New Bookmarks
Year 2006 Quarter 4:  October 1 - December 31 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

December 31, 2006

November 30, 2006

October 31, 2006

 

 

December 31, 2006

 

 

 

Bob Jensen's New Bookmarks on December 31, 2006
Bob Jensen at Trinity University 

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 December 1 and December 31, 2006 --- http://www.trinity.edu/rjensen/book06q4.htm#Tidbits123106

Click Here for Humor Between December 1 and December 31, 2006 --- http://www.trinity.edu/rjensen/book06q4.htm#Humor113006

Links to Documents on Fraud --- http://www.trinity.edu/rjensen/Fraud.htm

Bob Jensen's search helpers are at http://www.trinity.edu/rjensen/searchh.htm

Bob Jensen's Bookmarks --- http://www.trinity.edu/rjensen/bookbob.htm

Bob Jensen's links to free electronic literature, including free online textbooks --- http://www.trinity.edu/rjensen/ElectronicLiterature.htm

Bob Jensen's links to free online video, music, and other audio --- http://www.trinity.edu/rjensen/Music.htm

Bob Jensen's documents on accounting theory are at http://www.trinity.edu/rjensen/theory.htm 

Bob Jensen's links to free course materials from major universities --- http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's links to online education and training alternatives around the world --- http://www.trinity.edu/rjensen/Crossborder.htm

Bob Jensen's links to electronic business, including computing and networking security, are at http://www.trinity.edu/rjensen/ecommerce.htm

Bob Jensen's links to education technology and controversies --- http://www.trinity.edu/rjensen/000aaa/0000start.htm

Bob Jensen's home page --- http://www.trinity.edu/rjensen/




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




How do scholars search for academic references?

Scholarpedia Launches at the end of 2006

From the University of Illinois Issues in Scholarly Communication blog on December 28, 2006 --- http://www.library.uiuc.edu/blog/scholcomm/

Scholarpedia feels and looks like Wikipedia - the free encyclopedia that anyone can edit. Indeed, both are powered by the same program - MediaWiki. Both allow visitors to review and modify articles simply by clicking on the edit this article link.
However, Scholarpedia differs from Wikipedia in some very important ways:
• Each article is written by an expert (invited or elected by the public).
• Each article is anonymously peer reviewed to ensure accurate and reliable information.
• Each article has a curator - typically its author -- who is responsible for its content.
• Any modification of the article needs to be approved by the curator before it appears in the final, approved version.

…Currently, Scholarpedia hosts Encyclopedia of Computational Neuroscience, Encyclopedia of Dynamical Systems and Encyclopedia of Computational Intelligence. Although all three will eventually be published in a printed form, they will also remain freely available and modifiable online. (Producing a hard copy of each encyclopedia is important for archiving; besides, many academicians have a preconception that the prestige of an online article is not as high as that of a printed one.)

If there is enough interest and support from the public, Scholarpedia will grow in the following directions:
• The neuroscience chapter of Encyclopedia of Computational Neuroscience will be a seed to start Encyclopedia of Cognitive Neuroscience, and then Encyclopedia of Neuroscience
• Encyclopedia of Dynamical Systems will be a seed to start Encyclopedia of Applied Mathematics, and then Encyclopedia of Mathematics.
• Encyclopedia of Computational Intelligence will be a seed to start Encyclopedia of Computer Science.

Read more at Scholarpedia --- http://www.scholarpedia.org/article/Main_Page

Second Nature: PLoS One Picks Up Where Nature Left Off

From the University of Illinois Issues in Scholarly Communication blog on December 27, 2006 --- http://www.library.uiuc.edu/blog/scholcomm/

The launch of the new PLoS ONE scholarly research portal looks like a big win for open access research content from a number of angles. PLoS ONE is posting research and will allow interactive review before and after publication for scientific articles via a very sophisticated publishing environment. The PLoS ONE platform applies many of the best practices of social media, providing ready access to comments posting and awareness of active discussions to draw in more active discussions. PLoS ONE will publish all papers that are judged to be rigorous and technically sound, and had already posted more an 100 papers by its launch - a remarkable number for a just-launched scholarly journal of any kind. By contrast Nature's recently shuttered open-review portal trial, which ran for around four months, attracted only 71 authors willing to post their work online and attracted 92 technical comments.

As we noted in our latest news analysis article one of the keys to successful social media products is a dedicated core of trusted contributors who will be able to ensure editorial success. PLoS ONE starts with a global editorial board of more than 200 scholars, ensuring a broad array of inputs for reviewing content. Some of the fears about having content rejected after having had it exposed to comments prior to publication may be relieved by the PLoS ONE policy that allows papers that have been already rejected by PLoS Biology and Medicine journals to be re-submitted via PLoS ONE. This is a potentially valuable feature, allowing research that may not have yet reached the highest levels of acceptance to mature through its exposure to comments from a broader audience.

PLoS ONE is finally opening the doors to the potential for fundamental changes in how scholarly research proves its worth. With an open exchange of ideas and commentary facilitated by technologies long available to the general public and a solid body of research and reviewers PLoS ONE holds out the potential to liberate the highest levels of scholarly innovation from the regimen of the printing press. Changing the way that research is paid for was a good first step for open access, but with the ability to eliminate artificial distribution bottlenecks that choke off natural conversations PLoS ONE may do for scholarly research what Wikipedia has done for reference materials - with much more integrity in the underlying editorial processes.

John Blossom, Content Blogger 12/22/06

Bob Jensen's search helpers are at http://www.trinity.edu/rjensen/searchh.htm

How do scholars search for academic references?

Scholarpedia --- http://www.scholarpedia.org/article/Main_Page

PLoS One --- http://www.plosone.org/home.action

Google Scholar --- http://scholar.google.com/
Not to be confused with Google Advanced Search which does not cover many scholarly articles --- http://www.google.com/advanced_search?hl=en

Microsoft's Windows "Live Search" or  "Academic Search" ---
http://search.live.com/results.aspx?scope=academic&q=

Amazon's A9 --- http://a9.com/-/search/advSearch 

Beginning October 23, 2003, Amazon.com offers a text search of entire contents of over 120,000 books (over 10 million pages) ---
http://www.amazon.com/exec/obidos/tg/browse/-/10197021/ref%3Dsib%5Fmerch%5Fgw/104-3984945-7813514 

How It Works --- http://snurl.com/BookSearch 
A significant extension of our groundbreaking Look Inside the Book feature, Search Inside the Book allows you to search millions of pages to find exactly the book you want to buy. Now instead of just displaying books whose title, author, or publisher-provided keywords that match your search terms, your search results will surface titles based on every word inside the book. Using Search Inside the Book is as simple as running an Amazon.com search. 

Answers.com --- http://www.answers.com/

Wikipedia (heavily used by scholars in spite of authenticity risks)--- http://en.wikipedia.org/wiki/%s

Other Scholarly Search Engines (CrossRef and Scirus.) --- http://privateschool.about.com/b/a/116956.htm
Also see http://www.library.uq.edu.au/internet/scholsearch.html

Scholarly search tools

  • CiteBase
    Citebase is a trial service that allows researchers to search across free, full-text research literature ePrint archives, with results ranked according to criteria such as citation impact.

     

  • Gateway to ePrints
    A listing of ePrint servers and open access repository search tools.

     

  • Google Scholar
    A search tool for scholarly citations and abstracts, many of which link to full text articles, book chapters, working papers and other forms of scholarly publishing. It includes content from many open access journals and repositories.

     

  • OAIster
    A search tool for cross-archive searching of more than 540 separate digital collections and archives, including arXiv, CiteBase, ANU ePrints, ePrintsUQ, and others.

     

  • Scirus
    A search tool for online journals and Web sites in the sciences.
 

UCLA Library Scholarly Search Helpers --- http://www2.library.ucla.edu/googlescholar/searchengines.cfm

University of Kansas Scholarly Search Helpers --- http://www.lib.ku.edu/technology/searchengines/scholar.shtml

Social scientists and business scholars often use SSRN (not free) --- http://www.ssrn.com/

If you have access to a college library, most colleges generally have paid subscriptions to enormous scholarly literature databases that are not available freely online. Serious scholars obtain access to these vast literature databases.

Librarian's Index to the Internet --- http://www.trinity.edu/rjensen/searchh.htm#Librarian'sIndex

Searching the Deep Web --- http://www.trinity.edu/rjensen/searchh.htm#DeepWeb

Open Access Shared Scholarship --- http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

University Channel (video and audio) ---  http://uc.princeton.edu/main/

Bob Jensen's links to electronic literature, including free online textbooks and other learning materials --- http://www.trinity.edu/rjensen/ElectronicLiterature.htm

Bob Jensen's search helpers are at http://www.trinity.edu/rjensen/searchh.htm


I think this is a good deal for accounting students everywhere!

November 9, 2006 message from Tracey E. Sutherland [membership@aaahq.org]

I am proud to announce that student membership in the American Accounting Association is now available to full-time students residing anywhere in the world. Student members pay discounted membership dues and receive their selected Association journals online. Student membership also allows students to attend national, section, and regional meetings of the Association without vote but at reduced rates. Student members are also eligible to purchase Association publications at member prices.

Student membership dues in the AAA are as follows:

One electronic journal option - $25

Two electronic journal option - $35

Three electronic journal option - $45

Also included in student membership are electronic and hard copy versions of the AAA newsletter and updates/emails about upcoming events and conferences. Student members are also welcome to join any of our 15 interest sections at the discounted rate of only $6 per section.

Please encourage your students to take advantage of this new option to participate in the accounting education community, and share the news of this new opportunity with your colleagues.

Information about student membership in the AAA and an online student membership application can be found online at http://aaahq.org/membership/student_member.htm. If you have any questions about student membership, please feel free to contact Deirdre Harris at membership@aaahq.org or 941-921-7747, ext. 319.

Best regards,
Tracey Sutherland
Executive Director
American Accounting Association
Phone: 941/921-7747 ext. 311
Fax: 941/923-4093
AAA website:
http://aaahq.org
Email: tracey@aaahq.org

Although current issues of AAA publications are not free, I remind readers that back issues of The Accounting Review (up to I think year 2000) can be downloaded free as images (not PDF text) from http://maaw.info/TheAccountingReview.htm
You have to click on the "(Non USF user link)".

I've never found sources for free back issues of other AAA publications, although most college libraries subscribe to databases that provide free downloads of page images (not PDF text for older editions).


Congratulations Bill (Well Deserved)
The Management Accounting Section of the American Accounting Association is pleased to announce that it has awarded the Lifetime Contribution to Management Accounting Award to Professor William L. Ferrara. The AICPA sponsored award recognizes individuals who have made significant contributions to management accounting education, research, and practice over a sustained period of time through scholarly endeavors, teaching excellence, educational innovation, and service to the Management Accounting Section. The award extends profession-wide recognition to the recipient and promotes role models in management accounting.

"LIFETIME ACHIEVEMENT AWARD GIVEN TO WILLIAM FERRARA FOR CONTRIBUTIONS TO MANAGEMENT ACCOUNTING," AccountingEducation.com, December 7, 2006 --- http://accountingeducation.com/index.cfm?page=newsdetails&id=144010


Study: Most Audit Committees Do Not Have Even One Accountant
Then why call them audit committees?
A new report says that in 2005 the number of accountants sitting on audit committees doubled compared to four years prior, but that six out of 10 companies still did not have at least one accountant on their committee. The research from Huron Consulting is based on a sample of more than 700 audit committee members at 178 public companies from the NASDAQ 100 and Fortune 100 listings. The report analyzed patterns of audit committee composition between 2002 and 2005 using information contained in the companies' annual proxy statements and 10-K disclosures filed with the U.S. Securities and Exchange Commission.
"Study: Most Audit Committees Lack Accountant ," SmartPros, November 30, 2006 --- http://accounting.smartpros.com/x55639.xml

Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm


Issue 16 of the Ernst & Young Faculty Connection --- http://www.ey.com/global/content.nsf/US/EY_Faculty_Connection_(Issue_16)


IFAC Code of Ethics for Professional Accountants
From the IAS Plus blog on December 31, 2006 --- http://www.iasplus.com/ifac/0612ethicsed.pdf

The International Ethics Standards Board for Accountants (IESBA) has issued an exposure draft proposing to update and strengthen the auditor independence requirements contained in the IFAC Code of Ethics for Professional Accountants. Significant proposed modifications to the Code include:

Bob Jensen's threads on auditor professionalism and independence are at http://www.trinity.edu/rjensen/fraud001.htm#Professionalism


XBRL: You Can't Ignore It Anymore
The SEC has poured $54 million into a new interactive reporting tool to replace the retiring Edgar. Now the Big Four say it is time to scrap quarterly reports in favor of real-time (read: daily) financial reporting. If the phrase "XBRL" put you to sleep in the past, it's time to wake up. And as momentum for improving the format of data reporting builds, the push for enriched information content is moving along, too. Indeed, the big audit firms are calling on corporations to report scads of non-financial data to buttress the financials.
"XBRL: You Can't Ignore It Anymore," CFO Magazine Special Report, Various Dates in 2006 --- http://www.cfo.com/guides/guide.cfm/8310234?f=members_121406&x=1

THE INTERACTIVE DATA MOVEMENT

Q&A: Microsoft's Laux on Finance Reports The software giant's director of technical accounting and reporting thinks that once CFOs clear the Sarbox 404 hurdle, they'll show more enthusiasm for XBRL and the reporting of non-financial data.

Will the AICPA Take Over XBRL Standards? Companies could be filing XBRL-ready financial statements as soon as 2008. But some observers worry that the definitions corporations will have to follow will be written almost entirely by accountants.

The Good and Bad About XBRL's Future The setup costs for XBRL is relatively low, but without the proper user tools, regulatory filings can turn into "gibberish."

XBRL Will Keep Investors Wanting More The programming language will pique, not satiate, investors' appetite for more information.

SEC Hires a Company It's Investigating Hired on Monday to work on the commission's new filing system, BearingPoint earlier reported that it would file its financials late—and that it was under investigation by the SEC.

10-Ks, 8-Ks a Thing of the Past? In announcing that the SEC's XBRL project will be done within a year, Chairman Christopher Cox said investors will be able to assemble their own financial data, rather than rely on current regulatory documents.

XBR-What? Even as SEC chairman Cox champions "interactive data," few CFOs seem impressed. Is that because too few of the benefits accrue to them?

Another XBRL Nudge from the SEC The SEC issues a formal request to add an XBRL analysis tool to its online Edgar system. The move increases pressure on companies to voluntarily adopt the technology.

Will XBRL Improve Analyst Coverage? If more companies filed financial documents using XBRL, analysts would be able to spend less time on data collection and would be likely to ''expand buy- and sell-side coverage,'' according to one panelist at an SEC roundtable.

GE, Pepsi Join SEC Data Pilot More companies agree to provide the SEC with financial data in XBRL format, a program strongly backed by Chairman Christopher Cox.

Ready or Not, XBRL Is Coming The SEC and FASB are gearing up for XBRL, suggesting it's only a matter of time before its use becomes mandatory.

Tagged, But Not It Yet A small group of companies has signed up with the SEC to test Internet-tagging of financial data. Will this latest effort finally launch the long-predicted XBRL revolution?

XBRL: From Tags to Riches? The SEC is offering limited liability relief, the ability to file using Form 8-K, the freedom to tag just a portion of data, and other incentives to encourage companies to file financial data using XBRL.

What XBRL Means For You XBRL promises to bring a little context to numbers. And yes, that's a good thing.

THE SKINNY ON XBRL

For a more laid-back approach to our coverage of interactive data, check out the blog posts below, or click to go to the main blog page.

XBRL? No Thanks, Chaps

The Real-Time Reporting Conundrum

IDA? EVA? XENA?

Cue EDGAR's Fat Lady

Tiny XBRL

XBRL: Is it a TWR of BABL?

A Question of Terms

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

A while back I created a video tutorial for XBRL. You can download the xbrldemos.wmv files from the following path http://www.cs.trinity.edu/~rjensen/video/windowsmedia/


IFRSs, Applying International Financial Reporting Standards
Paul Pacter, a director in Deloitte's IFRS Global Office and webmaster of IASPlus, is co-author of the Second (Enhanced) Edition of the leading university textbook on IFRSs, Applying International Financial Reporting Standards, published this month by John Wiley and Sons (Australia). The focus of this 1,236-page text is on the analysis, illustration, and application of IFRSs. The textbook has been written for intermediate and advanced financial reporting courses, at both undergraduate and postgraduate level, and aligns with the knowledge expectations of the accounting profession. Paul's co-authors are Keith Alfredson, former chairman of the Australian Accounting Standards Board (AASB); Ruth Picker, AASB deputy chairman and a technical partner of Ernst & Young; Ken Leo and Jeannie Radford, both of Curtin University of Technology; and Victoria Wise of Victoria University. Here is the Book's Home Page, for more information and on-line purchasing. Or, for international orders, email custservice@johnwiley.com.au  (cite ISBN: 9780470808238).
IAS Plus, December 21, 2006 --- http://www.iasplus.com/index.htm


December 4, 2006 --- Dennis Beresford [dberesfo@TERRY.UGA.EDU]

The first of the PCAOB's inspection reports on Big 4 firm audits for the 2004 year end has been posted to the PCAOB's web site. It can be accessed at:

http://www.pcaobus.org/Inspections/Public_Reports/2006/Deloitte.pdf

Denny

December 9, 2006 reply from Bob Jensen

I'm getting increased messaging from companies who complain that the PCAOB inspections of Audits are making auditors highly conservative, especially regional auditing firms.

In particular auditors are becoming very tough about testing for hedge ineffectiveness under FAS 133. No auditing firm wants to get caught up anything like KPMG got caught up in before being fired from the Fannie Mae audit.

You can read more about ineffectiveness testing under the term "Ineffectiveness" at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#I-Terms

Because Denny is the new head of Fannie Mae's Audit Committee, I suspect he's heard a lot about ineffectiveness testing as of late.

Bob Jensen

December 9, 2006  reply from Denny Beresford [DBeresfo@TERRY.UGA.EDU]

Bob,

Without commenting on specific situations, it appears that the regulators would like companies and their auditors to actually follow the accounting literature. Seems pretty reasonable to me.

Denny


"PCAOB Finds Problems At PricewaterhouseCoopers (PwC)," by David Reilly, The Wall Street Journal, December 16, 2006; Page A4 --- http://online.wsj.com/article/SB116622194790551886.html?mod=todays_us_page_one

The Public Company Accounting Oversight Board, in an inspection report released Friday, cited PricewaterhouseCoopers LLP for deficiencies in some of its audits of public companies.

The PCAOB noted the firm had failed in some cases to catch or address errors in the way companies applied accounting rules or lacked sufficient evidence to back up some of its decisions. The PCAOB singled out for criticism nine audits done by PricewaterhouseCoopers, saying in a number of the cases the firm failed to adequately check the value of revenue, inventory and accounts receivable at companies whose books it was approving. The board's inspections entail reviews of a sampling of audits, not every audit done by a firm.

In keeping with the board's policies, the report doesn't identify the companies that had their audits cited. In addition, only a portion of the report is made public. A section that includes criticisms related to an accounting firm's quality-control systems is kept secret and never made public if a firm is able to show that it has corrected the problems cited within 12 months of the report's issuance.

In a comment letter included in the PCAOB report, PricewaterhouseCoopers said, "We have addressed each of the specific findings raised in the report and, where necessary, performed additional procedures or enhanced the related audit documentation." A spokesman for PricewaterhouseCoopers issued a statement saying that the firm believes it is "performing quality audits" and that it "will incorporate the board's findings" into the firm's practices.

The board's inspection reports are the only public assessment of audit firms' work available to investors and the corporate audit committees, which hire, fire and negotiate how much to pay the accounting firms.

The report is the second this year that the PCAOB has issued for a Big Four accounting firm covering inspections conducted last year of the firms' audits of companies' 2004 financial results. Earlier this month the agency issued its 2005 report for Deloitte & Touche LLP.

The PCAOB, which has been criticized for the length of time it is taking to issue annual reports, has yet to issue 2005 inspection reports for Ernst & Young LLP or KPMG LLP, the other two members of the Big Four. The board has until the end of the year to do so.

The PCAOB must issue an annual inspection report for any accounting firm that audits 100 or more public companies. Firms that audit fewer than 100 public companies are inspected every three years, although the PCAOB on Friday said it would look to amend this rule.

PricewaterhouseCoopers' response to its PCAOB report was in contrast to that of Deloitte, which included strong rebuttals of many of the board's findings.

Bob Jensen's threads on audit incompetence are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

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


"FASB Proposes Improved Derivatives, Hedging Disclosures," SmartPros, December 11, 2006 --- http://accounting.smartpros.com/x55778.xml

The Financial Accounting Standards Board issued a proposal that would provide investors and others with better information about the effects of derivative and hedging activities on a company's financial statements.

The proposed statement specifically addresses constituents' concerns that existing disclosure requirements associated with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, do not provide adequate information to financial statement users.

"The proposed disclosure requirements are intended to enhance understanding of how and why entities use derivatives, how they are accounted for in an entity's financial statements, and how they affect an entity's financial position, results of operations, and cash flows," said Kevin Stoklosa, FASB Project Manager.

The exposure draft would enhance the current disclosure framework by requiring that objectives and strategies for using derivative instruments be discussed in terms of underlying risk and accounting designation. The exposure draft would require tabular disclosure of notional and fair value amounts of derivatives instruments and the gains and losses on derivatives instruments and related hedged items. Additionally, the proposed statement would require disclosure of information about counterparty credit risk and the existence and nature of contingent features in derivative instruments.

The requirements of the proposed Statement would be effective for financial statements issued for fiscal years and interim periods ending after Dec. 15, 2007, with early application encouraged. The proposed statement would encourage but would not require disclosures for earlier periods at initial adoption. In years after initial adoption, the proposed statement would require disclosures for earlier periods.

The board is seeking written comments on the proposal by March 2, 2007.

For a short time you can download the proposed FAS 133 amendment from http://www.fasb.org/draft/ed_derivatives_disclosure.pdf

Bob Jensen's tutorials on FAS 133 and IAS 39 are at
http://www.trinity.edu/rjensen/caseans/000index.htm

A slide show on FAS 133 and IAS 39 disclosure rules is available at http://www.cs.trinity.edu/~rjensen/Calgary/CD/JensenPowerPoint/


Accounting Snags Push Dresser to Restate Problems with derivative transactions, inventory controls
Dresser Inc. said it will restate its financial statements for 2001 through 2003 based on a host of accounting errors. In May, the industrial engineering company had warned that it would restate its 2004 annual filing, its 2004 and 2005 quarterly financial statements, and would be evaluating the potential need to restate prior periods. The accounting errors relate to inventory valuation and derivative transactions under the Financial Accounting Standards Board's FAS 133. Other accounting errors relate to the company's businesses which were sold in November 2005.
Stephen Taub, "Accounting Snags Push Dresser to Restate Problems with derivative transactions, inventory controls, keep IPO on hold," CFO Magazine, November 26, 2006 ---
http://www.cfo.com/article.cfm/8346406/c_8347143?f=FinanceProfessor.com

Dresser Inc. changed its independent auditor to Pricewaterhouse Coopers (PwC) in 2002 and with plans to restate its 2001 financial statements after it changed auditors. The previous auditor was KPMG.

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


Monster says it made monster accounting errors
Monster Worldwide Inc. said on Wednesday it overstated profit from 1997 to 2005 by a total of $271.9 million, a result of its investigation into historical stock option grants and accounting. In a filing with the U.S. Securities and Exchange Commission, the parent of job search Web site Monster.com recorded a net charge of $9.2 million for 2005, $14.4 million for 2004, $27 million for 2003, $44.9 million for 2002, $65.6 million for 2001, and $110.8 million for the cumulative period of 1997 through 2000.
"Monster says overstated '97-'05 profit by $271.9 m," Rueters, December 13, 2006 --- Click Here

The Independent Auditor for Monster Worldwide is KPMG --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG


It just gets deeper and deeper for KPMG

Fannie Mae Sues KPMG
The mortgage lending company Fannie Mae filed suit on Tuesday against its former auditor KPMG, accusing the firm of negligence and breach of contract for its part in the flawed accounting that led to a $6.3 billion restatement of earnings. Fannie Mae states in its complaint that KPMG applied more than 30 flawed principles and cost it more than $2 billion in damages. Fannie Mae fired the accounting firm in mid-December 2004, just a week after the Securities and Exchange Commission ordered the company to restate more than two years of flawed earnings. A KPMG spokesman, Tom Fitzgerald, said the company planned to “pursue our own claims against Fannie Mae.”
"Fannie Mae Sues KPMG," The New York Times, December 13, 2006 --- http://www.nytimes.com/2006/12/13/business/13kpmg.html?_r=1&oref=slogin

KPMG fired back at former audit client Fannie Mae this week, saying it would counter the mortgage giant’s $2 billion negligence and breach of contract lawsuit. KPMG “will pursue our own claims against Fannie Mae” in the U.S. District Court in Washington, D.C., spokesman Tom Fitzgerald told reporters Tuesday. Fannie Mae filed its lawsuit Tuesday in the Superior Court of the District of Columbia. Fitzgerald said the issues raised in Fannie Mae's lawsuit “are already pending" in shareholder lawsuits before the federal district court. He did not elaborate on what claims KPMG would make against Fannie Mae, Reuters reported.
"KPMG Plans Counter Suit of Fannie Mae," AccountingWeb, February 14, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102902 

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


Guilty Plea Made in Trial Over Shelters From KPMG
A businessman pleaded guilty yesterday to charges of conspiracy and fraud and agreed to help federal prosecutors pursue indicted former employees of the accounting firm KPMG in a widening investigation into questionable tax shelters. The businessman, Chandler Stuart Moisen, who appeared in Federal District Court in Manhattan, is the third person to enter a guilty plea in the tax shelter investigation, which has ensnared accountants, bankers, lawyers and investment advisers. . . . . . . Although Mr. Moisen is a relatively minor figure in the tax shelter inquiry, his offer to cooperate with the prosecution could have major consequences for the KPMG defendants, in particular for Robert Pfaff, a former KPMG partner with whom Mr. Moisen worked closely to sell questionable tax shelters.
Lynnley Browning, "Guilty Plea Made in Trial Over Shelters From KPMG," The New York Times, December 22, 2006 --- http://www.nytimes.com/2006/12/22/business/22shelter.html?ref=business

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


Prison for Chip Executive
An executive with Samsung Electronics will plead guilty, serve 10 months in prison and pay a $250,000 fine for conspiring to fix prices of computer memory chips, the Justice Department said on Thursday. Young-hwan Park participated in the conspiracy while he was a vice president for sales at Samsung, which is based in South Korea and is the world’s top maker of memory chips, the department said.
"Prison for Chip Executive," The New York Times, December 22, 2006 --- http://www.nytimes.com/2006/12/22/technology/22samsung.html


"Fannie Mae Faces Work After Restatement," by Marcy Gordon, SmartPros, December 8, 2006 --- http://accounting.smartpros.com/x55766.xml

Mortgage giant Fannie Mae has taken a significant stride in its march out of an accounting scandal by completing a restatement of past earnings but still faces tough work to make its financial reporting current.

The restatement for 2001 through June 30, 2004, made public on Wednesday, wiped out $6.3 billion in profit for the government-sponsored company, which finances one of every five home loans in the United States. But it was well below Fannie Mae's earlier estimate of $10.8 billion. Ordered by the government two years ago, the massive reworking of its accounting has cost the company some $1 billion this year to carry out.

Shares of Fannie Mae rose $1.64, or almost 3 percent, to $60.14 in early trading Thursday on the New York Stock Exchange. It has traded in a range of $46.17 to $62.37 over the last 52 weeks, compared with its peak of around $80 in early 2004.

It was the first earnings statement filed by Fannie Mae since late 2004. The scandal erupted in the fall of that year when federal regulators accused Washington-based Fannie Mae - with its long-standing prestige, vaunted political clout and reputation for financial excellence - of serious accounting problems and earnings manipulation to meet Wall Street targets.

Fannie Mae also announced Wednesday an increase in its quarterly dividend to 40 cents from 26 cents, where it had been since being slashed in half in January 2005.

"We believe that returning higher levels of capital back to shareholders is a top priority at Fannie Mae, and this marks an important first step," Moshe Orenbuch, an analyst at Credit Suisse, said in a research note issued Thursday.

The company hasn't said when it will get caught up and report its results for 2005 and 2006; it could take a year or two.

The restatement "is a key step forward for the company and represents two years of hard work," James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight, said in a statement Wednesday. "Much remains to be done. ... Fannie Mae faces enormous challenges in fixing its operational and risk management systems, in (financial controls) compliance, and in producing audited financial statements for 2005 and 2006."

Jim Vogel, an analyst with FTN Financial Capital Markets, said in a research note that for Wall Street, the concern is "if there's a pattern of sustained quarterly losses that appear to reflect more difficulties in risk management than the market had thought."

OFHEO is the federal agency that regulates Fannie Mae and Freddie Mac, its smaller sibling in the $8 trillion home-mortgage market. Last May, it issued a blistering report alleging a six-year accounting fraud at Fannie Mae, the second-largest U.S. financial institution after Citigroup Inc. Regulators said the scheme included manipulations to reach quarterly earnings targets so that company executives could pocket hundreds of millions in bonuses from 1998 to 2004.

Lockhart also said Wednesday the agency plans to file a lawsuit before year's end to recover tainted bonus money from former Fannie Mae officials, including ex-chief executive Franklin Raines and chief financial officer Timothy Howard. Raines, a prominent Washington figure who was White House budget director in the Clinton administration, was swept out of office in December 2004 along with Howard. A number of senior executives and board directors have left the company.

Fannie Mae paid a record $400 million civil fine in a settlement with OFHEO and the Securities and Exchange Commission. It also agreed to limit the growth of its multibillion-dollar mortgage holdings, capping them at $727 billion, and to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk.

The company also disclosed Wednesday that its chief executive, Daniel Mudd, received a pay package of $13.1 million, including a $2.6 million bonus, for 2005. Mudd, who was the top operations official at the time of the accounting misdeeds, was elevated to the CEO in a management shakeup in December 2004.

In detailing its restatement, Fannie Mae cited a $7 billion net decrease from previously reported earnings for periods prior to 2002, a $705 million reduction for 2002, a $176 million increase for 2003 and a $1.2 billion increase for the first six months of 2004.

Over the last two years, Fannie Mae has disclosed a passel of new accounting problems that had been uncovered in several areas, including its core business of issuing securities backed by the billions of dollars of home mortgages annually that it buys from lenders and bundles together for resale to investors worldwide. Other problems were revealed in loans, houses acquired through foreclosures, interest on delinquent home loans and reverse mortgages.

They all were in addition to the accounting-rule violations that came to light in September 2004 involving derivatives, the financial instruments that Fannie Mae and Freddie Mac use to hedge against swings in interest rates.

Fannie Mae escaped criminal prosecution over the accounting failure. The Justice Department had pursued a criminal investigation, but federal prosecutors said in August that they had shut down their probe without bringing any action. The SEC still could bring civil actions against individual executives, including people no longer at Fannie Mae, with the burden of proof less stringent than in criminal prosecutions. Several shareholder lawsuits have been filed against the company and current and former executives.

Fannie Mae and Freddie Mac were created by Congress to pump money into the home-mortgage market to keep interest rates low and make home ownership affordable for low- and moderate-income people.

Freddie Mac, which also is government-sponsored and has its stock publicly traded, had its own accounting scandal that came to light in June 2003. The company misstated earnings by some $5 billion - mostly underreported - for 2000-2002 to smooth out volatility in profit and uphold its image on Wall Street as a steady performer.

Bob Jensen's threads on Fannie Mae are
http://www.trinity.edu/rjensen/caseans/000index.htm


"Regulators sue ex-Fannie Mae executives," Marcy Gordon, The Columbus Dispatch, December 19, 2006 ---
Click Here

The government yesterday filed civil charges against former Fannie Mae chief Franklin Raines and two other top executives, accusing them of misconduct costing shareholders billions of dollars.

The Office of Federal Housing Enterprise Oversight announced that it is seeking fines and the return of millions in bonus money. It filed 101 charges against Raines, former Chief Financial Officer Timothy Howard and former controller Leanne Spencer.

Raines and Howard were swept out of office two years ago in the multibillion-dollar accounting debacle at the government-sponsored company, which finances one of every five home loans in the United States. Fannie Mae earlier this month announced a longawaited restatement for 2001 through June 30, 2004, that erased $6.3 billion in profit.

OFHEO said it is seeking civil fines of $100 million or more against the three former executives and restitution of more than $115 million in bonus money tied to an improper accounting scheme.

Continued in article


Will Fannie eventually become an even bigger taxpayer loss than the infamous Savings and Loan frauds?
Fannie Mae's stock price has been on an upswing since late summer, reflecting investor confidence that a Democratic Congress would make strict scrutiny of the mortgage giant less likely (see the nearby chart). And there's no doubt that with Barney Frank wielding the gavel in the House Financial Services Committee, Fannie Mae and Freddie Mac will have a pal on Capitol Hill. Mr. Frank is already talking about expanding the companies' operations (and thus taxpayer exposure to any financial accident) . . . The well-documented allegation is that Fannie's managers manipulated earnings to ensure that their bonuses and incentive compensation were maximized. If Fannie didn't in fact reach those earnings targets -- and it has since restated its earnings by $6.3 billion -- then that money does not belong to the managers who "earned" it.
"Ill-Gotten Raines," The Wall Street Journal, December 20, 2006; Page A18 --- http://online.wsj.com/article/SB116658240822955337.html?mod=djemITP



Yet Again the SEC Amends Executive Compensation Disclosure (particularly regarding stock options)
The US Securities and Exchange Commission has amended its executive and director compensation disclosure rules to more closely conform the reporting of stock and option awards to FASB Statement No. 123 (revised 2004) Share-Based Payment. FAS 123R is similar to IFRS 2 Share-based Payment. The amendment modifies rules that were adopted in July 2006.
SEC Press Release 2006 219 --- http://www.iasplus.com/usa/0612seccomp.pdf


Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
 



Where were the auditors?
Firms cook the books to set executive pay
And these same executives are protesting Sarbanes-Oxley

 

 

"Firms cook the books to set executive pay," Editorial, The New York Times, December 19, 23006 --- http://www.sptimes.com/2006/12/19/Opinion/Firms_cook_the_books_.shtml

Among the corporate deceits that buttress America's obscene executive pay is the one about comparability. But a new federal rule may help expose the reality of so-called "peer groups." Far too often, the list of comparable CEOs is cooked.

As the New York Times reported in its latest installment on executive pay, former New York Stock Exchange chairman Richard Grasso was a poster child for the abuse. His $140-million compensation package was rationalized, in part, by comparing his job to those at companies with median revenues 25 times the size of the exchange, assets 125 times and employee bases 30 times the size.

Grasso was hardly alone. Executives have learned that the path to personal riches is paved by "peer groups" that include big and profitable companies. Eli Lilly compared itself to eight companies that had much higher profit margins. Campbell Soup used one set of companies for executive pay and a separate one as a benchmark for stock performance. Ford Motor Co. compared itself to other industries, its proxy statement said, because "the job market for executives goes beyond the auto industry."

The "job market" argument is particularly disingenuous. As the New York Times noted, ousted Hewlett-Packard chief executive Carly Fiorina was replaced by a data processing executive who was earning less than half her pay. His company, NCR, never appeared on the Hewlett-Packard "peer group."

The growth in executive pay has been so meteoric in the past quarter-century that it is demeaning the contributions of average workers and undermining public faith in corporate America. Last year, according to the Corporate Library, the average pay for an S&P 500 chief executive was $13.5-million. The average CEO now earns 411 times the average worker, up from 42 times in 1980.

The new Securities and Exchange Commission disclosure rules went into effect on Friday, and compensation consultants are scrambling to cover their tracks. But stockholders who have been kept mostly in the dark will now at least have a chance to see the playbook. That's the first step toward ending these games of executive greed.

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

 

Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

 

Bob Jensen's threads on fraudulent and incompetent auditing are at http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits
 


Where can you learn more about FAS 133?

February 15, 2006 message from XXXXX

Bob,

. . . .The purpose of my email is to solicit your opinion on the best resources I can leverage to answer various issues that arise and generally broaden my understanding of FAS 133. work in risk management but have difficulties with the accounting side of FAS 133.  [Other portions of message deleted]

Thanks for your time!

XXXXX

February 15, 2006 reply from Bob Jensen

Hi XXXXX,

I receive inquiries like this almost daily. Usually these questions come from accountants who do not have sufficient background in derivative instruments contracting and economic hedging and, as a result, have not been able to tackle FAS 133 and IAS 39. Sometimes the inquiries come from people like your self who have good background in finance and risk management but cannot comprehend the quirks of accounting that led to this monstrous set of incomprehensible rules for booking and/or disclosing derivative financial instruments.

When accountants do not understand derivatives and risk management, I tell them to work through one of the best textbooks I've ever seen (which has no accounting whatsoever inside):
Derivatives:  An Introduction by Robert A Strong, Edition 2
(Thomson South-Western, 2005, ISBN 0-324-27302-9)

When people like yourself who understand derivatives and risk management but cannot understand the quirks of accounting, I begin with an illustration of a basic quirk in accounting--- a quirk discussion that also introduces the concepts of "forecasted transaction" and "firm commitment" hedging under FAS 133 rules.

Unbooked Financial Risks
One of the first things we learned in Accounting 101 is that accountants traditionally do not book (and usually do not even disclose) purchase/sales contracts until legal title to the goods and services actually changes hands. Reasons are complicated, but the most fundamental reason is that defaulted purchase/sales contracts are usually settled in court or out of court for a small fraction of contracted amounts, i.e., settlements are usually based upon damages rather than contracted amounts in full. For example, when Dow Jones contracts with St. Regis Paper Company for paper purchases over the next 50 years of publishing The Wall Street Journal it would be absurd to try to book a soft estimate of the billions of the actual contracted dollars of this contract. Damage estimates are virtually impossible to estimate and change from month to month as more trees for paper harvesting are planted.

Hence the biggest problem finance and economics professors have with accounting professors is that purchase/sales contracts entail financial risks that accounting professors refuse to book. Furthermore these purchase/sales contract risks are commonly hedged. When the notional (quantity) and underlying (price or rate) are contracted, the purchase/sales contract is called a "firm commitment" under FAS 133. There is no cash flow risk in firm commitments, but they can be hedged for fair value (when future spot prices differ from contracted prices). When the notional (quantity) is contracted or otherwise reasonably certain and the underlying is not specified there is cash flow risk that can be hedged with a cash flow hedge defined in FAS 133. Also firm commitments and forecasted transactions can be hedged for foreign currency (FX) risk apart from U.S. dollar risks. Most accountants do not even understand that it is impossible to simultaneously hedge for fair value and cash flow.

FAS 133 as Source Material for Comedy Central TV
My purpose here is not to launch into a tutorial about purchase/sales contract hedge accounting rules under FAS 133. Rather my purpose is to illustrate the dilemma caused by traditional quirks in accounting. Where finance and accounting professors differ is on the basic concept of financial risk. Finance professors are confused when there are financial risks that can be hedged even though those risks are virtually ignored by accountants because legal title has not changed hands. Then along comes FAS 133 that declares the hedge contracts for unbooked hedged items must be booked and maintained at fair value even though the hedged items themselves are not booked until title passes. This begins to sound like great source material for Comedy Central TV --- perhaps the Cobert Report!

Where To Begin
Adding pain to misery is the fact that FAS 133 rules for fair value hedges differ greatly from rules for cash flow and FX hedges. Finance professors find the stated reasons in FAS 133 incomprehensible. Accounting professors don't bother to open FAS 133 and never get out of the starting gate in understanding derivatives, hedging, risk management, and FAS 133.

So where do you begin to understand the accounting quirks in FAS 133? My first piece of advice is to totally ignore accounting textbooks, including those that may claim to be derivatives accounting textbooks. These are worthless. Second ignore the finance and economics textbooks since authors of these books do not understand accounting quirks.

You mentioned Ira Kawaller. Ira is an economist who admits to having difficulties understanding accounting quirks. This is why he sometimes brings me into partner with him on teaching FAS 133 --- my role is to teach accounting quirks of FAS 133. I also give my own workshops on this topic --- http://www.trinity.edu/rjensen/resume.htm#Presentations

I also provide free online FAS 133 and IAS 39 tutorials and videos --- http://www.trinity.edu/rjensen/caseans/000index.htm

But the bottom line is that my audiences and my readers conclude that my biggest success in life is confusing them about accounting for derivatives. My defense is that it is very difficult to explain the huge gap between financial risk versus what accountants book. I get a lot of compliments for what I provide online, but the most common complaint is that my online materials are a nightmare to navigate

Where should you dig into to learn about the accounting quirks of FAS 133? The bottom line is that I don't know! You can pay thousands of dollars to attend one of our seminars, but these are so broad brushed that our audiences feel like they've just had a meal on hors'deovers.

The bottom line is that it is probably best to dig into the FASB's "Green Book" line for line as painful as that becomes for 873 pages of jargon ---
http://fasbpubs.stores.yahoo.net/dc133-3.html
 

Also request the FASB's supplemental documentation (119 pages to date) of error corrections in the Green Book.

Secondly, memorize the FAS 133 and IAS 39 rules rather than try to find a rationale. For example, it is utterly frustrating trying to reason why hedge accounting for cash flow/FX hedges use OCI offsets that are verboten  fair value hedges (never OCI for FV hedges). You should just to do or die, not reason why.

I do suggest that you especially look at my Excel workbooks at http://www.cs.trinity.edu/~rjensen/Calgary/CD/FAS133AppendixB/

I also suggest that you look at my PowerPoint files at http://www.cs.trinity.edu/~rjensen/Calgary/CD/ 

There is much pressure outside and within the FASB and the IASB to simplify rules for accounting for derivative financial instruments. This is a bit like appeals to reduce felony statutes to a mere Ten Commandments on stone tablets. Simplification sounds great as a principle, but in my viewpoint oversimplification will be disastrous. The reason is that there are thousands of different kinds of risk management contracts, and it's impossible to derive ten commandments covering all the variations arising in the practice of risk management.

Some argue that fair value accounting (in place of historical cost accounting) is the answer, but I have my doubts about this oversimplification ---
http://www.trinity.edu/rjensen/FairValueDraft.htm
Also see
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#FairValue

For example, fair value accounting is no panacea to accounting for purchase/sales contracts.

Bob Jensen

 


Federal Regulators Fine Grant Thornton $300,000 Over Audit of Failed Bank
Federal bank regulators have fined the accounting firm Grant Thornton LLP $300,000 for what they called "reckless conduct" in its audit of First National Bank of Keystone, a West Virginia institution whose collapse in 1999 was one of the costliest U.S. bank failures in the past decade.
Marcy Gordon, "Federal Regulators Fine Grant Thornton $300,000 Over Audit of Failed Bank, SmartPros, December 11, 2006 --- http://accounting.smartpros.com/x55776.xml

Grant Thornton LLP said it will challenge recent Treasury Department (DoT) findings and penalties stemming from the firm’s audit of a bank that collapsed in 1999. The Office of the Comptroller of the Currency, the Treasury agency that regulates nationally chartered banks, on Friday announced the telling $300,000 fine against the Chicago-based CPA firm that audited First National Bank of Keystone in 1998.
"Grant Thornton to Fight Claim of “Reckless” Audit," AccountingWeb, December 12, 2006 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=102894

Bob Jensen's threads on Grant Thornton (especially the Refco audit failure) are at http://www.trinity.edu/rjensen/Fraud001.htm#GrantThornton


"Accounting Firms Seek Overhaul," by Tad Kopinski, Institutional Shareholder Services ISS, November 20, 2006 ---
http://blog.issproxy.com/2006/11/accounting_firms_seek_overhaul.html

The six biggest international audit firms have called for a complete overhaul of corporate financial reporting as the U.S. and Europe move toward convergence of international audit standards.

In a Nov. 8 report, the accounting firms propose to replace static quarterly financial statements with real-time, Internet-based reporting that encompasses a wider range of performance measures, including non-financial ones. The report was signed by the chiefs of PricewaterhouseCoopers International, Grant Thornton International, Deloitte, KPMG International, BDO International, and Ernst & Young. The report can be downloaded here.

"We all believe the current model is broken," Mike D. Rake, KPMG's chairman, told the Financial Times. "There are significant shortcomings to U.S. GAAP [Generally Accepted Accounting Principles] and issues of concern with International Financial Reporting Standards. We're not in a very happy situation."

Rake noted that quarterly reporting and the short-term focus on companies' ability to meet Wall Street earnings expectations helped foster accounting scandals. The firms have been working on their proposals for more than a year.

The large discrepancy between the "book" and "market" values of many listed companies is clear evidence that the content of traditional financial statements is of limited use, the report said. The audit firms recommend using non-financial measures that would provide more valuable indications of a company's future prospects, such as customer satisfaction, product or service defects, employee turnover, and patent awards.

The report said the following developments need to occur to ensure capital market stability, efficiency, and growth:

--Investor needs for information are well defined and met;
--The roles of the various stakeholders in these markets--financial statement preparers, regulators, investors, standards setters, and auditors--are aligned and supported by effective forums for continuous dialogue;
--The auditing profession is vibrant, sustainable, and provides sufficient choice for all stakeholders in these markets;
--A new business-reporting model is developed to deliver relevant and reliable information in a timely way;
--Large, collusive frauds are more and more rare; and
--Information is reported and audited pursuant to globally consistent standards.
 

ICGN Expresses Concerns Over Convergence

Meanwhile, the International Corporate Governance Network (ICGN) has expressed concerns about a draft proposal on harmonizing international and U.S. accounting standards. The ICGN argues that the draft doesn't pay sufficient attention to shareholder rights and the stewardship role of boards and investors.

"Convergence must be there to raise standards," ICGN Executive Director Anne Simpson told the Financial Times. "Convergence for its own sake is not of value."

The ICGN letter was in response to a request for comment by the International Accounting Standards Board (IASB) and its U.S. counterpart, the Financial Accounting Standards Board (FASB) on a discussion paper on harmonization objectives. The IASB and the FASB have been working on harmonizing the two accounting systems since October 2002 and have set 2008 as the goal for finalizing the process.

Unlike the current IASB auditing framework, the discussion paper endorses a model more similar to U.S. standards, dropping a key shareowner safeguard embedded in U.K.-style standards, the ICGN noted. Rather than focusing audits on past transactions, the discussion paper calls for audits to focus on "decision-usefulness" that can affect company cash flows, the letter said.

"We are concerned that this emphasis on the ability to forecast the future does not fully capture the requirements of stewardship, which is concerned with monitoring past transactions and events," Mark Anson, the CEO of Hermes Pensions Management who chairs the ICGN, wrote in the Nov. 2 letter. (A Hermes affiliate is a part owner of ISS.)

"In many jurisdictions, financial statements provide significant input into the decisions we make as shareholders, by providing an account of past transactions and events and the current financial position of the business," the ICGN letter noted. "In de-emphasizing things that are particularly [relevant to shareholders' risks and rights], the standards setters could achieve the perverse effect of actually increasing the cost of capital."

The ICGN includes more than 400 institutional and private investors, corporations, and advisers from 38 countries with capital under management in excess of $10 trillion, according to its Web site. The ICGN letter also was signed by Claude Lamoureux, CEO of the Ontario Teachers' Pension Plan.

A copy of the IASB discussion paper, which was published in July, can be downloaded here.

 

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

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

Bob Jensen's threads on troubles in the big international accounting firms are at http://www.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's threads on proposed reforms are at
http://www.trinity.edu/rjensen/FraudProposedReforms.htm


Bob Jensen's threads on audit firm litigation instances are at http://www.trinity.edu/rjensen/Fraud001.htm

From The Wall Street Journal Accounting Weekly Review on November 3, 2006

TITLE: Booming Audit Firms Seek Shield From Suits
REPORTER: David Reilly
DATE: Nov 01, 2006
PAGE: C1
LINK: http://online.wsj.com/article/SB116235111161209823.html?mod=djem_jiewr_ac 
TOPICS: Auditing, Auditing Services

SUMMARY: The Big Four U.S. audit firms--PricewaterhouseCoopers, Deloitte & Touche, Ernst &Young, and KPMG--want legal limits on court damages granted to investors and others after failure of publicly traded companies they audit. "Their argument is being championed by an influential group recently formed to study the competitiveness of U.S. financial markets with the encouragement of Treasury Secretary Henry Paulson." Others, including the U.S. Chamber of Commerce and the European Commission, are considering similar measures.

QUESTIONS:
1.) The argument against limiting legal liability of public accounting firms argues that auditors should "be held to a high standard of performance." Explain this argument and describe who in business and investing activities likely holds this view.

2.) The argument for limiting legal liability includes the point made by the chief executive of Deloitte Touche Tohmatsu in the article that "the cost of ...audits was never built for insuring capital markets." Summarize the argument in support of limiting legal liability for audit firms, including and explanation of this statement.

3.) How did the Arthur Andersen firm failure result from the Enron scandal? How was the possibility of a similar fate for KPMG avoided? How do these events contribute to the debate on this issue?

4.) How did the Committee on Capital Markets Regulation become involved in the debate on limiting audit firms' legal liability?

5.) How does the discussion in the article indicate the international focus on this issue? Cite all points you can find in the article.

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES ---
TITLE: Panel's Mission: Easing Capital-Market Rules
REPORTER: Alan Murray
PAGE: A2
ISSUE: Sep 12, 2006
LINK: http://online.wsj.com/article/SB115802003723560082.html?mod=djem_jiewr_ac

"Booming Audit Firms Seek Shield From Suits," by David Reilly, The Wall Street Journal, by November 1, 2006; Page C1 ---
http://online.wsj.com/article/SB116235111161209823.html?mod=todays_us_money_and_investing

Business is booming at the world's biggest accounting firms, so their top lobbying priority may seem ironic: They want government protection from a big financial hit.

Revenues at the Big Four -- PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young and KPMG -- have grown at a double-digit pace in recent years as audit fees soared. Regulatory overhauls enacted in the wake of accounting scandals earlier this decade have led to new work for firms. One of the biggest problems facing the Big Four these days is a lack of staff to meet the huge demand for services.

Yet the Big Four want to limit court damages that investors and others can seek from them for flawed audits of public companies. Without such a shield, the firms say, it's only a matter of time before one of them is felled by a massive court award.

Their argument is being championed by an influential group recently formed to study the competitiveness of U.S. financial markets with the encouragement of Treasury Secretary Henry Paulson. The group is expected to recommend in coming weeks that the government enact new protections for auditors. A panel set up within the powerful U.S. Chamber of Commerce is sounding a similar theme. In Europe, the European Commission is studying the issue and is likely to recommend limitations on the damages accounting firms can face.

How much risk the big firms actually face has been largely absent from the debate over auditor liability. Despite a slew of big-ticket lawsuits that emanated from corporate scandals earlier this decade, none of the firms suffered a fatal blow from those legal actions. The one big firm that folded, Arthur Andersen LLP in 2002, fell victim not to a lawsuit but to a criminal obstruction-of-justice conviction, later overturned on appeal.

"I don't see that auditors have a real need for any kind of special protections," said Bill Kelley, general counsel at the Retirement Systems of Alabama, which has sued accounting firms following corporate blowups. "Auditors need to be held to a high standard. Those are the outsiders we rely on. It's tough to have that responsibility, but that's what they're getting paid for."

Mr. Kelley and likeminded critics say it's also difficult to quantify the risk the firms face from a big court award. That's because the accounting firms are private partnerships that don't, in most cases, disclose their financial condition or results. So outsiders don't know how much capital the firms have, their level of profitability or even how much insurance they carry.

If anything, the risk from class-action lawsuits appears to be dwindling. The number of class actions that cite auditors as defendants declined to five last year from 14 in 2002, according to the Stanford Law School Securities Class Action Clearinghouse.

The bigger threat to firms has stemmed not from civil litigation, but from alleged criminal actions related to their conduct. In addition to the Arthur Andersen case, KPMG LLP suffered a near-death experience last year due to its sale of improper tax shelters; federal prosecutors ultimately decided not to indict the firm, a move that likely would have put it out of business.

The Andersen and KPMG cases have led some lawyers to claim that the Big Four are already seen by government as too big to fail. "The fact is that the government couldn't indict KPMG for policy reasons," said Sean Coffey, a partner at New York law firm Bernstein Litowitz Berger & Grossmann LLP, who has sued several accounting firms. "These folks are effectively immune to being put out of business and now they're trying to find ways to further inoculate themselves from accountability."

The firms also have shown they can weather pretty big hits. Over the past two years, KPMG has agreed to pay out nearly $700 million in fines and settlements related to criminal and civil actions. In 2000, Ernst & Young LLP settled for $335 million a shareholder suit related to its work for Cendant Corp.

Accounting firms argue the danger they face from civil litigation is real and that there are still many scandal-era actions that have yet to work their way through the courts. What is needed, the firms say, are litigation caps similar to those many states have enacted to protect doctors from malpractice suits.

The firms say special protection is warranted because they can be sued not just by the companies whose books they audit, but also by others, such as investors. These investors, the firms add, try to use auditors to recoup stock-market losses.

"The cost of our audits was never built for insuring the capital markets," said William G. Parrett, chief executive of Deloitte Touche Tohmatsu, the international arm of Deloitte & Touche. "I don't think we're saying we shouldn't have any liability, but it has to be in proportion to our participation in any problem."

The firms also say they can't get sufficient insurance because their liability is almost unlimited, encompassing in a worst-case scenario the total stock-market value of the companies they audit. So they are forced to settle lawsuits rather than risk a trial.

A study for the European Commission, released in September, said the total costs of judgments, settlements, legal fees and related expenses for the U.S. audit practices of the Big Four firms had risen to $1.3 billion in 2004, or 14.2% of revenue, up from 7.7% in 1999. In addition, according to a study by insurer Aon, there were 20 claims outstanding against U.S. auditors as of September 2005 where damages sought or estimated losses topped $1 billion. Accounting firms say they couldn't survive an award of that size.

Advocates of liability caps frame the issue around the broader debate over U.S. market competitiveness.

"I think the whole issue of liability is one of the major reasons why foreign companies aren't coming here" to list their stocks on U.S. exchanges, said Hal S. Scott, a Harvard Law School professor and a founding member of the Committee on Capital Markets Regulation, the group formed with Mr. Paulson's blessing to study market competitiveness. Mr. Scott added that while court awards can serve as a deterrent to shoddy audit work, "if we left this to the legal process, we might come up with the right amount of damages to deter bad behavior but have just two or three accounting firms" because one will have gone out of business.

Recognizing, though, that auditor liability overhaul might be a tough sell on Capitol Hill, the committee may suggest that the U.S. Securities and Exchange Commission come up with a solution, Mr. Scott said. "The SEC could modify their own rules regarding liability," he added. One idea under study: Allowing accounting firms to negotiate liability caps with clients, a practice now barred to preserve auditors' independence.

November 2, 2006 reply from Mark Eckman, Rockwell Collins [mseckman@ROCKWELLCOLLINS.COM]

With tongue firmly planted in cheek, why don't we let the audit firms become insurance companies and let them charge premiums based on the risk of material misstatement and deny coverage when the risk is too high? Turn auditors into underwriters and I believe you would see a vast difference in how audits are conducted.

Mark S. Eckman

November 2, 2006 reply from Deborah Johnson [vicjohn@SPRINTMAIL.COM]

I have to agree. Even though you regard it as tongue in cheek, it actually sounds more rational than the current situation. Let each company comply with Sarbanes, and purchase two Bonds from an Insurer. The first Bond for the materiality of the Financial Statements. The Second Bond for Fraud Insurance.

November 5, 2006 reply from Bob Jensen

For years some professors like Josh Ronen (NYU) have made arguments for auditing firms to insure financial reports (not necessarily internal fraud that does not materially affect annual reports).

There are some very good reasons why it makes sense to do this, especially from the perspective of reducing litigation costs for misleading financial reports. However, there are some huge differences between auditing and insurance risks. Insurance risks are measured by actuarial studies of relatively stable systems such as mortality, home fires, wind damage, etc. Insurance companies tend to write in coverage exceptions for things that are less predictable like nuclear war and earthquakes that arise in non-stationary systems. Financial fraud and auditor errors that hugely impact financial statements are more like nuclear war and earthquakes.

Audits are conducted in much less stationary systems that defy actuarial prediction of losses. One problem is that the systems themselves are reactionary. The current rash of executive option backdating is a good example. Who could've predicted that thousands of executives would commence to backdate options? Events transpired to inspire these frauds, including changes in FAS 123, changes in tax constraints, and a window of opportunity before SOX went into effect. My point is that each new accounting standard, EITF, interpretation, law change (especially tax law), and political outcomes (with power shifting between conservatives and liberals) changes the entire system being audited such that actuarial calculations are impossible.

Bob Jensen

Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm

November 5, 2006 reply from Mark Eckman, Rockwell Collins [mseckman@ROCKWELLCOLLINS.COM]

Very good analysis. Still, I would raise the point that there are specialty underwriting segments available; viz., one can insure for exceptional things such as war, inconvertibility of currency, expropriation, kidnap & ransom, etc. that have no actuarial basis. However, where a need exists and the pvt insurance sector cannot or will not take on the entire risk, govt insurance entities as primary insurers, reinsurers, or insurers of last resort are frequently seen. My former employer, the Overseas Private Investment Corporation, is an example. Whether these coverages can provide indemnity in the same way as auto insurance is doubtful. Even so, as one looks for solutions to the increasingly complex problem of the modern role of financial auditing, these alternatives should be carefully examined.

Paul Bjorklund, CPA
Bjorklund Consulting, Ltd.
Flagstaff, Arizona

November 9, 2006 reply from Tom Hardy [thardy@IVESINC.COM]

In response to several inquiries that we have received regarding the Nov 1, 2006 Wall Street Journal article on Big 4 Litigation cases entitled “Booming Audit Firms Seek Shield on Suits,” I am making the attached analysis available to AECM.

Big 4 Securities Class Action Litigation- Citing Auditor as Defendant” highlights the number of security class action cases involving Big 4 Accounting Firms between 2002 and 2005. It also lists each case by year.

This research was compiled using the Audit Analytics Litigation Module. If you would like additional information or a demonstration of this new AuditAnalytics.com database please give me a call or send me an e-mail.

Tom Hardy
AuditAnalytics.com
IVES Group, Inc.
9 Main St. Suite 2F
Sutton, MA 01590
508-476-7007 Ext. 28

thardy@ivesinc.com 


Taxation of Dividends Creates European Union Stir
The Institute of Chartered Accountants in Ireland (ICAI) said that the European Court of Justice (ECJ) ruling this week on the UK dividends case creates issues for other European countries, including Ireland, which have a similar system of taxation of dividends to that in the UK. The ECJ ruled on the principles of freedom of establishment and freedom of movement of capital in relation to the UK dividends system. See further details in our full news item.
Andy Lymer, "ECJ DIVIDENDS CASE CREATES ISSUES FOR IRELAND," AccountingEducation.com, December 14, 2006 --- http://accountingeducation.com/index.cfm?page=newsdetails&id=144069


"2007 Excellence in Project Accounting Philosophy Essay Scholarship Contest Begins," AccountingWeb, December 8, 2006 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=102883

The 2007 Excellence in Project Accounting Philosophy essay scholarship contest launches on January 1, 2007. The winning essayist will receive $500 toward college tuition and fees from Journyx, the first company to provide Web-based time-tracking and project accounting solutions that guide customers to per-person, per-project profitability.

“Journyx is committed to eradicating cost ignorance from our knowledge worker society and leading organizations to the highest levels of profitability through innovation,” Curt Finch, chief executive officer (CEO) of Journyx said in a prepared statement. “We developed this essay scholarship so that we could educate and share our philosophy with some of the bright minds about to enter the workforce, as well as learn new ideas from them. We will choose the submission that is the most creative and has the most real-world business applicability.”

The scholarship is open to full-time student enrolled in a graduate level masters or doctoral level degree program at a university in the United States. Interested students should contribute an essay of 1,000 words or less on one of the following two topics:

Complete rules and details, including how the essays will be scored, where to send the entries, etc., can be found at www.journyx.com/company/scholarship.html All entries must be received by 5:00 p.m. CST on June 1, 2007.

 


January 1, 2007 message from Doug Roberts [robertsfd@APPSTATE.EDU]

I am teaching for the first time a fraud examination course. As this is not my area of experience, I'm looking for ideas on what to cover and how best to cover it. In addition, the timing of the class and the non- standard "audience" will impact what I do.

The course will meet 3 and 1/2 hours a day for 12 days (consecutive except for weekends) at the end of the semester. Students will be those just returning from tax internships who need another 3 credit hours to maintain full-time status (rather than taking the course because they have an interest in fraud examination); they will have just finished 15 weeks of busy season and I suspect will be less than motivated to do much work without thoughtful "pressure" on my part. Therefore, my objective is to have activities that will force them to remain involved and hopefully learn something and have fun at the same time.

The textbook is rather interesting reading covering various forms of fraud. Beyond their reading outside of class and some quizzes over the reading, I need ideas on what to do - I'd like to keep lecture time to a minimum but need to fill up at least 3 hours. I have some videos the Association of Certified Fraud Examiners put out and will try to get some guest speakers who work in the area. But that still leaves me much time.

Does anyone have any ideas? One thought I had was working with data using Excel and Access to look for fraud flags. However, I have not been able to find datasets. Does anyone know of any good datasets or cases where data analysis is used? I saw where IDEA offers an educational demo - does anyone have experience using that? And how long does that take to complete? Any other ideas using hands-on computer exercises?

Any ideas would be appreciated.

Happy New Year,

Doug Roberts

January 1, 2007 reply from Len Stokes

I have used some of the cases from the Knapp Audit Case book published by Thomson. Many of the cases relate to audit failure and I don't focus exclusively on the GAAS perspective but the Internal Control, fraud etc. I break the class into groups and have a specific grup lead the disucssion of the issues in the case and what they think went wrong, why and what could have been done to prevent it. I don't allow them to focus on the questions that are provided My concept is to get them to begin to think outside the box not just think that Fraud involves specific lists of thing to do. The Fraud videos usually are about an hour. The students usally have interesting comments related to what they saw. Use the class time like a seminar with disucssions and the time will fly with a great deal of interest on their behalf.

Len

January 2, 2007 reply from Bob Jensen

Here are a few references of possible interest on this topic:

Turn Excel into a financial sleuth: an easy-to-use digital analysis tool can red-flag irregularities
Journal of Accountancy, August, 2003 by Anna M. Rose, Jacob M. Rose --- http://www.aicpa.org/pubs/jofa/aug2003/rose.htm 

Three books are reviewed in the December 2002 issue of the Journal of Accountancy, pp. 88-90 ---
http://www.aicpa.org/pubs/jofa/dec2002/person.htm 

"Auditors’ New Procedures for Detecting Fraud," by D.D. Montgomery, M.S. Beasley, S. Menelaides, and Z. Palmrose, Journal of Accountancy, May 2002 ---
http://www.aicpa.org/pubs/jofa/may2002/mont.htm 

"Let Them Know Someone’s Watching, by Joseph T. Wells, Journal of Accountancy, May 2002 ---
http://www.aicpa.org/pubs/jofa/may2002/wells.htm 

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


Question
What happens when you don't qualify for the "Shortcut Method" for interest rate swaps under FAS 133?

How to avoid ineffectiveness testing for interest rate swaps using the Short-Cut Method --- http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Shortcut

Also see --- http://www.cs.trinity.edu/~rjensen/000overview/mp3/133summ.htm#ShortCut

December 2006 article by Ira Kawaller on Long Haul Hedge Accounting --- http://www.kawaller.com/pdf/BALM_Long_Haul.pdf


Pension Fund Accounting Fraud in San Diego

"San Diego Charges," by Nicole Gelinas, The Wall Street Journal, November 27, 2006; Page A12 --- http://online.wsj.com/article/SB116459315111633209.html?mod=todays_us_opinion

The SEC has announced that it has resolved its pension-fund fraud case against San Diego, with the city agreeing not to commit illegal shenanigans in the future and to hire an "independent monitor" to help it avoid doing so. Although the SEC went easy on the residents and taxpayers of San Diego in its settlement, it still has an opportunity to make an example of the former officials who the SEC determined committed the fraud. The feds should seize that chance to show they're serious about policing a sector of the investment world that remains vulnerable to similar fraud.

San Diego ran into legal trouble with its pension fund because elected officials wanted to keep its municipal workers happy by awarding them more generous pension and health-care benefits, but also wanted to keep taxpayers happy by sticking to a lean budget. The two goals were mathematically irreconcilable. So San Diego officials, with the cooperation of the board members of the city employees' retirement system (the majority of whom were also city officials), intentionally underfunded the pension plan for years. They used the "savings" to award workers and retirees more benefits, some retroactive. Because taxpayers couldn't see how much retirement benefits for public employees eventually would cost them, they couldn't protest against those high future costs. The fund also violated sound investment principles by using "surplus" earnings in boom years to pay extra benefits to retirees, including a "13th check" in some years. Trustees should have put such "surpluses" aside for years in which the market was down.

But the alleged escalated in 2002 and 2003, when city officials brushed aside warnings from outside groups, as well as from an analyst it had itself commissioned, about the fund's parlous financial straits. Although figures clearly showed that the pension fund would face a seven-fold increase in its deficit, to more than $2 billion, over less than a decade, San Diego didn't disclose what, according to the SEC, it "knew or was reckless in not knowing" was an inevitability, instead maintaining its charade. City officials disclosed not a word of the fund's financial troubles to potential investors or bond analysts as it raised nearly $300 million in new municipal securities during those two years.

The SEC elected to go easy on the city. The feds won't levy a fine against it, reasoning that it would end up being the taxpayers who would pay. This argument has merit, since these taxpayers are already on the hook for the $1.5 billion deficit -- roughly equal to the city's operating budget -- the pension-fund fraud had concealed. Taxpayers could face fallout if wronged investors sue the city. But while SEC won't punish taxpayers, it can't afford to go so easy on the officials it's still investigating. (The SEC doesn't name the current and former officials under its scrutiny, but former Mayor Dick Murphy, former city manager Michael Uberuaga and former auditor Ed Ryan, as well as members of the City Council, all had degrees of responsibility for and knowledge of the pension fund's operations.) The SEC must demonstrate that it considers the fraud officials committed against the city's bondholders to be just as grave as similar frauds in the private sector.

People who invest in municipal bonds do so because they feel that such investments are safer than investing in the common stocks of corporations. That's why cities and states enjoy access to capital at affordable interest rates. And, for tax reasons, municipal-bond investors often invest in the bonds of the city in which they reside, so they face double jeopardy. In the first place, if city officials are committing fraud, their bonds will turn out not to be as sound (and thus not as valuable) as they thought they were. The second risk is that they will have to pay higher taxes, or suffer lower government services, to cover pension-funding shortfalls in their city's budget if that is the case.

Continued in article

Bob Jensen's threads on pension fund and post-retirement accounting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Pensions


"Assessing and Responding to Risks in a Financial Statement Audit: Part II," Journal of Accountancy, January 2007 --- http://www.aicpa.org/pubs/jofa/jan2007/fogarty.htm

Bob Jensen's threads on professionalism in auditing are at http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

Bob Jensen's threads on the future of auditing are at http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing


The Cost Approach for Financial Reporting

From IASPlus on November 21, 2006 --- http://www.iasplus.com/index.htm

The International Valuation Standards Committee has published Proposed Revisions to International Valuation Guidance Note 8 – The Cost Approach for Financial Reporting {PDF 193k). The proposed revisions are the result of requests for clarification and suggestions of minor improvements to the 2005 version of GN8. Comment deadline is 31 December 2006. The IVSC has also released an update of its work programme:

Bob Jensen's threads on underlying bases for balance sheet valuation --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#UnderlyingBases


The CEO Who Jousted With Regulators
Options Backdating Takes Its Toll at Cyberonics

The tumultuous tenure of Robert P. Cummins as chairman, president and chief executive of the medical device maker Cyberonics has ended, the company disclosed yesterday. Mr. Cummins, 52, who is known as Skip, is a former venture capitalist who joined the board of Cyberonics in 1988 and became chief executive in 1995. He gained a reputation as one of nation’s most passionate and intimidating business leaders in dealing with critics, regulators and investors.
Barnaby J. Feder, "Head of Cyberonics Resigns as Options Inquiry Expands," The New York Times, November 21, 2006 --- http://www.nytimes.com/2006/11/21/business/21device.html?_r=1&oref=slogin

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


The CEO Who Argued Against Backdating of Options Because Such Practices Were Wrong

January 2, 2007 message from Denny Beresford [DBeresfo@TERRY.UGA.EDU]

I found the following article quite interesting. As noted, not backdating option grants (or other business correspondence) ought to be obvious rather than something that needs to be taught in ethics classes or otherwise. Yet it never hurts to mention these good examples to students.

Denny Beresford

"McNealy is one reason Sun never backdated," by Elise Ackerman and Nicole C. Wong, Mercury News

Stanford University's Faculty Club dining room buzzed at 8 a.m. one day recently with alumni, business leaders and community members wondering what former *Sun Microsystems *Chief Executive Scott McNealy would say about ``leadership transitions.''

McNealy -- a Silicon Valley icon known for pushing people's buttons while pushing technology forward -- relinquished the top job after 22 years to his hand-picked successor, Jonathan Schwartz, in April. However, McNealy remains chairman of the board.

His quick tips raced from the importance of ``asking prima donnas to leave'' the company (``Everyone will love you for it,'' he said) to hiring people who are smarter than you (``marrying up, as they say'').

``The other piece of identifying and grooming leaders is you have to watch for one very important breach -- that is a breach of integrity,'' McNealy said.

``You have