New Bookmarks
Year 2006 Quarter 3:  July 1 - September 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 

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/

Choose a Date Below for Additions to the Bookmarks File

August 31

July 31

September 30 

New Bookmarks on September 30, 2006

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

Click Here for Tidbits and Quotations Between September 1 and September 30

Click Here for Humor Between September 1 and September 30

Foilage in New Hampshire's White Mountains --- http://www.nhliving.com/foliage/index.shtml
Fall Foilage --- http://gonewengland.about.com/cs/fallfoliage/l/blfoliagecentrl.htm
Foilage Pictures --- http://photo.net/travel/us/ne/foliage

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

Click here to search Bob Jensen's web site if you have key words to enter --- Search 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/

Click Here for Tidbits and Quotations Between September 1 and September 30

Click Here for Humor Between September 1 and September 30

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

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

The way to do research is to attack the facts at the point of greatest astonishment.
Celia Green as quoted by Mark Shapiro at http://irascibleprofessor.com/comments-06-28-06.htm

Asked to define "truthiness," [Comedy Central's Stephen] Colbert tells [CBS Sixty Minute's interviewer Morley] Safer, "Truthiness is what you want the facts to be as opposed to what the facts are. What feels like the right answer as opposed to what reality will support." --- http://www.cbsnews.com/stories/2006/04/27/60minutes/main1553506.shtml

This is what makes "truthiness" a perfect word for postmodernism and its postpositive critical theory:

In particular, a dominant trend in critical theory was the rejection of the concept of objectivity as something that rests on a more or less naive epistemology: a simple belief that “facts” exist in some pristine state untouched by “theory.” To avoid being naive, the dutiful student learned to insist that, after all, all facts come to us embedded in various assumptions about the world. Hence (ta da!) “objectivity” exists only within an agreed-upon framework. It is relative to that framework. So it isn’t really objective....
Scott McLemee, "The Power of Postpositive Thinking," , Inside Higher Ed, August 2, 2006 --- http://www.insidehighered.com/views/2006/08/02/mclemee 

I have the honor of chairing the committee that will choose the recipient of the American Accounting Association’s 2007 AAA Innovation Accounting Education Award.

This award is doubly significant because of a $5,000 prize, courtesy of the Ernst & Young Foundation, and improved chances of publication in Issues in Accounting Education.

We encourage you to send in submissions via instructions now available at http://aaahq.org/awards/award6.htm

Members of the Selection Committee are shown below:

EC Liaison

Chair --- Bob Jensen rjensen@trinity.edu

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

Making Tutorial Videos From Computer Screens:  Camtasia versus Captivate

September 27, 2006 message from Bob Jensen

Hi Dan,

I have a Camtasia video tutorial on how to use Camtasia. It is one of the easiest video production programs I've ever used. Initially I did not like it because you could only produce avi files that could only be viewed by users having a Camtasia codec viewer. What changed my mind is later versions of Camtasia Producer that allowed us to compress the avi files into common video formats, including wmv MS Media Player videos that can be played by virtually anybody in the world. (I don't much care for Real Media compressions, but since this option preceded the wmv compressor, I produced some rm videos before Producer was capable of wmv compressions.)

My tutorial (badly in need of updating) on how to use Camtasia is at http://www.trinity.edu/rjensen/HelpersVideos.htm 

You can view some of my Camtasia tutorials that were produced under older and current versions of Camtasia at the following links:

Accounting Theory --- http://www.cs.trinity.edu/~rjensen/video/acct5341/ 

AIS (mainly MS Access and Excel tutorials) --- http://www.cs.trinity.edu/~rjensen/video/acct5342/ 

I've not yet tried the forthcoming upgrade (in October) that will allow us to do even more exciting things with Camtasia. One of the huge limitations of older versions of Camtasia was that only computer screen shots could be put into Camtasia videos. It is now possible to add other scenes to your computer-screen shots.

Bob Jensen

September 27, 2006 message from Richard Campbell [campbell@RIO.EDU]

Bob and others:

Let me summarize the differences and similarities between Camtasia and Captivate. I use both and I will upgrade to both Camtasia 4 and Captivate 2 next month. On Monday, I am allowed to talk about the features of Camtasia 4 and I will be doing a couple of web conferences about the new release.

Camtasia:

1. Full-motion video recording - records like a videocamera 2. Callouts can be added in post-production.

3. SCORM output is possible. This means that you can add a Camtasia-generated movie to a WebCT course and verify that a student has viewed the movie. In Camtasia 3.0, the quiz output does not properly record in the WebCT gradebook however.

4. Superior customer support. I am not saying that because I am a beta tester. They will freely admit any bugs and offer free updates to their software between releases.

 

Captivate:

1. Stop-action recording - records stop-action, individual frames. Like an early Disney animation.

2. Easier to add callouts and other actions to individual slides. Callouts are automatically added as you record screen activity. If you do a "File>Save As" that caption is automatically added.

3. In Respect to SCORM In Captivate 1.0, the quiz output does not properly record in the WebCT gradebook however.

4. Inferior customer support. After the Adobe - Macromedia merger, they fired a lot of the Captivate team and shipped development off to India.

5. Captivate is a superior tool in respect to SIMULATIONS. The simulation below was done in Captivate 2.0.

http://www.mark-fletcher.co.uk/cp-sample/sample.htm

More later. I'll show some stuff I have done in Camtasia 4.

Richard J. Campbell
School of Business
218 N. College Ave.
University of Rio Grande
Rio Grande, OH 45674
Voice:740-245-7288
http://faculty.rio.edu/campbell

"What’s a Couple of Hundred Trillion When You’re Talking Derivatives?" by Floyd Norris, The New York Times, September 23, 2006 --- http://www.nytimes.com/2006/09/23/business/23charts.html

Everett McKinley Dirksen, the Senate Republican leader in the 1950’s, is supposed to have said, “A billion here and a billion there, and pretty soon you’re talking real money.” What would he have thought of derivatives today?

The International Swaps and Derivatives Association, a trade group, reported this week that the outstanding nominal value of swaps and derivatives at the end of June was $283.2 trillion.

Compare that with the combined gross domestic product of the United States, the European Union, Canada, Japan and China, which is about $34 trillion. The total value of all homes in the United States is about the same amount.

To be sure, notional value is an exaggerated term as it greatly overstates the amount at risk in many contracts. But the growth rate is real, and in the fastest-growing area of swaps — credit default swaps — notional value is closer to the amount at risk, because such swaps promise to make up the losses if a borrower defaults on the notional amount.

The value of outstanding credit default swaps doubles every year — a trend that must eventually stop — and now equals $26 trillion. That is about the same as the total amount of bond debt in the United States, and corporate debt, on which most credit swaps are traded, comes to just $5.2 trillion.

The credit derivatives cover the risks of default by individual companies, and offer insurance against default for bond indexes and specified bond portfolios.

The growth of the market has forced the swaps and derivatives association to change the way its credit swaps work. It used to be that if a company defaulted, the writer of a credit swap would have to pay par value for the bond he had guaranteed, and could then sell the bond to reduce his losses.

But in some cases defaults led to bond rallies, as those who had purchased credit swaps scrambled to get bonds to deliver. Now traders can choose cash settlements, with the amounts to be paid determined through auctions.

Until 1997, the association provided separate numbers on currency and interest rate contracts, but innovations blurred the distinction between those categories, and now it publishes a combined total. At the end of June, the figure was $250.8 trillion, up 25 percent over the previous 12 months.

Growth in that market slowed markedly early in this decade, as worldwide markets cooled, and there was even one annual decline, from mid-2000 to mid-2001. But growth picked up in 2002 as economies began to recover.

The volume outstanding of equity derivatives is rising by about 30 percent a year, and now totals $5.6 trillion. It could go farther, with world stock market capitalization now about $41 trillion, according to Standard & Poor’s.

Robert Pickel, the chief executive of the association, said that the growth in derivatives enables “more and more firms to benefit from these risk management tools.” On the other hand, the situation allows more and more traders to load up on risk if they choose, and hedge funds have become major derivatives traders.

The combination of large unregulated hedge funds trading ever larger amounts of unregulated derivatives in nontransparent markets makes some people nervous. But so far, anyway, little is being done to change the situation, and nothing devastating has happened to markets.

Continued in article

Jensen Comment
One of the main differences between a "financial instrument" versus a "derivative financial instrument" is that the notional is generally not at risk in a "derivative financial instrument." For example if Company C borrows $600 million from Bank B in a financial instrument, the notional amount ($600 million) is at risk immediately after the notional is transferred to Company C. On the other hand, if Company C and Company D contract for an interest rate swap on a notional of $600 million using Bank B as an intermediary, the $600 million notional never changes hands. Only the swap payments for the differences in interest rates are at risk and these are only a small fraction of the $600 million notional. Sometimes the swap payments are even guaranteed by the intermediary, thereby eliminating credit risk.

So where's the risk of a derivative financial instrument that caused all the fuss beginning in the 1980s and led to the most complex accounting standards ever written (FAS 133 in the U.S. and IAS 39 internationally)?

Often there is little or no risk if the derivative contracts are held to maturity. The problem is that derivatives are often settled at fair values before maturity at huge gains to one party and huge losses to the counterparty. For example, if Company C swaps fixed-rate interest payments on $600 million (having current value risk with no cash flow variation risk) for variable-rate interest payments on $600 million (having cash flow variation risk but no market value variation risk), Company C has taken on enormous cash flow risk that may become very large if interest rates change greatly in a direction not expected by Company C. If Company C wants to settle its swap contract before maturity it may have to pay an enormous amount of money to do so either to counterparty Company D or to some other company who will take the swap off the hands of Company C. The risk is not the $600 million notional; Rather the risk is in the shifting value of the swap contract itself which can be huge even if it is less than the $600 million notional amount.

A tutorial on how swaps are valued is available at
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm
Illustrations of how this is accomplished are provided in the 133ex05a.xls Excel workbook at
http://www.cs.trinity.edu/~rjensen/ 

Perhaps derivative financial instrument risk is even better illustrated by futures contracts. Futures contracts are traded on organized exchanges such as the Chicago Board of Trade. If Company A speculates in oil futures on January 1, there is no exchange of cash on a 100,000 barrel notional that gives Company A the right to sell oil at a future date (say in one year) at futues price (say $80 per barrel futures price on January 1) when the beginning spot price (say $85) is greater than the forward price. The spot-futures prices differ by an amount called basis. Basis becomes zero at the settlement date. Futures prices on a given contract vary from day to day depending upon market price outlook. Basis is typically negative in what is termed a normal backwardation market. It can be positive for options contracts, however, in a contango market. The terms backwardation and contango are explained at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm 

Futures contracts are unique, relative to forward contracts and options contracts, in that futures contracts are settled in cash for daily changes in the futures price of a contract. Daily settlement is based on the changes in the futures price of the particular contract. If the futures price of this December 31 contract is $80 on January 1 and $75 on January 2, Company A must provide $500,000 = ($80-$75)(100,000 barrels) to its margin account (for the benefit of the counterparty) on January 2 even though the futures contract itself does not mature until December 31. On January 3 there may be more cash outflow or inflow depending upon how the futures price of this contract changes between January 3 and January 4.

Note that the risk is not the gross value of the entire notional of 100,000 barrels of oil. The risk is affected by the size of the notional, but the gain or loss is determined by the change in the futures prices rather than total spot price per barrel. The risk is in the change in the futures prices from day to day. In the case of futures contracts, the profit or loss is the netting of the daily settlements of cash inflows and outflows to the margin account.

I provide illustrations of futures contract accounting versus options contract accounting under FAS 133 at http://www.trinity.edu/rjensen/caseans/285case.htm
More illustrations are provided in the 133ex01a.xls through 133ex10a.xls Excel workbooks at http://www.cs.trinity.edu/~rjensen/

Hence, derivative contracts may have enormous risks even though the notionals themselves are not at risk. Prior to FAS 133 these risks were generally not booked or even disclosed. In the 1980s newer types of derivative contracts emerged (such as interest rate swaps) in part because it was possible to have enormous amounts of off-balance-sheet debt that did not even have to be disclosed, let alone booked, in financial statements. Astounding frauds transpired that led to huge pressures on the SEC and the FASB to better account for derivative financial instruments.

Most corporations adopted policies of not speculating in derivatives by allowing derivatives to be used only to hedge risk. However, such policies are very misleading since there are two main types of risk --- cash flow risk versus value risk. It is impossible to simultaneously hedge both types of risk, and hedging one type increases the risk of the other type. For example, a company that swaps fixed for floating rate interest payments increases cash flow risk by eliminating value risk (which it may want if it plans to settle debt prior to maturity). The counterparty that swaps floating rate interest payments for fixed rate payments eliminates cash flow risk by taking on value risk. It is impossible to hedge both cash flow and value risk simultaneously.

Hence, to say that a corporation has a policy allowing hedging but not speculating in derivative financial instruments is nonsense. A policy to only hedge cash flow risk may create enormous value risk. A policy to only hedge value risk may create enormous cash flow risk.

As the NYT article above points out that derivative financial instruments are increasingly popular in world commerce. As a result risk exposures have greatly increased even if all contracts were used for hedging purposes only. The problem is that a hedge only reduces or eliminates one type of risk at the "cost" of increasing the other type of risk. Derivative contracts increase one type or the other type of risk the instant they are signed.  Hedging shifts risk but does not eliminate risk per se.

You can read more about scandals in derivative financial instruments contracting (such as one company's "trillion dollar bet" that nearly toppled Wall Street and Enron's derivative scandals) at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

You can download the CD containing my slide shows and videos on how to account for derivative financial instruments at http://www.cs.trinity.edu/~rjensen/Calgary/CD/

You can find links to all my tutorials and my glossary of FAS 133 and IAS 39 at http://www.trinity.edu/rjensen/caseans/000index.htm

From the Financial Rounds blog on September 23, 2006 --- http://financialrounds.blogspot.com/

Saturday Link Dump

Unknown Daughter and Unknown Wife are going away for an overnight with Unknown Niece and Unknown Sister-In-Law. So, it's a boy's couple of days for the Lad and I. I'm putting in a couple of hours at the office while the rest of my family is at my daughter's soccer game, so I thought I'd post a few things for your reading pleasure.
 

Tim Harford's Dear Economist columns are now available online here, with an RSS feed here. Browse through some of his back columns - he's one of the best comenters out there when it comes to applying economic principles to just about anything.

Calculated Risk reports on the implied probabilities that the Fed will either pause in their increases or even cut rates in December - they're increasing.

Truth On The Market adds his $0.02 to the back and forth on options backdating in the blogosphere. He's also got links to previous posts by others.

ProfessorBainbridge.com links to this violent (but funny, in a sick kind of way) online procrastination tool. You've been warned...
 

I'll probably post more later. After Unknown Son and I do some Guy Things, we'll probably go to my office for a bit -- I'll use my laptop, and he'll use my computer - he's got a lot of internet games he likes to play and I've got two 19'' monitors on my office system.

And yes, we're a couple of nerds. Not that there's anything wrong with that.

Thursday Link Dump

Here's the latest Link Dump:
 

DealBook comments on the growing popularity of the “buyout-hunting game” (i.e. predicting which firms are likely to be the next targets of P-E firms)

CXO Advisory Group reviews a study that compares "behavioral finance" run mutual funds to good old fashioned, value funds.

Here's the latest FOMC press release. The main news: no rate increases for now, since the housing market is tanking and inflation seems likely to slow down in the near term.

ProfessorBainbridge.com asks the question "Can Sarbanes-Oxley 404 Be Fixed?"

In other Sarbox news, The Financial Times has an opinion piece by the Chief Executive of the London Stock Exchange. She argues that the loss of U.S. IPO listing business to the LSE is due to the fact that it's simply a better exchange.

The Wall Street Journal (online subscription required) just published its annual ranking of MBA programs.
 

Statistical Modeling, Causal Inference, and Social Science reports on a paper by Alan Gerber and Neil Malhotra on the bias in journals towards papers that report "statistically significant" results.
 

Finally, Sound Money Tips has some good advice on saving money on toy purchases. I particularly liked the link provided for buying used toys.
 

Enough for now- time to get back to my "real" job. I've got referee reports to write and data to torture.

Piled Higher And Deeper Explains The Scientific Method
Jensen Comment: To see this module and the accompanying graphic, go to the September 21, 2006 module at http://financialrounds.blogspot.com/

Withdrawals from Section 529 tuition plans are now permanently free of federal taxes.

"Congress Clears Up Uncertainty Over 529 Plans," AccountingWeb, September 8, 2006 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=102539

Parents worried about huge college costs have one reason to breathe easier: Withdrawals from Section 529 tuition plans are now permanently free of federal taxes.

One line in the massive Pension Protection Act clarified the uncertainty about these college savings plans. A federal law that allowed tax-free withdrawals for qualified education expenses was put in place in 2001, but a sunset date of 2010 was also set. The pension legislation, which became law last month, removed the expiration date.

"To have that issue put to rest and know that your 529 programs are going to receive the same favorable tax treatment indefinitely is a real victory," said Doug Chittenden, vice president of institutional product management at TIAA-CREF, according to MarketWatch. TIAA-CREF runs 529 programs for several states including Connecticut, Minnesota, Georgia, Tennessee and Vermont.

A 529 plan is similar to a 401(k) retirement savings plan. Every state and the District of Columbia offer at least one 529 plan. There are two types, explains Washington Post columnist Michelle Singletary: prepaid tuition plans and savings plans. A prepaid tuition plan allows people to pay a child's tuition in advance. The savings plan, which is more popular, allows people to invest in a tax-free investment account, she wrote.

“I was a fan of the 529 savings vehicle even when it wasn't a sure thing that it would retain tax-exempt status. Now there's no question this should be an essential part of your college investment plan,” Singletary wrote.

The 529 plans have been popular savings vehicles. The College Savings Foundation estimates parents, grandparents and other investors have stoked 529 plans with more than $77 billion, the Pittsburgh Post-Gazette reported.

Tax experts advise investors to study the plans and be aware of unexpected consequences. For example, the pension bill did not change the existing rules on withdrawals, rules that many people, including CPAs, are not aware of.

“Withdrawals for college tuition and expenses are reduced by tax-free scholarships, fellowships and certain other financial assistance. If the remaining expenses are less than the qualified distributions, part of the earnings will be taxable,” MarketWatch reported.

Rick Darvis, president of College Funding, Inc. and founder of the National Institute of Certified College Planners, said, "You cannot blindly assume that just because you use a withdrawal for qualified expenses, that it's going to be tax free.”

The College Savings Plan Network ( www.collegesavings.org ) provides links to each state's 529 plan website with details about what plans each state offers.

"Rating 529 College Savings Plans," by Jan E. Eighme, Journal of Accountancy, September 2006 --- http://www.aicpa.org/pubs/jofa/sep2006/eighme.htm

 

EXECUTIVE SUMMARY

Section 529 college savings plans offer numerous advantages and have few disadvantages compared with other options. Their benefits include tax savings, estate planning benefits, high contribution limits and no income limitations. One of the few drawbacks to these plans is that investment products usually are chosen by the state treasurer’s office and the 529 program manager. Withdrawals used to pay for qualified educational expenses usually are free of federal taxes. With any other withdrawals, the earnings portion is subject to federal taxes and a 10% penalty. If a child doesn’t go to college, the funds generally can be used to pay for another family member. There are two types of plans: prepaid tuition plans and savings plans. The two most common asset-allocation options clients can choose for savings plans are age-based and static-investment allocation. Clients will want to consider which states have the best-performing plans. Unfortunately, because 529 savings plans are relatively new, it is difficult to determine their long-term investment performance. Because 529 plans invest in mutual funds, it is possible to use the long-term performance evaluations of these funds from a rating service such as Morningstar or Lipper in order to calculate weighted-average ratings for a state’s 529 portfolio options.

Also see "A College Savings Plan With One Less Worry," by James Pethokoukis, The New York Times, September 17, 2006 --- Click Here

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

The IRS tells you how to get in trouble with the IRS --- http://www.aicpa.org/pubs/jofa/sep2006/tax_ex1.htm

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

The Enron stuff is very sexy, but that type of fraud was not pervasive.
Backdatings of executive stock option frauds are another matter.

From Jim Mahar's blog on September 22, 2006 --- http://financeprofessorblog.blogspot.com/

The sleuth who exposed (stock option) backdating scandal

I always like to see finance professors in the news!

Philadelphia Inquirer | 09/21/2006 | Sleuth who exposed backdating scandal:

A few "look-ins":
 

"From his second-floor office at Iowa's Tippie College of Business, [Erik] Lie spent months analyzing data to demonstrate how companies were illegally and retroactively timing, or backdating, stock option grants to fatten bonuses paid to top executives.

 

"He's uncovered a scandal that has just mushroomed," said Adam C. Pritchard, a former attorney at the Securities and Exchange Commission and now a law professor at the University of Michigan.

and later in the article:
 

"'The Enron stuff is very sexy, but that type of fraud was not pervasive,' said Andrew Metrick, a professor of finance and corporate governance at the Wharton School in Philadelphia. 'This is widespread, pervasive. I think when this is all said and done, the total amount of dollars that we'll find have been stolen from the corporate till is larger here than any other case we've seen.'"

Bob Jensen's threads on abuses in accounting for employee stock options --- http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

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

Once Again We Ask:  Where were the auditors?

"Union to Accounting Firms: Backdating?" SmartPros, September 13, 2006 --- http://accounting.smartpros.com/x54687.xml

The AFL-CIO, one of the largest shareholders in public companies, is seeking to learn about the role that big accounting firms may have played in the burgeoning stock options timing affair.

In letters Friday, the labor federation asked the Big Four accounting firms -- Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte & Touche -- to provide information on their potential involvement as outside auditors for companies now under federal investigation for possible rigging of option grants to boost their value to the recipients.

"Given the potential damage to shareholders due to options backdating, I am concerned about what role (name of accounting firm) may or may not have had in the backdating ...," the AFL-CIO's secretary-treasurer, Richard Trumka, said in the letters to the chief executives of the four firms, which were made public Monday. "I urge you to describe what steps are being taken to determine (name of firm)'s involvement in stock option backdating where it has occurred."

In backdating, options are issued retroactively to coincide with low points in a company's share price, a practice that can fatten profits for options recipients when they sell their shares at higher market prices. Backdating options can be legal as long as the practice is disclosed to investors and properly approved by the company's board. In some cases, however, the practice can break federal accounting and tax laws.

Spokesmen for PricewaterhouseCoopers and KPMG had no immediate comment on the AFL-CIO request. Ernst & Young and Deloitte & Touche spokesmen didn't immediately return telephone calls seeking comment.

Last week, government officials said they want to know what roles corporate directors as well as outside attorneys, accounting firms and compensation consultants might have played in helping executives manipulate the timing of option grants to enrich themselves and their colleagues.

More than 100 public companies, many of them in the technology sector, are under scrutiny by the Securities and Exchange Commission in the affair. The Justice Department is investigating scores of companies for possible criminal violations. And the Internal Revenue Service is looking at possible tax-law violations in option grants by some companies.

The potential cost to shareholders escalated Friday, when computer chip supplier Broadcom Corp. said it may need to boost a charge it takes to $1.5 billion or more for option accounting flaws -- double what it had estimated in July.

On Monday, chip maker Nvidia Corp. and software maker Wind River Systems Inc. both warned that they will miss regulatory deadlines for filing their most recent quarterly reports, joining a long list of tardy tech companies scrambling to clean up a stock options mess. The delay will expose both Nvidia and Wind River to being dropped from trading on the Nasdaq Stock Market. But that process takes several months, giving the companies time to comply with the SEC's reporting rules before getting bounced from the Nasdaq.

The AFL-CIO has some $400 billion in assets and is a major investor in companies, including many of those that are under investigation.

Cablevision awarded options to a vice chairman after his 1999 death but backdated them to make it appear they were awarded when he was still alive. Cablevision restated its results as an options probe escalated.
Peter Grant, James Bandler, and Charles Forelle, The Wall Street Journal, September 22, 2006; Page A1 --- http://online.wsj.com/article/SB115884346082669986.html?mod=todays_us_page_one

"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."

Suspected Fraud:  Attorneys, Auditors, Others Getting Attention In Options Timing Affair
"It's hard to believe ... that the executives did this all by themselves," Sen. Charles Grassley, R-Iowa, said at a hearing Wednesday. "And to be honest, the idea that all executives at different companies came up with this idea at the same time stretches the imagination." Grassley said he planned to write to "several major corporations" that have engaged in backdating of stock options, asking them to provide the minutes of board meetings in which directors discussed the matter as well as documents from attorneys, accountants and consultants who assisted. In backdating, options are issued retroactively to coincide with low points in a company's share price, a practice that can fatten profits for options recipients when they sell their shares at higher market prices. Backdating options can be legal as long as the practice is disclosed to investors and properly approved by the company's board. In some cases, however, the practice can run afoul of federal accounting and tax laws. "We need to understand and bring enforcement action against all the actors who were involved with this abusive scandal," Grassley declared.
"Attorneys, Auditors, Others Getting Attention In Options Timing Affair," SmartPros, September 11, 2006 --- http://accounting.smartpros.com/x54672.xml

Conrad W. Hewitt, chief accountant of the Securities and Exchange Commission, sought on September 19, 2006 to clarify the proper accounting for backdated options, reserving the harshest accounting for companies that followed a practice of reducing the exercise price after options were issued.
"S.E.C. Clarifies Accounting for Backdated Options," by Floyd Norris, The New York Times, September 20, 2006 --- http://www.nytimes.com/2006/09/20/business/20options.html

Mr. Hewitt offered some good news for companies, saying that if complete records were not available it would not automatically mean that companies had to restate their books, limiting the accounting damage for companies that issued backdated options.

Mr. Hewitt’s guidance also clarified that there was no accounting damage from “spring loaded” options, issued by companies that already know that forthcoming good news is likely to raise the stock price.

Such guidance is not officially blessed by the commission, but in this case accountants had expected it after Christopher Cox, the commission chairman, promised last week that “we will soon issue further accounting guidance that will help honest companies to avoid any problems with the law.”

The guidance also warned that companies that allowed executives to falsify the dates they exercised options might be required to restate their books as well.

In recent months it has become clear that many companies were not following the rules for issuing options and were getting the favorable accounting treatment that used to be available. But there have been questions about the proper accounting to use.

Under the normal accounting that then prevailed, companies did not have to show any expense for options issued to employees, so long as the exercise price was at or above the market price at the time of issuance.

Some companies followed a practice of adjusting the exercise price later if it fell. Mr. Hewitt’s guidance took the position that in such cases the option never had a formal completion time, and thus variable accounting was required. That means a company must record an expense as the stock price — and therefore the value of the option — rises, for the life of the option.

Some companies have used that variable accounting for all the backdated options they issued, something Mr. Hewitt said would often not be necessary.

In one common practice, employees were told the exercise price would be the lowest market price during the first month of their employment. In that case, the S.E.C. said, the only expense will be the difference between the price at the end of the period and the low price.

So for a company that issued 100 options at $30 each, when the end-of-the-month price was $32, there would be an expense of $200, which would be taken over the several-year period in which the options vested.

The practice of allowing options to be exercised retroactively was popular with executives because it could minimize the tax they owed. For example, if an option for 100 shares with an exercise price of $20 was exercised when the stock was at $30, that would create taxable income of $1,000. But if the executive was able to claim he or she had exercised it earlier, when the price was $25, the income would be only $500.

In such a case, Mr. Hewitt said, the company would have to record an additional $500 in compensation expense, because it would have given up a $500 tax deduction it had coming. (Companies normally get tax deductions equal to the taxable profit received by employees when they exercise options.)

The memo did not cover the most important tax issue for companies: the amount they owe. A deduction is allowed for only the first $1 million of compensation expenses for executives, but some categories — like the profits employees realize on options — do not count against that limit.

But Mark Everson, the commissioner of the Internal Revenue Service, has told Congress that profits on backdated options would count — and companies could lose millions of dollars in tax exemptions.

Also see http://accounting.smartpros.com/x54789.xml

From The Wall Street Journal Accounting Weekly Review on September 22, 2006

TITLE: SEC Accountant Issues Guidelines on Stock Options
REPORTER: David Reilly
DATE: Sep 20, 2006
PAGE: C3
LINK: http://online.wsj.com/article/SB115871130408368314.html?mod=djem_jiewr_ac 
TOPICS: Accounting, Fair Value Accounting, Securities and Exchange Commission, Standard Setting, Stock Options

SUMMARY: "The Securities and Exchange Commission's chief accountant issued guidance on how companies should account for employee stock options in light of regulators' probes into "backdating" of this type of compensation." Specific guidance issued in a letter by Chief Accountant Conrad Hewitt is developed from the SEC's observations from reviews of cases investigated during the options backdating scandal.

QUESTIONS:
1.) Through what mechanism is the Securities and Exchange Commission (SEC) issuing this new guidance on accounting for stock options? How does this guidance differ from that provided in statements of financial accounting standards issued by the Financial Accounting Standards Board (FASB)?

2.) Summarize the requirements currently in place to account for employee stock options. What accounting standard establishes these requirements?

3.) Refer to the related article. What were the political pressures that were put to bear on the FASB when it implemented changes in accounting for stock options?

4.) Define the terms "in the money", "at the money", and "out of the money" stock options.

5.) How do current accounting requirements differ from those that were in effect prior to issuance of this most recent standard? Relate this description to your definitions provided in answer to question 4

6.) Describe the issue of options backdating. Again, relate this answer to the definitions provided in answer to question 4.

7.) Based on comments in the main article, how has elevating the accounting for stock options to the face of the financial statements, rather than merely requiring disclosures of the fair values of stock options granted to employees, likely impacted the audit process over these activities?

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES ---
TITLE: FASB Appears in a New Light on Stock Options
REPORTER: David Reilly
PAGE:
C1 ISSUE: Aug 14, 2006
LINK: http://online.wsj.com/article/SB115552025107534780.html?mod=djem_jiewr_ac

"SEC Accountant Issues Guidelines On Stock Options," by David Reilly, The Wall Street Journal, September 20, 2006; Page C3 --- Click Here

The Securities and Exchange Commission's chief accountant issued guidance on how companies should account for employee stock options in light of regulators' probes into "backdating" of this type of compensation.

But chief accountant Conrad Hewitt made clear that in considering problems related to options accounting the commission would distinguish between honest mistakes, such as paperwork errors, and those that showed a company was trying to game accounting rules. Mr. Hewitt's tone echoed previous comments made by SEC Chairman Christopher Cox that indicated the commission would look closely at a company's intent when investigating possible backdating practices.

Stock options give employees the right to purchase stock at a preset price, known as the strike or exercise price, at a future date. Under accounting rules in place until the start of this year, companies didn't have to recognize any expense related to options grants if the exercise price was equal to the company's share price on the date the options were granted.

However, many companies retroactively picked a grant date to correspond with a low-point for their stock, in effect setting a lower bar for executives.

Under accounting rules in place at the time, such grants could have required companies to book an expense because the exercise price picked wasn't actually the same as the company's share price on the real grant date. Starting this year, companies have had to take an expense for all options grants.

Mr. Hewitt's letter laid out examples where questions have arisen over whether a company should have taken an expense for options under the old accounting rules. In cases where companies picked an exercise price over a 30-day period, for example, they generally should have recorded an expense for the options, the letter said. However, so-called springloading of options, where companies grant options ahead of good news, doesn't result in an accounting issue, the letter said.

The SEC guidance to companies follows an alert to auditors on backdating issues in July from the Public Company Accounting Oversight Board. More than 100 companies are under investigation in relation to backdating, according to recent congressional testimony from Mr. Cox. The agency has brought civil charges against executives from two companies in tandem with criminal charges by prosecutors.

Mr. Hewitt stressed that the guidance related only to accounting issues, not legal matters arising from backdating issues.

Bob Jensen's threads on abuses in accounting for employee stock options --- http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

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

Sort of Knocks Your SOX Off:  Accounting Firms Post Double-Digit Growth Rates
The past year has been profitable for the majority of accounting firms, with an average growth rate of 16.5 percent, the highest reported growth since 2000, according to the CCH Public Accounting Report Top 100 list released Friday. Firms outside the Big Four posted stronger overall results than their larger counterparts, with non-Big Four firms growing their revenue at an average rate of 21.9 percent compared to 14.7 percent for the Big Four.
"Accounting Firms Post Double-Digit Growth Rates," SmartPros, September 5, 2006 --- http://accounting.smartpros.com/x54636.xml

Bob Jensen's threads on accounting careers are at http://www.trinity.edu/rjensen/Bookbob1.htm#careers

"The Accounting Cycle:  The Conceptual Framework for Financial Reporting Op/Ed,"  by J. Edward Ketz, SmartPros, September 2006 --- http://accounting.smartpros.com/x54322.xml 

The Financial Accounting Standards Board and the International Accounting Standards Board have joined forces to flesh out a common conceptual framework. Recently they issued some preliminary views on the "objectives of financial reporting" and the "qualitative characteristics of decision-useful financial reporting information" and have asked for comment.

To obtain "coherent financial reporting," the boards feel that they need "a framework that is sound, comprehensive, and internally consistent" (paragraph P3). In P5, they also state their hope for convergence between U.S. and international accounting standards.

P6 indicates a need to fill in certain gaps, such as a "robust concept of a reporting entity." I presume that they will accomplish this task later, as the current document does not develop such a "robust concept."

Chapter 1 presents the objective for financial reporting, and the description differs little from what is in Concepts Statement No. 1. This objective is "to provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions." The emphasis lay with capital providers, as it should. If anything, I would place greater accent on this aspect, because in the last 10 years, so many managers have defined the "business world" as including managers and excluding investors and creditors. To our chagrin, we learned that managers actually believed this lie, as they pretended that the resources supplied by the investment community belonged to the management team.

FASB and IASB further explain that these users are interested in the cash flows of the entity so they can assess the potential returns and the potential variability of those returns (e.g., in paragraph OB.23). I wish they had drawn the logical conclusion that financial reporting ought to exclude income smoothing. Income smoothing leads the user to assess a smaller variance of earnings than warranted by the underlying economics; income smoothing biases downward the actual variability of the earnings and thus the returns.

Later, in the basis of conclusions, the document addresses the reporting of comprehensive income and its components (see BC1.28-31). Currently, FASB has four items that enter other comprehensive income: gains and losses on available-for-sale investments, losses when incurring additional amounts to recognize a minimum pension liability, exchange gains and losses from a foreign subsidiary under the all-current method, and gains and losses from derivatives that hedge cash flows.

The purported reason for this demarcation between earnings and other comprehensive income rests with the purported low reliability of measurements of these four items; however, the real reason for these other comprehensive items seems to be political. For example, FASB capitulated in Statement No. 115 when a number of managers objected to reporting gains and losses on available-for-sale securities because that would create volatility in earnings. (I find it curious how FASB caters to the whims of managers but claims that the primary rationale for financial reporting is to serve the investment community.) Because one has a hard time reconciling other comprehensive income with the needs of investors and creditors, it would serve the investment community better if the boards eliminate this notion of comprehensive income.

Two IASB members think that an objective for financial reporting should encompass the stewardship function (see AV1.1-7). Stewardship seems to be a subset of economic usefulness, so this objection is pointless. It behooves these two IASB members to explain the consequences of adopting a stewardship objective and how these consequences differ from the usefulness objective before we can entertain their protestation seriously.

Sections BC1.42 and 43 ask whether management intent should be a part of the financial reporting process. Given management intent during the last decade, I think decidedly not. Management intent is merely a license to massage accounting numbers as managers please. Fortunately, the Justice Department calls such tactics fraud.

Chapter 2 of this document concerns qualitative characteristics. For the most part, this presentation is similar to that in Concepts Statement No. 2, though arranged somewhat differently. Concepts 2 had as its overarching qualitative characteristics relevance and reliability. This Preliminary Views expounds relevance, faithful representation, comparability, and understandability as the qualitative characteristics.

The discussion on faithful representation is interesting (QC.16-19) inasmuch as they distinguish between accounts that depict real world phenomena and accounts that are constructs with no real world referents. They explain that deferred debits and credits do not possess faithful representation because they are merely the creation of accountants. I hope that analysis applies to deferred income tax debits and credits.

Verifiability implies similar measures by different measurers (QC.23-26). I wish FASB and IASB to include auditability as an aspect of verifiability; after all, if you cannot audit something, it is hardly verifiable. Yet, the soon to be released standard on fair value measurements includes a variety of items that will prove difficult if not impossible to audit.

Understandability is obvious, though the two boards feel that users with a "reasonable knowledge of business and economic activities" can understand financial statements. I no longer agree. Such a person might employ a profit analysis model or ratio analysis on a set of financial statements and mis-analyze a firm's condition because he or she did not make analytical adjustments for off-balance sheet items and other fanciful tricks by managers. This includes so many of Enron's investors and creditors. No, to understand financial reporting today, you must be an expert in accounting and finance.

Benefits-that-justify-costs acts as a constraint on financial reporting. While this criterion is acceptable, too often the boards view costs only from the perspective of the preparers. I wish the boards explicitly acknowledged the fact that not reporting on some things adds costs to users. When a business enterprise engages in aggressive accounting, the expert user needs to employ analytical adjustments to correct this overzealousness. These adjustments consume the investor's economic resources and thus involve costs to the investment community.

In the basis-for-conclusions section, FASB and IASB explain that the concept of substance over form is included in the concept of faithful representation (see paragraphs BC2.17 and 18). While I don't have a problem with that, I think they should at least emphasize this point in Chapter 2 rather than bury it in this section. Substance over form is a critically important doctrine, especially as it relates to business combinations and leases, so it deserves greater stress.

On balance, the document is well written and contains a good clarification of the objective of financial reporting and the qualitative characteristics of decision-useful financial reporting information. I offer the criticisms above as a hope to strengthen and improve the Preliminary Views.

My most important comment, however, does not address any particular aspects within the document itself. Instead, I worry about the usefulness of this objective and these qualitative characteristics to FASB and IASB. To enjoy coherent financial reporting, there not only is need for a sound, comprehensive, and internally consistent framework, we also must have a board with the political will to utilize the conceptual framework. FASB ignored its own conceptual framework in its issuance of standards on:

* Leases (Aren't the financial commitments of the lessee a liability?) * Pensions (How can the pension intangible asset really be an asset as it has no real world referent?) * Stock options (Why did the board not require the expensing of stock options in the 1990s when stock options clearly involve real costs to the firm?), and * Special purpose entities (Why did the board wait for the collapse of Enron before dealing with this issue?).

Clearly, the low power of FASB -- IASB likewise possesses little power -- explains some of these decisions, but it is frustrating nonetheless to see the board ignore its own conceptual framework. Why engage in this deliberation unless FASB is prepared to follow through?

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries.

Also see
"The Accounting Cycle: Herz Encourages Simpler Accounting: Again, Bah, Humbug!" by: J. Edward Ketz, SmartPros, December 2005 --- http://accounting.smartpros.com/x50933.xml

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

The following messages appear at the link http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Replication

December 3, 2004 reply from Robin A Alexander [alexande.robi@UWLAX.EDU] 

Interesting. I too came from a math background and finally realized there was no accounting theory in the scientific sense. I also came to suspect it was not a system of measurement either because to be so, there has to be something to measure independent of the measuring tool. Rather it seemed to me accounting defined, for instance, income rather than measured it.

Robin Alexander 

December 3, 2004 reply from Bob Jensen

Hi Robin,

I think the distinction lies not so much on "independence" of the measuring tool as it does on behavior induced by the measurements themselves, although this may be what you had in mind in your message to us.

Scientists measure the distance to the moon without fear that behavior of either the earth or the moon will be affected by the measurement process. There may some indirect behavioral impacts such as when designing fuel tanks for a rocket to the moon. In natural science, except for quantum mechanics, the measurers cannot re-define the distance to the moon for purposes of being able to design smaller fuel tanks.

In economics, and social science in general, behavior resulting from measurements is often more impacted by the definition of measurement itself. Changed definitions of inflation or a consumer price index might result in wealth transfers between economic sectors. Plus there is the added problem that measurements in the social sciences are generally less precise and stable, e.g., when people change behavior just because they have been "measured" or diagnosed.

Similarly in accounting, changed definitions of what goes into things like revenue, eps, asset values, and debt values may lead to wealth transfers. The Silicon Valley executives certainly believe that lowering eps by booking stock options will affect share prices vis-a-vis merely disclosing the same information in a footnote rather than as a booked expense. Virtually all earnings management efforts on the part of managers hinges on the notion that accounting outcomes affect wealth transfers. In fact if they did not do so, there probably would not be much interest in accounting numbers See "Toting Up Stock Options," by Frederick Rose, Stanford Business, November 2004, pp. 21 --- http://www.gsb.stanford.edu/news/bmag/sbsm0411/feature_stockoptions.shtml

Early accounting theorists such as Paton, Littleton, Hatfield, Edwards, Bell, Chambers, etc. generally believed there was some kind of optimal set of definitions that could be deduced without scientifically linking possible wealth transfers to particular definitions. And it is doubtful that subsequent events studies in capital market empiricism will ever solve that problem because human behavior itself is too adaptive. Academic researchers are still seeking to link behavior with accounting numbers, but they're often viewed as chasing moving windmills with lances thrust forward.

Auditors are more concerned about being faithful to the definitions. If the definition says book all leases that meet the FAS 13 criteria for a capital lease, then leases that meet those tests should not have been accounted for as operating leases. The audit mission is to do or die, not to question why. The FASB and other standard setters are supposed to question why. But they are often more impacted by the behavior of the preparers than the users. The behavior of preparers trying to circumvent accounting standards seems to have more bearing than the resulting impacts on wealth transfers that defy being built into a conceptual framework. Where science fails accounting in this regard is that the wealth transfer process is just too complicated to model except in the case of blatant fraud that lines the pockets of a villain.

It is not surprising that accounting "theory" has plummeted in terms of books and curricula. Theory debates never seem to go anywhere beyond unsupportable conjectures. I teach a theory course, but it has degenerated to one of studying intangibles and how preparers design complex contracts such as hedging and SPE contracts that challenge students into thinking how these contracts should be accounted for given our existing standards like FAS 133 and FIN 46. One course that I would someday like to teach is to design a new standard (such as a new FAS 133) and then predict how preparers would change behavior and contracting. Unfortunately my students are not interested in wild blue yonder conjectures. The CPA exam is on their minds no matter where I try to fly. They tolerate "theory" only to the point where they are also learning about existing standards. In their minds, any financial accounting course beyond intermediate should simply be an extension of intermediate accounting.

Bob Jensen

September 26, 2006 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Bob,

Internal consistency seems to have become the holy grail of accounting. It is simply not attainable, and the earlier we recognise this fact the better.

If logic teaches us anything, thanks to Kurt Goedel, it is that no logical system can be complete, consistent and decidable all at the same time. Some thing has got to give.

In law, generally, consistency has been given up since legal principles are inherently conflicting. In accounting, we seem to be chasing "internal consistency" the way a dog chases its own tail.

Having given up consistency as an overriding principle, law has developed interesting, useful, and intellectually demanding theories of reasoning about law. In accounting, on the other hand, we have been caught up in this morass of consistency ever since accounting was divorced from common law.

Accounting is not science the way Physics is (even Physics recognises frailty of human reasoning these days). It is an endeavour to coherently but normatively interpret certain social exchanges.

Jagdish

More Than a Numbers Game: A Brief History of Accounting
Author: Thomas A. King
ISBN: 0-470-00873-3
Hardcover 242 pages
September 2006

Inspired by a 1998 speech by former SEC Chairman Arthur Levitt, this book addresses the why of accounting instead of the how, providing practitioners and students with a highly readable history of U.S. corporate accounting. Each chapter explores a controversial accounting topic. Author Thomas King is treasurer of Progressive Insurance.
SmartPros Newsletter, September 25, 2006

Jensen Comment
The Chief Accountant of the SEC under Arthur Levitt was one of my heroes named Lynn Turner.
Let me close by citing Harry S. Truman who said, "I never give them hell; I just tell them the truth and they think its hell!"
Great Speeches About the State of Accountancy
"20th Century Myths," by Lynn Turner when he was still Chief Accountant at the SEC in 1999 --- http://www.sec.gov/news/speech/speecharchive/1999/spch323.htm

It is interesting to listen to people ask for simple, less complex standards like in "the good old days." But I never hear them ask for business to be like "the good old days," with smokestacks rather than high technology, Glass-Steagall rather than Gramm-Leach, and plain vanilla interest rate deals rather than swaps, collars, and Tigers!! The bottom line is—things have changed. And so have people. Today, we have enormous pressure on CEO’s and CFO’s. It used to be that CEO’s would be in their positions for an average of more than ten years. Today, the average is 3 to 4 years. And Financial Executive Institute surveys show that the CEO and CFO changes are often linked. In such an environment, we in the auditing and preparer community have created what I consider to be a two-headed monster. The first head of this monster is what I call the "show me" face. First, it is not uncommon to hear one say, "show me where it says in an accounting book that I can’t do this?" This approach to financial reporting unfortunately necessitates the level of detail currently being developed by the Financial Accounting Standards Board ("FASB"), the Emerging Issues Task Force, and the AICPA’s Accounting Standards Executive Committee. Maybe this isn’t a recent phenomenon. In 1961, Leonard Spacek, then managing partner at Arthur Andersen, explained the motivation for less specificity in accounting standards when he stated that "most industry representatives and public accountants want what they call ‘flexibility’ in accounting principles. That term is never clearly defined; but what is wanted is ‘flexibility’ that permits greater latitude to both industry and accountants to do as they please." But Mr. Spacek was not a defender of those who wanted to "do as they please." He went on to say, "Public accountants are constantly required to make a choice between obtaining or retaining a client and standing firm for accounting principles. Where the choice requires accepting a practice which will produce results that are erroneous by a relatively material amount, we must decline the engagement even though there is precedent for the practice desired by the client." We create the second head of our monster when we ask for standards that absolutely do not reflect the underlying economics of transactions. I offer two prime examples. Leasing is first. We have accounting literature put out by the FASB with follow-on interpretative guidance by the accounting firms—hundreds of pages of lease accounting guidance that, I will be the first to admit, is complex and difficult to decipher. But it is due principally to people not being willing to call a horse a horse, and a lease what it really is—a financing. The second example is Statement 133 on derivatives. Some people absolutely howl about its complexity. And yet we know that: (1) people were not complying with the intent of the simpler Statements 52 and 80, and (2) despite the fact that we manage risk in business by managing values rather than notional amounts, people want to account only for notional amounts. As a result, we ended up with a compromise position in Statement 133. To its credit, Statement 133 does advance the quality of financial reporting. For that, I commend the FASB. But I believe that we could have possibly achieved more, in a less complex fashion, if people would have agreed to a standard that truly reflects the underlying economics of the transactions in an unbiased and representationally faithful fashion. I certainly hope that we can find a way to do just that with standards we develop in the future, both in the U.S. and internationally. It will require a change in how we approach standard setting and in how we apply those standards. It will require a mantra based on the fact that transparent, high quality financial reporting is what makes our capital markets the most efficient, liquid, and deep in the world.

Bob Jensen's overview of accounting history is at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AccountingHistory

Especially note the module on "Controversies in Setting Accounting Standards" --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#MethodsForSetting

Question
How can you block out portions of a digital screen projection while lecturing?

September 25, 2006 message from Ramsey, Donald [dramsey@UDC.EDU]

I am getting the hang of using my new digital projector in the classroom, to display solutions to the homework. With our old overhead transparencies, I could show each individual journal entry, or whatever, by covering the unwanted material with a piece of paper, revealing each item progressively. (You know what I mean.)

But with the digital, I have not discovered any way to do this short of transferring each item to a PowerPoint slide show, which would clearly be a lot of work. Likewise, I could copy each item to a separate Word page; again a lot of work. Does anyone know of a better way?

It’s a real teaching problem, because the students tend to immediately begin copying the entire screen into their notebooks, and not pay attention to the one item under discussion.

Donald D. Ramsey, CPA,
Department of Accounting, Finance, and Economics,
School of Business and Public Administration,
University of the District of Columbia,
Room 404A, Building 52 (Connecticut and Yuma St.),
4200 Connecticut Ave., N. W., Washington, D. C. 20008

September 25, 2006 reply from David Fordham, James Madison University [fordhadr@JMU.EDU]

Donald, what application are you using to display your digital images?

If you are using Word, Excel, or some sort of picture viewer to view Word, Excel, PDF or JPG images, you might try this:

Create a rectangle the same color as the background of your image. Then, in the classroom, use the mouse to grab and move the rectangle, moving it out of the way as you want to "uncover" each portion of your solution.

I've used that trick successfully with several different projection applications. It's a sort of "high tech piece of paper covering". ;-)

A lot of "answer keys" from the publishers come in MS Word format, or Excel. The colored rectangle works great with those.

Some publishers actually provide the answer keys in PowerPoint format if you ask for them. Powerpoint is the way to go, if you have the option. You can create successive slides, each one adding a little bit (by copying and pasting the same slide several times, then eliminating the latter material from the earlier slides). Or you can add custom animation to have successive entries "enter" the view like bullet points.

If the material is not in PowerPoint format, often the publisher will provide it in a format that you can easily cut and paste into PowerPoint. Depending on how many solutions you display each day, cutting and pasting a half- dozen solutions might not be too onerous compared to your other preparation.

More specific suggestions might be available depending on what application you are using to display your material.

September 25, 2006 reply from David Coy [dcoy@ADRIAN.EDU]

I've used a digital projector for several years. The problem you speak of is not easily solved. I am fortunate in that I project images on a Smart Board, which allows me to draw on it in various colors.

Have you thought about increasing the size of the image you are projecting? This would limit the amount of material displayed.

Another possibility might be to distribute copies of the material you are discussing, and encourage them to embellish it with notes and commentaries derived from your presentation.

David Coy
Adrian College

September 25, 2006 reply from Bob Jensen

I've used a number of approaches to blocking out all our parts of answers in presentations.

At the low tech end, I've simply added blank lines where you can scroll down or use the navigation buttons to scroll down automatically. See the "View Answer" buttons at http://www.cs.trinity.edu/~rjensen/Calgary/CD/ExamMaterial/PracticeQuestions/  

If you are using files in software like Excel, MS Word, or Frontpage, it is easy to add blank rows and navigation buttons. Excel file navigation buttons (similar to what you can also do in MS Word) are illustrated in the 138ex01a.xls Excel workbook at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/FAS133OtherExcelFiles/138bench 

(Of course these navigation buttons won't work if you turn off the macros before downloading the Excel file.)

I had a wonderful presentation pointer that would dim parts of a screen and light up where the mouse was pointing in expandable rectangles or circles. It would also magnify. I don't think this tool is on the the market these days.

There is a somewhat more limited magnifying Screen Pen described at
http://www.topshareware.com/Screen-Pen-download-41600.htm 

I think if you search around a bit you will find some more versatile presentation tools that do exactly what you want. Of course these entail software installation which may not be easy for you on classroom computers that restrict software installation.

Bob Jensen

September 25, 2006 reply from Robert Holmes Glendale College [rcholmes@GLENDALE.CC.CA.US]

I use two methods. One is to create Excel spreadsheets by putting the first line on a page. Then make a copy of the page and add the second line. In class you just go to the bottom of the page and click on each tab in succession. After you get the hang of it you can create the pages almost as fast as putting it on one page. Second I have a Gyro Mouse that came with a set of utilities. One of them is a screen that covers the whole page, then you click and drag and move the screen down a line at a time to reveal the information. The gyro mouse is held in the hand and as you move your hand from right to left or up and down, the pointer follows your motions. It has buttons to click and drag and several utilities that you can pop up in addition to the screen. It works anywhere in the classroom and lets you wander about as you control the screen. Gyration.com sells them these days.

Learning Accountability
The Spelling Plans for carrying the recommendations of her Commission on the Future of Higher Education
Education Secretary Margaret Spellings plans a many faceted campaign to carry out the recommendations of her Commission on the Future of Higher Education, including providing matching funds to colleges and states that collect and publicly report how well their students learn, building a “privacy protected” database of college students’ academic records, and streamlining the process of applying for federal student aid.
Doug Lederman, "The Spellings Plan," Inside Higher Ed, September 26, 2006 --- http://www.insidehighered.com/news/2006/09/26/spellings

Abolishing the Core Computer Science Curriculum in an Effort to Attract Majors
The Georgia Institute of Technology is today unveiling what some experts believe is a much broader approach to the problem. The institute has abolished the core curriculum for computer science undergraduates — a series of courses in hardware and software design, electrical engineering and mathematics. These courses, in various forms, have been the backbone of the computer science curriculum not just at Georgia Tech but at most institutions.
Scott Jaschik, "New ‘Threads’ for Computer Science," Inside Higher Ed, September 26, 2006 --- http://www.insidehighered.com/news/2006/09/26/gatech

The other, perhaps more costly alternative, is to maintain a core of required courses that are no longer silos in terms of specialized content --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#Silos

Students may take the easiest way out in customizable curricula ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#CustomizedCurricula
 

Electronic Book Readers Update

"Review: Sony's Reader a step forward," PhysOrg, September 27, 2006 --- http://physorg.com/news78593741.html

Sure, there are electronic books available for download at Amazon and elsewhere, but they haven't really caught on. Sony Corp. is now tackling part of the problem with the U.S. launch of the first e-book reader that imitates the look of paper by using an innovative screen technology.

Is this the iPod for books? Not quite. But it is a step forward.

The Sony Reader is a handsome affair the size of a paperback book, but only a third of an inch thick. It goes on sale for $350 on Sony's Web site Wednesday, and in Borders stores in October.

The 6-inch screen can be taken for a monochrome liquid-crystal display at first glance, but on closer inspection looks like no other electronic display. It's behind a thin pane of glass, but unlike an LCD it shows no "depth" - it pretty much looks like a light gray piece of paper with dark gray text.

The display, based on technology from Massachusetts Institute of Technology spinoff E Ink Corp., is composed of tiny capsules with electrically charged particles of white and black ink. When a static electric charge is applied on the side of the capsule that faces the reader, it attracts the white particles to the face of the display, making that pixel show light gray. Reversing the charge brings the black pigments floating through the capsule to replace the white pigments, and the pixel shows as dark gray.

Like paper, the display is readable from any angle, but it doesn't look as good as the real thing, chiefly because the contrast doesn't compare well. The background isn't white and the letters aren't black. The letters show some jaggedness, even though the resolution is a very respectable 800 by 600 pixels. It will display photos, though they look a bit like black-and-white photocopies.

But it's still a more comfortable reading medium than any other electronic display. The text is easy on the eyes in almost any light you could read a book by.

The other major advantage of the display is that it's a real power sipper. Sony says a Reader with a full charge in its lithium battery can show up to 7,500 pages, an amazing figure that I unfortunately didn't have the time to test.

The reason behind this trilogy-busting stamina is that the display only consumes power when it flips to a new page. Displaying the same page continuously consumes no power, though the electronics of the device itself do use a little bit.

The Reader's internal memory holds up to 100 books, depending on their size. The memory can be expanded with inexpensive SD cards or Memory Sticks.

To load books, connect the Reader with a supplied cable to a Windows PC running the accompanying software. You can transfer Word documents or Portable Document Format files to the Reader, download blog feeds, or buy e-books at Sony's online store. It will also play MP3 music or audiobook files.