New Bookmarks
Year 2006 Quarter 2:  April 1 - June 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 
Tidbits Directory --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/.

Choose a Date Below for Additions to the Bookmarks File

April 30

June 30

June 30, 2006

Bob Jensen's New Bookmarks on June 30, 2006
Bob Jensen at Trinity University 

For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/.

Bob Jensen's Blogs --- http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures --- http://www.trinity.edu/rjensen/resume.htm#Presentations   

Click Here for Tidbits and Quotations Between June 1 and June 23, 2006

Click Here for Humor Between June 1 and June 30, 2006

For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/.

Bob Jensen's Blogs --- http://www.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm
 

Bob Jensen's past presentations and lectures --- http://www.trinity.edu/rjensen/resume.htm#Presentations   
 

Bob Jensen's various threads --- http://www.trinity.edu/rjensen/threads.htm
       (Also scroll down to the table at http://www.trinity.edu/rjensen/ )

Click here to search this Website if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/.

Bob Jensen's Home Page is at http://www.trinity.edu/rjensen/

Everyone is entitled to their own opinion, but not their own facts.
Senator Daniel Patrick Moynihan --- FactCheck.org --- http://www.factcheck.org/

Bob Jensen's complete set of Enron Updates are at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates

Bob Jensen's threads on the Enron scandal are at http://www.trinity.edu/rjensen/FraudEnron.htm

Bob Jensen's Video Collection of Accounting Research at the University of Mississippi

Over the years I videotaped many presentations at meetings, particularly AAA meetings and some EAA meetings. Most of the presentations are by accounting professors and/or leaders from industry.

I've now donated these tapes to be archived at the University of Mississippi which seems to have the largest library of accounting history, particularly history of accounting in the U.S.

The tapes include some classic presentations and some real duds. In some cases the speakers like Ray Sommerfeld are now dead. Their presentations bring tears to the eyes of some old professors like me.

It may take a while for Dale to get these tapes cataloged, and eventually he may have digital copies of selected presentations available for distribution. In other cases, scholars may have to travel to Mississippi to view the presentations.

Except in the areas of technology, it's amazing how many problems in accounting are recycled without being able to solve systemic problems such as those illustrations listed at the following two links:

http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

http://snipurl.com/JensenTheory

-----Original Message-----
From: Dale Flesher [mailto:acdlf@olemiss.edu] 
Sent: Wednesday, May 31, 2006 2:20 PM
To: Jensen, Robert
Subject: RE: AAA Videos

Bob:

I have just received two boxes of videotapes from you (144 tapes to supplement the 50+ you sent a couple of months ago).  This looks like a gold mine of information.  You had mentioned earlier that you would recommend some for digitization.  I have discussed this possibility with the librarian in charge of our AICPA National Library of the Accounting Profession and he indicates there are no major problems in digitizing the videos and making them available to the general public, although he wasn't sure about copyright restrictions. 

To ease his initial fears about copyright, we might begin with some videos of you speaking, since you could grant copyright release from both the photographer and the provider of information.

Let me know your thoughts, and thanks for the donation.

Dale Flesher

Free derivative financial instruments document from Ira Kawaller --- http://www.kawaller.com/

"10 Tenets of Derivatives" (loads very slow) --- http://www.kawaller.com/pdf/AFP_10Tenets.pdf 

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

The Critical Shortage of Doctoral Graduates in Business and Accountancy in Particular
Quotations from a New Report Published in May 2006

An overview of doctoral program graduation rates is provided at http://www.trinity.edu/rjensen/HigherEdControversies.htm#DoctoralPrograms
There is a Ph.D. glut reported in some disciplines and shortages in other disciplines, especially in business education programs. The AACSB business education accrediting agency reports that doctoral graduate output is critically short in all specializations. The shortage is especially acute in accountancy.

Some of the references cited below are listed at http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

In the 1960s huge catalysts for change in accounting research occurred when the Ford Foundation  poured millions of dollars into the study of collegiate business schools and the funding of doctoral programs and students in business studies. Gordon and Howell (1959) reported that business faculty in colleges lacked research skills and academic esteem when compared to their colleagues in the sciences. The Ford Foundation thereafter provided funding for doctoral programs and for top quality graduate students to pursue doctoral degrees in business and accountancy. The Foundation even funded publication of selected doctoral dissertations to give doctoral studies in business more visibility. Great pressures were also brought to bear on academic associations like the AAA to increase the scientific standards for publications in journals like TAR. A perfect storm for change in accounting research arose in the late 1950s and early1960s. First came the critical Pierson Carnegie Report (1959) and the Gordon and Howell Ford Foundation Report (1959). Shortly thereafter, the AACSB introduced a requirement requiring that a certain percentage of faculty possess doctoral degrees for business education programs seeking accreditation (Bricker and Previtts 1990). Soon afterwards, both a doctorate and publication in top accounting research journals became necessary for tenure (Langenderfer 1987).

Supply of doctoral graduates in accountancy rose sharply between 1960 and 1989 to where over 200 graduates per year were entering academe from over 100 doctoral programs. The largest programs were such as those at the Universities of Illinois and Texas were beginning to cut back by 1989. Subsequently, numbers of doctoral graduates nationwide began to taper off in spite of assorted newer doctoral programs.

The numbers of accountancy doctoral graduates in the past few years are critically short to meet increases in demand in college accountancy programs in virtually all states of the United States. Increasing salary levels to the highest levels in many colleges has not seemed to attract more entrants into doctoral programs. Rodgers and Williams (1996, 67-68) list 56 newer U.S. doctoral programs and some have been added since 1996. But these increases in the number of doctoral programs failed to alleviate the dramatic declines in graduation rates in larger and older programs.

As baby boomers from the World War II era begin to retire, we may experience a shortage of new faculty to take their place and meet the growing demand for business programs at universities. In August 2002, the AACSB International Management Education Task Force (METF) issued a landmark report, “Management Education at Risk.” The following is a quotation from the Foreword on Page 4 that appeals to a wide-ranging scholarship of “incredibly complex and dynamic environments”:

Let’s be clear about the real doctoral faculty issue. It’s not about day-to-day recruiting challenges, escalating faculty salaries, adhering to accreditation standards, or protecting the professoriate. The real threat is to the very core of collegiate business schools and institutions of higher education—scholarship. Doctoral faculty produces the body of knowledge that sustains intellectual inquiry and the ongoing development of a discipline. Any diminishment of our shared objective to advance such knowledge and ground education in solid conceptual frameworks will be a threat to the eventual academic legitimacy of our discipline. At a time when organizations operate in incredibly complex and dynamic environments, when different norms are colliding, and leadership credibility is at the lowest, such a retreat will compromise our ability to serve students and other constituents.

Data are provided in the above report about the serious decline in the number of doctoral degrees granted in recent years. Demand is more than double the projected supply of new doctoral faculty. For accounting in particular, Hasselback (2006) reports that the number of accounting doctoral degrees plunged from 212 in 1989 to 96 in 2004. Even if he missed some in his count, the trend is clearly critical.  Fewer and fewer accounting undergraduate and master’s degree graduates are returning to earn doctoral degrees. The reasons for this are complex, but there is considerable anecdotal evidence that some potential doctoral candidates are not interested in the narrow scientific methodology curriculum offered at most doctoral programs.

In 2004 American Accounting Association President Bill Felix formed an ad hoc Committee to Assess the Supply and Demand for Accounting Ph.D.s. The Committee conducted an exhaustive survey and published a report in May 2006 in the following reference:

"Assessing the Shortage of Accounting Faculty," by  R. David Plumlee (Chairman), Steven J. Kachelmeier, Silvia A. Madeo, Jamie H. Pratt, and George Krull, Issues in Accounting Education, Vol. 21, No. 2, May 2006, pp. 113-126.

Some of the highlights of this report are quoted below.

QUOTATION FROM PAGE 114
The AACSB predicts a major shortage of all business faculty with Ph.D.s over the next ten years (AACSB 2003).  Within accounting, there is substantial anecdotal evidence that a shortage of Ph.D.-qualified accounting faculty already exists and may grow.  Referring to the recent increase in accounting majors, the Wall Street Journal (2004) noted that "some universities face a problem: a shortage of professors to teach these young beancounters."  The article continues by stating that:

the comeback of the accounting career occurs as the number of business doctorates produced is at a 17-year low and universities struggle to recruit new accounting professors.  That leaves many wondering who will be left to teach all the new rules and regulations to the growing student pool.  While many academic fields are suffering from professor shortages, the issue is more acute in accounting because of the pull toward high-paying public-accounting jobs.  (Wall Street Journal 2004)

QUOTATION FROM PAGES 115-117
Table 1 details the estimated demand for new accounting faculty for the academic years 2005-08 at the three types of schools by rank.  We estimated that program leaders expected to hire 1,174 new accounting faculty in 2005-06.  However, new doctoral graduates represent only 30.0 percent of the faculty demand for 2005-06.  The demand for experienced Ph.D.s. (Assistant, Associate, and Full Professors) represents 35.5 percent of the total, and it remains at about the same level for the subsequent two years.  Demand for faculty whose primary responsibility is teaching (whether or not they have a doctoral degree) amounts to 36.6 percent of the total faculty demand.  When viewed at the school-category level, 56.0 percent of the "teaching only" faculty are expected to be hired by Undergrad Schools.

Table 2 shows sample responses indicating the number of faculty expected to be hired for each specialty, by both type of school and year.  The number of teachers that the three types of schools expect to hire within each teaching specialty differs substantially.  While financial accounting is the specialty in highest demand across all three types of schools, it is in highest relative demand for the Ph.D. Schools, with 40.3 percent of their expected hiring in financial accounting.  Master's Schools have a somewhat more balanced approach to hiring across specialties and have the highest demand for tax and systems teaching.  The category with the most surprising number of anticipated hires is the multiple-specialty category.  Table 2 indicates that the Master's and Undergrad Schools expect approximately one-fourth of their new Ph.D.s hires to teach in multiple areas.  The results of the Ph.D. program directors' survey found that none of the students are preparing themselves for multiple teaching specialties.  When asked about hiring strategies, Master's Schools had a strong preference for hiring to meet specific teaching needs, while schools in the other two categories showed a slight tendency to recruit the best candidate regardless of specialization.

QUOTATION FROM PAGES 118-120
We estimate a total of 141 students will earn their Ph.D.s in 2005-06, 145 in 2006-07, and 187 in 2007-08.  Since some attrition in student numbers is likely, the supply may be overestimated for later years.  As shown in Table 3, 234 out of 391 students described in the responses (59.8 percent) have financial accounting as their teaching specialty.  The two identifiable specialties with the fewest students are auditing and tax with 7.4 percent and 5.9 percent of the students, respectively.

Estimated Shortages

One of the Committee's most critical tasks was to estimated the shortage of new Ph.D.-qualified faculty members.  Using the data collected from both the accounting program leaders and the Ph.D. program directors, we estimated the shortages in each teaching specialty--as well as overall shortages--by combining the program directors' estimates of students graduating and the accounting program leaders' estimates of the number they need to hire.  The shortages were estimated by taking the percentage demanded by specialty from the sample and multiplying those percentages by the estimated total supply of new Ph.D.-qualified faculty for two periods: (1) 2005-06 and (2) 2006-08.  For example, in Table 4, the demand for 43 new auditing Ph.D.s in 2005-06 is found by taking the percentage demanded for the audit specialty (12.3 percent as shown in Table 2) reported by the department heads who do hiring and multiplying that percentage by the estimated total supply of new Ph.D.s (352) in that year (shown in Table 4).

Table 4 shows that, across all specialties for 2005-08, the overall supply of new accounting faculty is only 49.9 percent of the number demanded.  Focusing just on the shortages estimated for 2005-06, the supply for every specialty falls short of the demand.  The two categories with the greatest shortages are multiple specialties and the "other" category, estimated to have none of their demand met.⁴  Nonetheless, we must acknowledge that many Ph.D. students will be expected to teach across specialties when they assume their first faculty position.  Financial accounting will have 79.1 percent of its demand met.  Tax will have only eight students graduating and auditing will only have seven, which is only 18.6 percent and 16.4 percent, respectively, of the expected demand for 2005-06.  Looking at the subsequent two years, shortages remain across all specialties; however, these shortages are less severe in most cases.

Figure 1 shows that over the three-year period 2005-2008, we expect substantial variation across specialties in the proportion of demand met.  As before, the "multiple" and the "other" categories fall well short in percentage terms.  For the "other" category, the characteristics of the faculty members demanded and the students being supplied are unlikely to match.  In the more defined specialties, graduate candidates are expected to supply only 27.1 percent of the tax faculty and 22.8 percent of the audit faculty demand, viewed cumulatively over the three years.  On the other hand, graduates interested in teaching financial accounting almost reach the level demanded (91.6 percent).  These shortages need to be considered with respect to the significant demand for experienced Ph.D.s; this demand can only be met in the short run by faculty moving from one school to another, creating more demand to replace those faculty members.

⁴    Note, however, that the program directors were not given multiple specialties as a reporting option and "other" may have been perceived as too vague an option.

 QUOTATION FROM PAGE 125
Diversifying Training across Teaching Specialties

The Committee believes the dire shortages in tax and audit areas warrant particular focus.  One possible solution to these specific shortages is for Ph.D. programs to create new tracks targeted toward developing high-quality faculty specifically in these areas.  These tracks should be considered part of a well-rounded Ph.D. program in which students develop specialized knowledge in one area of accounting, but gain substantive exposure to other accounting research areas.  In addition, Master's Schools that do not currently offer a doctorate could develop accounting doctoral programs that support tax and audit education as part of an overall doctoral program.

A possible explanation for the shortages in these areas is that Ph.D. students perceive that publishing audit and tax research in top accounting journals is more difficult, which might have the unintended consequence of reducing the supply of Ph.D.-qualified faculty to teach in those specialties.  Given that promotion and tenure requirements at major universities require publication in to-tier journals, students are likely drawn to financial accounting in hopes of getting the necessary publications for career success.  While the Committee has no evidence that bears directly on this point, it believes that the possibility deserves further consideration.

CONCLUSIONS

The Committee has uncovered some valuable information about the nature of the demand for accounting faculty, the state of Ph.D. programs, and perceptions of current accounting Ph.D. students.  While there is surely some estimation error in determining the existence of a shortage of new accounting faculty, it is clear that particularly in the tax and auditing teaching specialties a shortage exists.  At this point there is neither an organized strategy to recruit more accounting Ph.D. students, nor is it evident that current accounting Ph.D. programs have the capacity to absorb additional students.  Despite the Committee's efforts, many questions and a great deal of work remain to be done in areas such as developing sources of information useful in recruiting new accounting Ph.D. students and developing creative ways to lower the costs to students of getting a Ph.D. and the costs to schools of offering doctoral programs.  Assuring an adequate supply of qualified accounting faculty in the future will require broad and dedicated efforts by Ph.D.-granting schools, the AAA, and other entities with a vested interest in the academic accounting profession.

Jensen Opinions

Although the reasons for the decline in doctoral students in accountancy are very complex, Bob Jensen's opinion is that the leading factor is that virtually all accountancy programs in the U.S. stripped most accounting courses from these programs in the shift toward mathematics, statistics, econometrics, finance, sociometrics, and psychometrics. In some programs the doctoral studies courses are not even taught in the business school. Students with high aptitudes and professional experience in accounting are discouraged from entering into doctoral programs unless they want to become economists or other social scientists.

It is also Bob Jensen's opinion that accountancy doctoral programs became social science programs due to the positivism biases of top accounting research journals that forced positivism research methods on virtually all accounting faculty seeking to publish in those leading journals. See http://www.trinity.edu/rjensen/395wpTAR/Web/TAR.htm

PG. #390 NONAKA
The chapter argues that building the theory of knowledge creation needs to an epistemological and ontological discussion, instead of just relying on a positivist approach, which has been the implicit paradigm of social science. The positivist rationality has become identified with analytical thinking that focuses on generating and testing hypotheses through formal logic. While providing a clear guideline for theory building and empirical examinations, it poses problems for the investigation of complex and dynamic social phenomena, such as knowledge creation. In positivist-based research, knowledge is still often treated as an exogenous variable or distraction against linear economic rationale. The relative lack of alternative conceptualization has meant that management science has slowly been detached from the surrounding societal reality. The understanding of social systems cannot be based entirely on natural scientific facts.
Ikujiro Nonaka as quoted at Great Minds in Management: The Process of Theory Development --- http://www.trinity.edu/rjensen//theory/00overview/GreatMinds.htm 

Leading accounting research journal biases for accountics in the past three decades illustrate the process of  Gemeinschaft to Gesellschaft where the "process eventually went too far." The Heck and Jensen (2006) paper is highly supportive of President Judy Rayburn's TAR Diversity Initiative. This is important not only for improved accounting research, it's important for expanded curricula of doctoral programs that more closely align academe with the accounting profession much in the same way that schools of law and medicine are aligned with their practicing professions.

For the good of the AAA membership and the profession of accountancy in general, one hopes that the changes in publication and editorial policies at TAR proposed by President Rayburn will result in the “opening up” of topics and research methods produced by "leading scholars." I might add that Paul Williams at North Carolina State University is a long-time advocate of such changes, and I thank Paul for some helpful input to the early stages of the Heck and Jensen paper.

I might also add that the Heck-Jensen paper tops off my long standing threads on the sad state of accounting research at
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession
Many problems of accounting research extend well beyond the TAR editorial policies.

An "Appeal" for accounting educators, researchers, and practitioners to actively support what I call The Accounting Review (TAR) Diversity Initiative as initiated by American Accounting Association President Judy Rayburn --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR.htm

An overview of doctoral program graduation rates is provided at http://www.trinity.edu/rjensen/HigherEdControversies.htm#DoctoralPrograms

Rigor in accounting doctoral programs has resulted in a critical shortage leading to more non-doctoral instructors of accounting in colleges nationwide.

"Teaching for the Love of It:  The joy of being an educator—eight career changers tell their stories," by Randy Myers, Journal of Accountancy, June 2006 --- http://www.aicpa.org/pubs/jofa/jun2006/myers2.htm

Once they earn their college degrees and embark on careers, many CPAs are perfectly happy never to see the inside of a classroom again. But others can’t wait to return. What happens when they follow their hearts and minds back to campus? To find out, we interviewed eight professionals—seven CPAs and one tax attorney—who gave up successful business careers in favor of academia. Some moved directly into the classroom and are now teaching as professionally qualified faculty (see “Emerging Opportunities for Professionally Qualified Faculty”). Others are students again, pursuing PhDs in accounting with an eye toward becoming university professors. Still others have already earned their PhDs and are working as senior faculty at some of the country’s leading business schools, where they divide their time between teaching and academic research. If you are considering a career in academia—or are simply curious about how the other half lives—this article is for you.

This article reveals what these eight professionals have come to learn, love and yes, question, about academia. It shows the road to the academic life has many forks, which can be pursued at almost any stage of a career in accounting. And it shows that even more than in the business world, CPAs in academia can tailor their careers to match their own interests and objectives.

Supply and Demand Over the next three years, U.S. and Canadian universities will try to hire 942 new PhDs. Unfortunately, the number of graduates available to fill those slots is expected to total only 621. Source: American Accounting Association.

Jensen Comment
Keep in mind that this does not mean that shortages are equally spread across all education programs. Some programs face far more difficulties than others for a variety of reasons. For example, some educators just do not want to relocate from Knee Deep, North Dakota to New York City and vice versa.

An overview of doctoral program graduation rates is provided at http://www.trinity.edu/rjensen/HigherEdControversies.htm#DoctoralPrograms

Property and Damage Costs of Schools
Something to consider in the design and implementation of AIS courses

From THEJournal Newsletter on June 28, 2006

Asset loss and damage costs the average district nearly a quarter of a million dollars a year. Larger districts lose even more, some topping $1.4 million in loss and damage annually. These are among the results of a recent study of district asset management, conducted in conjunction with Quality Education Data (QED). The study, which was co-sponsored by Follett Software Co., provides a picture of how districts manage their assets and the growing challenges they face. Its findings illustrate the importance of the emerging category of Educational Resource Management (ERM) solutions-products that centralize the management of district resources. The study surveyed 479 district business managers, administrators and technology chiefs in all 48 contiguous states. Respondents were asked about the problems they faced in managing assets, and about the systems they used to keep track of everything from laptops to band uniforms. They were also asked to estimate the cost of loss, damage, and redundant purchases of these assets. Other major findings of the study included: Investments in educational technology (primarily computer and AV equipment) are among the assets most at risk, averaging more than $80,000 in loss annually per district. Districts that used manual tracking for computers reported a 41% greater annual cost of loss/damage than those that used a commercial asset tracking program, and 32% greater loss than those that used a spreadsheet/database program. For the full story, visit http://www.fsc.follett.com/newsnevents/pressreleases/release.cfm?pressID=22

Bob Jensen's threads on tricks and tools of the trade are at http://www.trinity.edu/rjensen/000aaa/thetools.htm

Resources for Faculty --- http://www.trinity.edu/rjensen/000aaa/newfaculty.htm 

The Courts Inevitably Protect Fees of Lawyers Above All Others

"Thompson Memo, R.I.P.?" The Wall Street Journal, June 28, 2006; Page A14 --- http://online.wsj.com/article/SB115146005782092658.html?mod=opinion&ojcontent=otep

Something remarkable and salutary happened in a Manhattan courtroom this week: U.S. District Court Judge Lewis A. Kaplan upheld the logic and meaning of the Constitution's Due Process Clause and the Sixth Amendment.

The case involves the Justice Department's prosecution of 16 former KPMG executives, accused of having engineered fraudulent tax shelters for their clients. We have our doubts about just how "fraudulent" those shelters were, seeing that they were never banned by the IRS, their legality was never tested in court, and KPMG stopped marketing them long before the IRS listed them as suspect. The criminal trial will be no slam dunk.

But the real whopper was the decision by KPMG to stop paying the legal fees of its former executives, largely to satisfy the requirements of the so-called Thompson memo. That 2002 document, written by then-Deputy Attorney General Larry Thompson amid corporate scandal fever, laid out the measures that companies facing prosecution could take to demonstrate cooperation and thereby avoid firm-wide indictment. Not wishing to share the fate of bankrupted Arthur Andersen, KPMG complied with the Thompson diktat and hung its executives out to dry while negotiating a deferred prosecution accord.

Enter Judge Kaplan, who on Monday delivered a scathing 83-page rebuke of the government's case. Noting that Constitutional rights to a fair trial and competent counsel were at stake here, he went on to limn a third principle, "not of constitutional dimension," but "very much a part of American life." To wit:

"Bus drivers sued for accidents, cops sued for allegedly wrongful arrests, nurses named in malpractice cases, news reporters sued in libel cases, and corporate chieftains embroiled in securities litigation generally have [the right] to have their employers pay their legal expenses." By holding "the proverbial gun to [KPMG's] head" with the threat of a company-wide indictment, the Judge wrote, the government had used the company as a proxy to violate the defendants' rights.

The 16 defendants must still contend with the charges of the indictment. But with KPMG now required to foot their legal bills, at least they don't face the bleak choice between financial ruin or copping a plea. As for the Justice Department, now is the time for Attorney General Alberto Gonzales to reinterpret, or better yet rewrite, those parts of the Thompson memo that his too-zealous prosecutors have been using in violation of defendants' due process rights.

The June 28, 2006 New York Times account of this is at http://www.nytimes.com/2006/06/28/business/28kpmg.html

Bob Jensen's threads on KPMG scandals are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG 

A Break Lurks in College Tuition
If you're writing a college-tuition check this summer, there may be a backdoor way to deduct a chunk of the payment that's perfectly legal yet utterly underutilized. The trick is to make a contribution to your state's "529" college-savings plan, as long as it's one of the 26 states (plus the District of Columbia) that give you a tax deduction or credit when you deposit money. Then, simply withdraw the money and use it to pay the college bill. Veteran users of 529 plans know all about the state tax breaks. But plenty of others don't -- and could benefit from the quick in-and-out. "This makes a lot of sense for wealthy people who don't need to save," says tax partner Bernard S. Kent of PricewaterhouseCoopers, who has advised both individuals and savings plans.
Ron Lieber, "A Break Lurks in College Tuition:  Some '529' Plans Offer Underused Move For Tax Deductions," The Wall Street Journal, June 10, 2006; Page B1 --- Click Here

"Efficient Markets The Welfare of American Investors," by Henry G. Manne, The Wall Street Journal, June 13, 2006; Page A16 --- Click Here

Behavioral finance, a developing field of academic research that emphasizes investor irrationality (and ignorance) and the inefficiency of markets, has been hailed by defenders of the SEC as offering a solid economic rationalization for our vast scheme of federal securities regulations. Even apart from the obvious implications for the regulatory system of ignorance and irrationality on the part of regulators, a closer examination of the logic of behavioral finance leaves little for the pro-regulation crowd to crow about.

Initially, behavioral finance emerged as an academic antidote to a claim of substantial market perfection in the finance field, the well-known "efficient market" theory of stock prices. Numerous "anomalies" or irrationalities were discovered in the market for securities, such as various kinds of over- or under-reactions to new information, herding behavior, endowment effects, January effects, weekend effects, small-firm or distressed-firm effects, bubbles and crashes -- to name a few.

Faulty Data

Most of these alleged peculiarities proved in time to be far less anomalous than was first thought. The data on which they were based were often faulty, or the econometric models were measuring the wrong thing, or various kinds of relevant transactions costs were ignored. The effects of irrational or uninformed behavior were often canceled out by opposite forces, and much of it was simply irrelevant. Furthermore, the behavioralists did not -- and do not -- have a general theory that can explain why financial markets work as well as they do. Some close approximation of the efficient market theory is still the most accurate and useful model of the stock market that we have.

Still, some of the behavioralists' criticisms stuck, especially in regard to crashes and bubbles, events that arguably should not occur in perfectly efficient markets. In this connection the efficient market theorists had no choice but to reexamine and refine their own models, which they have now done with some success. Perhaps the most important behavioralist contribution to economics has been their reminder that the market-model claim of rationality often does not comport with actual human behavior.

Economists frequently failed to qualify economic pronouncements as being limited in application to aggregate behavior. Too many assumed that if markets in the aggregate behave rationally, it must be because the "marginal" participant -- the trader who has the correct information about what a price should be -- was himself a perfectly rational maximizer. This better-informed and rational trader would always arbitrage away any discrepancies from efficiency that a market displayed.

But there is a vast difference between economics and psychology, and we can thank the behavioralists for forcing economics back into its correct posture of dealing with aggregate behavior. We can also thank the behavioralists for demonstrating that the marginal trader/arbitrage theory cannot explain all price formation, since we have no way, a priori, of knowing that this hypothetical individual will be rational. Nor can we any longer assume that the arbitrageur (apart from a purchaser of 100% of the securities of a given company) will have all the information necessary to set the correct price.

That discovery left a serious gap in economic theory. The efficient market mavens were indeed correct in their conclusions about aggregate market behavior -- but how could they explain this near perfection of functioning markets while irrational and less-than-fully informed individuals (so-called "noise" traders) were known to abound?

Traditional economics did contain the start of an answer to this question, most notably in F.A. Hayek's classic "The Use of Knowledge in Society" (1945). There, Hayek (addressing the then-pressing problem of countering socialist doctrine) made the astute observation that centralized or socialist planning can never be economically efficient because it was impossible for a central planner to accumulate all the information needed for correct economic decisions ("correct" in the sense of displaying efficient market allocations of goods). The critical information, he noted, is too scattered in bits and pieces throughout the population ever to be assembled in one person's mind (or computer). Diffused markets, on the other hand, function well because the totality of relevant information, even subjective preferences, can be aggregated through the price mechanism into a correct market valuation.

This insight of Hayek's has been a mainstay of market theory ever since it was advanced, but it remains merely an observation and a conclusion. It does not detail how new information gets so effectively impacted into the prices of goods and services. In other words, how does this "weighted averaging" get done? And why should we assume that the impact of rational participants would dominate that of irrational ones in markets?

Similarly, the efficient market theory was based almost entirely on empirical observations and did not offer a theory of how the market came to be so efficient. Subsequent literature examined the mechanisms of market efficiency (including insider trading), but these were again observational and descriptive works that did not even recognize the absence of a good theory of how new information gets properly integrated into a price. The implicit and often explicit theory of price formation was always the "arbitrage" notion, with the marginal trader calling the shots.

Enter now financial journalist James Suroweicki and his charming and insightful book, "The Wisdom of Crowds" (2004). The book opens with the story of a contest at a county fair in England in 1906 to guess the weight of an ox on display after slaughter and dressing. There were about 800 guesses entered in the contest both by knowledgeable people and by those who had no expertise in such matters. We are not told what the winning guess was, but we are told that the average of all the guesses (1,197 pounds) was virtually identical to the actual weight (1,198 pounds).

Similar results show up regularly in the relatively new use of so-called "prediction" or "virtual" markets, primarily employed today in predicting outcomes of political elections, sporting events, new product introductions or new movies. Though there are still some problems with the technique, these "markets" have proved in the main to be much more accurate than traditional interview polls. And these various illustrations of the wisdom of crowds suggest a solution to the problem of how correct prices are formed in financial markets beset by irrational and poorly informed traders.

* * *

Weighted-average results are similar to "correct prices," since informed investors can be assumed to invest more money if their confidence in the validity of their information -- or the intensity of their desire for the product -- is higher, thus imparting a weighted average element to each price. And while the actual weight of an ox is a more objective measure than the "correct" price of a security, the main difference may be between a static and a dynamic figure with the "correct price" of a stock being a kind of moving target.

The literature on prediction markets makes clear that the more participants in a contest and the better informed they are, the more likely is the weighted average of their guesses to be the correct one. That is true, ironically, even though the additional participants have even less knowledge than the earlier ones. The only requirements for these markets to work well are that the various traders be diverse and that their judgments be independent of one another. Clearly, there is still a lot more work of a statistical and mathematical nature to be done before the idea of the wisdom of crowds is turned into a full-fledged theory of price formation, but at least we have identified the problem and made a start towards a solution.

'Wisdom of Crowds'

The implications of what we already know of this "wisdom of crowds" approach to price formation, as against the traditional marginal pricing/arbitrage approach, are apt to be startling. We should rethink any current policies based on a view of pricing in which we exclude the best-informed traders and discard the wisdom of the many. For instance, we now have a new and more powerful argument than we had in the past for legalizing most insider or informed trading.

Since such trading clearly makes the market process work more efficiently, it aids capital allocation decisions and informs business executives through market-price feedback of the best predictions about the value of new plans. Furthermore, the Supreme Court's "fraud on the market" theory of civil liability under the federal securities laws and Congress's ideas of correct civil damage claims for insider trading no longer have any intellectual merit. The same is true of any other part of our securities laws implicitly based on the notion of the marginal trader as a rational arbitrageur of price.

The new approach would suggest that it is undesirable to have laws discouraging stock trading by anyone who has any knowledge relevant to the valuation of a security. Thus, assembly-line workers, administrative assistants, office boys, accountants, lawyers, salespeople, competitors, financial analysts and, of course, corporate executives (government officials are another story) should all be encouraged to buy or sell stocks based on any new information they might have. Only those privately enjoined by contract or other legal duty from trading should be excluded. The "wisdom of crowds" can do far more for the welfare of American investors than all the mandated disclosures and insider trading laws that the SEC and Congress can think up.

Mr. Manne, a resident of Naples, Fla., is dean emeritus of George Mason University School of Law. This is the first of a two-part series.

Jensen Comment
Henry Manne's theory might fly if so many insiders were not rotten to the core with back dating of options and other exploitations of existing shareholders and potential investors. Bob Jensen's threads on "Rotten to the Core" are at http://www.trinity.edu/rjensen/FraudRotten.htm

Deloitte's Concept of Pricing Options is Legally and Ethically Questionable
(Recall that Deloitte is the Only Big 4 Firm that Did Not Sell its Consulting Division)

"Inquiry Into Stock Option Pricing Casts a Wide Net," by Eric Dash, The New York Times, June 19, 2006 --- http://www.nytimes.com/2006/06/19/business/businessspecial/19options.html?_r=1&oref=slogin 

So when new hires began complaining that the company's volatile share price meant that colleagues who had arrived just days earlier were receiving stock options worth thousands of dollars more, Micrel executives moved to satisfy the troops. They raised with their auditor, Deloitte & Touche, the idea of adopting a new options pricing strategy similar to one that other tech companies, including Microsoft, used at the time.

Instead of granting options at the market price on a new employee's hire date, Micrel proposed setting the price at the lowest point in the 30 days from when the grant was approved.

It seemed like an ideal solution. The 30-day window could help Micrel attract and reward new hires on a more equal footing, while helping to retain existing employees. And if it were extended up the corporate ladder, the prospect of built-in gains and tax breaks, worth millions of dollars, could enrich senior executives.

But the 30-day pricing method, which Micrel adopted in mid-1996, was an aggressive move legally and financially. In hindsight, it was also a major misstep.

Nearly five years later, Deloitte reversed its opinion and urged Micrel to restate its financial reports. The Internal Revenue Service came banging on its door. And today, Micrel and Deloitte are passing blame back and forth in court.

Micrel is hardly the only firm ensnared in such a mess. What began as a creative solution among a handful of technology firms to address recruitment issues soon became common practice in Silicon Valley. It appears the practice also became a way to enrich chief executives and other top managers.

The result is a nationwide scandal with major accounting, corporate governance, tax and disclosure ramifications. Dozens, perhaps hundreds, of companies are caught up in a giant civil and criminal law enforcement sweep by the Justice Department, the I.R.S. and the Securities and Exchange Commission.

It is no coincidence that stock option abuses are once again taking center stage in an unfolding scandal. The easy money that options can rain down on recipients motivated many of the numbers games that companies played with their quarterly earnings during the stock market boom, leading to numerous accounting fraud prosecutions at Enron, WorldCom and others.

In the latest scandal, companies seem to have handed out stock options that were already "in the money" on the date of grant, undermining the idea of using options as a pay-for-performance tool. The practice appears to have been widespread from the early 1990's to 2002, and possibly beyond.

Handing out in-the-money options is not illegal as long as the grants are disclosed to shareholders. At the time, in-the-money options had to be counted as an expense on the company's books. (New rules now require companies to routinely deduct options as an expense.) Failure to disclose or to deduct in-the-money options from income could lead to securities fraud charges. And because such options do not qualify for tax breaks once they are exercised, such grants raise tax fraud issues, too.

The Micrel case and others raise troubling questions about how companies that were pushing the envelope of accounting and tax practice were able to get the blessings of auditors and lawyers. And the widening scandal reveals the extent to which boards of directors, especially the compensation committees that approve option grants, may have failed to do their jobs.

"It appears, from the S.E.C. and a number of reports that are coming up daily, that there was a systemic problem at a lot of companies," said Bradley E. Beckworth, a plaintiffs' attorney who has filed one of the first class-action lawsuits against Brocade Communications and KPMG, its auditor, for options backdating. "If these accounts turn out to be true, you have to ask the question, Who was the gatekeeper here?"

Micrel, by most accounts, is one of the last technology companies where one might expect to find problems. While the chip manufacturer was one of the high-flying growth businesses of the 1990's, it was different in several respects from most of the era's fledgling public companies.

Its founder and longtime chief executive, Raymond D. Zinn, a 68-year-old engineer, is a Mormon who calls honesty his guiding rule. And unlike many of its technology rivals, Micrel's own profits, not venture financing, fueled its growth until it went public in 1994.

But like many high-tech firms in the mid-1990's, Micrel went on a hiring binge. The Bay Area was booming with opportunities for ambitious people. Companies were growing at astronomical rates and desperately needed talent to fill new jobs. And instead of higher salaries, companies preferred to grant stock options to lure new employees.

Micrel, a company that had a few hundred employees but was adding two or three new people a week, began facing a fairness problem in its options awards in mid-1996.

Continued in article

Bob Jensen's threads on options controversies are at
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

Bob Jensen's threads on Deloitte are at
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

"Why '90s Audits Failed to Flag Suspect Options," by George Anders, The Wall Street Journal, June 22, 2006; Page B1--- http://online.wsj.com/article/SB115093901436887061.html?mod=todays_us_marketplace

When controversial options-timing practices were rippling through U.S. companies during the late 1990s, why didn't companies' own accounting systems spot anything odd?

Some clues can be found in the rise of an especially popular piece of options-tracking software, known as EquityEdge. Cheap and easy to use, it became a record-keeping backbone for thousands of companies. It logged in details of each options grant, it calculated their overall impact on a company's financial statements and it generated filings with the Securities and Exchange Commission.

But when EquityEdge was catching on a decade or more ago, it didn't offer much in the way of audit-trail capabilities aimed at spotting people tinkering with grant dates. Such systems would have been costly, and clients weren't asking for them. As a result, wrong or inconvenient data could be swept away while leaving hardly a trace.

Now, the SEC is focusing on the possibility that dozens of companies in the 1990s fiddled with options-grant dates so that executives could get the right to purchase stock at unusually cheap prices. Forensic accountants -- often hired by companies' independent directors -- are poring over EquityEdge databases, trying to see whether options grants were done properly or whether companies might need to address irregularities by restating earnings or paying additional taxes.

Ernest Ten Eyck, a forensic accountant based in King of Prussia, Pa., who is a senior managing director at FTI Consulting Inc., says his firm is reviewing at least 10 companies' historical EquityEdge records as part of a detailed look into possible cases of options backdating. What has been preserved is useful, he says, but not everything he would like.

That is because older versions of EquityEdge were designed to be simple and low-cost, he says, when it was assumed that no one was trying to game the system. "If everyone had been playing it right," he adds, "there would be no need for a lot of extra audit data."

EquityEdge got started in 1983 in Sunnyvale, Calif., by Cheryl Breetwor. She had worked at a Silicon Valley company whose efforts to handle stock-options accounting by hand got so badly snarled that it was forced to amend its proxy statement one year. "I figured there had to be a better way," she recalls. So she and a small team built EquityEdge as a desktop software product and sold it for as little as $3,000 per corporate customer. They named their company ShareData Inc.

ShareData's early clients included Microsoft Corp. and Oracle Corp. ShareData also signed up some companies that have received SEC inquiries about their options-timing practices, including Intuit Inc., KLA-Tencor Corp. and McAfee Inc. Representatives for all three client companies declined to comment on those probes.

Ms. Breetwor sold ShareData to E*Trade Financial Corp. in 1998 for about $35 million. She has since retired. But she remains an enthusiastic supporter of Silicon Valley's pro-options culture, which seeks to get more stock of fast-growing young companies into the hands of both executives and rank-and-file employees. The current probes into options-timing schemes amount to "a witch hunt," Ms. Breetwor contended in a phone interview this week.

Ms. Breetwor also said that while ShareData tried to educate its customers about the right ways to do options accounting, it wasn't her job to opine on legal issues or to flag regulators if she saw variations in the ways customers were handling certain issues.

Vito Palmieri, head of Equity Administration Solutions Inc., an options-software vendor in Pleasanton, Calif., says that the routine annoyances of data-entry errors were a bigger concern a decade ago. Glitches were common enough that customers wanted the freedom to revise or rework numbers with little interference. "The ability to be flexible was highly valued -- more so than auditability," Mr. Palmieri recalls.

Only after Sarbanes-Oxley legislation passed in 2002, tightening up corporate-governance requirements, did options-software vendors start focusing on audit-related issues. Since then, vendors have been retooling their programs so they can capture -- and highlight -- any tinkering with options-grant terms, for whatever reason.

EquityEdge's new owner, E*Trade, is beefing up the software to provide better auditing tools. Product manager Elizabeth Dodge says that when EquityEdge 7.0 is launched near year end, it will record any changes in individual options records and show which user made the change. Rejiggering data without leaving clear traces will be essentially impossible.

Similar changes have already been made to options-software packages sold by Computershare Ltd.

"Our systems don't prevent people from backdating options," says Gary Scrofani, a senior product manager at Computershare. "But the audit tool provides a clear record if anyone wants to try it."

While the options-backdating probe is still in its early days, inquiries in at least a half-dozen cases have led to executive departures or pledges to restate earnings. Some maneuvers may be traceable through options-tracking software; others may leave a paper trail only in the boardroom, where executives' options grants are approved. And in some cases, corporate lawyers say, ambiguous records may make it hard to tell exactly how grant dates were established.

For all the software vendors' current vigilance, their new changes amount to an attack on a problem that has largely been put to rest by other means.

Sarbanes-Oxley now requires executive options to be publicly disclosed within two business days of their granting. Under the old system, options grants didn't need to be disclosed for weeks or even months after they were made, creating much more maneuvering room for people wanting to pick favorable grant dates, after the fact.

As the current options probes play out, EquityEdge's founder, Ms. Breetwor, hopes that the uproar won't ruin stock options' image. "Used appropriately, options are a wonderful thing," she says. "Unfortunately, for some people, there came to be an expectation that they would be rewarded if the stock went down, as well as up."

Bob Jensen's threads on why "Incompetent and Corrupt Audits are Routine" are at http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

"The thing I think that is more problematic is there have been some allegations that auditors knew about this and counseled their clients to do it," said Joseph Carcello, director of research for the corporate-governance center at the University of Tennessee. "If that turns out to be true, they will have problems."

"Backdating Woes Beg the Question Of Auditors' Role," by David Reilly, The Wall Street Journal, June 23, 2006; Page C1 --- http://online.wsj.com/article/SB115102871998288378.html?mod=todays_us_money_and_investing

Where were the auditors?

That question, frequently heard during financial scandals earlier this decade, is being asked again as an increasing number of companies are being probed about the practice of backdating employee stock options, which in some cases allowed executives to profit by retroactively locking in low purchase prices for stock.

For the accounting industry, the question raises the possibility that the big audit firms didn't live up to their watchdog role, and presents the Public Company Accounting Oversight Board, the regulator created in response to the past scandals, its first big test.

"Whenever the audit firms get caught in a situation like this, their response is, 'It wasn't in the scope of our work to find out that these things are going on,' " said Damon Silvers, associate general counsel at the AFL-CIO and a member of PCAOB's advisory group. "But that logic leads an investor to say, 'What are we hiring them for?' "

Others, including accounting professionals, aren't so certain bookkeepers are part of the problem. "We're still trying to figure out what the auditors needed to be doing about this," said Ann Yerger, executive director of the Council of Institutional Investors, a trade group. "We're hearing lots of things about breakdowns all through the professional-advisor chains. But we can't expect audit firms to look at everything."

One pressing issue: Should an auditor have had reason to doubt the veracity of legal documents showing the grant date of an option? If not, it is tough for many observers to see how auditors could be held responsible for not spotting false grant dates.

"I don't blame the auditors for this," said Nell Minow, editor of The Corporate Library, a governance research company. "My question is, 'Where were the compensation committees?' "

To sort out the issue, the PCAOB advisory group -- comprising investor advocates, accounting experts and members of firms -- last week suggested the agency provide guidance to accounting firms on backdating of stock options. A spokeswoman for the board said, "We are looking to see what action they may be able to take."

To date, more than 40 companies have been put under the microscope by authorities over the timing of options issued to top executives. Federal authorities are investigating whether companies that retroactively applied the grant date of options violated securities laws, failed to properly disclose compensation and in some cases improperly stated financial results. A number of companies have said they will restate financial statements because compensation costs related to backdated options in questions weren't properly booked.

All of the Big Four accounting firms -- PricewaterhouseCoopers LLP, Deloitte & Touche LLP, KPMG LLP and Ernst & Young LLP -- have had clients implicated. None of these top accounting firms apparently spotted anything wrong at the companies involved. One firm, Deloitte & Touche, has been directly accused of wrongdoing in relation to options backdating. A former client, Micrel Inc., has sued the firm in state court in California for its alleged blessing of a variation of backdating. Deloitte is fighting that suit.

The big accounting firms haven't said whether they believe there was a problem on their end. Speaking at the PCAOB advisory group's recent meeting, Vincent P. Colman, U.S. national office professional practice leader at PricewaterhouseCoopers, said his firm was taking the issue "seriously," but more time is needed "to work this through" both "forensically" and to insure this is "not going to happen going forward."

Robert J. Kueppers, deputy chief executive at Deloitte, said in an interview: "It is one of the most challenging things, to sort out the difference in these [backdating] practices. At the end of the day, auditors are principally concerned that investors are getting financial statements that are not materially misstated, but we also have responsibilities in the event that there are potential illegal acts."

While the Securities and Exchange Commission has contacted the Big Four accounting firms about backdating at some companies, the inquiries have been of a fact-finding nature and are related to specific clients rather than firmwide auditing practices, according to people familiar with the matter. Class-action lawsuits filed against companies and directors involved in the scandal haven't yet targeted auditors.

Backdating of options appears to have largely stopped after the passage of the Sarbanes-Oxley corporate-reform law in 2002, which requires companies to disclose stock-option grants within two days of their occurrence.

Backdating practices from earlier years took a variety of forms and raised different potential issues for auditors. At UnitedHealth Group Inc., for example, executives repeatedly received grants at low points ahead of sharp run-ups in the company's stock. The insurer has said it may need to restate three years of financial results. Other companies, such as Microsoft Corp., used a monthly low share price as an exercise price for options and as a result may have failed to properly book an expense for them.

At the PCAOB advisory group meeting, Scott Taub, acting chief accountant at the Securities and Exchange Commission, said there is a "danger that we end up lumping together various issues that relate to a grant date of stock options." Backdating options so an executive can get a bigger paycheck is "an intentional lie," he said. In other instances where there might be, for example, a difference of a day or two in the date when a board approved a grant, there might not have been an intent to backdate, he added.

"The thing I think that is more problematic is there have been some allegations that auditors knew about this and counseled their clients to do it," said Joseph Carcello, director of research for the corporate-governance center at the University of Tennessee. "If that turns out to be true, they will have problems."

Bob Jensen's threads on why "Incompetent and Corrupt Audits are Routine" are at http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

Question
How does the U.N. fend off fraud investigations?

"U.N. Best Practices," The Wall Street Journal, May 5, 2006; Page A16 --- http://online.wsj.com/article/SB114679661661544615.html?mod=opinion&ojcontent=otep

Deep in the weeds of Turtle Bay, U.S. Ambassador John Bolton has been hacking a path toward United Nations reform -- an effort about as fraught as Marlow's quest for Captain Kurtz in Conrad's "Heart of Darkness," and no less horrifying.

But here's the good news: Two reports, released late last month by Congress's Government Accountability Office, are shedding light on how the U.N. mismanages its procurement and auditing functions. U.N. bureaucrats may be trying to downplay the findings, but the rest of us should pay attention.

Consider procurement. Thanks to various Oil for Food investigations, we learned that Alexander Yakovlev, a middle-ranking U.N. procurement officer, siphoned $1 million in bribes from $79 million worth of U.N. contract work. Mr. Yakovlev pleaded guilty in a U.S. court to three counts of fraud and money laundering last August.

But that's just the beginning. In January, Secretary General Kofi Annan placed eight top procurement officials on special leave, pending investigations by the U.N. and U.S. One of these officials is Sanjaya Bahel, former head of the U.N.'s Commercial Activities Services as well as its Post Office. Among other charges, Mr. Bahel, who also worked for the Indian Defense Ministry while at the U.N., is alleged to have improperly steered U.N. peacekeeping contracts to several Indian companies, one of them government-owned.

Also in January, the U.N.'s Office of Internal Oversight Services conducted an audit of U.N. peacekeeping procurement, the value of which has quadrupled over the last decade to $1.6 billion. The Office found that $110 million worth of expenditures had "insufficient" justification; another $61 million bypassed U.N. procedures; $82 million had been lost to various kinds of mismanagement; close to $50 million in contracts had shown indications of "bid rigging"; and $7 million were squandered through overpayment. That's a total of more than $300 million.

Senior U.N. management has responded with denial: "Not a penny was lost from the organization," insists Deputy Secretary General Mark Malloch Brown. But that point is hard to credit in light of the GAO's findings. Among them: The U.N. has set no training requirements for its procurement staff; has no independent process to address vendor protests; and has no internal mechanisms either to monitor procurement or identify areas prone to fraud or mismanagement.

On auditing, too, corruption starts at the top: Along with Mr. Yakovlev, the other U.N. official to have been recently indicted in the U.S. for bribery is Vladimir Kuznetsov, formerly head of the U.N.'s budget oversight committee. In theory, the oversight offi