers tag their financial statements with elements from a taxonomy that defines the reporting concepts so that the XBRL files can be understood by information consumers. The U.S. GAAP taxonomy was designed to represent common reporting practices and support the disclosure requirements of U.S. GAAP. If taxonomy elements for each disclosure concept are not present, the filer creates an extension element. Extensions, when used appropriately, provide decision-relevant information. When used inappropriately, particularly when a semantically equivalent element already exists in the foundation taxonomy, extensions add no information content. This research analyzes extensions made in a subset of XBRL filings made to the SEC between April 2009 and June 2010. Forty percent of these extensions were unnecessary, as semantically equivalent elements were already in the U.S. GAAP taxonomy. Extensions that aggregated or disaggregated existing elements comprised 21 percent of the extensions. New concepts accounted for 30 percent of the extensions, although many were variants of existing elements, rather than significantly new concepts.

Continued in article

XBRL
"Exposure Draft of the IFRS Taxonomy 2012," IAS Plus, January 18, 2012 ---
http://www.ifrs.org/Alerts/XBRL/Exposure+Draft++IFRS+Taxonomy+2012.htm 

The IFRS Foundation has published for public comment an exposure draft of the International Financial Reporting Standards (IFRS) Taxonomy 2012. The proposed Taxonomy is a translation of IFRSs and interpretations as issued at 1 January 2012 into XBRL (eXtensible Business Reporting Language).

The 2012 Taxonomy consolidates all IFRS Taxonomy interim releases that were published in 2011.

In addition, the proposed IFRS Taxonomy 2012 will be the first IFRS Taxonomy to include common practice extensions to the IFRS XBRL Taxonomy. These extensions were derived from an analysis of approximately 200 IFRS financial statements and will diminish the need for preparers to customize the taxonomy to fit their individual business when filing IFRS compliant financial statements online.

The exposure draft IFRS Taxonomy 2012 is open for comment until 17 March 2012. IFRSs issued by the International Accounting Standards Board (IASB) from 1 January 2012 onwards will be published as interim releases to the Taxonomy.

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

Question
Do you want to teach XBRL in some of your courses?

Zane Swanson's Website --- www.askaref.com

"U.S. Charges 3 Swiss Bankers in Tax Case," by Chad Bray, The Wall Street Journal, January 3, 2011 ---
http://online.wsj.com/article/SB10001424052970204368104577139043222716600.html

Jensen Comment
These Swiss bankers were indicted for helping U.S. taxpayers hide $1.2 billion from the IRS in offshore accounts

Purportedly their defense is full of holes (sorry about that).

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

Grammar Girl traces the @ symbol back to the middle ages ---
http://grammar.quickanddirtytips.com/where-did-the-at-symbol-come-from.aspx?WT.mc_id=0

.. .

Scribes used to use it to list prices on invoices and accounting sheets, as in 12 eggs AT one pence per egg.

Continued in article

American spelling -- traveled
* British spelling -- travelled

But we see "modelled" and modeled use somewhat interchangeably with "modeled" being more popular.

Frequently Asked Questions in Corporate Finance
By Pascal Quiry, Yann Le Fur, Antonio Salvi, Maurizio Dallochio 
http://www.wiley.com/WileyCDA/WileyTitle/productCd-111997755X.html
Thanks to SmartPros for the heads up.

"CONGRESS THE CORRUPT," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, January 9, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/474

The Christmas and New Year’s break allows university faculty not only to enjoy family and friends, but also it supplies a moment to do some nontechnical reading.  After all, we don’t need that much time to look over our teaching notes.  Faculty need something constructive to do during the three or four weeks we have off, and catching up on our reading fits in marvelously.

We read two interesting books during this break.  The first is Throw Them All Out by Peter Schweizer.  The subtitle tells it all: “How politicians and their friends get rich off insider stock tips, land deals, and cronyism that would send the rest of us to prison.”  For example, the author discusses how Speaker Nancy Pelossi (Democrat) and her husband garnered Visa IPO shares in 2008 after intimating that she would introduce legislation which would prove very costly to Visa.  Of course, Pelosi backed off her threat once she and her husband received those IPO shares.  Schweizer also gives the example of Speaker Dennis Hastert (Republican), who used his knowledge of a proposed interchange for Interstate 88 to buy acreage on the cheap and sell it for its new market value.  Hastert realized millions in profits.

Worse, the ethics rules of the House and the Senate allow these things to occur.  In some twisted logic, Congress permits its members to engage in insider trading and land deals and regulatory intimidation.  It has legalized what is criminal for the rest of us.

We also read China in Ten Words by Yu Hua.  The text is part autobiographical, part historical, and part social commentary.  Mr. Hua describes China in ten chapters, each titled with a single word.  The words he chooses are people, leader, reading, writing, Lu Xun, revolution, disparity, grassroots, copycat, and bamboozle.  With these words, he describes the incredible social and economic changes in China during his life-time, starting with the Cultural Revolution from 1966 until late 1970s, which was followed by the economic revolution to the present.

The description records incredible changes in China, such as the nation’s becoming the second largest economic power in the world.  It also traces the failings of this transformation, such as ranking about 100^th in the world in per capita income.  The contradiction between these two measures foreshadows social conflict that must be dealt with sooner or later.

What proved serendipitous, even ironic, in this reading is to note the connection between the books.  In certain ways the two countries show similar contradictions and shortcomings.  Yu Hua discusses “today’s large-scale, multifarious corruption” in China; but the U.S. Congress engages in similar dishonesty.

Continued in article

The Wonk (Professor) Who Slays Washington

Insider trading is an asymmetry of information between a buyer and a seller where one party can exploit relevant information that is withheld from the other party to the trade. It typically refers to a situation where only one party has access to secret information while the other party has access to only information released to the public. Financial markets and real estate markets are usually very efficient in that public information is impounded pricing the instant information is made public. Markets are highly inefficient if traders are allowed to trade on private information, which is why the SEC and Justice Department track corporate insider trades very closely in an attempt to punish those that violate the law. For example, the former wife of a partner in the auditing firm Deloitte & Touche was recently sentenced to 11 months exploiting inside information extracted from him about her husband's clients. He apparently did was not aware she was using this inside information illegally. In another recent case, hedge fund manager Raj Rajaratnam was sentenced to 11 years for insider trading.

Even more commonly traders who are damaged by insiders typically win enormous lawsuits later on for themselves and their attorneys, including enormous punitive damages. You can read more about insider trading at
http://en.wikipedia.org/wiki/Insider_trading

Corporate executives like Bill Gates often announce future buying and selling of shares of their companies years in advance to avoid even a hint of scandal about exploiting current insider information that arises in the meantime. More resources of the SEC are spent in tracking possible insider information trades than any other activity of the SEC. Efforts are made to track trades of executive family and friends and whistle blowing is generously rewarded.

Question
Trading on insider information is against U.S. law for every segment of society except for one privileged segment that legally exploits investors for personal gains by trading on insider information. What is that privileged segment of U.S. society legally trades on inside information for personal gains?

Hints:
Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop

Answer (Please share this with your students):
Over the years I've been a loyal viewer of the top news show on television --- CBS Sixty Minutes
On November 13, 2011 the show entitled "Insider" is the most depressing segment I've ever watched on television ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok
Also see http://financeprofessorblog.blogspot.com/2011/11/congress-trading-stock-on-inside.html

Jensen Comment

• It came as no surprise that many (most?) members of the U.S. House of Representatives and the U.S. Senate that writes the laws of the land made it illegal for to trade in financial and real estate market by profiting personally on insider information not yet available, including pending legislation that they will decide, wrote themselves out of the law making it legal for them to personally profit from trading on insider information. What came as a surprise is how leaders at the very top of Congress make millions trading on inside information with impunity and well as immunity.
   
• The Congressional  leader that comes off the worst in this Sixty Minutes "Insider" segment is former House Speaker and current Minority leader Nancy Pelosi. When confronted with specific facts on how she and her husband made some of their insider trading millions she fired back at reporter Steve Kroft with an evil glint saying what is tantamount to:  "How dare you question me about insider trades that are perfectly legal for members of Congress. Who are you to question my ethics about exploiting our insider trading privileges. Back off Steve or else!" Her manner can be extremely scary. Other Democratic Party members of Congress come off almost as bad in terms of insider trading for personal gain.
   
• Current Speaker of the House, John Boehner, is more subtle. He denies making any of his personal portfolio investment decisions and denies communicating with the person he hires to make such decision. However, that trust investor mysteriously makes money for Rep. Boehner using insider information obtained mysteriously. Other Republican members of Congress some off even worse in terms of insider trading.
   
• Members of Congress on powerful committees regularly make insider profits on legislation currently being written into the law that is still being held secret from the public. One of my heroes, former Senator Judd Gregg, is no longer my hero.
   
• Everybody knows that influence peddling in Congress by lobbyists, many of them being former members of Congress, is a dirty business of showering gifts on current members of Congress. What is made clear, however, is that these lobbyists are personally getting something in return from friendly members of Congress who pass along insider information to lobbyists. The lobbyists, in turn, peddle this insider information back to the private sector, such as hedge fund managers, for a commission. Moral of story:  Voters do not stop insider trading by a member of Congress by voting him or her out of office if they become peddlers of insider information obtained, as lobbyists, from their old friends still in the Congress.
   
• Five out of 435 members of the House of Representatives are seeking to sponsor a bill to make it illegal for representatives and senators to profit from trading on inside information. The Sixty Minutes show demonstrates how Nancy Pelosi, John Boehner, and other House leaders have buried that effort so deep in the bowels of the legislative process that there's no chance in hell of stopping insider trading by members of Congress. Insider trading is a privilege that attracts unethical people to run for Congress.

Watch the "Insider" Video Now While It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody

Bob Jensen's threads on the Sad State of Government Accounting and Accountability ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

"What the Heck is Research Anyway?" by Brent Roberts, The Hardest Science, December 20, 2011 ---
http://hardsci.wordpress.com/2011/12/20/what-the-heck-is-research-anyway-a-guest-post-by-brent-roberts/

Jensen Comment
This is pretty much what we teach students about research if we're both practical and idealists. But it's a nice summary.

If I were to add something to this it would be examples of how some of the greatest discoveries in the world came about by accident. It might also be nice to compare the lazy Aristotle with the ambitious Galileo.

Followed by an upskirt fantasy video that got my attention.

"The Dumbest Idea In The World: Maximizing Shareholder Value," by Steve Denning, Forbes, November 28, 2011 ---
http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/

“Imagine an NFL coach,” writes Roger Martin, Dean of the Rotman School of Management at the University of Toronto, in his important new book, Fixing the Game, “holding a press conference on Wednesday to announce that he predicts a win by 9 points on Sunday, and that bettors should recognize that the current spread of 6 points is too low. Or picture the team’s quarterback standing up in the postgame press conference and apologizing for having only won by 3 points when the final betting spread was 9 points in his team’s favor. While it’s laughable to imagine coaches or quarterbacks doing so, CEOs are expected to do both of these things.”

Imagine also, to extrapolate Martin’s analogy, that the coach and his top assistants were hugely compensated, not on whether they won games, but rather by whether they covered the point spread. If they beat the point spread, they would receive massive bonuses. But if they missed covering the point spread a couple of times, the salary cap of the team could be cut and key players would have to be released, regardless of whether the team won or lost its games.

Suppose also that in order to manage the expectations implicit in the point spread, the coach had to spend most of his time talking with analysts and sports writers about the prospects of the coming games and “managing” the point spread, instead of actually coaching the team. It would hardly be a surprise that the most esteemed coach in this world would be a coach who met or beat the point spread in forty-six of forty-eight games—a 96 percent hit rate. Looking at these forty-eight games, one would be tempted to conclude: “Surely those scores are being ‘managed’?”

Suppose moreover that the whole league was rife with scandals of coaches “managing the score”, for instance, by deliberately losing games (“tanking”), players deliberately sacrificing points in order not to exceed the point spread (“point shaving”), “buying” key players on the opposing team or gaining access to their game plan. If this were the situation in the NFL, then everyone would realize that the “real game” of football had become utterly corrupted by the “expectations game” of gambling. Everyone would be calling on the NFL Commissioner to intervene and ban the coaches and players from ever being involved directly or indirectly in any form of gambling on the outcome of games, and get back to playing the game.

Which is precisely what the NFL Commissioner did in 1962 when some players were found to be involved betting small sums of money on the outcome of games. In that season, Paul Hornung, the Green Bay Packers halfback and the league’s most valuable player (MVP), and Alex Karras, a star defensive tackle for the Detroit Lions, were accused of betting on NFL games, including games in which they played. Pete Rozelle, just a few years into his thirty-year tenure as league commissioner, responded swiftly. Hornung and Karras were suspended for a season. As a result, the “real game” of football in the NFL has remained quite separate from the “expectations game” of gambling. The coaches and players spend all of their time trying to win games, not gaming the games.

The real market vs the expectations market

In today’s paradoxical world of maximizing shareholder value, which Jack Welch himself has called “the dumbest idea in the world”, the situation is the reverse. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services.

The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control—at least to some extent.

The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company.

“What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”

In fact, a CEO has little choice but to pay careful attention to the expectations market, because if the stock price falls markedly, the application of accounting rules (regulation FASB 142) classify it as a “goodwill impairment”. Auditors may then force the write-down of real assets based on the company’s share price in the expectations market. As a result, executives must concern themselves with managing expectations if they want to avoid write-downs of their capital.

In this world, the best managers are those who meet expectations. “During the heart of the Jack Welch era,” writes Martin, “GE met or beat analysts’ forecasts in forty-six of forty-eight quarters between December 31, 1989, and September 30, 2001—a 96 percent hit rate. Even more impressively, in forty-one of those forty-six quarters, GE hit the analyst forecast to the exact penny—89 percent perfection. And in the remaining seven imperfect quarters, the tolerance was startlingly narrow: four times GE beat the projection by 2 cents, once it beat it by 1 cent, once it missed by 1 cent, and once by 2 cents. Looking at these twelve years of unnatural precision, Jensen asks rhetorically: ‘What is the chance that could happen if earnings were not being “managed’?”’ Martin replies: infinitesimal.

In such a world, it is therefore hardly surprising, says Martin, that the corporate world is plagued by continuing scandals, such as the accounting scandals in 2001-2002 with Enron, WorldCom, Tyco International, Global Crossing, and Adelphia, the options backdating scandals of 2005-2006, and the subprime meltdown of 2007-2008. The recent demise of MF Global Holdings and the related ongoing criminal investigation are further reminders that we have not put these matters behind us.

“It isn’t just about the money for shareholders,” writes Martin, “or even the dubious CEO behavior that our theories encourage. It’s much bigger than that. Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism. These theories underpin regulatory fixes instituted after each market bubble and crash. Because the fixes begin from the wrong premise, they will be ineffectual; until we change the theories, future crashes are inevitable.”

“A pervasive emphasis on the expectations market,” writes Martin, “has reduced shareholder value, created misplaced and ill-advised incentives, generated inauthenticity in our executives, and introduced parasitic market players. The moral authority of business diminishes with each passing year, as customers, employees, and average citizens grow increasingly appalled by the behavior of business and the seeming greed of its leaders. At the same time, the period between market meltdowns is shrinking, Capital markets—and the whole of the American capitalist system—hang in the balance.”

How did capitalism get into this mess?

Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”

The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created. The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i.e., they own it and benefit from its prosperity, while the executives are agents who are hired by the principals to work on their behalf.

The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals. Ignoring Peter Drucker’s foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders.

To achieve that goal, they academics argued, the company should give executives a compelling reason to place shareholder value maximization ahead of their own nest-feathering. Unfortunately, as often happens with bad ideas that make some people a lot of money, the idea caught on and has even become the conventional wisdom.

Continued in a long article

Jensen Comment
It's a good thing my friend Al Rappaport made it big on book royalties and consulting before this word leaked out ---
http://en.wikipedia.org/wiki/Shareholder_value

More pension funds adopt mark-to-market accounting in anticipation of IFRS deadline

"More pension plans count down to year-end mark," by Nanette Byrnes, Reuters, December 30, 2011 ---
http://www.reuters.com/article/2011/12/30/us-pension-accounting-mark-idUSTRE7BT0TL20111230

Note that IFRS 9 implementation was recently delayed by the IASB and will not go into effect until the beginning of 2015.

"IAS 32 Financial Instruments: Presentation — Put options written over non-controlling interests," IAS Plus, January 17, 2012 ---
http://www.iasplus.com/ifric/1201.htm#ias32

Throughout 2010 and 2011, the Committee considered a request for guidance on how an entity should account for changes in the carrying amount of a financial liability for a put option, written over shares held by a non-controlling interest shareholder (NCI put), in the consolidated financial statements of a parent entity. The request is the result of perceived diversity in accounting for the subsequent measurement of the financial liability that is recognised for those NCI puts. The issue arises because of potential inconsistencies between the requirements for measuring financial liabilities and the requirements for accounting for transactions with owners in their capacity as owners, whereby some believe that subsequent changes in the liability that is recognised for the NCI put should be recognised in profit or loss while others believe the change in the liability should be recognised in equity.

Given that the IASB rejected the Committee's initial recommendation for a possible scope exclusion to IAS 32 Financial Instruments: Presentation for put options written over the non-controlling interest in the consolidated financial statements of a group, the Committee considered possible paths forward on this project.

The Committee was directed by the IASB to specifically consider whether changes in the measurement of the NCI put should be recognised in profit or loss or equity and whether the scope of the recognition decision should be applied only to NCI puts or extended to include both NCI puts and NCI forwards. While the Committee was asked to consider these two focused questions, they quickly expanded the scope of the discussion by considering broader concerns surrounding the project including the counterintuitive result of recognising a 'gross' liability when reflecting subsequent changes in the liability in profit or loss (as opposed to reflection on a 'net' basis), the treatment of the purchase of a NCI put with variable consideration and the timing of transaction recognition; acknowledging that these were the same concerns expressed when they made their initial recommendation to the IASB to exclude from the scope of IAS 32 put options written over the non-controlling interest in the consolidated financial statements of a group.

One Committee member expressed a preference that application guidance be drafted which specifies that paragraph 30 of IAS 27 Consolidated and Separate Financial Statements does not apply to NCI puts because the change in ownership interest has not yet occurred. Put another way, only transactions with owners are recognised in equity, and remeasuring an NCI put is not a transaction with an owner (thus should be reflected in profit or loss). Paragraph 30 in IAS 27 is describing a circumstance in which the controlling shareholder's and the non-controlling interest shareholder's relative ownership of the subsidiary changes, and this is not the case when the NCI put is remeasured. This was seen as a clarification of the literature for subsequent measurement (to avoid diversity), albeit without addressing some of the larger issues in the Committee's minds.

Many Committee members supported the view expressed by this Committee member. However, other Committee members continued to express concerns over the scope of this decision in resolving underlying concerns previously discussed by the Committee.

When put to a vote, the Committee elected to move forward with the application guidance proposal. However, the Committee asked the staff to consider certain issues offline including any potential knock-on implication to the consolidation analysis, specific principle concerns raised by Committee members (including accounting for the premium on warrants, accounting for the debit side of the transaction in IAS 32 and when to derecognise the non-controlling interest) and whether the above application guidance recommendation should be included in the body of IAS 27 as an amendment or interpretation or as application guidance.

Bob Jensen's threads on accounting for derivative financial instruments ---
http://www.trinity.edu/rjensen/caseans/000index.htm

United Kingdom Financial Reporting Council
"FRC issues an update responding to country and currency risk in financial reporting," FRC, January 2012 ---
http://www.frc.org.uk/images/uploaded/documents/Update for Directors Jan 12 FINAL2.pdf

Executive Summary

This Update for Directors has been prompted by the current economic uncertainties facing a number of countries around the world. This Update aims to draw together a number of the more significant issues directors may reflect when considering how best to provide a balanced and understandable assessment of a company’s position and prospects in the context of increased country and currency risk. The issues Directors could consider include, where relevant:

 The company’s exposure to country risk, direct or to the extent practical indirect1, through financial instruments but also in terms of exposure to trading counterparties (customers and suppliers);

 The impact of austerity measures being adopted in a number of countries on the company’s forecasts, impairment testing, going concern considerations, etc.;

 Possible consequences of currency events that are not factored into forecasts but may impact reported exposures and sensitivity testing of impairment or going concern considerations; and

 A post balance sheet date event requiring enhanced disclosures to avoid misleading investors.

The examples referred to in this Update are not intended to be comprehensive but to provide a stimulus to Directors and Audit Committees, who are better able to judge the relevance of these and other related issues to the company’s particular circumstances.

Similar guidance has also been issued by other regulators in recent months, including ESMA’s November 2011 public statement “Sovereign Debt in IFRS Financial Statements”2 which Directors may also want to consider.

Bob Jensen's threads on accounting for foreign exchange (FX) risk ---
http://www.trinity.edu/rjensen/caseans/000index.htm

"Have We Got a Convention Center to Sell You! From Boston to Austin, politicians spend money on fancy white elephants," by Steven Malanga, The Wall Street Journal, December 31, 2011 ---
http://online.wsj.com/article/SB10001424052970204720204577126603702369654.html#mod=djemEditorialPage_t

. . .

Then there's Boston, perhaps the quintessential example of a city that interprets failure in the convention business as a license to spend more on it. Massachusetts officials shelled out $230 million to renovate Hynes Convention Center in the late 1980s. When the makeover produced virtually no economic bounce, officials decided that the city needed a new, $800 million center financed by a hotel occupancy excise tax, a rental-car surcharge, and the sale of taxi medallions. Opened in 2004, that new Boston Convention and Exhibition Center was projected (by consultants hired by the state) to have Boston renting some 670,000 additional hotel rooms annually within five years. Instead, Beantown saw just 310,000 additional hotel room rentals in 2009.

Now Massachusetts officials want to spend $2 billion to double the size of the Boston Convention Center and add a hotel. Of course, they predict that the expanded facilities would bring an additional $222 million into the local economy each year, including 140,000 hotel room rentals. Even with these bullish projections, officials claim that the hotel would need $200 million in public subsidies.

"The whole thing is a racket," Boston Globe columnist Jeff Jacoby recently observed. "Once again the politicos will expand their empire. Once again crony capitalism will enrich a handful of wired business operators. And once again Joe and Jane Taxpayer will pay through the nose. How many times must we see this movie before we finally shut it off?"

Many times, if officials in Baltimore have their way. Several years ago they built a $300 million city-owned hotel, (the Hilton Baltimore Convention Center Hotel) to boost the fortunes of the city's struggling convention center. Having opened in 2008, the hotel lost $11 million last year. Now the city is considering a public-private expansion plan that would add a downtown arena, an additional convention hotel, and 400,000 feet of new convention space at the cost of $400 million in public money.

The list goes on—everywhere from Columbus, Ohio, to Dallas, Austin, Phoenix and places in between. One problem is that optimistic projections about new facilities fail to account for how other cities are expanding, too. Why did Minneapolis struggle to hit projected targets after it enlarged its convention center in 2002? "Other cities expanded right along with us,'' Minneapolis's convention center director, Jeff Johnson, said this year.

The surest sign that taxpayers should be leery of such public investments is that officials have changed their sales pitch. Convention and meeting centers shouldn't be judged, they now say, by how many hotel rooms, restaurants, and local attractions they help fill. That's "narrow-minded thinking," said James Rooney of the Massachusetts Convention Center Authority this year. Instead, as Boston Mayor Thomas Menino has said, expanding a convention center can "demonstrate to the world that we have unlimited confidence in our city and what it can do, not only as a convention destination but as the center of the most important trends in hospitality, science, health and education."

Continued in article

Jensen Comment
When I still lived in San Antonio, taxpayers went on the hook for an Alamo Dome Convention Center that cost nearly $300 million intended to also be the home of the NBA San Antonio Spurs. Almost the instant the ribbon was cut on the the Alamo Dome, the San Antonio Spurs asked taxpayers to fund their own new arena. These things sell because the promoters say that the funding will come for taxes on visitors to the city rather than local taxpayers. What they don't tell you is that the new taxes event revenues do not pay millions of dollars in operating and vacancy losses. Those losses are then quietly billed to local taxpayers. Welcome to the world of urban crony business fraud

"Tracing the L.A. Coliseum's fiscal decay As the landmark stadium's finances nose-dived, commissioners took little notice," by Paul Pringle and Rong-Gong Lin II, Los Angeles Times, December
http://www.latimes.com/news/local/la-me-coliseum-commission-20111231,0,338108.story
Thank you Glen Gray for the heads up.

Month after month, the financial forecasts for the Los Angeles Memorial Coliseum seemed as sunny as could be.

General Manager Patrick Lynch would tell his bosses on the Coliseum Commission that the box office from rave concerts was brisk and a lucrative deal for naming rights to the stadium could be just around the corner, records show.

For the most part, the nine-member commission took the affable Lynch at his word. And why not? As L.A. County Supervisor Don Knabe, who si

Despite Lynch's assurances, there was a different reality: The Coliseum had become mired in conflicts of interest, spending irregularities and loose accounting that eroded its fiscal foundation and had all but bankrupted its future as one of the nation's most-storied public landmarks.

Lynch resigned in February after The Times began a series of reports on the Coliseum's finances. He and his former events manager, Todd DeStefano, who quit shortly before the first story appeared, are the subjects of a criminal investigation by county prosecutors involving alleged kickbacks and self-dealing. State regulators and the Los Angeles city controller's office have also launched inquiries.

Three other Coliseum managers and employees have gone on leave or left the stadium's employment after The Times' investigation questioned the propriety of their financial dealings. All deny wrongdoing.

How a multimillion-dollar scandal at such a high-profile venue could go undetected for so long is not entirely clear. But the groundwork for alleged abuse lay in a history of clumsy stewardship, inattentiveness by commission members and a cozy relationship between Lynch and his overseers.

The commission was empowered to safeguard the interests of the state, county and city. But it became more of a sportsmen's club than a watchdog.

"The place was on autopilot," said mall developer Rick Caruso, who resigned as a commissioner earlier this year. He was often a lone voice in challenging Lynch, with scant results. "There was no accountability."

The Coliseum is now so broke that it is unable to make upgrades promised in its lease with USC, whose football Trojans are the stadium's main tenant. As a result, the panel is about to turn over day-to-day control of the taxpayer-owned property to the private school.

Jessica Levinson, a Loyola Law School professor who studies public corruption, described the commission's failure to spot warning signs of the scandal as a "great tragedy."

"This was below the standards of how you would run a neighborhood lemonade stand," she said.

The Coliseum, completed in 1923 when Warren G. Harding was in the White House, was heralded as a symbol of a burgeoning metropolis' ambitions to play on the global stage.

Continued in article

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

"How to Write a Lot for the Sciences," by Heather M. Whitney, Chronicle of Higher Education, January 17, 2012 ---
http://chronicle.com/blogs/profhacker/how-to-write-a-lot-for-the-sciences/37966?sid=wc&utm_source=wc&utm_medium=en

I’ve often been frustrated by the how-to-succeed-in-academia advice that’s out there. To be honest, a sizable portion of it is not applicable to my work in science. Grad school was an especially dim time. Most of the advice doled out online and in other venues was along the lines of “just write! write! write!” and I would sigh and ask myself, “but what about getting productive at planning and doing experiments?”

But lately I’ve had a bit of a change of heart. Maybe there is something I can glean from the advice on writing. I read a fascinating post by Holly Tucker, a historian of science and medicine, in which she details the practice of her writing group. Tucker describes how the book How to Write a Lot: A Practical Guide to Productive Academic Writing changed her point of view on writing and has led to a greater productivity in this slice of her job.

I figured, if a historian of science can get something out of this, maybe so can I. So I purposed with a faculty friend of mine and we both read the book over the holiday break.

I won’t give all the details of the book here, but in short, the author, Paul Silvia, advises that you write and meet with an accountability group regularly. He claims that if you make appointments with yourself to write, and give these appointments the level of importance that you give other items in your schedule (such as teaching a class), you will see productivity.

Continued in article

Jensen Comment
I plan to post this to the AAA Commons Writing Forum commenced by our AECM friend Zane Swanson ---
http://commons.aaahq.org/posts/c5fdcaace5

Bob Jensen's helpers for writers ---
http://www.trinity.edu/rjensen/Bookbob3.htm#Dictionaries

"When They Are Wrong, Analysts May Dig in Their Heels," by John L. Beshears and Katherine L. Milkman, Stanford Graduate School of Business, August 2011 ---
http://www.gsb.stanford.edu/news/research/beshears_analysts_2011.html?cmpid=alumni

When they are wrong about quarterly earnings forecasts, analysts may stubbornly stick to their erroneous views, a tendency that might contribute to market bubbles and busts, according to research coauthored by John Beshears of the Stanford Graduate School of Business.

Continued in article

Bob Jensen's threads on behavioral and cultural economics and finance ---
http://www.trinity.edu/rjensen/Theory01.htm#Behavioral

What is a good formula for balancing creative license with historical accuracy?
Case in Point: A woman with a tattoo on her chin
"She's a Character Who Could Have Stepped Out of Melville or Hawthorne" by Michael Stratford, Chronicle of Higher Education, January 15, 2012 --- 
http://chronicle.com/article/An-English-Professor-Explores/130344/

Jensen Comment
I added this link to Zane's AAA Commons Writing Forum ---
http://commons.aaahq.org/posts/c5fdcaace5#13893

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

Perspectives and priorities:  On Motherhood and Apple Pie
An introduction from Michel Prada, the newly appointed Chairman of the IFRS Foundation Trustees, January 4, 2012
http://www.ifrs.org/Features/perspectives+priorities.htm

"Best of 2011: Accounting:  After predicting that a decision on whether U.S. GAAP would converge with global standards would come sometime in 2011, SEC officials have punted until well into 2012," by David M. Katz, CFO.com, January 3, 2012 ---
http://www3.cfo.com/article/2011/12/gaap-ifrs_gaapifrsaicpasecfasbiasb
Thank you Glen Gray for the heads up.

After much brooding about whether the United States would fully meld its financial reporting with international financial reporting standards (IFRS), the Securities and Exchange Commission ended 2011 without making its long-awaited, long-delayed decision on the issue.

In fact, after predicting that the decision would likely come sometime in 2011, the SEC doesn't appear likely to opine on the matter until far into 2012. In a December 5 speech before the American Institute of Certified Public Accountants (AICPA), James Kroeker, the SEC's chief accountant, said that the U.S. Financial Accounting Standards Board and the International Accounting Standards Board were "many months away from finalization of even the small group of key . . . projects" essential for convergence.

While FASB and the IASB had made good progress on converging leasing and revenue-recognition standards, "the prospect for a converged solution" on accounting for financial instruments "has not been as encouraging," said Kroeker, noting that it has been particularly tough for the two boards to agree on a single standard for hedging transactions. Further, the SEC's staff will need "a measure of a few additional months" to complete its own final assessment of how it "could or should proceed with a decision to incorporate IFRS for U.S. issuers," he said. 

In the course of working on that assessment last year, the commission's staff did, however, manage to spawn one of the ugliest verbal coinages in recent memory: “condorsement.” Melding “convergence” with “endorsement,” the SEC’s staff proposed that FASB could continue to hold sway in this country over a convergence of U.S. GAAP and IFRS during a transition period of five to seven years. But once convergence has been achieved, FASB would merely endorse the standards the IASB developed.

That proposal kindled a furious debate in 2011 on the future role of FASB. Firing back against the condorsement plan, the Financial Accounting Foundation, FASB's parent organization, proposed a system that puts the standards board still squarely at the helm of U.S. accounting standards.

Another hotly debated issue: the role of FASB in setting private-company accounting standards. A group spearheaded by Barry Melancon, president and CEO of the AICPA, called for "a separate private-company standards board" that would be overseen by the FAF and would "work closely" with FASB. But the board, not FASB, "would have final authority" over changes and exceptions to U.S. GAAP targeted to private companies. The FAF then returned the volley, proposing a system that would make FASB the rule-maker for nonpublic companies. Below are the biggest stories of last year.

Continued in article

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

IFRS Convergence is not the only thing the SEC has been putting on hold
"SEC Delays Rulemaking on Executive Compensation Yet Again," by Reese Darragh, Compliance Week, January 5, 2012 ---
http://www.complianceweek.com/sec-delays-rulemaking-on-executive-compensation-yet-again/article/221898/

Here's a gift from the Securities and Exchange Commission to compliance officers and executive compensation committees to usher in the new year:

The SEC recently updated its schedule for Dodd-Frank Act rulemaking for the year, and it has pushed back the deadline to propose and implement some of the rules on executive compensation, including the disclosure of pay-for-performance, pay ratios, the compensation clawback provision, and hedging activities by employees and directors.

The original deadline set by the SEC to propose these rules was between April and July 2011 while the adoption of the final rules was targeted to occur in the second half of the year. On July 29 last year, the Commission pushed back the proposal date to the second half of last year and was expecting to adopt the final rules in the first half of the year.

For some companies, however, the postponement brings little cheer. They'd rather have the certainty of the rules in place so they can begin planning for complying with them, especially for the Dodd-Frank provisions that are still fairly nebulous.

Compensation experts have cumulatively expressed their skepticism over the Commission's ability to meet the tight deadlines it had set for 2011. Of concern to them is the rule that will require companies to disclose the pay ratios of executives and employees as prescribed under Section 953 and 955. Many companies, compensation consultants, and others say the requirement to disclose chief executive officer pay as a ratio of total employee pay leaves much still to be settled. In order to meet the requirement, companies will need to gather wage information from all employees—a task that can be overwhelming for those companies with a global presence.

Attached below are excerpts of the new corporate governance and disclosure rulemaking timeline published by the SEC for 2012.  

January – June 2012 (planned)
§951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
§952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts
§§953 & 955: Propose rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
§954: Propose rules regarding recovery of executive compensation

July – December 2012 (planned)
§§953 & 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
§954: Adopt rules regarding recovery of executive compensation
§956: Adopt rules (jointly with others) regarding disclosure of, and prohibitions of certain executive compensation structures and arrangements for financial institutions
§952: Report to Congress on study and review of the use of compensation consultants and the effects of such use

Jensen Comment
The timing won't matter much. Rule breakers only get slapped on the hand with Mary's SEC feather.

Jim Martin is a retired accounting professor who maintains one of the largest and most useful reference sites for academic accountants ---
http://maaw.info/

January 8, 2012 message from Jim Martin

I have been playing around with the Pearler for several days. It allows you
to collect web pages, place them in Pearltrees and add Pearls or links to
the pages you like. You can use it on the Pearler site, or place your root
tree, or individual Pearltrees on different pages on your own site. You can
also work on your Pearltrees with team members. It's fun to play with, but
somewhat addictive. For what it's worth, I organized MAAW's hundred + topics
into 14 Pearltrees.

MAAW's Pearltrees on the Pearler site -
http://www.pearltrees.com/#/N-reveal=5&N-fa=4029796&N-u=1_484552&N-p=32411065&N-s=1_4074700&N-f=1_4074700

MAAW's Pearltrees on the MAAW site -
http://maaw.info/MAAWsPearltrees/MAAWsPearltreesMain.htm

A single Pearltree for MAAW's Journal bibliographies -
http://maaw.info/MAAWsPearltrees/JournalBibsPearltree.htm

January 8, 2012 reply from Bob Jensen

You are a tremendous open sharing accounting professor!

Respectfully ten times over,
Bob Jensen

How one of my favorite technology commentators discovered, as a kid, what we in accounting call CPV, CVP, PCV or whatever analysis

"A Gadget Is More Than the Sum of Its Parts," by David Pogue, The New York Times, January 5, 2012 ---
http://pogue.blogs.nytimes.com/2012/01/05/a-gadget-is-more-than-the-sum-of-its-parts/

As a teenager growing up in the Cleveland suburbs, my first real job was at a Chick-fil-A restaurant in a local mall. I did everything: manned the cash register, made sandwiches and cleaned up.

. . .

It’d be fun to report that that job taught me important skills and precepts that followed me for the rest of my life, but that’d be pushing it.

¶That job did teach me, however, one important thing about the business world. My best friend, John, worked next door at a watch shop. He told me he could get incredible discounts on the watches — all I had to do was ask. I needed a watch, in fact, so I picked out a $200 model and asked what I’d have to pay. He said $60.

¶I was appalled. “You mean to tell me that your shop pays $60 for that watch, and then jacks up the price to $200 for the consumer? That’s outrageous! That’s practically robbery! You should be ashamed to work there!”

¶John was amused, and he proceeded to teach me a lesson. “Oh, really? That’s a big ripoff, huh? Well, let me ask you this: How much do you think Chick-fil-A pays for each of the chicken breasts?”

¶I calculated that in the massive quantities this chain purchased, it was maybe 40 cents.

¶“And the bun?” Maybe 4 cents. “The pickle?” One-tenth of a cent. “O.K., and how much do you sell the sandwich for?” $2.40.

¶Now, it’s been 30 years. All of the numbers in this story are vague recollections — I don’t need e-mail from chicken-farm vendors setting me straight. But I’m quite sure of the result: By the time I’d done the math, John had made me realize that my sandwich shop was marking up its product more than his watch shop. I was the one who should be ashamed.

¶Right?

¶I think of this transaction every time somebody does a “teardown analysis” of an iPhone, a Kindle Fire or some other hot new product. These companies buy a unit, take it apart, photograph the components and then calculate the price of each. Then they tally those component costs and try to make you outraged that you’ve paid so much markup.

Continued in article

Jensen Comment
I eat three or more (usually more) times per day. But I've not bought a new Timex watch in the past ten years.

Bob Jensen's threads and cases on CVP analysis ---
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting
CVP analysis becomes more interesting when we extend it to multiple products, operating leverage, and pricing (with demand functions). David Pogue adds complications when the sum is not equal to the summation of its parts.

An appeaser is one who feeds a crocodile—hoping it will eat him last.
Winston Churchill

If you have ten thousand regulations, you destroy all respect for the law.
Winston Churchill

You can always count on Americans to do the right thing—after they’ve tried everything else.
Winston Churchill

On Regulation and Rules
"The Trojan Horse of cost benefit analysis," by John Kemp, Reuters, January 3, 2012 ---
http://af.reuters.com/article/metalsNews/idAFL6E8C31UN20120103

In Letters to PCAOB, EU, Australian and Japanese Accounting Groups Oppose Mandatory Audit Firm Rotation ---
January 9, 2011 ---
http://jimhamiltonblog.blogspot.com/2012/01/in-letters-to-pcaob-eu-australian-and.html

One of the better (albeit older) articles I've seen on the issue of whether or not standard setters should require mandatory audit firm rotation is by the following interesting set of authors (including the very respected long-time research professor Kurt Pany).

Barbara Arel, CPA, is a doctoral student at the W.P. Carey School of Business, Arizona State University, Tempe, Ariz.
Richard G. Brody, PhD, CPA, is an associate professor at the College of Business, University of South Florida, St. Petersburg.
Kurt Pany, PhD, CPA, is a professor at the W.P. Carey School of Business.

"Audit Firm Rotation and Audit Quality," by Barbara Arel, Richard G. Brody, and Kurt Pany, The CPA Journal, January 2005 ---
http://www.nysscpa.org/cpajournal/2005/105/essentials/p36.htm

. . .

Unanswered Questions

The net effect of audit firm rotation is uncertain. On the one hand, it is bothersome that auditors placed in a situation where no rotation is expected are more likely to agree with a client on a difficult accounting issue. Logically, an expected long-term stream of audit fees could also result in different decisions, due to either conscious or subconscious reasons. Despite these considerations, the research indicating high first-year audit failure rates suggests that rotations might result in auditors with higher perceived independence performing lower-quality audits. Many other potential effects of mandatory audit firm rotation remain unmeasured. For example, how will a much larger annual supply of possible new audit clients affect auditors? Will marketing ability trump technical competence in winning new engagements? Would CPAs staff their audits differently toward the end of the rotation period? In addition, there is no information on likely changes in the costs of audits due to rotation.

Even the high audit failure rates in the early years of an engagement are uncertain. Under mandatory rotation, would the increased number of first- and second-year audits lead to a higher level of auditor skill in these circumstances and to a lower level of audit failure? Or, could a closer working relationship with the predecessor auditor limit early-year audit failures?

Another issue relates to audit firms themselves. Given that the Big Four handle the bulk of the large publicly held corporations, will rotation involve only these four firms? Are non–Big Four firms able or willing to handle large SEC audits? Will audit firm incentives to specialize in specific industries be diminished because the possible future benefits do not outweigh the current costs of training auditors? Anecdotal evidence suggests that the Big Four will gain greater market share if rotation is mandatory, which will lead to a less competitive environment without addressing the related policy issues. Less competition will probably lead to substantially higher audit fees—firms estimate that first-year fees would increase by more than 20%—and significantly higher costs for companies. (Estimates are that the additional costs associated with selecting and assisting new auditors are at least 17% of a company’s current audit fee.)

The idea of enhancing auditor independence through mandatory audit firm rotation appeals superficially to many, yet the net effects of rotation are far from certain. The impact of SOA reforms is not yet known. Safeguards are now in place to address many of the key concerns relating to the independence and objectivity of the audit firms. In addition, companies and their top management are taking a more active role in oversight of the system in place to prepare accurate financial statements and prevent abuse. Experience and further research related to both audit firm rotation and these changes may lead to a more informed decision on mandatory audit firm rotation than is now possible.

"Mandatory Auditor Rotation: Evidence from Restatements," December 2003
James N. Myers University of Illinois at Urbana-Champaign
Linda A. Myers University of Illinois at Urbana-Champaign
Zoe-Vonna Palmrose University of Southern California and
Susan Scholz University of Kansas
http://aaahq.org/audit/midyear/04midyear/papers/Myers.pdf

Jensen Comment
It would be interesting to know how these same authors feel about the current raging debate over mandatory audit firm rotation following the bigger audit firm scandals following the subprime loan disasters and failure of the large auditing firms to provide going concern doubts to thousands of failed banks.

"Opinion: Market Transparency Demands Audit Rotation," by Lynn Turner, The Wall Street Journal, December 12, 2011 ---
http://blogs.wsj.com/cfo/2011/12/12/opinion-market-transparency-demands-audit-rotation/

Jensen Comment
Normally I buy into Lynn Turner's opinions. But not this time.

Bob Jensen's threads on the scandals of large auditing firms ---
http://www.trinity.edu/rjensen/Fraud001.htm

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

Please note that IFRSs in Russia do not replace national financial reporting standards – preparing consolidated financial statements under IFRSs does not lift the requirement to prepare standalone financial statements under the Russian statutory rules.
Links from Deloitte's IAS Plus:

Click for more information:

• 25 November Russia's Ministry of Finance Statement (in Russian, DOC 42k)
• Amended Russian Law on Securities Markets (in Russian, DOC 688k)
• Our Russia country page.

 

I wonder the SEC might adopt the same strategy for the United States.
"The Russians are Coming; The Russians are Coming"

An Enormous Amount of  Free Open Sharing Accounting Course Material from Jim Peters

January 8, 2012 message from Jim Peters

A year of so ago, I make the texts that I write for my classes and the in-class exercises I use available to the public and notified this list.  I have just completed revising those materials and bringing them up to date.  If you are interested, the URL is  http://petersfamily.us/Courses.htm.  Feel free to use anything you want and to contact me if you have questions or want more materials.  For example, I am a heavy user of cases and have developed a lot of cases for each class.  I did not post all those supporting materials to the website.  Just not enough time in the day to do everything.  The four classes involved are Auditing, Accounting Information Systems, Financial Statement Analysis, and Managerial Accounting for MBAs.

I have my own approach to education, which is why I do stupid things like maintaining my own texts for the these classes.  But, I starting doing this over 20 years ago when my students found my materials more accessible than published texts.  For example, as apposed to published texts, my texts are informally worded (e.g., lots of first person pronouns), but I have found students identify with the material more effectively if I write as if I am have a conversation with the reader.

OK, enough defending my approach.  The materials are there for anyone who wants to review and/or use them.

Jim

January 8, 2012 reply from Bob Jensen

Thank you for both revising and open sharing Jim. This is a huge task for some of your topics as important content changes so quickly in some of the topics that you cover.

I especially commend you for sharing a free casebook for financial statement analysis. This is a huge amount of material.

One suggestion for the future is to build in some modules on XBRL since that will become an enormous part of financial statement analysis and auditing in the future for our accounting students.

I added your message to my links to free textbooks and other materials contained at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm

The problem is when the model created to represent reality takes on a life of its own completely detached from the reality that it is supposed to model that nonsense can easily ensue.

Was it Mark Twain who wrote: "The criterion of understanding is a simple explanation."?
As quoted by Martin Weiss in a comment to the article below.

But a lie gets halfway around the world while the truth is still tying its shoes
Mark Twain as quoted by PKB (in Mankato, MN) in a comment to the article below.

"US Net Investment Income," by Paul Krugman, The New York Times, December 31, 2011 ---
http://krugman.blogs.nytimes.com/2011/12/31/us-net-investment-income/
Especially note the cute picture.

December 31, 2011 Comment by Wendell Murray
http://krugman.blogs.nytimes.com/2011/12/31/i-like-math/#postComment

Mathematics, like word-oriented languages, uses symbols to represent concepts, so it is essentially the same as word-oriented languages that everyone is comfortable with.

Because mathematics is much more precise and in most ways much simpler than word-oriented languages, it is useful for modeling (abstraction from) of the messiness of the real world.

The problem, as Prof. Krugman notes, is when the model created to represent reality takes on a life of its own completely detached from the reality that it is supposed to model that nonsense can easily ensue.

This is what has happened in the absurd conclusions often reached by those who blindly believe in the infallibility of hypotheses such as the rational expectations theory or even worse the completely peripheral concept of so-called Ricardian equivalence. These abstractions from reality have value only to the extent that they capture the key features of reality. Otherwise they are worse than useless.

I think some academics and/or knowledgeless distorters of academic theories in fact just like to use terms such as "Ricardian equivalence theorem" because that term, for example, sounds so esoteric whereas the theorem itself is not much of anything.

Ricardian Equivalence --- http://en.wikipedia.org/wiki/Ricardian_equivalence

Jensen Comment
One of the saddest flaws of accountics science archival studies is the repeated acceptance of the CAPM mathematics allowing the CAPM to "represent reality on a life of its own" when in fact the CAPM is a seriously flawed representation of investing reality ---
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious

At the same time one of the things I dislike about the exceedingly left-wing biased, albeit brilliant, Paul Krugman is his playing down of trillion dollar deficit spending and his flippant lack of concern about $80 trillion in unfunded entitlements. He just turns a blind eye toward risks of Zimbabwe-like inflation. As noted below, he has a Nobel Prize in Economics but "doesn't command respect in the profession". Put another way, he's more of a liberal preacher than an economics teacher.

Paul Krugman --- http://en.wikipedia.org/wiki/Paul_Krugman

Economics and policy recommendations

Economist and former United States Secretary of the Treasury Larry Summers has stated Krugman has a tendency to favor more extreme policy recommendations because "it’s much more interesting than agreement when you’re involved in commenting on rather than making policy."

According to Harvard professor of economics Robert Barro, Krugman "has never done any work in Keynesian macroeconomics" and makes arguments that are politically convenient for him.Nobel laureate Edward Prescott has charged that Krugman "doesn't command respect in the profession", as "no respectable macroeconomist" believes that economic stimulus works, though the number of economists who support such stimulus is "probably a majority".

Bob Jensen's critique of analytical models in accountics science (Plato's Cave) can be found at
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics

Fabricated Data at Least 145 times
"UConn Investigation Finds That Health Researcher Fabricated Data." by Tom Bartlett, Inside Higher Ed, January 11, 2012 ---
http://chronicle.com/blogs/percolator/uconn-investigation-finds-that-health-researcher-fabricated-data/28291

Jensen Comment
I knew of a few instances of plagiarism, but not once has it been discovered that an accountics scientist fabricated data. This could, however, be due to accountics scientists shielding each other from validity testing ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

However, we disagree with the proposal that a non-investment entity parent of an investment entity should consolidate all entities it controls through its consolidated investment entity subsidiary.
Deloitte comment letter on investment entities, January 5, 2012 ---
http://www.iasplus.com/dttletr/1201investent.pdf

What's Right and What's Wrong With (SPEs), SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

"Investment strategist: 'Big banks make their money from optimism'," by Joris Luyenduc, The Guardian, January 3, 2012 ---
http://www.guardian.co.uk/commentisfree/joris-luyendijk-banking-blog/2012/jan/03/investment-strategist-emerging-markets

. . .

"If you take an honest look at the financial sector today, you see banks can borrow money almost for free on what is called the short-term market, then lend that money to governments for 2% or 3%. Now why would they lend to small businesses if they can make money so easily? This is what 'zero interest rates' are doing to our economy, as well as taxing savers with inflation at over 5%. You take on new debt to pay off your old debt. It's like drinking your hangover away with ever more drinks. You are destroying your liver. That's what's currently happening."

Continued in article

Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

"Hear the One About the Rejected Mathematician? Call it a scholarly 'Island of Misfit Toys,'," Chronicle of Higher Education, August 12, 2009 --- Click Here

Rejecta Mathematica is an open-access online journal that publishes mathematical papers that have been rejected by others. Rejecta's motto is caveat emptor, which is to say that the journal has no technical peer-review process.

As The Economist notes in its article on the journal, there are plenty of examples of scholars who have suffered rejection, only to go on to become giants in their field. (OK, two.) Nonetheless, if you have lots of free time on your hands, by all means, check out the inaugural issue.

And if deciphering mathematical formulae isn't your thing, stand by: Rejecta says it may open the floodgates to other disciplines. Prospective franchisees are invited to contact the journal.

Next up: Rejecta Rejecta, a journal for articles too flawed for Rejects Mathematica, printed on single-ply toilet paper.

"Leading Humanities Journal Debuts 'Open' Peer Review, and Likes It," by Jennifer Howard, Chronicle of Higher Education, July 26, 2010 ---
  http://chronicle.com/article/Leading-Humanities-Journal/123696/?sid=at&utm_source=at&utm_medium=en

A ‘Radical’ Rethinking of Scholarly Publishing
"Upgrading to Philosophy 2.0," by Andy Guess, Inside Higher Ed, December 31, 2007 --- http://www.insidehighered.com/news/2007/12/31/apa

There was no theorizing about ghosts in the machine at an annual meeting of philosophers last Friday. Instead, they embraced technology’s implications for their field, both within the classroom and beyond.

. . .

Harriet E. Baber of the University of San Diego thinks scholars should try to make their work as accessible as possible, forget about the financial rewards of publishing and find alternative ways to referee each other’s work. In short, they should ditch the current system of paper-based academic journals that persists, she said, by “creating scarcity,” “screening” valuable work and providing scholars with entries in their CVs.

“Now why would it be a bad thing if people didn’t pay for the information that we produce?” she asked, going over the traditional justifications for the current order — an incentive-based rationale she dubbed a “right wing, free marketeer, Republican argument.”

Instead, she argued, scholars (and in particular, philosophers) should accept that much of their work has little market value ("we’re lucky if we could give away this stuff for free") and embrace the intrinsic rewards of the work itself. After all, she said, they’re salaried, and “we don’t need incentives external [to] what we do.”

That doesn’t include only journal articles, she said; class notes fit into the paradigm just as easily. “I want any prospective student to see this and I want all the world to see” classroom materials, she added.

Responding to questions from the audience, she noted that journals’ current function of refereeing content wouldn’t get lost, since the “middlemen” merely provide a venue for peer review, which would still happen within her model.

“What’s going to happen pragmatically is the paper journals will morph into online journals,” she said.

Part of the purpose of holding the session, she implied, was to nudge the APA into playing a greater role in any such transition: “I’m hoping that the APA will organize things a little better.”

‘Scholarship Reconsidered’ as Tenure Policy," by Scott Jaschik, Inside Higher Ed, October 2, 2007 ---
http://www.insidehighered.com/news/2007/10/02/wcu