Enterprise Resource Planning (ERP) Installations for Smaller Enterprises

Dawning of the Age of XBRL

Dawning of the Age of Continuous Auditing and Auditbots

Dawning of Age of Customized Reporting and Aggregations

Dawning of the Age of P2P File Sharing

Harmonization of Accounting Standards Is Finally Becoming a More Serious Goal

New Spirit of Reform and Ethics Awareness

Expansion of the Accounting Profession into Assurance Services 

Some Things Do Get Better Under Threatening Litigation Storm Clouds 
(There are signs that the Sarbanes Oxley legislation is working)

Lifelong Learning Alternatives in the Age of Distance Education and Training 

Independence Rules

Corporate Reform: The New SEC Auditor Independence Rules (from Ernst & Young) --- 

http://www.ey.com/global/download.nsf/US/Corporate_Reform_SEC_Auditor_Independence_Rules/$file/CorporateReformSECAuditorIndependenceRules.pdf 

• Systemic Problem:  All Aggregations Are Arbitrary
• Systemic Problem:  All Aggregations Combine Different Measurements With Varying Accuracies
• Systemic Problem:  All Aggregations Leave Out Important Components
• Systemic Problem:  All Aggregations Ignore Complex & Synergistic Interactions of Value and Risk
• Systemic Problem:  Disaggregating of Value or Cost is Generally Arbitrary
• Systemic Problem:  Systems Are Too Fragile
• Systemic Problem:  More Rules Do Not Necessarily Make Accounting for Performance More Transparent
• Systemic Problem:  Economies of Scale vs. Consulting Red Herrings in Auditing
• Systemic Problem:  Intangibles Are Intractable

White Collar Crime Pays Big Even If You Get Caught

Profitable Looting in the Capital Markets:  Crime Keeps on Paying

Debate Topic:  Punishing the Many for Crimes of a Few  
(The above link contains a module on the rise in class action lawsuits resulting from Sarbanes-Oxley reforms)

Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation 

Accounting Tricks and Creative Accounting  

Outrageous Executive Compensation Schemes That Reward Failure and Fraud

Corporate Boards and the SEC Will Not Solve Corporate Governance the Crisis

Incompetent and Corrupt Audits are Routine

Whistle Blowing is Not Rewarded  

Cost Cutting Pressures Create Moral Hazards

Computer Security is Becoming More Fragile in the Age of Electronic Warfare

Collision of Security and Privacy and Freedom Criteria

Investment Banking and Security Analysis Professions Are Rotten to the Core

Dawning of the Age of Unaccountable Contracting

Failed Education Systems In the Early Years Leave Weak Foundations to Build Upon

Media Coverage is Very, Very Good and Very, Very Bad
From Enron to Earnings Reports, How Reliable is the Media's Coverage?
   http://www.trinity.edu/rjensen/FraudRotten.htm#Media  

CPA = Career Passed Away   

The Three Cs of Fraudulent Financial Reporting (Warning Signs)

Will public accounting audit services survive?  Insurance Versus Assurance?

The Most Criminal Class Writes the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

Rotten to the Core --- http://www.trinity.edu/rjensen/FraudRotten.htm

At first, governments and companies supplied reports online that were also available in hard copy.  In this respect, the Internet simply became a more convenient, faster, and less-costly way of distributing hard copy reports.  However, digitized versions have some added advantages that are not feasible in hard copy reports, the most notable of which is the ability to search for words and pictures.  Another advantage is the ability for analysts to slice and dice reports and combine components in to more useful combinations.

Some innovative companies have moved even further in Internet Reporting.  One of the most innovative companies in this regard is Microsoft Corporation.  Microsoft allows users to generate alternate financial reports under different sets of foreign accounting standards, including Japanese standards, French standards, etc.  In addition, Microsoft provides two types of databases in Excel:

1. Pivot tables that allow very simple and interactive slicing, dicing, and reformation of data by the user.
   
   
2. Forecast spreadsheets that allow users to make their own economic and growth assumptions to easily generate financial forecasts under alternative assumptions.

For details regarding Microsoft's financial analysis tools, go to http://www.microsoft.com/msft/tools.htm 

The FEI has a new 16-page fraud checklist that can be downloaded for $50. Access to an online database is $129 --- Click Here

"New research provides resources on fraud prevention and financial reporting," AccountingWeb, January 18, 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=104443

Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International (FEI), has announced the release of two important new pieces of research designed to aid public company management and corporate boards in the efficient evaluation of their assessment of reporting issues and internal controls. A new FERF Study, entitled "What's New in Financial Reporting: Financial Statement Notes from Annual Reports," examines disclosures from 2006 annual reports for the 100 largest publicly-traded companies which used particularly innovative techniques to clearly address difficult accounting issues. The study identifies and analyzes recent reporting trends and common practices in financial statements.

The report illustrates how companies addressed specific accounting issues recently promulgated by the Financial Accounting Standards Board (FASB), and by the Securities and Exchange Commission (SEC), and in doing so, uncovered a number of trends, which included:

• Most of the disclosures selected appear to have been developed specifically for a company's own operations and industry standards, rather than "boilerplate" disclosures.

• Four accounting areas identified with a considerable variation in disclosures. The examples cited in these areas used innovative techniques to clearly address difficult accounting issues.
   

  1. Commitments and contingencies
      
  2. Derivatives and financial instruments
      
  3. Goodwill and intangibles
      
  4. Revenue recognition

Twenty-five out of 100 filers in the 2006 reporting season reported tangible asset impairments as a critical accounting policy.
 

Many companies report condensed consolidating cash flows statements as part of their segment disclosures, although not required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

 

To further facilitate use of this report as a reference tool, all of the financial statement footnotes gathered for the study are available to members on the Financial Executives International Web site.

"FERF undertook this study to provide our members with an illustration of how companies have used innovative techniques to clearly address difficult accounting concerns," said Cheryl Graziano, vice president, research and operations for FERF. "Recent accounting issues publicized by the FASB and the SEC have had a direct impact on members of the financial community, and the report shows that many companies are taking action."

"We hope that all financial executives can utilize the report as both a quick update to summarize recent trends in the most annual reporting season, as well as a reference to address common accounting issues. The convenience of the online database will provide executives with a readily handy tool when drafting their own annual reports," said Graziano.

A second piece of research by FEI, entitled the "FERF Fraud Risk Checklist," provides boards of directors and management with a series of questions to help in assessing the potential risk factors associated with fraudulent financial reporting and the misappropriation of assets. These questions were developed from a number of key sources on financial fraud and offer executives a single framework in which to evaluate their company's reporting, while providing a sample structure for management to use in documenting its thought process and conclusions.

"Making improvements to compliance with Sarbanes Oxley is a daily practice for financial executives, and the first step in efficient evaluation of internal controls is the proper assessment of potential exposures or risks associated with fraud," said Michael Cangemi, president and CEO, Financial Executives International. "Through conversations with members of the financial community, we learned that, while this type of risk assessment is a routine skill for auditors, many members of management are not always familiar with this concept. This checklist combines knowledge from the leading resources on fraud to help financial management take a proactive step in evaluating their company's practices and identifying areas for improvement."

The annual report study, including the full report and access to the online database, and the fraud checklist, are available for purchase on the FEI Web site

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm

Until recently, giant databases both within and between firms either did not communicate with one another or they did so only after expensive "back door" software was custom developed for each instance. 

Deconstructing Babel:  eXtensible Markup Language (XML)
XML and application integration XML may not yet be a true "silver bullet," but it can be used to great effect in integration projects if IT managers create a detailed plan that can overpower its weaknesses. 
"Deconstructing Babel: XML and application integration," By Henry Balen, Application Development Trends, December 2000 --- http://www.adtmag.com/ 

 

XML has become the lingua franca for inter-application communication. Using XML, all messages sent between applications consist of self-describing text. This makes the messages easily understandable by both humans and machines, although it does not supply an efficient packaging of the message. (XML messages can be considerably larger than a binary representation of the same information.)

There are three aspects of inter-application communication:

Transport—how to get information across the wire; Protocol—how to package the information sent across the wire; and Message—the information itself. The transport is usually a lower level network standard such as TCP/IP. Inter-process communications standards, such as CORBA, DCE and DCOM, have their own protocols that sit on top of such transports.

The protocol used depends on the communication mechanism. Standards may use different protocols to communicate: CORBA uses IIOP, while electronic mail uses SMTP. Each of these protocols allows you to package a message, specify a destination and get the message to the designated location. In protocols that support remote method invocation (RMI), the destination can consist of an object reference and method.

With each of these protocols, the user defines the message that is sent across the wire. In the case of CORBA, DCE, DCOM and so on, the message is defined using an Interface Definition Language (IDL). In E-mail and message-oriented middleware (MOM) it can be more fluid. No matter what you use, there is an agreement between the sender and receiver about the meaning of the message. The meaning is not transferred with the message.

So why use XML? In XML, documents contain meta-information about the information being transmitted, and can be extended easily. However, XML is less efficient than transmitting the information using a binary protocol. One advantage, though, is that humans and computers can both read the document.

To overcome the communication problem, the application can be enabled to send and receive information in the form of XML. This can be done independent of protocol, and if the meaning is agreed upon between the applications or organizations, then you just need to get the package to its intended destination. How it gets there is up to you. Of course, in these days of the Internet, the HTTP protocol is a natural choice. There are business domain-specific XML vocabularies under development.

Application integration 

From the point of view of an application, there are various points of integration: data store, APIs or components, and protocol. The point of integration used depends on the nature of the application. If integration means the ability to speak XML, then you will need to acquire or build adapters for the point of integration. These adapters are responsible for getting information in and out of the application, and performing any necessary transformations along the way.

If the integration involves the sharing of information, you may want to integrate at the level of the data store. Assuming you have an existing database containing the information you want to share, your integration adapter is responsible for translating from a query's result set to an XML document. Conversely, when the application receives information in the form of XML, the adapter performs a reverse translation and maps the document elements to the appropriate database entities.

Additional Reading

XML, VoiceXML, XLink, XHTML, XBRL, XForm, XSLT, RDF and Semantic Web Watch --- http://www.trinity.edu/rjensen/xmlrdf.htm 

"Financial Reporting on the Internet – Instant, Economical, Global Communication," by Glen Gray, Information Technology, May 20021 --- http://www.ifac.org/Library/SpeechArticle.tmpl?NID=979235133150990 

"Financial reporting on the Internet and the external audit," by Roger Debreceny and Glen Gray, The European Accounting Review, Volume 8, Number 2, 1999 --- http://www.bham.ac.uk/EAA/ear/conts/volume8.html 

"Electronic Based Financial Reporting, by Hasri Bin Mustafa and Nor Azman Bin Shaari --- http://www.spk.uum.edu.my/azizi/electronic%20financial%20reporting.htm 

Electronic Corporate Reporting Website --- http://accounting.rutgers.edu/SUMMA/corp/papers/papers.html 

"Spotlight on Midlevel ERP Software," by Roberta Ann Jones, Journal of Accountancy, May 2002 --- http://www.aicpa.org/pubs/jofa/may2002/jones.htm 

Years ago, when the personal computer was just coming into its own, accounting software was relatively simple: Its single function was to automate the task of double-entry accounting and produce a straightforward balance sheet. As computers became more robust and integrated databases standardized, accounting software developers added more functions—including cost accounting, manufacturing resource planning (MRP), customer resource management (CRM), human resources (HR) and payroll. To differentiate these superproducts from the simple accounting programs, marketing-minded vendors christened the new packages enterprise resource planning (ERP) software.

Additional Reading

ERP Overview and Email Messages from Teachers of ERP --- http://www.trinity.edu/rjensen/245glosap.htm 

1. Missing information due to not choosing the proper word or phrase.  For example, a search for "Financial Reporting on the Internet" missed documents that instead used a phrase like "Financial Reporting on the Web."
   
   
2. Being overwhelmed with hits that are only indirectly related to what is being sought or they are not related at all.  For example, when searching for academic papers on a given topic, a searcher may not be able to separate the wheat from the chaff of thousands of advertisements that use the keyword or documents that use the keyword in a different context.  For example, the term "derivatives" will generate thousands of documents on financial derivates and thousands more on mathematics derivatives.

Deconstructing Babel:  eXtensible Business Reporting Language (XBRL)

XML was designed to overcome both of the above two problems.  However, XML provides only a general framework that cannot be used to drill down into the specialized vocabulary of each discipline until that discipline develops its own standardized taxonomy.  For business reporting, a consortium of major corporations, investment firms, accounting firms, security analysts, and others came together under the leadership of the American Institute of CPAs to develop an "under-the-hood" taxonomy and framework that extended XML to the varied and complex terminologies of accounting and business.

XBRL specifications have at last been completed for U.S. GAAP and will soon be widely employed in electronic financial statements.

From http://www.xbrl.org/Overview.htm 

XBRL is:

• A standards-based method with which users can prepare, publish (in a variety of formats), exchange, and analyze financial statements and the information they contain.
• Freely licensed, which permits the automatic exchange and reliable extraction of financial information across all software formats and technologies, including the Internet.
• Ultimately benefits all users of the financial information supply chain: public and private companies, the accounting profession, regulators, analysts, the investment community, capital markets and lenders, as well as key third parties such as software developers and data aggregators.
• Does not require a company to disclose any additional information beyond that which they normally disclose under existing accounting standards. Does not require a change to existing accounting standards.
• Improves access to financial information/speeds up access.
• Reduces need to enter financial information more than one time, reducing the risk of data entry error and eliminating the need to manually key information for various formats, (printed financial statement, an HTML document for a company’s Web site, an EDGAR filing document, a raw XML file or other specialized reporting formats such as credit reports and loan documents) thereby lowering a company's cost to prepare and distribute its financial statements while improving investor or analyst access to information.
• Leverages efficiencies of the Internet as today’s primary source of financial information by making Web browser searches more accurate and relevant. (More than 80% of major US public companies provide some type of financial disclosure on the Internet.)
• XBRL meets the needs of today's investors and other users of financial information by providing accurate and reliable information to help them make informed financial decisions.

June 6, 2002 message from Neal Hannon

Here is a list of companies that have joined XBRL-Germany. Good luck in Deutschland! 
http://www.xbrl-deutschland.de/xg_memberlist.htm  

Additional Reading

XBRL Home Page --- http://www.XBRL.org

 XML, VoiceXML, XLink, XHTML, XBRL, XForm, XSLT, RDF and Semantic Web Watch --- http://www.trinity.edu/rjensen/xmlrdf.htm 

Audited financial statements seriously lag most investment decisions in the market place.  In most instances, they appear only once a year and refer to a point in time that is at best three months behind the date of the statements.  The information is too infrequent and too delayed.

In the past, it was just too costly for auditors to monitor each transaction in real time as it transpired and to follow the course of this transaction through various phases such as the transformation of raw material into work in process and then into finished goods and cost of goods sold.   Computing and networking technologies have eliminated most of those cost barriers.   We are approaching an age where it may be more costly to monitor a transaction after the fact than to monitor it in real time as it is happening.

Many CEOs receive financial statements at least one per day.  There is no reason why upgraded auditing processes cannot attest to these statements for external users.   These upgrades are termed "continuous" or "real-time" audits.   In the future, encapsulated software that can be accessed only by the auditors might accompany each and every transaction of a firm.  These might be called "auditbots" or "audit robots" that detect, trace, verify, aggregate, and report to auditors as transactions take place.  Sampling errors will be reduced since it becomes possible to monitor every transaction rather than a post-event sampling of transactions.

Continuous auditing shifts the entire focus from auditing on verification of processes as opposed to mere verification of outputs.  This type of auditing is especially important for XBRL reporting since the semantic demands of XBRL require a verification of the basic underlying transactions prior to being aggregated into outputs.  One of the major obstacles is that auditing standards will one day have to be entirely revamped for continuous auditing.  See Lymer and Debreceny (2002).

Information becomes more accurate, more timely, and more relevant to managers, creditors, and investors.  Long-time advocate of continuous auditing, Professor Miklos Vasasarhelyi at Rutgers University contends that continuous auditing may have prevented the excess swelling and ultimate collapse of Enron.

"Auditors in Search of the Future," June 14, 2002 --- http://www.smartpros.com/x34375.xml 

Swinney is a partner with KPMG. He heads a team of 10 at an inhouse think tank KPMG calls its Assurance and Advisory Services Center. The task: Establish what financial reporting will look like three, five, 10 years from now.

The sorts of reforms Swinney and others envision would have a dramatic impact on accounting firms, their clients and investors. "Auditing standards, systems, our own business model, all would clearly change," Swinney says.

KPMG isn't alone in its quest. Other firms have similar teams doing similar work. "It all connects back to improving the effectiveness of the audit," says John Fogarty, who directs Deloitte & Touche LLP's "third generation audit" project, from the firm's headquarters in Wilton, Conn.

For auditors, these are trying times. Andersen, of course, is unraveling. High-profile corporate disasters continue to explode. Restated accounts appear almost daily. Practitioners are being maligned. Methods are being questioned. Critics question the extent external auditors have cozied up with their corporate clients and how this impugns credibility.

"What society needs are accurate, believable reports," says Ira Solomon, who heads the accounting department at the University of Illinois. For more than 10 years, Solomon has been investigating the growing gap between businesses -- especially their assets and their value determinants -- and the financial statements that are issued. "There's a long, long way to go" to get an audit that accurately reflects these changes, he says.

For example, Solomon continues, auditors traditionally have engaged in "vouching and tracing." But that is based on tangible assets. What happens, he asks, when the assets of large corporations are no longer tangible, as is the case in many companies today? The whole definition of value changes. An audit must reflect this.

Swinney, for one, maintains the rash of negative publicity that began with Enron Corp. is neither the driver of nor the distraction for his project. "Things that we're doing, things that we're thinking about, aren't affected by Enron," says the veteran accountant, who is due to return to his New York-based media practice sometime this summer.

While Fogarty agrees Enron hasn't dictated direction, he believes next-generation audit techniques would militate against the kind of renegade corporate bookkeeping that Enron has come to symbolize. "All this is aimed at helping improve our ability to detect fraud or things that are like fraud," he says.

The changes envisioned by accounting's futurists are about content and mindset, says Fogarty. Technology, however, has provided the impetus. It enables the availability of more information more quickly than conceivable even a few years ago. "The whole world's changed," says Solomon.

Auditors want to tap into that technological potential. Investors and other interested parties outside the corporation clamor for access. "We believe marketplace demand will drive the acceleration of the reporting as well as the depth of reporting," says Swinney.

What will encompass the next-generation audit is far from settled. Planners agree that changes will be evolutionary. The degree of change may differ greatly from country to country and even from company to company. Here, however, are some of the likely elements.

*Continuous reporting. Audit planners believe within the next few years they will have the technological means to monitor the financial complexities of a corporation in real time. From an auditing viewpoint, that will render the fiscal quarter or year pretty much meaningless. "Today, we're very periodic oriented, but in the future, I believe it will become more continuous," says Fogarty.

*The virtual close. The time gap already is shrinking between when books are closed, an audit is completed and the results are made public. Technology should allow that to disappear almost completely. When combined with continuous reporting, this gives outsiders the theoretical ability to monitor financial results as fast as company executives. However, that kind of real-time reporting could make stock markets horribly unstable and stock prices volatile. "I don't see it ever coming, at least in my professional lifetime," says Fogarty, who is 47.

*Web-based audits. In the future, a company's financial accounts and data will be completely digitized. The Web will act as host. That will allow auditors to sit in one location and access all necessary corporate information and transactions. While the technology for this exists and while there are small-scale experiments under way, Swinney believes widespread Web-based audits are "realistically six, seven years down the road."

*Non-financial audits. Now, audits are restricted to transactions, accounts and balance sheets. In the future, auditors could be called on to verify non-financial indicators such as environmental performance, health and safety records or comparisons with competing companies. They might weigh industry risks. Some European and Canadian companies voluntarily submit themselves to this non-financial reporting today. Already, there are moves afoot within the Securities and Exchange Commission for auditors to verify the management discussion and analysis section of quarterly reports.

*Embedded agents and data mining. Accounting firms believe they could do a better job if they were allowed access to client systems and used software not only to collect data, but to alert auditors about possible anomalies. An auditor could open his or her laptop each morning and receive any warnings about potential problems. Swinney describes it as a kind of warning light system on a dashboard.

Not that corporations can be expected to embrace all this willingly. As the Financial Accounting Standards Board can attest, corporate lobbyists have tried their best to kill accounting reforms of the past several decades. Many of these ideas, while now mostly theoretical, would likely run into significant opposition should regulators try to make them mandatory. Corporate technology departments would resist opening any systems to outsiders.

Auditors counter that they need the kind of access that technology offers to do their job properly. An audit "will never be perfect," says Fogarty. But he believes "the more auditors are involved in processes, the more discipline is brought to bear. The more discipline is brought, the more the chances of information being incorrect or misleading or left out can be reduced."

"Embedded Audit Modules in Enterprise Resource Planning Systems: Implementation and Functionality," by Roger S. Debreceny, Glen L. Gray, Joeson Jun-Jin Ng, Kevin Siow-Ping Lee, and Woon-Foong Yau, Journal of Information Systems, Fall 2005, pp. 7-28 --- http://aaahq.org/ic/browse.htm

Embedded Audit Modules (EAMs) are a potentially efficient and effective compliance and substantive audit-testing tool. Early examples of EAMs were implemented in proprietary accounting information systems and production systems. Over the last decade, there has been widespread deployment of Enterprise Resource Planning (ERP) systems that provide common business process functionality across the enterprise. These application systems are based upon a common foundation provided by large-scale relational database-management systems. No published research addresses the potential for exploiting the perceived benefits of EAMs in an ERP environment. This exploratory paper seeks to partially close this gap in the research literature by assessing the level and nature of support for EAMs by ERP providers.

We present five model EAM-use scenarios within a fraud-prevention and detection environment. We provided the scenarios to six representative ERP solution providers, whose products support "small," "medium," and "large" scale clients. The providers then assessed how they would implement the scenarios in their ERP solution. Concurrent in-depth interviews with representatives of the ERP providers address the issue of implementing EAMs in ERP solutions.

The research revealed limited support for EAMs within the selected ERP systems. Interviews revealed that the limited support for EAMs was primarily a function of lack of demand from the user community. Vendors were consistent in their view that EAMs were technically feasible. These results have a number of implications for both practice and future research. These include a need to understand the barriers to client adoption of EAMs and to build a framework for integrating EAMs into firm risk-management environment.

Bob Jensen's threads on ERP education are at http://www.trinity.edu/rjensen/245glosap.htm
Also see http://www.trinity.edu/rjensen/FraudConclusion.htm#ERP  

Additional Reading

Canadian Continuous Disclosure Obligations:  OSC Rule 51-801
http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/rule_51-102_20020621_notice_roc.pdf 

"AICPA Top 5 Emerging Impacts on You!" by Roman H. Kepczyk, CPA (Published in Accounting Today - April 25, 1999) --- http://www.itpna.com/Vision/1999/990510%20AICPA%20Top%205%20Emerging%20Technologies.htm 

"Non-stop Auditing," by Greg Shields, CA Magazine, September 1998, --- http://www.camagazine.com/Library/EN/1998/Sep/e_d2.pdf 

Texas A&M Center for Continuous Auditing --- http://www.tamu.edu/univrel/aggiedaily/news/stories/01/120701-7.html 

S. Michael Groomer and Uday S. Murthy, Accounting Information Systems:  A Database Approach --- http://www.cybertext.com/ 

ISACA/IIA Los Angeles, March 25, 2002 --- http://www.isaca-la.org/doc/2000may%20Continuous%20Auditing%20IIA.pdf 

We analyze the relation between customization and standardization in corporate financial reporting. We argue that “Customization Around a Standard Report” (CASR) is a promising approach to financial reporting. Under this approach, the prevailing general purpose report serves as a benchmark, upholds information credibility, maintains information comparability, and satisfies users’ common information needs while the added customization meets users’ different information and presentation requirements. CASR will be less effective if implemented by the reporting company alone. To be more effective, CASR should be undertaken jointly by the reporting company, the information intermediary, and the end user. Such joint CASR could be implemented in a peer-to-peer networking environment where data-bases from primary financial data sources, such as reporting companies, and secondary reports from certified financial analysts are networked and shared. Such an environment will create an enormous demand for both customization and standardization. We predict that networking and file sharing in this way will greatly enhance opportunities for assurance services to add legitimacy and selectivity to an over-whelming menu of customization options that will one day be available online.

Additional Reading

"The impact of cognitive styles on information systems design," by Benbast, I., and R. N. Taylor, MIS Quarterly, June 1978, pp. 43–54.

Building Database-Driven Web Catalogues, by Danish, S., and P. Gannon (New York, NY: McGraw-Hill, 1998)

Peer-to-Peer Networking (P2P) Technology and CASR This joint CASR could be implemented in an environment of networked databases and distributed file sharing. Such an environment is emerging with the advent of a group of Internet-based peer-to-peer distributed software alternatives such as Napster (http://www.napster.com ), Gnutella (http://gnutella.wego.com), InfoSearch (http://infosearch.com ), Freenet  (http://www.freenet.com ), and Pointera (http://www.spinfrenzy.com ). Peer-to-peer file distribution technology allows users to search for data on other people’s computers. Although these software products are not the same, the technology’s main features are its ability to facilitate distributed file sharing, ad hoc networking, and distributed search. These features make the location of files irrelevant; data belong to the entire network rather than to a particular computer (Oram 2000). The importance of peer-to-peer file sharing in the future is nicely summarized by Waters (2001). This type of technology has enormous implications for CASR. In the world of peer-to- peer networking, companies and analysts can earmark the data for access by numerous networked users and any user can access numerous interpretations of a business report and share financial analyses of Company XYZ by Analyst A, Analyst B, and Company XYZ itself.

Additional Reading 
Threads on the P2P, PDE, Collaboration, and the Napster/Wrapster/Gnutella/Pointera/FreeNet/BearShare/ Paradigm Shift in Web Serving and Searching --- 
http://www.trinity.edu/rjensen/napster.htm 

Standard setting entails a constant power struggle between corporations seeking more discretion in earnings management and off-balance sheet financing versus investors and standard setters seeking more uniformity in reporting, reduced managerial discretion in reporting, and more extensive booking of debt and extensive disclosures.  Since IASB standards in the past have not been "required," there has never been a true test of whether the IASB can withstand the financial and political power moves by corporations.  Auditing firms are often caught in the middle between their clients and standard setters.  This has often led to hypocrisy and inconsistencies where auditing firms preach virtue but silently side with major clients in the political arena to constrain standard setters.  See http://www.trinity.edu/rjensen/fraud.htm#Blame 

Additional Reading

Paul Pacter's great site at http://www.iasplus.com/index.htm 

IASB Home Page --- http://www.iasc.org.uk/cmt/0001.asp 

IAS Around the World --- http://www.iasc.org.uk/cmt/0001.asp?n=56&s=841341&sc={C5C71BC5-9A76-4D41-92C9-DA31D6B20319}&sd=395693802 

Europe Moves to International Accounting Standards 
The European Union has adopted a regulation requiring public companies to prepare their consolidated accounts in accordance with international accounting standards starting January 1, 2005. The U.S. reaction to an international GAAP has been rather ho-hum, but key figures in the U.S. are starting to rally behind the cause. http://www.accountingweb.com/item/83467 

PwC Chief Recommends Adoption of Global Accounting Standards
PricewaterhouseCoopers' CEO Samuel DiPiazza is becoming a very vocal proponent of disbanding U.S. GAAP in favor of moving towards more global accounting standards. Mr. DiPiazza is recommending the adoption of a global GAAP that moves away from rules-based reporting to principles-based reporting, and has outlined a system to accomplish this. http://www.accountingweb.com/item/83984 

The Enron/Andersen scandals have sickened investors, academics, courts, security analysts,  government leaders, and the world in general to a point where the future of capital markets and capitalism itself rests heavily upon restoring confidence in integrity of the information systems that underlie the functioning of free markets. 

The world is growing weary of constantly reading (monthly) where leading auditing firms have been fined and/or have lost civil suits due to incompetent or fraudulent auditing and consulting.  It appears that in the U.S., auditing firms and the AICPA have survived the current threat of government takeover of auditing, but continued scandals like the one that led to the demise and fragmentation of the Andersen accounting firm will renew this threatened takeover that will put auditing controls in the public rather than private sector.

In testimony given before the US Senate Committee on Banking, Housing, and Urban Affairs on September 9, 2004, Ernst & Young Chairman and CEO Jim Turley discussed the changes in the accounting profession in the two years since the Sarbanes-Oxley Act of 2002. He emphasized the value of the PCAOB, the reviews and changes we've implemented in our organization, strengthened corporate governance and accountability, and increasing investor confidence. --- http://snipurl.com/Turley2004 

The Big Five Firm CEOs Join Hands (in Prayer?)
Facing up to a raft of negative publicity for the accounting profession in light of Big Five firm Andersen's association with failed energy giant Enron, members of all of the Big Five firms joined hands (in prayer?) on December 4, 2001 and vowed to uphold higher standards in the future. http://www.accountingweb.com/item/65518 

The American Institute of Certified Public Accountants released a statement by James G. Castellano, AICPA Chair, and Barry Melancon, AICPA President and CEO, in response to a letter published by the Big Five firms last week that insures the public they will "maintain the confidence of investors." --- http://www.smartpros.com/x32053.xml 

Additional Reading

Bob Jensen's Threads on Accounting Fraud, Forensic Accounting, Securities Fraud, and White Collar Crime --- http://www.trinity.edu/rjensen/fraud.htm 

Proposed Accounting and Auditing Reforms in the Wake of the Enron Scandal --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

Teaching Ethics -- Bill Christie once helped bust Nasdaq price fixers. Now, he's Vanderbilt's B-school dean -- and bringing those lessons to MBAs http://www.businessweek.com/mediacenter/list/bs01.htm 

"Deloitte & Touche Launches DTect Financial Fraud Investigation Service," SmartPros, September 7, 2004 --- http://www.smartpros.com/x45061.xml 

The Financial Advisory Services practice of Deloitte & Touche LLP has launched DTect, a proprietary fraud investigation service designed to help companies identify, track and analyze electronic and financial fraud indicators by sifting through large amounts of electronic data in a fraction of the time expended by using existing conventional methods.

“We involved forensic technology practitioners and forensic accountants from around the world in the development of the service. Many of these professionals are former law enforcement technologists with significant experience in the use of computers in economic crime investigations,” said Peter McLaughlin, DTect National Product Line Leader.

DTect is a procedural-driven service created to analyze mountains of historical financial transactional data such as sales, accounts payable, inventories and employee compensation. It is designed to utilize hundreds of analytical test algorithms, resulting in profiles that help identify anomalies that could indicate financial fraud. These test algorithms are executed against client-supplied data, which result in a series of profiles that are scored and ranked according to client-specific risk measurements. The higher ranking scores indicate the most probable occurrences of potential fraud, abuse, or collusion of employees and vendors.

The DTect service does not rely solely on traditional sampling techniques but enables comprehensive testing of multiple aspects of financial transactions. Anomalies and trends are identified through DTect’s unique scoring methodology, which is used to focus efforts on the highest risk transactions and entities. Other differentiators that set DTect apart from traditional software technology include the incorporation of third-party data sources, analysis of the total population of records rather than only a sampling and the ability to customize test scenarios to conform to specific client needs.

In developing DTect, Deloitte & Touche forensic professionals analyzed all types of fraud to identify distinguishing attributes. The investigators then created the tests, which can be applied to business processes such as vendor, payroll and expense disbursements, to detect the presence of fraud characteristics. Each test generates a risk score, which is assigned to each vendor, employee or job category, invoice, or transaction that fails a test. High risk scores indicate anomalies in vendors and transactions. Deloitte & Touche investigators then work with their clients to interpret and explain results, to investigate and resolve anomalies, and to identify potential incidents of fraud.

Continued in the article

AICPA formed the Special Committee on Assurance Services (SCAS) in 1994.  After a careful analysis of demographic and other trends, this committee concluded the following:

Your marketplace is changing.  Multibillion-dollar markets for new CPA services are being created.  Investors, creditors, and business managers are swamped with information, yet frustrated about not having the information they need and uncertain about the relevance and reliability of what they use.  CPA firms of all sizes--from small practitioners to very large firms--can help these decision makers by delivering new assurance services.  (AICPA Web site, "Assurance Services," www.aicpa.org).

The Elliott Committee (named after its chair, Robert K. Elliott) identified six new service areas considered to have high potential for revenue growth for assurance providers:

1. Risk Assessment
   

2. Business Performance Measurement
   

3. Information Systems Reliability
   

4. Electronic Commerce
   

5. Health Care Performance Measurement
   

6. ElderCare

The work of the Elliott Committee was followed by the appointment of the ongoing Assurance Services Executive Committee, chaired by Ronald Cohen.  This committee is charged with the ongoing development of new assurance services and the provision of guidance to practicing CPAs on implementing the services developed.

• Information Systems Reliability Assurance 
  
  
• Electronic Commerce Assurance. 

Business-To-Consumer Assurance

• CPA/CA WebTrust (Joint Venture of AICPA and CICA)
  

  • Business Practices and Disclosure--The entity discloses its business and information privacy practices for e-business transactions and executes transactions in accordance with its disclosed practices.
    

  • Transaction Integrity--The entity maintains effective controls to provide reasonable assurance that customers' transactions using e-business are completed and billed as agreed.
    

  • Information Protection and Privacy--The entity maintains effective controls to provide reasonable assurance that private customer information obtained as a result of e-business is protected from uses not related to the entity's business.
    
    

• Proprietary E-Business Audits
  
  
• Privacy Audits

Business-to-Business Assurance

• Assurances against service disruptions and product shipments
  
  
• CPA/CA SysTrust (Joint Venture of AICPA and CICA)
  

  • Availability--The system is available during times specified by the entity.
    

  • Security--Adequate protection is provided against unwanted logical or physical entrance into the system.
    

  • Integrity--Processes within the system are executed in a complete, accurate, timely and authorized manner.
    

  • Maintainability--Updates (upgrades) to the system can be performed when needed without disabling the other three principles.
    
    

• SAS 70 Reviews of Service Organizations (extended to B2B Risks)

SAS 70, Reports on the Processing of Transactions by Service Organizations, was issued to provide assistance in the auditing of entities that obtain either or both of the following services from an external third party entity.

• Executing transactions and maintaining related accountability
  

• Recording transactions and processing data

• Internal Controls Risk
  

  • The financial statement assertions that are either directly or indirectly affected by the service organization's internal control policies and procedures.

  • The extent to which the service organization's policies and procedures interact with the user organization's internal control structure.

  • The degree of standardization of the services provided by the third-party to individual clients.  In the case of highly standardized services, the service auditor may be best suited to provide assurance: however, when the third-party offers many customized services, the third-party auditor may be unable to provide sufficient assurance regarding a specific client.

SAS 70 provides for two reports the service auditor can provide to the user auditor concerning the policies and procedures of the service organization:

• Reports on policies and procedures placed in operation.
  

• Reports on policies and procedures placed in operation and tests of operating effectiveness.

Other Potential New Services to Facilitate E-Business

• Value-Added Network (VAN) Service Provider Assurance

• Evaluation of Electronic Commerce Software Packages
  

• Trusted Key and Signature Provider Assurance
  

• Criteria Establishment
  

• Counseling Services

The AICPA's Assurance Services Website is at http://www.aicpa.org/assurance/index.htm 

Billions of dollars of lawsuit settlements have, in retrospect, changed the entire focus of the automobile industry toward passenger safety.  Millions upon millions of dollars lost in court battles really do change priorities.  Although the price of added quality and safety is reflected in prices, we now have safer products and better warranties in most instances.

The same thing is true in any industry that has lost lawsuits to consumers, patients, employees, and investors.  Powerful lobbying efforts combined with free-wheeling spending in state and federal legislatures have often been successful in fending off restraining legislation, but corporations have been much less successful in fending off lawsuits from injured parties, including investors who lost their savings and creditors who lost the money loaned to industry.

The Andersen accounting firm exploded into bits and pieces due to the pile up of past and pending civil litigation for incompetence and alleged fraud.  It was not the SEC or the Justice Department that sent Andersen's partners scurrying to remove themselves from Andersen.  Rather, it was the burden of past and pending lawsuits.  Remaining public accounting firms are going to be much more aware that lawsuit after lawsuit can sink the largest ships in the industry if greater care is not taken to prevent such litigations from taking place.

It's a change in philosophy for an agency that has spent the last couple of years chasing after wrongdoing uncovered by New York Attorney General Eliot Spitzer. Throughout the spate of corporate scandals, the SEC has been conducting investigations after the fact, levying fines on companies long after the abuse has occurred, and failing to spot questionable practices, such as mutual fund trading abuses.   Donaldson (SEC Chairman) wants to change that by taking a cue from Spitzer. Spitzer's strategy was to narrow his focus and concentrate on areas where small investors were being harmed. The SEC will do the same through a newly formed office of Risk Assessment, the Washington Post reported.
"SEC Chairman: Find Solutions Before Problems Explode," AccountingWeb, September 30, 2004 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=99840 

The European Commission on Monday rejected a plea from the "Big Four" accounting firms for a monetary limit on the amount that auditors can be sued for. Frits Bolkestein, European commissioner responsible for financial services, said unlimited liability was a "quality driver" because auditors who did their job properly had no exposure to litigation.
Andrew Parker, The New York Times, March 24, 2003

SOX is Deemed a Success by Deloitte's CEO 

"D&T Chief Tells Congress Sarbanes Is Working," SmartPros, July 23, 2004 --- http://www.smartpros.com/x44464.xml 

New corporate reform regulations are working as intended, according to James Quigley, chief executive officer of Deloitte & Touche USA.

In testimony before the House Committee on Financial Services Thursday, Quigley called on stakeholders in the capital markets to continue to work constructively to fully implement the Sarbanes-Oxley Act of 2002 (SOX) to realize its objectives.

"The signing of the Sarbanes-Oxley Act represented a landmark event for investors," he said. "the act is already having a significant impact and, over time, it should help in fulfilling its intended purpose of restoring investor confidence."

Citing the results of a Deloitte survey of Fortune 1000 Deloitte clients, Quigley said progress has been made in several key areas, including the focus and commitment of audit committees and corporations to transparent financial reporting. The survey found that the number of audit committee meetings held has increased by more than 50 percent since SOX was signed.

Quigley said that he has been impressed with the degree to which audit committees are meeting the new expectations that have been placed on them, saying that committee members have responded by increasing their time commitment to their responsibilities.

On the topic of tax services, he recommended that the authority of the audit committee to make decisions with respect to tax scope of services should be supported, and that further scope of services regulations were not warranted. He noted, however, that structured tax strategies with no business purpose should not be marketed by any service provider.

Continued in the testimony.

Additional Reading

"The Costs of Ordinary Litigation," by David M. Trubek, et al., UCLA Law Review, October 1983 --- http://polisci.wisc.edu/users/kritzer/research/CLRP/clrp.htm 

Law & Economics Class Notes of Professor William M. Landes, March 29, 2000, University of Chicago --- http://blsa.uchicago.edu/Upper%20class/Law&EconNotes-Landes2000.doc 

The fact of the matter is that thousands upon thousands of distance education courses are available worldwide.  The University of Wisconsin alone has over 5,000 such courses.  The University of Massachusetts system in provided over 700 online summer school courses in 2002.  Army University (comprised of 24 major colleges providing training and education courses to soldiers) had over 12,000 students in its first year and will have over 22,000 by the end of 2002.

One of the signs of changing times is when venerable Harvard University modified its residency requirement for "mid-career" students.  Harvard now has a significant number on online courses.  Prestigious universities like Stanford, Columbia, Carnegie-Mellon, and Columbia are looking an tens of millions of dollars from online tuition.

In accounting, as in other disciplines, the knowledge needed has become too complex to lead to chance or to haphazard continuing education systems of the past, especially those that give CPE credit for attendance alone rather than tested comprehension.  Increasingly, accountants will have newer specialties accompanied by certifications that can be obtained from online training and education programs.  Distance education is too powerful and too convenient to hold back in spite of the efforts of some traditional educators and teachers' unions to do so.

Additional Reading

Bob Jensen's Review Documents at http://www.trinity.edu/rjensen/000aaa/0000start.htm 

Bob Jensen's Threads on Cross-Border (Transnational) Training and Education --- http://www.trinity.edu/rjensen/crossborder.htm 

Take a look at how your favorite greens stack up in the chart below:

Systemic Problem:  All Aggregations Are Arbitrary
Systemic Problem:  All Aggregations Combine Different Measurements With Varying Accuracies
Systemic Problem:  All Aggregations Leave Out Important Components
Systemic Problem:  All Aggregations Ignore Complex & Synergistic Interactions of Value and Risk
Systemic Problem:  Disaggregating of Value or Cost is Generally Arbitrary

While looking at the following diet guides, it dawned on me that perhaps accounting reports should be more like food labeling and comparison tables/charts rather than the traditional bottom line reporting.  The problem with accounting is bottom-line reporting of selective and ill-conceived aggregates such as earnings-per-share or debt/equity.  Suppose spinach has an e.p.s. of 4.67 in comparison to 5.62 for Kale.  The aggregations all depend upon how components are measured, how they are weighted (e.g., Vitamin A versus Folate weighting coefficients), and what components are included/excluded (e.g., Vitamin A is included below, but Vitamin B components are ignored).  The same is true of e.p.s. in financial reporting.   The "bottom line" depends in a complex way upon how components are measured and weighted as well as upon what components are included/excluded.  

In a similar manner, accounting aggregations all depend upon how components are measured, weighted, and included/excluded.  Cash is measured with great accuracy whereas goodwill impairment is highly inaacurate, thereby causing greater error range when cash and goodwill are added together in balance sheets.   Similarly, in the "New Economy" where intangible intellectual capital is soaring in value relative to traditional tangible assets, the intangibles left off the balance sheet may be far more important that the combined value of everything included in the balance sheet.

An even larger problem is that the value and risk of diet components depend heavily upon complex and synergistic relationships.  For example, research shows that after the body hits its maximum threshold of Vitamin C, it simply throws off the excess.  Kale far surpasses endive in Vitamin C content, but this is irrelevant in a diet overflowing in Vitamin C from other sources such as citrus fruits.  Some persons may be allergic to components that are of greater value to other persons.

In a similar manner accounting valuations are greatly complicated by synergistic complexities.  A patent in the hands of one company may be all but useless in the hands of another company.  Indeed some companies buy up patents just to squelch newer technology that threatens existing products.  Similarly, financial risk is not a fixed thing.  It is a very dynamic threat that is based upon all sorts of contingencies such as world events and media coverage that can interact heavily with the level of risk at any point in time.

For similar reasons disaggregating of values/costs is generally arbitrary.  Firstly there is the famous problem of joint production cost allocation arbitrariness noted in the early writings of John Stuart Mill (The Principles of Political Economy) and Alfred Marshall (The Principles of Economics).  Then there is the problem of synergistic complexities noted above.  For example, suppose spinach sells for $5 per bunch.  Any attempt to disaggregate that $5 into additive values of nutrients will be arbitrary, because nutrients in combination may be worth more or less than the sum of disaggregated values of each nutrient.  This gives rise to the systemic problem of consolidation goodwill when two or more companies are combined into one whole.