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Year 2007 Quarter 4:  October 1 - December 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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December 31, 2007

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    Bob Jensen's New Bookmarks n December 31, 2007
    Bob Jensen at Trinity University 

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    Large International Accounting Firm History ---

    Fascinating Statistics ---

    It saddens me that Sidney Davidson recently died. He was a good friend and a great accounting professor for many years at the University of Chicago.

    His Accounting Hall of Fame module summarizes some of his many accomplishments ---

    It also saddens me that Bob Sprouse also died in 2007. Bob was an accounting professor and a former Board member of the FASB.

    Bob's Accounting Hall of Fame module --- Click Here

    Integrity is a cornerstone of our culture and we continue to make great progress in our effort to build a model ethics and compliance program. This means fostering awareness, trust, and personal responsibility at every level of the firm. This year, we issued our first ever ethics and compliance progress report and guidebook. This report, Ethics and Compliance Report 2007: It Starts with You, highlights initiatives that we have in place to support our values-based compliance culture, and features real-life stories of some of KPMG's partners and employees who faced ethical challenges and how they handled them. We responded to heightened interest in ethics education and input from your fellow academics and created our KPMG Ethical Compass—A Toolkit for Integrity in Business, a three-module package of classroom materialsto help you present ethics-related topics to your students.
    An Open Letter From Tim Flynn, Chairman and CEO, KPMG LLP
    This was part of an email message that I assume was sent to the academy of accountants.

    Once again the link to the Ethics and Compliance Report 2007 is at

    Bob Jensen's threads on the triumphs and trials of KPMG are at

    A New Type of Intangible Investment (sort of not yet legal in the U.S.) --- Litigation
    How should it be booked and carried in financial statements?
    I say "sort of" since this intangible asset might be buried (as Purchased Goodwill") in acquisition prices when firms are purchased purchased or merged.

    The notion of litigation as a separate asset class is a novel one. It's hard to imagine fund managers one day allotting a bit of their portfolio to third-party lawsuits, alongside shares, bonds, property and hedge funds. But some wealthy investors are starting to dabble in lawsuit investment, bankrolling some or all of the heavy upfront costs in return for a share of the damages in the event of a win. The London-managed hedge fund MKM Longboat last month revealed plans to invest $100million (£50.5million) to finance European lawsuits. Today a new company, Juridica, floats on AIM, having raised £80million to make litigation bets.
    "The law is now an asset class," The London Times, December 21, 2007 ---

    Jensen Comment
    Under U.S. GAAP, intangible assets are generally booked only when purchased and are not conducive to fair value accounting afterwards. Probably the most serious problem in both accounting theory and practice is unbooked value (and in many cases undisclosed) of intangible assets and liabilities. Do the values of human capital and knowledge capital ring a bell? Does the cost retraining the world's workforce to use Office software other than Microsoft Office (Word, Excel, PowerPoint, etc.) ring a bell?

    Contingent liabilities (particularly pending lawsuits) are problematic until the amount of the liability is both reasonably measurable and highly probable. Until now, contingent litigation assets were not investment assets. Contingent liabilities were booked as current or past expenses. Now purchased litigation assets having future value? Horrors!

    In the past when a company purchased another company, some of the "goodwill" value above and beyond the traceable value to net tangible assets could easily have been the value of future litigation such as when Blackboard acquired WebCT and WebCT's patents on online education software. Patents and Copyrights may have value with respect to fending off future competition.

    But patents and copyrights may also have value in future litigation regarding past infringements. Now hedge funds might invest in bringing litigation to fruition.

    Intangible assets and liabilities are, and will forever remain, the largest problem in accounting theory and practice! In some cases, such as Microsoft Corporation, booked assets are so miniscule relative to unbooked intangible assets that the balance sheets are virtually a bad joke.

    An enormous problem, besides the fact that current value of intangibles cannot be counted, current value can change by enormous magnitudes overnight as new discoveries are made and new legislation is passed, to say nothing of court decisions. Tangible asset values can also change, but in general they are not as volatile.

    December 25, 2007 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]


    SFAS 141R (available on the FASB web site) substantially changes the accounting for both contingent assets and liabilities in connection with business combinations. In fact, 141R coupled with SFAS 160 on noncontrolling interests makes major changes to both the accounting for business combinations and the accounting for consolidation procedures. While the new rules can't be applied until 2009, anyone teaching advanced accounting or where ever else these topics are covered should throw out their old lesson plans and be prepared to enter into an entirely new world of accounting - not for the better in my humble opinion.

    By the way, another interesting thing to read on the FASB web site is the proposal to reduce the size of the FASB and make some other changes to improve the standard-setting process. We celebrated our family Christmas a few days ago because of travel plans and I'm working on my comment letter to the Financial Accounting Foundation today.

    Merry Christmas!


    December 25, 2007 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

    What I found interesting about 141R is the discussion in the appendices that showed both the FASB and IASB views and how the Boards reached convergence.

    141R also added a couple paragraphs to FIN 48 that result in goodwill no longer being adjusted if the contingent tax liability is increased or decreased. Instead the DR is to tax expense, which makes a lot more sense to me. If I read the statement correctly, the purchased assets and liabilities are stated at fair value under a recognition, then measurement principle. Taxes are exempt from those two principles; instead FAS 109/FIN 48 apply. What I couldn't tell is if the purchaser still has up to one year (the maximum measurement period) to get the tax contingent liability right before the DR goes to tax expense. Can anyone help me?

    Amy Dunbar

    From the AccountingWeb on December 27, 2007 ---

    On December 4, 2007, the Financial Accounting Standards Board issued FASB Statements No. 141 (revised 2007), Business Combinations. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. The revision of 141 is part of the FASB's push toward "fair value," or mark-to market accounting.

    Financial Week (December 10, 2007) reports that Dennis Beresford, a former FASB chairman now serving on a Securities and Exchange Commission advisory committee that is studying the U.S. financial reporting system says “The rules will be difficult to apply and will require companies and analysts to relearn a lot of things.” The article goes on to say that the revisions to 141 “essentially extend the fair-value requirements to new areas. That will increase the valuation work required of corporate finance departments, and in some cases jack up the volatility of reported earnings as various assets and liabilities are marked to market.”

    "FASB Issues FASB Statements No. 141(R), Business Combinations and No. 160, Noncontrolling Interests in Consolidated Financial Statements," SmartPros, December 6, 2007 ---

    Jensen Comment
    You can download FAS 141(R) from

    December 31, 2007 reply from Gerald Trites [gtrites@ZORBA.CA]

    Warren Buffett referred to "mark to market" as "mark to myth", a comment that I think is right on the mark.

    Bob Jensen's threads on intangible/contingency asset asset and liability accounting are at 

    "Fair Value: Bumpy Road from Theory to Practice American Banker," by Todd Davenport, American Banker, December 28, 2007 ---
    (Link forwarded by Denny Beresford)

    To its critics, fair-value accounting is far from fair and has only a casual relationship with value. To its supporters, fair-value accounting is a logical response to innovative and complex financial markets that have outstripped traditional valuation methods.

    Though it has long been a passionate topic among accounting practitioners, academics, and corporate financial officers, the larger investing public has thankfully been spared the details of the debate. But that's changing.

    Early this year several companies — most of them banks, investment banks, and insurers — adopted the clearest articulation yet of fair value by the Financial Accounting Standards Board. Hopes for an easy transition to the new standard have run hard against some of the worst market conditions in recent memory, turning what might have been a clinical application of the new model into a messy tangle that has undermined the credibility of those struggling to implement it and pushed the debate about accounting methods out of the corporate controller's office and into the marketplace. Even the president of the United States is weighing in on how banking companies should recognize their losses, and the Securities and Exchange Commission has launched an investigation of securities valuation by dealer banks.

    Questioning the reliability of banks' financial statements is not novel sport. The industry's accounting for, among other things, mergers, loan losses, derivatives, and off-balance-sheet instruments has fed the skepticism of analysts, investors, and regulators. As a general matter, the larger and more complex the bank, the deeper the questions surrounding the accuracy of the financial statements.

    Anyone who isn't convinced of that skepticism is likely ignoring the market's treatment of large banking companies. As 2007 draws to a close, the country's three largest banks — Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co. — all trade at under 10 times their earnings over the past year. That explicit vote of no confidence is as much an expression of concern about banks' asset valuations as it is about their earnings prospects.

    Fair-value accounting, which in the best of all possible worlds would have ameliorated those concerns, has only exacerbated them. In the midst of a subprime crisis in which writedowns of illiquid, opaque financial instruments — including collateralized debt obligations and asset-backed securities — by global banking companies now total more than $75 billion, the fundamental question is what happens next.

    Cynicism runs deep, and in every direction. Some observers wonder whether the new accounting standards have forced a reckoning that the industry would have papered over in the past. Others wonder whether banks continue to underestimate the true nature of their losses, while still others wonder whether the fair-value method has given banks a new cookie jar from which to feed earnings in the future.

    The accounting board "tried to accommodate everybody's movement into these less transparent, less liquid asset classes, and they enabled the mess by letting people do that if they merely assigned values to them — and there is no way to value them," said Chris Whalen, the managing director at Lord, Whalen & Co.'s Institutional Risk Analytics. "The great fallacy that we have all committed is allowing ourselves to get pulled into asset classes that are not liquid, and fair value means nothing in an asset class that is illiquid — it's only a matter of debate."

    The parade of fair-value-related writedowns by global banking companies simultaneously implementing new fair-value standards has led some observers to see something less than a coincidence. Others claim that the accounting hasn't changed much, if at all, and frankly doubt that banks would have been able to hide their subprime-related losses. Truth, like value, is an elusive standard.

    Neri Bukspan, the chief accountant at Standard & Poor's, said he believes the adoption of the fair-value standards has influenced the level of writedowns reported by banking companies.

    The standards "crystallized the vision around fair value" and "put much greater emphasis on the importance of market attributes and transactions in the market," he said. "I think it created a greater focus on the relevant data points to which you look as a reference for the writedowns."

    David Morris, a former controller at JPMorgan Chase and now an accounting consultant, said the fair-value precepts laid out in the accounting literature before the adoption of the new standards are similar enough that he sees little impact from the standards.

    "I think the writedowns would have been about the same and probably would have occurred in the same time frames," he said. " I don't think the accounting caused the problem. The problem was in the way the loans were created and underwritten."

    And there are those who hew a middle path.

    "It may be that we have so much more emphasis on fair value and disclosures that the application of 157 and 159 has led to some differences," said Sydney Garmong, an executive in Crowe, Chizek & Co. LLC's financial institutions group. "But I'm not sure it would be significantly different," and though "the downward adjustments may be somewhat larger because of 157 and 159, I just don't think we're talking night and day."

    The accounting board's drive to fair value is underpinned by the belief that what a company once paid for an asset is not nearly as relevant as what the asset is currently worth. By that reasoning, market value trumps book value. Leave aside arguments that potentially undermine that reasoning; the more immediate concern is how to value assets for which there is no ready, liquid market. That nettlesome question is one reason why FASB has not yet implemented a model that would apply fair value to banks' chief assets: loans.

    The FASB has required the use of fair value for some instruments in standards and guidance issued over the years, but it had never consolidated a practical method for applying it. To fill that void, it issued Financial Accounting Standard 157, Fair-Value Measurements, in October 2006; the 158-page standard is essentially a reference book that tells companies how to apply fair value, but not where they must apply it.

    It issued a companion statement, FAS 159, Fair Value Option for Financial Assets and Financial Liabilities, in February 2007, that has been seen by many observers as an enticement to get companies to apply fair value to a wider swath of assets. Under 159, companies have the latitude to use fair value only for the financial instruments of their choosing. The discretion is so complete that companies can make separate designations for similar securities in the same portfolio.

    Though the standards are only now in effect — companies following generally accepted accounting principles must use them in preparing financial statements for periods beginning after Nov. 15 — the board allowed for early adoption in the first quarter of 2007. The catch: Companies that wanted to use the option standard, 159, also had to adopt the new measurement standard, 157, for every instrument on the balance sheet required to be measured at fair value.

    The banking industry did not have a unified response to either standard, and that is because the "banking industry" is not nearly as monolithic as it sounds. The fair-value model works for some business lines better than it does for others.

    Continued in article

    "Fair Value: Simple Idea, Complex Path,"  by Todd Davenport, American Banker, December 31, 2007 ---

    It's fair to say that there is more than a little hostility to the concept of fair value, and the hostility intensifies depending on the instruments under discussion.

    For some bankers, accounting standard-setters' ongoing search to define "fair value" for traditional loans is almost heretical. But there are fewer grounds for objecting to the application of fair value to securities, which, after all, are created primarily to make illiquid assets liquid.

    Companies have used fair value for years. The Financial Accounting Standards Board's decision to adopt a new standard on fair value, issued in October of last year, was intended merely to clarify its use and identify methods for valuing increasingly complex securities that have poured into the market.

    The seizure of markets once presumed to be liquid has complicated what was to be a no-hassle transition to the new standard, FAS 157.

    "Companies and their auditors are really nervous about changing values, and they are nervous about whether they could be second-guessed" on securities valuations, said Dennis Beresford, a former FASB chairman and now a professor of accounting at the University of Georgia and the director who chairs Fannie Mae's audit committee. "It's awfully hard for some people to believe that markets could have changed so quickly."

    The organizing principle of FAS 157 is a three-level liquidity hierarchy for financial instruments. Valuation is simple enough for Level 1 securities, which are traded actively in liquid markets with regular, quoted prices. For these securities, fair value is market value, and the math is straightforward.

    Common equities and highly liquid U.S. Treasuries generally are considered Level 1 securities. For those securities quoted by bid and ask prices, companies can choose either the midpoint or the point between them that is "most representative" of fair value.

    But the association between fair value and market value starts to break down with Level 2 securities, which are not quoted directly or traded actively but have "observable inputs" — market prices of similar securities, for instance — that can be thrown into models.

    Common interest rate swaps, options, and other derivatives frequently fall in this bucket, as do licensing arrangements and even buildings. Agency mortgage-backeds, corporate debt, and some collateralized debt obligations fall into this category, as well.

    Level 3 of the fair-value inferno is reserved for instruments that have "no observable inputs." The value of these instruments is almost entirely model-driven. They are worth what the company says, provided it can get its auditor to bless the calculated value.

    This bucket, by and large, is the home of mortgage servicing rights, asset-backed commercial paper, and structured products like synthetic CDOs.

    "The fair-value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability," the standard reads. "Therefore, unobservable inputs shall reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk)."

    That's a lot of assumptions. Even granting the standard's comprehensible internal logic, figuring out which securities qualify as what is not always clear. Companies can reach different conclusions about the level and value of securities that seem similar. Value depends on the models, which can vary from company to company and produce wildly varying results, depending on the inputs.

    "These values for Level 2 and particularly Level 3 are not as precise as the financial statements might imply," Prof. Beresford said. "But what they don't tell you, and probably couldn't very accurately, is tell you what kind of range we're talking about."

    It is, of course, the Level 3 instruments that have gotten the most attention since markets dried up, given that their value is based largely on internal — if audited — assumptions. Investors have taken a dim view of these assets; the larger the portion of these assets, the larger the perceived black hole in the balance sheet.

    As of Sept. 30, Citigroup Inc. held $135 billion of Level 3 assets, JPMorgan Chase & Co. held $55 billion, and Bank of America Corp. held $28 billion. Spokesmen for the companies would not make executives available to discuss their use of fair-value accounting.

    "Level 3 raises a reasonable question: If an asset is hard to value, should you be buying it at all?" asked Donald van Deventer, the CEO of Kamakura Corp., which helps companies and investors value securities. "The answer is probably no, unless you are really good at the analytics."

    Banking companies could argue reasonably that they are good at the analytics, and that as financial intermediaries, they must be expected to hold a variety of instruments, including those not easy to value. But then the companies must live with the questions that arise from holding them.

    "If an investor, in deciding whether to buy shares of a particular bank, sees a huge fraction of its assets are Level 3, the investor may wonder if the assets are worth as much as the bank says they are," said Darrell Duffie, a professor of finance at Stanford University's Graduate School of Business. "That's a discipline on the bank. It's helpful information for the investor making that decision, and banks will be forewarned not to load up on Level 3 assets if they want to sell at high multiples in the market."

    Most accountants are quick to remind that the three-level hierarchy was a rough element in the accounting literature even before the FASB delineated it clearly in FAS 157. Fair value is a central element of FAS 115, a 1993 standard. Under that standard, securities held in the trading portfolio — the portfolio in which the largest U.S. banking companies keep most of their securities — are marked at fair value, with the aggregate change running through the income statement.

    Banking companies that do not have substantial investment-banking businesses — from large regional ones to community ones — are more likely to keep their securities in the available-for-sale portfolio, which also is marked at fair value. Though the unrealized gains and losses in that portfolio are reflected in GAAP capital (regulatory capital calculations do not include unrealized gains or losses), they do not hit the income statement as long as they are relatively insignificant and reasonably likely to be recovered in future periods.

    (Companies lose that safe harbor if losses are serious enough that recovery becomes unlikely. Zions Bancorp. reported one of the most recent instances of other-than-temporary impairment. In a securities filing Dec. 20, the Salt Lake City company, which has not adopted FAS 157, disclosed a $94 million impairment of CDOs in its available-for-sale portfolio and said it would record the entire amount as a charge to fourth-quarter earnings.)

    Continued in article

    "Fair Value: Trust Is Wild Card in Debate,"  by Todd Davenport, American Banker, January 2, 2008 --- 

    The market meltdown in the second half of last year gave investors plenty of reasons to doubt the accuracy of banks' asset valuations, and the way the situation has unfolded is telling.

    What was seen initially as a liquidity crisis soon was revealed as a crisis of confidence. There was money to transact, but investors did not trust what they were being told about the value of the securities that banks were originating, packaging, and trading. Representations of value derived by models are only as good as the models themselves, and investors have learned the hard way that dealers' incentives are quite different from those of their clients.

    "For a long time people looking for values were relying on quotes from Wall Street with no transactions associated with them," said Donald van Deventer, the chief executive officer of Kamakura & Co., which helps companies and investors value securities. "If you take the business cycle and macroeconomic factors into account to drive default probabilities up and down, you get dramatically different answers than you get using the popular method that Wall Street and the rating agencies have encouraged people to use."

    Mr. van Deventer, a former investment banker, said he has a pretty clear idea why the dealer banks encouraged clients and internal auditors to use the valuation techniques of their choosing.

    "Because it makes more money if you do," he said. "Anybody who doesn't understand that is just hopelessly naive, and there are a lot of investors who by self-admission have fallen into that category."

    And again, he sees a change under the Financial Accounting Standards Board's new standard.

    "The combination of [FAS] 157 and the current crisis has meant that unless there is a real trade, the quote has no credibility, because the quoter has a vested interest in your perception of value," Mr. van Deventer said.

    Cynicism about bankers' valuations is embedded so deeply that some observers who say banks are being forced only now to recognize the true value of their illiquid securities also suspect that the companies could undervalue the securities they once overvalued.

    Loan-loss provisions spike so consistently in the fourth quarter that it is known as the "kitchen sink" quarter. Taking the losses at the end of the year makes comparisons with next year's earnings easier, and a plump fourth-quarter provision can lead to smaller bites from the bottom line in future quarters.

    Some skeptics say writedowns afford the same opportunity; once the big dealer banks realized their writedowns would be substantial, they arguably had as much incentive to overstate as to understate. A sophisticated financial institution knows its stock may get pummeled if it reports a $4 billion writedown; would the market reaction be any more violent if the writedown was, say, $5 billion, or $6 billion, or $8 billion? Preserving capital ratios is the primary limitation on the magnitude of writedowns.

    The freedom of FAS 159, a companion statement to FAS 157, would give banks the tools to follow an earnings-management strategy that would not violate accounting rules. (Principles are another matter, but that's a debate for another day.)

    "A bank can choose which financial instruments it wants to report at market value," said Darrell Duffie, a professor of finance at Stanford University's Graduate School of Business. "A bank that wanted to report lower earnings now and bank any embedded gains later could mark to market anything that had embedded loss and leave at book value anything that has an embedded gain to be marked later."

    The advantage of fair-value accounting is that it allows companies to take market gains back through the income statement as quickly as they incurred the losses. Should models lead them to conclude that marked-down securities had recovered value, the difference would be reflected as income.

    "Companies, of course, aren't supposed to use the new standard as a way to manage earnings — they're only supposed to use it to get a closer approximation of fair value," Prof. Duffie said. "But accountants will sometimes be led to do what management of a bank wants them to do."

    Nevertheless, he said he supports fair-value accounting, because the potential for earnings management dissipates the longer a company has reported under the regime.

    In current market conditions, there is one more strange, almost perverse, effect of the new standard: Companies stand to profit when the value of their own debt falls. Bank debt, of course, tends to tumble when the credit cycle worsens, as it is doing now.

    Corporate debt is a liability, and companies apply fair or market value, if available, to that debt. Never mind the principal value — as the liability's market value falls, it is marked as a pickup in earnings on the company's income statement. This unusual development, known as the "own-creditworthiness" doctrine, already has been recognized by some companies.

    On Dec. 21, SunTrust Banks Inc. reported a series of writedowns and a huge increase in its loan-loss provision. "Market valuation declines are expected to result in an estimated fourth quarter 2007 pretax writedown of $125 million to $150 million, net of a positive mark on the company's debt carried at fair value," the Atlanta company said in a filing with the Securities and Exchange Commission.

    Own-creditworthiness does have an internal logic, but some of its potential consequences raise serious questions. It makes sense to value liabilities the way the market is valuing them, but the possibility of recording income from a loss of investor credibility seems perverse.

    It is only one reason the debate over fair value is not likely to be resolved soon. Bankers may save their biggest fight for when the FASB articulates a standard that applies fair value to bread-and-butter loans.

    Christopher Whalen, the managing director at Lord, Whalen LLC's Institutional Risk Analytics, dismisses the notion that fair value is a step forward for accounting.

    "In between when you buy something and when you sell something, valuing it may be an interesting exercise, but it may not be one that is practical," he said. "The only time you can value something dynamically is if it is traded — if you have a visible, public price. Otherwise, who wants to know?"

    Legions of bankers agreed with that expression of contempt. They cite this summer's events as evidence that markets are not always rational and occasionally may put values on securities that do not match what they believe are the securities' economic or intrinsic value. And wildly moving markets mean income statements will move with them.

    To which fair-value adherents say: Tough.

    Continued in article

    Bob Jensen's threads on fair value accounting are at

    "The Finer Points of Fair Value," by Thomas A. Ratcliffe, Journal of Accountancy, December 2007 ---

    To adopt FASB Statement no. 159, companies must comply with the requirements of Statement no. 157, Fair Value Measurements.

    Companies and their auditors must consider whether the use of fair value option accounting reflects a “substance over form” decision by management rather than an effort to gain an accounting result.

    FASB has raised the bar for disclosure required when the fair value option is in play so that financial statement users will be able to clearly understand the extent to which the option is utilized and how changes in fair values are being reflected in the financial statements.

    Companies are encouraged but not required to present the fair value option disclosures in combination with the fair value disclosures required in other accounting literature.

    The guidance must be implemented on an instrument-by-instrument basis and is irrevocable.


    "Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions" ---


    1. This FASB Staff Position (FSP) amends FASB Statement No. 157, Fair Value Measurements, to exclude FASB Statement No. 13, Accounting for Leases, and its related interpretive accounting pronouncements that address leasing transactions.


    2. The Exposure Draft preceding Statement 157 proposed a scope exception for Statement 13 and other accounting pronouncements that require fair value measurements for leasing transactions. At that time, the Board was concerned that applying the fair value measurement objective in the Exposure Draft to leasing transactions could have unintended consequences, requiring reconsideration of aspects of lease accounting that were beyond the scope of the Exposure Draft.

    3. However, respondents to the Exposure Draft indicated that the fair value measurement objective for leasing transactions was generally consistent with the fair value measurement objective proposed by the Exposure Draft. Others in the leasing industry subsequently affirmed that view. Based on that input, the Board decided to include lease accounting pronouncements in the scope of Statement 157.

    4. Subsequent to the issuance of Statement 157, which changed in some respects from the Exposure Draft, constituents have raised issues stemming from the interaction

    Proposed FSP on Statement 157 (FSP FAS 157-a) 1 FSP FAS 157-a between the fair value measurement objective in Statement 13 and the fair value measurement objective in Statement 157.

    5. Constituents have noted that paragraph 5(c)(ii) of Statement 13 provides an example of the determination of fair value (an exit price) through the use of a transaction price (an entry price). Constituents also have raised issues about the application of the fair value measurement objective in Statement 157 to estimated residual values of leased property. These issues, as well as other issues related to the interaction between Statement 13 and Statement 157, would result in a change in lease accounting that requires considerations of lease classification criteria and measurements in leasing transactions that are beyond the scope of Statement 157 (for example, a change in lease classification for leases that would otherwise be accounted for as direct financing leases).

    6. The Board acknowledges that the term fair value will be left in Statement 13 although it is defined differently than in Statement 157; however, the Board believes that lease accounting provisions and the longstanding valuation practices common within the leasing industry should not be changed by Statement 157 without a comprehensive reconsideration of the accounting for leasing transactions. The Board has on its agenda a project to comprehensively reconsider the guidance in Statement 13 together with its subsequent amendments and interpretations.

    Bob Jensen's threads on fair value accounting are at


    "Common blunders: Personal finance resolutions for 2008," by Carrie Schwab Pomerantz, Town Hall, January 1, 2008 --- Click Here

    Bob Jensen's personal finance helpers are at

    Forensic Accounting
    There’s a rather nice module on Forensic Accounting at
    This includes links to a journal and career opportunities.

    The link to the following article was forwarded by Charles Wankel [wankelc@VERIZON.NET]

    "Account for more than hill of beans," The Bay City Times Via The Saginaw News, December 16, 2007 --- Click Here

    When Kojo Quartey went to college to learn accounting 25 years ago, many considered the job a steady, unexciting career.

    But financial scandals in recent years at Enron, WorldCom and other companies have transformed the field, says Quartey, dean of Davenport University's Donald W. Maine School of Business.

    ''When I was an accounting student, we were all number crunchers. In this day and age, it's a much more exciting field,'' he said.

    Many accountants today are seeking specialized training to work as detectives who can sniff out financial fraud. They call themselves forensic accountants.

    Davenport, a Grand Rapids-based university with branches at 5300 Bay in Kochville Township and at 3930 Traxler Court in Bay County's Monitor Township, has two online offerings in the growing field. One is a new bachelor's degree in business administration in accounting fraud investigation and the other is a forensic accounting examiner certificate available to postgraduates.

    Forensic accountants undergo training to mind the books while keeping an eye out for crime.

    Demand for accountants who have such training is skyrocketing, Quartey told a group of Bay and Arenac county high school counselors.

    In addition to traditional accounting, forensic accountants may learn from law enforcement experts about how to detect fraud, and from psychologists about how to interview people to detect lying, Quartey said.

    Irene Bembenista teaches classes at Davenport required for the forensic examiner certificate.

    ''It's not just how to do an audit, but what are some of the clues that would indicate something more is going on? And ideas about where to further investigate,'' said Bembenista, Davenport's associate business school dean.

    Bembenista said 10 years ago, people did not generally recognize forensic accounting as a college career path.

    A federal law enacted in 2002 to reform accounting has brought the investigation field into its own. It's also created job opportunities because it requires accountants at public entities to maintain a separation of duties, Bembenista said.

    ''Accountants aren't allowed to do double duties, like taxes and audit the company at the same time,'' she said.

    ''And businesses are very interested in accountants with a fraud (detection) background, because they are looking out for the well-being of the organization.''

    The starting salary for an accounting fraud investigator is $48,000 to $60,000 a year, and certified forensic examiners can earn more than $100,000 a year, Davenport says compensation studies indicate.

    Davenport has about two dozen students enrolled in the forensic accounting certificate curriculum, Quartey said. The next term begins in January, and more information is available on the Internet at

    Bob Jensen's threads on forensic accounting are at

    Bob Jensen's threads on accountancy careers are at

    What's Your Fraud IQ? ---

    1. According to ACFE’s 2006 Report to the Nation on Occupational Fraud and Abuse, the typical organization loses what percentage of its annual revenue to fraud?
    a. 1%
    b. 5%
    c. 10%
    d. 20%

    2. The most common method of concealing inventory theft is:
    a. Misstating inventory counts
    b. Padding the physical inventory
    c. Falsifying journal entries
    d. Altering shipping and receiving documentation

    3. To prevent the forged endorsement of a check, which of the following is MOST critical?
    a. The check preparer should not be able to modify the vendor addresses
    b. Signed checks should not be returned to the preparer
    c. The duties of receiving and delivering signed checks should rotate

    4. The most basic and important control for detecting cash larceny from a deposit is to:
    a. Monitor the deposit slip receipt for alterations
    b. Compare monthly bank statements to the organization’s end-of-the-month report
    c. Reconcile the receipt copy of the daily deposit slip with the organization’s daily receipts
    d. None of the above

    5. All of the following are methods of preventing overstated expense reimbursements EXCEPT:
    a. Reviewing expense reimbursements per employee looking for individuals whose travel and entertainment expenses appear to be out of line
    b. Spot-checking expense reports with vendors
    c. Prohibiting the reimbursement of any expenses supported by a photocopied receipt without first verifying that the expense is legitimate
    d. Reimbursing air travel expenses based only on itineraries supplied by travel agencies

    6. Which of the following schemes might be used to increase a company’s income in the current year?
    a. Understating liabilities
    b. Capitalizing expenses
    c. Improperly recording returns and allowances
    d. All of the above

    7. Which of the following scenarios would represent a departure from the prescribed method of obtaining a confirmation during a financial statement audit?
    a. The auditor prepares the confirmation letter and allows the client to inspect the letter before the client mails it
    b. The client mails the confirmation letter and a return envelope addressed to the auditor
    c. Both a and b
    d. Neither represents a departure from the prescribed procedure

    8. A fictitious accounts receivable scheme almost always involves which of the following?
    a. Fictitious inventory
    b. Fictitious sales
    c. Fictitious credit memos
    d. Both b and c

    9. Company XYZ has a controlling relationship over Firm C. This relationship must be disclosed in the notes to non-consolidated financial statements even if no transactions have occurred between the two companies.
    a. True
    b. False

    10. A key indicator of fictitious revenues can be found through a comparison of the increase in sales to the change in which of the following accounts?
    a. Cost of goods sold
    b. Advertising expense
    c. Shipping expense
    d. Both a and c

    Answers ---

    Bob Jensen's fraud updates are at

    "Distance learning: The world of online training for accountants," AccountingWeb, December 2007 ---

    From Smart Stops on the Web, Journal of Accountancy, November 2007 --- 



    This Smart Stop is part of the National Association of State Boards of Accountancy’s, which offers “tools for accountancy compliance.” CPAs can search CPE course providers, the National Registry of CPE Sponsor courses and quality assurance service courses, plus click on “Pilot Test CPE Courses” to try out courses for free. There’s also access to instructor resumes and in-house course providers. Click on the state you’re licensed in to find updated information on mandated continuing education requirements and links to your state’s board of accountancy.


    Check this site for free CPE podcasts, available as streaming audio or downloadable to your computer or audio player. Click on “Course Catalog” to download available podcasts and their supplementary PDFs, including a study guide and final exam questions. When you’re ready to take the exam, enroll and purchase the credits—your exam grading and certification is available immediately. Be sure to check if your state’s board of accountancy accepts these CCH self-study courses by clicking the “CPE Accreditation” link.


    Just starting your continuing education requirements? Test your skills and training needs with the site’s “Competency Self-Assessment Tool,” free for AICPA members, then search CPE courses by topic, level, job area or format, including CD-ROM and DVD. Check back often to see the month’s top sellers and new releases or to download catalogs for the “CPE Direct” program and “Staff Training Series.”


    Can’t keep up with your CPE hours? Launched in 2006, this site keeps accounting professionals and firms up-to-date on CPE hours and compliance. Registered users can record CPE credits, which are then compared to the requirements from each state’s board of accountancy and regulatory agencies. The service also provides status reports by jurisdiction and reporting period, as well as access to all of your CPE records in one location.


    Most accountancy associations, firms, and many colleges also offer CPE courses.

    Bob Jensen's threads on online training and education are at

    Also see the bookmarks at

    From The Wall Street Journal Accounting Weekly Review on November 30, 2007

    Global Accounting Effort Gains a Step
    by David Reilly and Kara Scannell
    The Wall Street Journal
    Nov 16, 2007
    Page: A4
    Click here to view the full article on ---


    TOPICS: Accounting, Financial Accounting, Financial Reporting, GAAP, International Accounting Standards, SEC

    SUMMARY: The SEC voted 4-0 to drop a requirement that foreign companies with U.S. listings reconcile their results to U.S. accounting rules. Regulators are hoping to eventually create a single, global set of accounting rules that could potentially benefit investors and companies world-wide. One concern is that a uniform set of global accounting rules could be undermined by differing views over who those rules are supposed to serve: investors, companies, or governments.

    CLASSROOM APPLICATION: This article notes that GAAP is not a set of international accounting standards, but that it applies to U.S. companies and those foreign companies who list in the U.S. Also discussed are some of the issues surrounding a possible movement towards uniform international accounting standards.

    1.) What is the SEC? What is it area of enforcement?

    2.) What rule has the SEC recently changed? Why do you think the SEC made the change?

    3.) What is GAAP? What companies must follow GAAP? Why is it important to have GAAP, and for companies to utilize it?

    4.) What are the benefits for having standard international accounting standards? What are the problems associated with having one uniform set of accounting standards for all companies in the world?

    5.) What parties want foreign companies to reconcile financial statements with U.S. standards? What are their concerns? Do you agree with their concerns?

    6.) What are the various constituents served by financial reporting around the world? Which countries cater to each of these groups of constituents? How does each particular focus affect the financial statements?

    7.) Is a single, global accounting system possible? Why or why not? What is hindering it? What could be done to make it work?

    Reviewed By: Linda Christiansen, Indiana University Southeast


    Overhaul Proposed in Accounting Standards Board
    The Financial Accounting Foundation, the body that decides who will set accounting rules in the United States, plans on Tuesday to propose an overhaul aimed at enabling the Financial Accounting Standards Board to act faster while increasing the power of its chairman, Robert H. Herz. The proposals being put out for comment Tuesday would reduce the size of the FASB to five members from seven, and give the chairman the power to decide whether to place issues on the board’s agenda.
    Floyd Norris, The New York Times, December 18, 2007 ---

    Bob Jensen's threads on accounting standards setting are at

    What are CDOs?
    Should they be booked?

    CDO --- Click Here

    From The Wall Street Journal Accounting Weekly Review on November 30, 2007

    Citi's $41 Billion Issue: Should It Put CDOs On the Balance Sheet?
    by David Reilly
    The Wall Street Journal
    Nov 26, 2007
    Page: C1
    Click here to view the full article on


    TOPICS: Accounting, CDO, Collateralized Debt Obligations, Consolidated Financial Statements, Consolidations, Financial Accounting, Reconsideration Events

    SUMMARY: Does Citigroup need to bring $41 billion in potentially shaky securities onto its balance sheet? Opinions are divided, reflecting a wider debate over how to interpret accounting rules on off-balance-sheet treatment for some financing vehicles.

    CLASSROOM APPLICATION: This article offers a good basis for discussion of CDOs, possible consolidation of CDOs, and the balance sheet presentation of CDOs based on the rules related to "reconsideration events."

    1.) What are CDOs? What are the recent problems connected with CDOs? What is the cause of these problems? In general, why are they especially a concern for Citigroup?

    2.) What is the specific issue facing Citigroup, as detailed in the article?

    3.) What are the accounting rules regarding consolidation of CDOs? How do banks avoid having to consolidate?

    4.) Why is there controversy over the how the losses should be booked by the bank? What is the potentially vague part of the rules?

    5.) What position does Citigroup take? What position are some accounting experts taking? Is either side getting support from other parties? If so, from whom?

    6.) With what position do you agree? How did you reach this conclusion? Please offer support from your answer.

    Reviewed By: Linda Christiansen, Indiana University Southeast

    Why Citi Struggles to Tally Losses
    by Carrick Mollenkamp and David Reilly
    Nov 05, 2007
    Page: C1

    The Nine Lives of CDOs
    Nov 26, 2007
    Page: C10

    Goldman Says Citigroup Faces $15 Billion CDO Write-Downs
    by Kimberly A. Vlach
    Nov 20, 2007
    Online Exclusive

    "Citi's $41 Billion Issue: Should It Put CDOs On the Balance Sheet?" by David Reilly, The Wall Street Journal, November 26, 2007; Page C1 ---

    A $41 billion question mark is hanging over Citigroup Inc.

    That is the amount, in a worst-case scenario, of potentially shaky securities the bank would need to bring onto its balance sheet. Citi has already taken billions of dollars of such securities onto its balance sheet and expects to take big write-downs on those holdings.

    The fate of the $41 billion rests on the outcome of a debate going on in accounting circles over what constitutes a "reconsideration event." Those who say Citi needs to put these securities, known as collateralized debt obligations, onto its balance sheet argue that because Citi acted over the summer to backstop some of them, its relationship with them changed, prompting a reconsideration event.

    At the moment, it seems unlikely Citigroup will be forced to bring the assets onto its books. The bank doesn't believe such a reconsideration event is in order. A spokeswoman says Citigroup is confident its "financial statements fully comply with all applicable rules and regulations."

    But the division of opinion reflects debate within accounting circles over just how to interpret rules that govern off-balance-sheet treatment for some financing vehicles. That, in turn, underscores what many consider to be a failure of these rules to ensure that investors in the companies that create these vehicles are adequately informed of the risks posed by them.

    In recent months, investors have been shocked to learn that many banks were exposed to big losses because of their involvement with vehicles that issued commercial paper and purchased risky assets such as mortgage securities. The troubles facing one kind of off-balance-sheet entity, known as structured investment vehicles, have even prompted Citigroup and other major banks to organize a rescue fund.

    But CDO vehicles created by Citigroup have proved to be a more immediate threat. The bank's announcement this month that it expects to take $8 billion to $11 billion in write-downs in the fourth quarter largely stems from its exposure to CDO assets. Citigroup was one of the biggest arrangers of CDOs -- products that pool debt, often mortgage securities, and then sell slices with varying degrees of risk.

    If Citigroup had to include an additional $41 billion in CDO assets on its books, that could potentially spur a further $8 billion in write-downs, above and beyond those already signaled, according to a report earlier this month by Howard Mason, an analyst at Sanford C. Bernstein. Such losses could further weaken Citigroup's capital position, threatening its dividend or forcing the bank to raise money.

    The issue for Citigroup is when, and if, it has to reconsider consolidation of the CDO vehicles it sponsors.

    Like other banks, Citigroup structured these vehicles so they wouldn't be included on its books. The vehicles are created as corporate zombies that ostensibly aren't owned or controlled by anyone. In that case, accounting rules say consolidation of such vehicles is determined by who holds the majority of risks and rewards connected to them.

    To deal with that, banks sell off the riskiest pieces of the vehicles. This ensures they don't shoulder a majority of the risk and so don't have to consolidate the vehicles. The assessment of who absorbs the majority of losses is made when the vehicles are created.

    Over time, though, rising losses within a vehicle can lead a sponsor to shoulder more risk, or even a majority of it. That can also happen if a sponsor takes on additional interests in the vehicle by buying up the short-term IOUs it issues.

    That is what happened to Citigroup. Over the summer, the bank was forced to buy $25 billion in commercial paper issued by its CDO vehicles because investors were no longer interested in the paper. Citigroup already had an $18 billion exposure to these vehicles through other funding it had provided.

    This combined $43 billion exposure means that if CDO losses climb high enough, the bank could be exposed to more than half the losses, according to Bernstein's Mr. Mason. That would seem to argue for Citigroup's consolidating all $84 billion of its CDO assets originally held in off-balance-sheet vehicles.

    But the accounting rules don't say that sponsors of these vehicles have to reassess on any regular basis the question of who bears the majority of risk of loss. Such "reconsideration events" occur when there is a change in the "governing documents or contractual arrangements" related to these vehicles, the rules say.

    Citigroup believes that because it hasn't changed the documents or contracts related to the vehicles, it shouldn't have to reconsider its relationship to them, according to people familiar with the bank's thinking.

    But some accounting experts point out that the rule also says a reconsideration event occurs when an institution acquires additional interests in the vehicle. "If a bank is being forced to step in and be a bigger holder of the commercial paper, to me that's pretty black and white that it's a reconsideration event," says Ed Trott, a retired member of the Financial Accounting Standards Board, the body that wrote the accounting rule.

    An influential accounting-industry group, the Center for Audit Quality, also seems to lean toward this view. In a paper issued last month, the center said the purchase of commercial paper is an example of a change in the contractual arrangements governing these vehicles. This "may also result in a reconsideration event," the paper said.

    But Citigroup believes its purchase of the CDO vehicles' commercial paper is different, because it had taken on the obligation to provide such assistance when the vehicles were created. This means the bank was acting within the contractual arrangements governing the vehicles, not changing them, according to the people familiar with Citigroup's thinking.

    Some accounting experts agree. "If all that's happening is one set of [paper holders] is going out and another is coming in, that's not a reconsideration event," says Stephen Ryan, an accounting professor at New York University. "I don't think you reconsider moment by moment; an event is not just bad luck happening."

    Bob Jensen's threads on accounting theory are at

    Leading Democrats Do Not Seem to Agree on Corporate Tax Rates
    If you watch the constant stream of political advertisements in New Hampshire these days, all Democratic Party presidential candidates want to tax corporations harder but old Charlie, who really wields the power, thinks otherwise.

    From The Wall Street Journal Accounting Weekly Review on December 6, 2007

    Review & Outlook: Corporate Tax War
    The Awll Street Journal
    by WSJ Opinion Page Editors
    Dec 04, 2007
    Page: A20
    Click here to view the full article on ---

    TOPICS: Accounting, Personal Taxation, Tax Laws, Taxation

    SUMMARY: This Fall, House Democrat Charlie Rangel proposed " cut the U.S. corporate income tax] rate to 30.5% from 35%." This WSJ opinion page article argues that, " As a new study makes clear, such a reduction would give a lift to the U.S. economy when it really needs it...[and concludes that] if America is going to remain the developed world's leading job creator and economic engine, corporate tax rates are going to have to fall -- and by more than even Mr. Rangel has suggested."

    CLASSROOM APPLICATION: Use this article to integrate political and economic issues into tax policy discussion.

    1.) What entity prepared this report assessing the association between corporate income tax rates and economic performance? Why does this entity undertake such analyses?

    2.) What measures were used to identify the relationships between corporate tax rates and economic health? In your answer, be sure to define statutory income tax rates and effective income rates and to identify specific measures of economic health.

    3.) Summarize the main points of the discussion. With what political party typical supports this viewpoint?

    4.) Is it surprising to you that a Democrat proposes to cut the corporate income tax rate? Explain your answer.

    5.) How do personal income taxes also contribute to the issues discussed in this article?

    6.) This opinion page piece clearly presents just one side of the debate on raising or lowering income tax rates. Identify one counter-argument to those presented in the piece.

    Reviewed By: Judy Beckman, University of Rhode Island

    Democrats' Tax Measure Could Delay Energy Bill
    by John J. Fialka
    Dec 05, 2007
    Page: A5

    "Corporate Tax War," The Wall Street Journal, December 4, 2007; Page A20

    Word is that the Bush Administration will soon propose a cut in the U.S. corporate income tax, following House Democrat Charlie Rangel's proposal this fall to cut the rate to 30.5% from 35%. As a new study makes clear, such a reduction would give a lift to the U.S. economy when it really needs it.

    The study, from the National Bureau of Economic Research, looked at corporate taxes in 85 countries from 1996 to 2005. Economists from the World Bank and Harvard University calculated the effective business tax rate for each country, because some nations have so many tax loopholes that the rate paid by companies can be one-half to one-third the statutory tax rate. The study found that corporate taxes have a statistically significant negative effect on economic performance.

    High business taxes were found to reduce a nation's domestic capital investment, the amount of foreign investment into that country, and its overall growth in GDP. The authors conclude that "corporate taxation reduces the return on capital and thus discourages investment" and "reduces the cash flow of the firm" in such a way as to reduce the after-tax capital available for reinvestment.

    The researchers also found that high corporate levies reduce entrepreneurship, which drives new industries and job growth. In many nations the corporate tax rate is paid both by large corporations and small businesses. In the U.S., small businesses are often organized under Subchapter S of the tax code and thus pay the personal income tax rate. However the tax is imposed, the study found, "a 10 percentage point rise in a nation's effective corporate tax rate causes a decline in the number of firms by 1.8 per 100 people (the average is 5 per 100 population)."

    The clear implication is that raising the U.S. personal income tax rates would also stunt small business entrepreneurship. Yet this is precisely what all of the Democratic Presidential candidates, and even Mr. Rangel, propose. In Mr. Rangel's case, the benefits of his cut in the corporate tax for big business to 30% would be offset by the damage he'd do by raising the top marginal tax rate on individuals and small businesses to as high as 44%. The NBER research suggests this could discourage hundreds of thousands of small businesses from being formed in the next few years.

    This study supports research earlier this year by economist Kevin Hassett of the American Enterprise Institute, which found that high business taxes also result in lower wages for workers. The higher rate means less capital investment in making workers productive, which translates into smaller pay checks.

    What American CEOs understand, but most in the media and political class so far refuse to acknowledge, is that the U.S. is far behind the rest of the world in reducing corporate tax rates. The U.S. corporate income tax rate is the world's second highest after Japan's among developed nations. Even Mr. Rangel's proposed reduction would leave the U.S. well above the OECD average of 25%. In recent years, Germany, France, the United Kingdom, Vietnam, Poland and Singapore, among many other nations, have either cut or proposed to cut their business tax rates. These lower rates are attracting more investment and capital, and they pose a threat to America's economic competitiveness if Washington fails to act.

    The NBER study is a reminder of how out-of-touch America's current political debate is with global economic trends. American politicians are proposing new barriers to trade, as well as new obstacles to capital formation, even as the rest of the world is welcoming more of both. The study is also a reminder that because workers don't see a tax does not mean that they don't feel its impact. If America is going to remain the developed world's leading job creator and economic engine, corporate tax rates are going to have to fall -- and by more than even Mr. Rangel has suggested.

    You can read much more about corporate taxes at

    Congratulations to Andrea Locke from New Zealand

    A New Zealand accounting student has scored the the highest mark in the world on the financial reporting exam run by the Association of Certified Chartered Accountants (ACCA), beating more than 20,000 other people. Less than half of those who sit it pass the financial reporting exam. Twenty-seven-year-old Andrea Locke, of Arrowtown, NZ and originally from England, scored 95 percent on the three-hour exam. She is studying for by correspondence. Forty-five percent passed the exam, which was given in June.
    AccountingWeb, December 6, 2007 ---

    XBRL and the SEC in December 2007

    "SEC releases taxonomy for GAAP financial reports," AccountingWeb, December 6, 2007 --- 

    The Securities and Exchange Commission's Office of Interactive Disclosure is heralding the release for public comment of computer labels that will help companies make their financial disclosures more useful for investors. The labels are already supported by at least nine software companies whose products will enable public companies to make quarterly and annual financial reports available in interactive data form instead of text form. Interactive data concepts allow companies to present their financial information in an electronic format that investors, analysts, and others can use to more easily locate and analyze desired information. The interactive data is encoded in a format known as eXtensible Business Reporting Language (XBRL), which allows companies to map their financial information to a set of computer codes that represent U.S. GAAP accounting standards. This standardized list of codes used to represent U.S. GAAP is known as a taxonomy.

    The SEC's Office of Interactive Disclosure, created in October to lead the transformation to interactive financial reporting by public companies, encourages broad public review of the taxonomy and the corresponding instructions about how to create a financial statement in XBRL.

    "We've been saying that interactive data is on the brink of transforming the review and analysis of financial information for the benefit of investors and public companies alike," said David Blaszkowsky, Director of the SEC's Office of Interactive Disclosure. "With the release of this taxonomy today, investors can now begin to visually see the progress being made, and so will every public company that uses GAAP. Interactive data is no longer merely an up-and-comer, it's becoming reality. We encourage both users and preparers of financial information to participate in this public review so we can advance interactive data to be recognized as, not only amazing technology, but a superior way of doing business and making faster, cheaper, and more informed investment decisions."

    The SEC launched its interactive data filing initiative in April 2005 to make filings more accessible and understandable to the common investor. A test group of public companies have since been voluntarily submitting XBRL documents as exhibits to periodic reports and Investment Company Act filings. Through feedback from these voluntary XBRL filers and a global collaboration of technologists, the XBRL US project team created tags for a financial reporting taxonomy that covers every U.S. GAAP accounting concept — virtually every fact that a company might want to report on its financial statements and in its footnotes.

    The SEC will use the initial financial statements prepared using the new taxonomy to help it update its electronic filing system to seamlessly accept and render the filings.

    "We have gone a long way since we started this in 2005. The voluntary pilot program started out when there was nothing like the fully-fledged taxonomies that we are going to release to the public on Wednesday," SEC Chairman Christopher Cox told a media briefing in Vancouver earlier this week.

    "That's really what got us from a slow jog to right now, a full gallop," he said following a presentation to the 16th annual XBRL International Conference.

    A free taxonomy review tool is publicly available on the Internet at along with other information, including the nine software companies whose products are compatible with the new draft taxonomy. The public comment period ends on April 5, 2008.

    Once the testing period ends, regulators expect to be ready to propose that U.S. companies begin filing financial reports in XBRL format.

    "A lot is going to depend on the acceptance phase that we are now entering for the U.S. GAAP taxonomies," Cox told Reuters news.

    "If that all works the way it's supposed to then we'll have some opportunities to introduce it more broadly. If there are suggestions from people who are using it that are going to take time to meet, then that will influence our thinking."

    Some U.S. companies, including General Electric, Microsoft, and United Technologies Corp., are already using XBRL voluntarily, and international acceptance has been strong, with several countries, including Japan, China, and the Netherlands, embracing the format.

    Informative podcasts available

    XBRL US, Inc., the nonprofit consortium dedicated to the adoption of XBRL, initiated its first two podcasts featuring important stakeholders. The programs featured Jeff Diermeier, CFA, president and CEO of CFA Institute, and Barry Melancon, president and CEO of the American Institute of Certified Public Accountants. Podcasts can be downloaded to a handheld device or simply listened to online at

    The series of 10-minute interviews will feature industry experts presenting their view on interactive data or covering a specific topic related to XBRL. The series is designed to address key stakeholder viewpoints but will also feature timely and sometimes controversial topics related to the use of interactive data in different reporting situations.

    Diermeier kicked off the webcast series, reflecting the fact that Wall Street is the ultimate stakeholder in the XBRL movement. CFA Institute, a global professional association that is well known for its administration of the Chartered Financial Analyst(R) (CFA(R)) and Certificate in Investment Performance Measurement (CIPM) curriculum and exam programs, recently became a member of XBRL US and has been conducting a roadshow series to educate its members about interactive data. It has also surveyed its members about their awareness

    Continued in article

    December 8, 2007 message from Roger Debreceny [Roger@DEBRECENY.COM]

    XBRL International has held its semi-annual meeting in Vancouver this week. Some key elements of the meeting were:
    • As many on AECM will know, the new (see what $5m will buy) US GAAP XBRL taxonomy is on its way. It has moved from internal review within the XBRL community to public review. See and for the draft taxonomy. You can sign up to review the taxonomy, code financials etc. The quality of the taxonomy is central to the adoption of XBRL by the SEC.
    • An interesting set of ideas from Peter Wallison of the AEI on the role of XBRL in capital markets presented as a keynote at the meeting is at,pubID.27191/pub_detail.asp
    • There are two new MP3 podcasts on XBRL at .. Mark Bolgiano, CEO of XBRL US, interviews AICPA President Barry Melancon and CFA Institute President Jeff Diermeier.
    Later, all presentations will be available at Presentations from earlier XBRL International conferences are available on the archive.


    Roger Debreceny

    Shidler College Distinguished Professor of Accounting

    School of Accountancy

    Shidler College of Business

    University of Hawai`i at Mānoa

    2404 Maile Way, Honolulu, HI 96822, USA

    Office: +1 808 956 8545 Cell: +1 808 393 1352

    December 8, 2007 message from Saeed Roohani [sroohani@COX.NET]

    1-We now have: XBRL for Dummies – A Reference for the Rest of Us, ISBN: 978-0-470-22874-6 Published by Wiley. This is a quick course on XBRL without getting too technical.

    2-US GAAP Taxonomy project is completed for public review Academics with any interest in financial accounting, auditing, or XBRL are strongly encouraged to go to the web site and evaluate this product. The use of archival data about public companies will be impacted by this US. GAAP taxonomy, most likely we all have a dog in this fight. Although a lot of tools and guidance provided by the website, you might need additional skills/training for this evaluation. Charlie Hoffman , also father of XBRL, has offered to provide such training for academics and I will be happy to coordinate it; please let me know.

    Saeed Roohani
    Bryant University


    Bob Jensen's threads on XBRL are at

    Bob Jensen's video demos of XBRL are at

    Majority of Companies Produce Unreliable Financial Forecast, Potentially Hurting Share Prices

    The KPMG study of 544 global executives found that 78 percent of the companies surveyed reported forecasting errors of more than 5 percent. Although other factors are undoubtedly at play, companies with unreliable and inaccurate forecasting had a six percent drop on average in share price over the past three years, according to the survey findings. Similarly, the survey also found that companies that kept forecast fluctuations below the five percent mark realized a 46 percent rise in share price over the same three-year period, compared to a 34 percent increase among the companies that had more than a five percent margin of error in their forecasts.
    SmartPros, December 14, 2007 ---

    Bob Jensen's threads on pro forma reporting are at

    A Blue State Singing the Blues

    California Takes Fiscal-Stress Test
    by Jim Carlton
    The Wall Street Journla

    Dec 19, 2007
    Page: A4
    Click here to view the full article on ---

    TOPICS: Advanced Financial Accounting, Governmental Accounting

    SUMMARY: "In all, 15 states face either deficits or lower-than-expected revenues stemming in part from the subprime crisis, according to the National Association of State Budget Officers." California has an approximately $100 billion general fund and faces a "budget deficit during the next two year of $10 billion to $14 billion....State agencies have been notified to prepare for cuts that could total as much as 10% each."

    CLASSROOM APPLICATION: This article can lead to a class discussion on governmental accounting.

    1.) What is a "general fund of a state governmental entity"? What are its major sources of revenues?

    2.) How large is the general fund of the State of California? What are its major expenditures?

    3.) What is a "budget deficit"? Is the State of California currently operating in a deficit? Explain your answer.

    4.) How were general fund budget deficits resolved in recent years under Governor Schwarzenegger's administration?

    5.) In general terms, what is included in the general fund's statement of revenues, expenditures, and changes in net assets? How would this statement appear if the California budget crisis is again resolved with a bond issuance?

    Reviewed By: Judy Beckman, University of Rhode Island


    "California Takes Fiscal-Stress Test:  New Taxes, Cuts in Services Among Plans Considered To Avoid Big Budget Deficit," by Jim Carlton, The Wall Street Journal, December 19, 2007; Page A4 ---

    California's ballooning budget deficit will test Gov. Arnold Schwarzenegger as he balances raising taxes and cutting services.

    Mr. Schwarzenegger last week said he would declare a fiscal emergency in the state, which faces a projected $14.5 billion gap over two years, convening legislators next month to consider cuts to an array of services. Many state officials say the projected budgetary gap is so vast that new taxes may be required to balance the budget. That is likely to set off a new round of partisan wrangling, and test Mr. Schwarzenegger's mettle. Many legislators in the Republican minority say they won't sign off on any taxes; many Democrats say there may be no other choice.

    "For us, I'm very clear: Taxes are not an option," says Michael Villines, the Assembly Republican leader.

    California's projected budget shortfall during the next two years is precipitated in part by the subprime-mortgage collapse, which is also wreaking havoc in other states as borrowers default or curb their spending to cope with higher rates on adjustable-rate loans. Florida faces an additional $1 billion budgetary shortfall in 2008 after addressing a $1.1 billion deficit this year. Arizona estimates at least an $800 million deficit in the current fiscal year. In all, 15 states face either deficits or lower-than-expected revenues stemming in part from the subprime crisis, according to the National Association of State Budget Officers.

    No governor faces a more formidable challenge than Mr. Schwarzenegger, who rode into office in 2003 after his Democratic predecessor became ensnared in a California budget crisis. As recently as June, California had a $4.1 billion reserve set aside for emergencies, thanks to several years of a booming housing market and sharp increases in personal income tied to a strong stock market.

    At the same time, California housing sales have cooled as rates on adjustable mortgages have climbed. California tops the country in foreclosure filings, with Central Valley and Southern California cities among the hardest hit. State officials say a spending pullback by cash-strapped borrowers has resulted in a sharp slowdown in the revenues the state gets on taxable sales, which account for nearly one-third of California's approximate $100 billion general fund.

    With taxable sales growth slowing to 1.3% in the second quarter from as high as 7.4% in 2005, those revenues for the current fiscal year are now projected to be as much as $624 million lower than expected, according to estimates by California Legislative analyst Elizabeth Hill. California is more reliant on sales and income taxes than other states, in part because of property-tax limits voters imposed under Proposition 13 in 1978.

    As a result, Gov. Schwarzenegger on Friday projected that California faced a budget deficit during the next two years of $10 billion to $14 billion; people familiar with the situation say the shortfall is expected to be $14.5 billion. State agencies have been notified to prepare for cuts that could total as much as 10% each. The governor's budget advisers note the state's general economic condition remains healthy, with job growth continuing despite the housing problems.

    Mr. Schwarzenegger faces a tough road in resolving the shortfall. California is one of only a few states where two-thirds of legislators, rather than a simple majority, have to sign off on any tax increase.

    With Republicans in the statehouse effectively blocking most new taxes, lawmakers in recent years have relied on ballot measures to get more money. Indeed, after ousting Gov. Gray Davis in a recall election four years ago, Mr. Schwarzenegger resolved the last budget crisis by getting California voters in 2004 to pass $15 billion in bonds.

    Mr. Schwarzenegger faces other challenges, too. Some of the governor's fellow Republicans are chafing over his support for a state Assembly bill passed Monday that would create the nation's largest universal health-care plan. Since Assembly Republicans have indicated they wouldn't approve any additional taxes to fund the plan, the bill was written so it would have to go before voters next year to approve the $14.4 billion in financing with new levies on tobacco products, hospitals and employers.

    Even some Democrats are leery of the health bill. Don Perata, a Democrat and president of the state Senate, which also has to sign off on the bill, says he wouldn't call for a vote by his members until after the fiscal impact of the health plan can be better assessed.

    Meanwhile, powerful interest groups are poised to defend big recipients of state funding, such as education. Fully 40% of the state's approximate $100 billion-a-year general-fund budget goes to schools from kindergarten through community college. "Nobody wants to start there," says Craig Cornett, budget director for Assembly Speaker Fabian Núñez.

    Continued in article



    "The Fallout from FAS 133: Should Congress Change Tax Law to Match New Accounting Standards?" by Ira Kawaller and John J. Ensminger: ---

    Suggested Citation
    Kawaller, Ira G. and Ensminger, John J., "The Fallout from FAS 133: Should Congress Change Tax Law to Match New Accounting Standards?" . Regulation, Vol. 23, No. 4 Available at SSRN: or DOI: 10.2139/ssrn.256752

    Bob Jensen's threads on FAS 133 are at

    This is a neat little caselet for Intermediate Accounting
    Then you can unleash the confusion with the Jensen links that follow

    From The Wall Street Journal Accounting Weekly Review on December 7, 2007

    Investment-Grade Firms Find It Cheaper to Sell Debt
    by Romy Varghese
    The Wall Street Journal

    Dec 05, 2007
    Page: C2
    Click here to view the full article on ---

    TOPICS: Accounting, Bond Prices, Bonds, Debt

    SUMMARY: "Highly-rated companies...are finding it is now cheaper to sell new debt in the corporate bond market than before the summer credit crunch....Corporate issuers typically pay rates based on Treasury yields plus risk premiums." Yields on treasurys have fallen as prices have risen due to investors' demand for these safe debt securities in the current credit markets. Furthermore, Treasury market participants have already priced an expected interest rate reduction, also due to current market conditions, from the Federal Reserve Board.

    CLASSROOM APPLICATION: Use this article to discuss the economic conditions surrounding issuance of corporate debt.

    1.) What is a risk premium? How are corporate bond issuances priced using interest rates on U.S. Treasury securities and a risk premium?

    2.) What is the relationship between the interest rate associated with debt and the price of the debt, or the proceeds from debt issuance received by the issuing company?

    3.) Define the terms coupon rate, effective interest rate, and bond yield.

    4.) What factors have led to the current situation for corporate debt issuances, identified in the current Lehman U.S. Investment-Grade Corporate Index average of 5.7% versus 6.1% in June, 2007?

    5.) How does the situation for high-grade corporate issuers differ from those with less favorable balance sheets and debt ratings?

    Reviewed By: Judy Beckman, University of Rhode Island

    "Investment-Grade Firms Find It Cheaper to Sell Debt," by Romy Varghese, The Wall Street Journal, December 5, 2007; Page C2  ---

    Sometimes, skyrocketing risk premiums on corporate debt aren't so daunting.

    That's the case for highly rated companies, which -- unlike their counterparts with riskier credit profiles -- are finding it is now cheaper to sell new debt in the corporate bond market than before the summer credit crunch.

    This is occurring even as investment-grade companies have been hit by fears that the subprime mortgage problem will hurt their bottom lines, particularly financial firms that already have been forced to write down billions in mortgage-related exposure.

    To be sure, such companies have had to offer hefty risk premiums on their debt to entice investors, who are worried about subprime contagion impacting the financial resources of these borrowers. But the Federal Reserve's two rate cuts and accompanying sharp drop in yields on Treasurys have offset the increase in risk premiums.

    Corporate issuers typically pay rates based on Treasury yields plus risk premiums. Yields on investment-grade corporate debt, as measured by the Lehman U.S. Investment-Grade Corporate Index, now average 5.7%, according to Joseph DiCenso, Lehman Brothers senior fixed-income strategist. In June, before the onset of the credit crunch, they were higher, at 6.1%, he said.

    "The market's been choppy, but [total] yield costs are really attractive" for borrowers, said Tom Murphy, sector leader for investment grade corporate bonds at RiverSource Investments in Minneapolis.

    Last week, General Electric Co., holding the top-notch rating of triple-A, sold 10-year bonds at 1.4 percentage points over Treasurys. "That's really wide" when compared to its existing debt that was trading around 1.2 percentage points in the secondary market, said Michael Kastner, head of fixed-income at Sterling Stamos Capital Management in New York.

    Still, this deal is 0.6 percentage point cheaper for GE than one done the same time last year, he said. Although the risk premium is higher, it is offset by the lower yield on the 10-year Treasury.

    However, this doesn't mean borrowers in good standing won't feel the pinch of risk aversion if it continues.

    The market has yet to return to normalcy, said John Olert, managing director at Fitch Ratings. "You certainly don't see any meaningful benefit in the long-term right now," he said.

    It would be "virtually impossible" for Treasury yields to rally enough to offset the increased risk premiums for speculative-grade issuers, Mr. DiCenso said. The average yield is 9.53%; higher than the June average yield of 8.22%.

    Meanwhile, Treasurys continue to maintain their low yields. On Tuesday, the 10-year rose 1/32, or $0.3125 per $1,000 face value, to yield 3.890%, little changed from the 3.893% on Monday. The yield was more than 5% in June. The 30-year bond rose 4/32 to push down the yield to 4.346%, from 4.353% on Monday. Diane Vazza, managing director at Standard & Poor's Ratings Services, said the current strong showing in Treasurys is due to participants already pricing in a rate cut.

    China Plans Bond Sale to Finance Wealth Fund

    China's Ministry of Finance plans to sell 750 billion yuan ($101.3 billion) of 15-year bonds next week to finance the recently launched $200 billion sovereign-wealth fund.

    Sale of the bonds Monday will bring the ministry closer to completing the financing of China Investment Corp., or CIC. The sovereign-wealth fund hopes eventually to play a role on the global financial stage.

    Jensen Comment and Links
    Here are some extensions on how to hedge interest rate risk (fair value versus cash flow hedges).

    One question I'm often asked is why companies that have no cash flow risk on bond investments/debt will create cash flow risk by hedging fair value?

    Do you know how to respond to the above question?

    Compare the Example 2 versus Example 5 Excel Workbooks at

    You can also watch the Example 5 video at

    Then if you really want to delve into (or get confused by) the technicalities of risk premiums and benchmark interest rate hedging under FAS 138, go

    "SEC's technology limits hurt efforts against insider trading, congressional auditors find," MIT's Technology Review, December 17, 2007 ---

    Deficiencies in its computer system hamper the Securities and Exchange Commission's efforts to ferret out insider trading and other securities-law violations, congressional auditors found in a report issued Monday.

    The Government Accountability Office, Congress' investigative arm, found that the SEC receives many referrals from the exchanges' internal inspectors concerning suspected insider trading. However, the agency's computer systems for receiving such investigative referrals and tracking cases don't allow its investigators to electronically search all the referral information, the report said.

    As a result, it said, that ''may limit SEC's ability to monitor unusual market activity, make decisions about opening investigations and allow management to assess case activities.''

    Sen. Charles Grassley of Iowa, who requested the GAO study, said that if the SEC investigators can't easily search the data, ''it's like working with one hand tied behind their backs.''

    ''It's a no-brainer that the (SEC) ought to be at least looking at this information and have a computer system that can spot trends and let investigators review the data as effectively and efficiently as possible,'' Grassley, the senior Republican on the Senate Finance Committee, said in a statement.

    Grassley also asked SEC Chairman Christopher Cox in a letter why the agency does not use the internal audits made by the exchanges' inspectors to plan and conduct its own investigations, as noted in the GAO report.

    SEC spokesmen didn't immediately return telephone calls seeking comment.

    Cox, in a letter to the GAO included in the report, noted its suggestion that technological changes be made in the SEC's computer systems to give the agency's investigators electronic access to the referrals from the exchanges.

    ''We agree that additional information-technology changes such as these may help the (SEC) enforcement staff to effectively analyze trends, manage current caseloads and focus areas of investigation,'' Cox wrote. ''We will assess the feasibility of the recommended system improvements.''

    "IRS Issues Fall 2007 Statistics of Income Bulletin," SmartPros, December 3, 2007 ---

    The Internal Revenue Service today released the fall 2007 issue of the Statistics of Income Bulletin, featuring data from 134.4 million individual income tax returns filed for tax year 2005.

    U.S. taxpayers reported $7.4 trillion of adjusted gross income less deficit in tax year 2005, up 9.3 percent from tax year 2004 when 132.2 million returns were filed.
    Certain types of income posted strong gains between 2004 and 2005. Net capital gains climbed 41 percent and taxable interest rose 29.5 percent, while net partnership and S corporation income gained 27.3 percent.

    Taxable income totaled $5.1 trillion in tax year 2005, up 10 percent from the prior year. Total income tax increased for a second straight year, rising 12.4 percent to $934.8 billion.  Between tax years 2003 and 2004, total income tax rose 11.2 percent, the first increase in 4 years.

    The alternative minimum tax (AMT) grew 33.7 percent between 2004 and 2005 to $17.4 billion. Four million taxpayers paid the AMT in 2005, compared to almost 3.1 million in tax year 2004.

    This edition of the quarterly Bulletin also includes articles about:

    • Growth trends in partnerships: Between tax years 2004 and 2005, the number of partnerships rose 8.5 percent to about 2.76 million. The number of partners increased just 4.2 percent to about 16.21 million in tax year 2005. Meanwhile, income rose at a much faster rate. Total partnership net income climbed 42 percent to $546.2 billion in tax year 2005.
    • Municipal bond issuance: State and local governmental entities issued about $475 billion of tax-exempt bonds in calendar year 2005, up 11.9 percent from the prior year. Governmental bonds accounted for about three-quarters of the total, while private-activity bonds represented the remainder.
    • A look at private foundations: The number of private foundations that filed Form 990-PF remained nearly the same between tax years 2003 and 2004,while the number of nonexempt charitable trusts treated as private foundations that filed the return increased by 12 percent. In tax year 2004, private foundations distributed $27.6 billion in contributions, gifts, and grants and other outlays for charitable purposes, while nonexempt charitable trusts distributed $314 million.
    • Recent data on charities: For tax year 2004, nonprofit charitable organizations exempt from income tax under Internal Revenue Code Section 501(c)(3) filed more than 276,000 information returns, an increase of 5 percent from 2003. These organizations held more than $2.0 trillion in assets, a real increase of 5 percent from the previous year and 52 percent over the past decade.
    • Corporate foreign tax credits: For tax year 2003, U.S. corporations claimed $50 billion in foreign tax credits.  Corporations that claimed a foreign tax credit paid $140.5 billion in worldwide income taxes on $424.5 billion in worldwide taxable income.
    • Historical data: The final article in the issue describes the availability and expansion of SOI's published corporate data between 1917 and today and presents some corporate data highlights within a historical context.

    The Bulletin also includes historical data on income, deductions and tax reported on returns filed by individuals, corporations and unincorporated businesses, with selected data.

    Continued in article

    IRS Homepage (The best U.S. Government agency web site on the Internet) 

    IRS Site Map ---

    FAQs and answers ---

    IRS Tax Interactive,,id%3D15552,00.html  

    The IRS youth education web site on taxation (an IRS  joint development project with the American Bar Association)

    Taxpayer Advocate Service ---

    Will you get hit by the Alternative Minimum Tax?
    The AMT Assistant from the IRS ---

    Bob Jensen's taxation helpers are at

    What are some of the most popular tactics for front loading income?
    Hint:  One of the most popular is "Gain on Sale" Accounting.

    The article below by Greenberg revealed to me where Don Vickery ended up. I think Don's last stop was Arizona State -West before becoming Editor-in-Chief of Gradient.
    My hat's off to Don. It takes courage to enter the real world.
    The SEC dropped its investigation of Gradient Analytics in February 2007 ---
    You can read Gradient's response to the Sixty Minutes (CBS) television exposé --- Click Here

    From The Wall Street Journal Accounting Weekly Review on December 14, 2007

    This Game Theory Is Cautionary Tale
    by Herb Greenberg
    The Wall Street Journal

    Dec 08, 2007
    Page: B3
    Click here to view the full article on ---

    TOPICS: Accounting, FASB, Financial Accounting Standards Board, GAAP, Generally accepted accounting principles

    SUMMARY: Some companies might be reporting losses and charges that are artificially low, says Donn Vickrey, of Gradient. That is something to keep in mind if you're bargain hunting among the most beaten down financial-services companies. He says much of this is a result of the companies meeting "the bare minimum letter of GAAP, but not adhering to the spirit of GAAP."

    CLASSROOM APPLICATION: This article presents the opportunity for a very interesting discussion of the ways a company can manipulate its earnings and other financial numbers while technically staying within the rules of GAAP (but still 'playing games'). It offers specific examples of some of these activities.

    1.) What is GAAP? Why was it established? How does requiring GAAP help the users of the financial statements?

    2.) Is GAAP objective or subjective? Why? Please explain why this is important to realize.

    3.) How could these accounting practices impact investors? How can investors protect themselves?

    4.) Are Mr. Vickery's criticisms well-known among investors? Among accountants? Why or why not? Is anyone doing anything to limit these practices?

    5.) Why is accounting manipulation said to be occurring so often recently? What events or conditions make this seem to be an option for companies?

    6.) Please give some examples of the types of tactics that Mr. Vickery is publicizing. Are these allowed under GAAP or are the companies violating required standards? Please explain your answer.

    7.) Is it easy, challenging, or impossible for investors to detect these particular increases or decreases in account balances? Please offer some reasoning for your answer.

    8.) Who, if anyone, is in the best position to detect and/or prevent these reporting "games?"

    9.) What does the reporter mean by "hidden losses?" What does he mean by "low quality income?"

    Reviewed By: Judy Beckman, University of Rhode Island
    Reviewed By: Linda Christiansen, Indiana University Southeast


    "This Game Theory Is Cautionary Tale," by Herb Greenberg, The Wall Street Journal, December 8, 2007; Page B3 ---

    The reality of Generally Accepted Accounting Principles, or GAAP, is that they give companies just enough rope to hang themselves and their investors, if they so please. Much of GAAP is so subjective that you could drive side-by-side snow plows through the gray areas.

    That is something to keep in mind if, with the latest wave of write-offs, you believe it is time to start bargain hunting among the most beaten down financial-services companies tied to the mortgage blowup. The time may very well be right, but a recent report by Gradient Analytics warns that financial-reporting practices of some of these companies yesterday and today could still come back to bite investors tomorrow.

    Gradient, a Scottsdale, Ariz., research firm that caters to mutual funds and hedge funds, was early to spot accounting issues at Krispy Kreme Doughnuts, Biovail and Children's Place Retail Stores, among others, and their stocks subsequently tumbled.

    "I think for a number of years they played games," Don Vickrey, a former accounting professor who co-founded and is now editor-in-chief of Gradient says about the financial-services companies.

    By "playing games" he means a tendency during the mortgage boom "to report numbers that were artificially high." There were a variety of ways to do that, all of them completely legitimate and blessed by the gods of financial accounting rules -- otherwise known as the Financial Accounting Standards Board.

    One of the most-popular tactics was front-loading income and cash flows through what is known as "gain on sale" accounting, as loans were packaged and sold to other investors. The amount recognized largely reflected what the company expects to receive at some point in the future, based on predictions of such things as delinquencies, prepayments and interest rates. It is totally discretionary; the more conservative the predictions, the lower the gain.

    Just as companies may have been reporting numbers that were too high, Mr. Vickrey believes some might now be reporting losses and charges that are artificially low, hoping they will somehow get bailed out before the situation worsens.

    This is being done, he believes, by such things as deferring recognition of losses; transferring mortgages that are likely to default from one part of the balance sheet to another, where management has more discretion in determining the seriousness of the loss; somehow concealing "the aftereffects" of aggressive gain-on-sale accounting, and reliance on interest income from negatively amortized mortgages -- those in which the amount owed rises if payments don't cover all the interest due, which in this environment at best appears dicey.

    Much of this, he says, involves meeting "the bare minimum letter of GAAP, but not adhering to the spirit of GAAP."

    Among the five biggest companies involved in mortgage securities, Gradient believes Washington Mutual and Countrywide Financial have been the most aggressive, with Washington Mutual edging out Countrywide as having "the most risk for a material misstatement." Washington Mutual didn't respond to requests for comment.

    Countrywide said its accounting is appropriate and it has taken steps to reduce risk.

    Gradient warns that Washington Mutual may not be properly valuing loans it is holding for investment purposes. As a result, reserves for future losses may be too low.

    While the company boosted its loss provision in the third quarter, the Gradient report says "the increase appears to be too little too late as the allowance for loan losses has failed to keep pace with the increase in nonperforming loans."

    Meanwhile, in recent years, interest from negatively amortized mortgages leapt as a percentage of interest income to 7.2% for the first nine months of this year from 1.8% in the same period two years ago. Not only is that income unsustainable, Gradient says, but more prone to write-offs, especially if there are increased delinquencies and defaults.

    Then there's the high level of gain-on-sale income in prior years "that may signal additional risks to come."

    Washington Mutual, the report says, ranked second behind only Countrywide in terms of its reliance on gain-on-sale. Countrywide has been on Gradient's screen for four years because of a variety of earnings-quality issues.

    As with Washington Mutual, Gradient now wonders whether there could be "hidden losses" among loans held by Countrywide for investment. While reserves as a percentage of nonperforming loans have been rising, hitting 63.4% as of Sept. 30, Gradient says they still lag behind peers, including Washington Mutual. Countrywide disagrees, and says that "when all of the relevant factors are considered, our 'reserves' are comparable to our competitors."

    Like Washington Mutual, Gradient says Countrywide suffers from "low quality income" related to negative-amortized loans. "Unfortunately," the report says, in trying to determine its exposure, "Countrywide does not provide as much detail as other firms we surveyed."

    While the stocks of these companies and others have fallen considerably, Mr. Vickrey believes "a lot remains to be revealed." Can't wait.

    Another example of how to front load income under GAAP
    Mr. Wallison is correct about their motivations: "holding mortgages is profitable -- much more so than creating pools of mortgages and selling . . . to investors." However, much of that reported profit is illusory. Generally accepted accounting principles (GAAP) do a poor job of reflecting economic reality in this case. While they do have a funding cost advantage, most of their reported profit is simply "phantom income," that is, front-loaded income. By funding mortgages with a mix of short-term bullet bonds and longer-term callable bonds, GAAP front-loads income. There is fixed coupon income from the mortgages over 30 years, but the cost of funding rises over time as the shorter-term, lower-cost debt matures.
    Jerry Hartzog, "Fannie and Freddie's 'Phantom Income'," The Wall Street Journal, October 6, 2007; Page A19 ---

    Bob Jensen's threads on how to cheat with revenue accounting are at

    From The Wall Street Journal on Accounting Weekly Review on December 14, 2007

    Deloitte Receives $1 Million Fine
    by Judith Burns
    The Wall Street Journal
    Dec 11, 2007
    Page: C8
    Click here to view the full article on ---

    TOPICS: Accounting, Audit Firms, Auditing, Big Four, PCAOB, Public Accounting, Public Accounting Firms

    SUMMARY: The PCAOB, the nation's audit watchdog, recently fined Deloitte & Touche $1 million and censured the firm over its work checking the books of a San Diego-based pharmaceutical. This is the first PCAOB enforcement case against a Big Four accounting firm.

    CLASSROOM APPLICATION: This article can serve as a basis of discussion of audit firm responsibility and the enforcement process. It also discusses the PCAOB and a little of its history and enforcement, as well as provides information for discussion of Deloitte's response.

    1.) What firm recently agreed to a fine imposed by the PCAOB? What was the reason for the fine? Is this firm a large, medium, or small firm?

    2.) What is the PCAOB? What is its purpose? When was it created? What caused the creation of the PCAOB?

    3.) What is Deloitte's response to the fine? How does the firm defend itself against the allegations? What do you think of the firm's comments and actions?

    4.) What does it mean that Deloitte settled this case "without admitting or denying claims?" Why would that be a good tactic to take? How could it hurt the firm/

    5.) Is the PCAOB's main focus enforcement? Why or why not? What other responsibilities does the organization have?

    6.) Relatively speaking, is this a substantial or minor fine for the firm? Will fines like this change the behavior of the firms? Why or why not?

    Examine the PCAOB's website? What information is offered there? What information are you interested in as an accounting student? What might interest you as an investor? What would interest a businessperson? Does the website offer extensive information or is it general information? What information is offered regarding enforcement? Is the website a good resource for accountants? Why or why not? Is it a valuable resource for businesspeople? Please explain your answers. Offer specific examples of value offered on the website? What would you like to see detailed or offered on the website that is not included? What did you learn from this website that you have not seen elsewhere?

    Reviewed By: Linda Christiansen, Indiana University Southeast

    "Deloitte Receives $1 Million Fine," by Judith Burns, The Wall Street Journal, December 11, 2007; Page C8 --- 

    In its first-ever enforcement case against a Big Four accounting firm, the nation's audit watchdog fined Deloitte & Touche LLP $1 million and censured the firm over its work checking the books of a San Diego-based pharmaceutical company.

    Deloitte settled the matter without admitting or denying claims brought by the Public Company Accounting Oversight Board that one of the firm's former audit partners failed to perform appropriate and adequate procedures in a 2004 audit of Ligand Pharmaceuticals Inc.

    Deloitte signed off on Ligand's books, finding they fairly presented the firm's results and complied with U.S. generally accepted accounting principles, or U.S. GAAP.

    Ligand later restated financial results for 2003 and other periods because its recognition of revenue on product shipments didn't comply with U.S. GAAP.

    Ligand's restatement slashed its reported revenue by about $59 million and boosted its net loss in 2003 by more than 2½ times, the oversight board said.

    First-Ever Case

    The PCAOB's action against Deloitte marked the first time since it was created in 2003 by the Sarbanes-Oxley corporate-reform legislation that it has taken action against one of the Big Four accounting firms -- Deloitte, PricewaterhouseCoopers LLP, KPMG LLP and Ernst & Young LLP.

    The PCAOB previously took enforcement actions against 14 individuals and 10 firms, according to a spokeswoman, although they all involved smaller firms.

    Oversight-board Chairman Mark Olson told reporters yesterday after a speech to the American Institute of Certified Public Accountants that the board isn't looking to bring a lot of enforcement actions but said "it is reasonable to expect that there will be others" against Big Four firms.

    Mr. Olson said in an earlier statement that the board's disciplinary measures are needed to ensure public confidence isn't undermined by firms or individual auditors who fail to meet "high standards of quality and competence."

    Competence was lacking in the 2003 Ligand audit, according to the regulatory body. The oversight board said former auditor James Fazio didn't give enough scrutiny to Ligand's reported revenue from sales of products that customers had a right to return, even though Ligand had a history of substantially underestimating such returns.

    Deloitte's Response

    In a statement yesterday, Deloitte said it is committed to ongoing efforts to improve audit quality and "fully supports" the role of the accounting-oversight board in those efforts.

    "Deloitte, on its own initiative, established and implemented changes to its quality control policies and procedures that directly address the PCAOB's concerns," the company said.

    It added that it is confident that Deloitte's audit policies and procedures "are among the very best in the profession and that they meet or exceed all applicable standards."

    New York-based Deloitte began auditing Ligand in 2000 and resigned in August 2004.

    Mr. Fazio, who resigned from Deloitte in October 2005, agreed to be barred from public-company accounting for a minimum of two years, the PCAOB said. Mr. Fazio's lawyer couldn't be reached to comment.

    The oversight board also faulted Mr. Fazio for not adequately supervising others working on the audit and faulted Deloitte for leaving him in place even though some managers had determined he should be removed and ultimately asked him to resign from the firm.

    Mr. Fazio remained on the job despite the fact that questions about his performance had been raised in the fall of 2003, the oversight board said.

    In addition, the oversight board said Deloitte had assigned a greater-than-normal risk to Ligand's 2003 audit but failed to ensure that the partners assigned to the work had sufficient experience to handle it.

    "Deloitte Agrees to Pay $38 Million to Ex-Delphi Investors," SmartPros, December 31, 2007

    A U.S. Securities and Exchange Commission investigation found that Delphi manipulated its earnings from 2000 to 2004, using several illegal schemes to boost its earnings, including the concealment of a $237 million transaction in 2000 with GM involving warranty costs.

    Deloitte & Touche, now part of the privately held Deloitte Touche Tohmatsu, served as Delphi's outside accountant.

    The agreement requires approval by Detroit U.S. District Judge Gerald Rosen and completes a $325 million settlement of investor claims over the accounting issue, lawyers for the investors said. Delphi agreed to pay about $205 million, with Delphi's insurers and banks paying the rest.

    "It's about holding the gatekeepers accountable," said attorney Stuart Grant of Grant & Eisenhofer, one of four law firms representing public employee pension funds and other Delphi investors in the class action suit. "We're forcing the accountants ... to say, 'I am my brother's keeper.'"

    Continued in article

    Bob Jensen's threads on Deloitte are at

    Does it pay to evade taxes and, if so, why don't more people do it?

    "Why so Little Tax Evasion?" by Nobel Laureate Gary Becker, The Becker-Posner Blog, November 25, 2007 ---

    All the rich countries are successful in raising sizable amounts of revenue from taxes with only a rather little tax evasion. Tax avoidance is the use of legal means to reduce taxes, whereas tax evasion uses illegal means. The federal government of the US raises almost 20 percent of American GDP through taxes on personal and business income, capital gains, estates, and the sale of gasoline and some other goods. The estimates from the 2001 IRS National Research Program indicate that the percent of income not reported is quite low for wages and salaries, but rises to over 50 percent for farm income, and about 40 percent for business income. Income tax payments overall are under reported by about 13 percent. What determines the degree of tax evasion?

    If taxpayers responded only to the expected cost of evading taxes, evasion would be far more widespread. The reason is that only about 7 percent of all tax returns are audited (over a 7 year period), and typically the penalty on under reported income is only about 20 percent of the taxes owed. Virtually no one is sent to jail simply for evading taxes unless that evasion is on a very large scale, or involves massive fraud. If a person were to evade $1,000 in taxes, his expected gain would be 0.93x$1000 -0.07x$200 (=$1000/5) = $916. On these considerations alone, he should not hesitate to evade paying the $1,000, and presumably much more.

    To be sure, the expected gain is not the right criterion since most taxpayers would be risk averse regarding audits and punishments, especially if there is some chance of much greater than the average punishment or likelihood of an audit. However, if the expected gain from evading $1,000 were $916, the degree of risk aversion would have to be huge, far higher than the risk aversion that is embodied in pricing of assets, for risk to explain why there is so little tax evasion.

    This is not to say that possible punishments have no affect on the amount of tax evasion. Compliance rates are much higher when governments have independent evidence on a person's income since then the probability of audit when he under reports his income is much higher than when they do not have this information. For example, income from independent consulting to companies is better reported than tips on earnings, or than the incomes of farmers and other small business owners because employers report how much they paid to independent consultants, whereas no one reports how much they paid in tips, or how much they bought from a local store. A PhD study in progress at the University of Chicago by Oscar Vela also shows that persons in occupations where integrity is a more important determinant of success, such as law or medicine, are less likely to evade taxes. Presumably, any publicity that an individual in these occupations was convicted of tax evasion would damage his reputation and earnings.

    Vela finds that considerations of reputation, along with more traditional variables in the tax evasion literature do help explain how much evasion occurs for different types of income. These variables include the likelihood of audits that varies for different classes of taxpayers, punishments for those audited, marital status (not surprisingly, married persons are less likely to evade taxes), the marginal tax rate, and the ease with which governments can match reported incomes with independent evidence on incomes, such as from 1040 and 1099 tax forms,

    Note that tax avoidance as well as tax evasion tends to rise as the marginal tax rate increases. That is, with higher tax rates, individuals and businesses are both more likely not to report some of their income to the tax authorities, and also to search harder for ways to reduce how much of their income they are obligated to report. This implies, for example, that flattening the income tax structure would increase the amount of personal income reported to tax authorities because both the amount of evasion and the avoidance of the personal income tax would be reduced.

    However, audits, punishments, and the other deterrence variables mentioned in the previous paragraphs do not fully explain why there is not much more tax evasion. I believe it is necessary to recognize that most people believe they have a duty, moral or otherwise, to report their taxable income more or less honestly. I intentionally say "more or less honestly" because a little cheating on taxes is usually considered to be ok, as long as it does not go too far. Individuals might not pay social security taxes on their payments to workers who clean their houses, and they might pay a mason in cash because he then gives them a lower price, but these same persons would be very reluctant to engage in large-scale tax evasion.

    Similarly, most people do not believe it is moral to steal money even when there is little chance they will be found out, and they feel obligated to obey many other laws, even when that entails inconvenience and cost to themselves. There would be considerably more crime if individuals only obeyed laws when the expected cost of being caught, adjusted for risk, exceeded the benefits from disobeying these laws. To some extent, people obey many laws, including tax laws, because most other persons are doing the same. If so, their behavior might change radically if they lost confidence that others would pay their taxes and obey other laws.

    Clearly, morality about obeying laws does not apply to all types of taxes, or all laws-people often cross a street when the light is red, do not stop at stop signs when riding their bikes, and do not report much of their tips. Moreover, in many countries of Latin America, Africa, and Russia and other parts of Eastern Europe, individuals do not even feel much obligation to pay ordinary income and other taxes. They evade except when they expect the chances of being caught are high, as with businesses paying value added taxes. These countries are unable to raise substantial amounts from taxes on personal incomes or businesses except when marginal tax rates are low. Instead they rely greatly on value added and other more difficult to evade taxes.

    "Why so Little Tax Evasion?" Richard Posner, The Becker-Posner Blog, November 25, 2007 ---

    Becker presents persuasive evidence that the amount of tax evasion varies, as one would expect in a rational-choice model of taxpaying, with variance in the private costs and private benefits of evasion. I am inclined to believe that the private costs are higher than he suggests, which if true would mean that more tax compliance can be attributed to rational fear of punishment than he suggests and less to taxpayers' feeling a moral duty to pay taxes. For example, the civil penalties for tax evasion are quite severe (the fraud penalty is 100 percent of the amount of taxes evaded), and anyone charged with civil or criminal tax evasion will incur heavy legal and accounting expenses in defending against the charge. Although the audit rate is low, it is not random, but rather is higher for those taxpayers who are in the best position to evade taxes without being caught or whose tax returns raise a red flag because of unusually high deductions or other suspicious circumstances. And once one has been caught evading taxes, one can expect the rate of future audits of one's returns to be high. While it is true that underpayment of taxes is rarely prosecuted criminally, even when deliberate, criminal prosecution is likely if the tax evader takes steps to conceal the evasion, as by never filing a tax return, keeping phony books, or forging evidence of deductions. Moreover, the government does occasionally prosecute even small fry.

    . . .

    The general question that Becker raises of the moral costs of committing crime is a fascinating one. I would be inclined to search as hard as possible for nonmoral costs before concluding that morality is a major motivator of behavior, especially with regard to crimes, like tax evasion, that do not have an identifiable victim. In the case of many crimes, the benefits to most people of perpetrating them would be so slight (and often zero or even negative) that sanctions play only a small role in bringing about compliance; enforcement costs needn't be high in order to deter when nonenforcement benefits are low. Some examples: the demand for crack cocaine among white people (including cocaine addicts) appears to be very small. Both altruism and fear deter most people from attempting crimes of violence, quite apart from expected punishment costs. The vast majority of men do not have a sexual interest in prepubescent children. Well-to-do people often have excellent substitutes for crime: any person of means can procure legal substitutes for illegal drugs (for example, Prozac for cocaine, Valium for heroin). Fear of injury deters most people from driving recklessly or while drunk. People who have no taxable income are incapable of evading income tax. People who do have taxable income can obtain benefits from evading it, but the costs of evasion are, as I have emphasized, nonnegligible, so there is widespread compliance along with a good deal of evasion. I would therefore expect differences across countries in tax evasion to be related more to differences in penalties, collection methods, and so forth than to differences in morality. Americans may exhibit higher tax compliance than Italians, but Americans are not a more moral people than Italians.

    Continued in article

    Jensen Comment
    I inclined to think that more people evade taxes than Becker and Posner suggest, although this evasion has declined due to added reporting of revenues, particularly 1099 forms for miscellaneous and investment income. Increasingly, without formal audits, the IRS is sending out bills for underreported 1099 income. In the United States, the IRS estimated in 2007 that Americans owed $345 billion more than they paid, or about 14% of federal revenues for FY2007. But these estimates are very soft numbers based largely on intense audits of a miniscule proportion of taxpayers filing returns ---


    You can learn a lot about taxation at
    Also see

    Bob Jensen's tax helpers are at

    Legalizing Same-Sex Marriage Could Bring a Tax Windfall to States ---

    Small Business Helpers from Smart Stops on the Web
    Journal of Accountancy, December 2007 ---


    Whether you’re a CPA with small business or sole proprietor clients or you’re interested in leading your own firm, the Small Business Administration is here to help. This Smart Stop offers free online training in business planning and management, marketing and advertising, federal taxes, compliance and cyber security. Prepare for the future with guidance on disaster planning, contract opportunities and loan eligibility. Looking for a more personal experience? Use the site to locate the nearest Small Business Development Center or Women’s Business Center.


    With plenty of day-to-day responsibilities, it’s hard for small business owners to step back and look at the big picture: their financial future. Take some time to use CCH’s Financial Planning Toolkit, which provides resources on commercial loans, working capital and profit margins, as well as dozens of calculators for debt management, investments, tax and personal finance. Click on “Planning Guide” and “Planning Tools” for guidance on risk management, taxes, retirement and estate planning, including “Ages and Stages Approach to Investing” and “Tax Year and Accounting Methods.”


    This site delivers how-tos for life and work right to your desktop. You can purchase courses that help you master a computer program, build a Web site or learn how to negotiate successfully. Its skills training offerings include series of courses on sales and organizational development, personal finance and Internet marketing. Free offerings include step-by-step guides ranging from the everyday—how to clean your computer or how to remove spyware—to the workday—how to identify your customers or choose office

    Human Resource Calculators (cost of employee turnover, productivity losses, relocation losses, etc.) ---

    The home page for human resource management is at

    Bob Jensen's links to calculators ---

    Bob Jensen's small business helpers are at

    "Ex-CEO Agrees To Give Back $620 Million:  UnitedHealth, SEC Settle With McGuire On Options Backdating," by Vanessa Fuhrmans and James Bandler, The Wall Street Journal, December 7, 2007; Page A1 ---

    In one of the largest executive-pay givebacks in history, former UnitedHealth Group Inc. Chief Executive William McGuire has agreed to forfeit about $620 million in stock-option gains and retirement pay to settle civil and federal-government claims related to stock-option backdating.

    The settlement comes a year after the options-backdating scandal led to Dr. McGuire's ouster from the Minnetonka, Minn., company, one of the largest U.S. health insurers. Dr. McGuire had been among the most successful and highest-paid executives in the U.S.

    Stock options allow executives to buy stock at a fixed price, generally the market price on the day the options were granted. In the scandal, dozens of companies pretended that options were granted at an earlier date than they actually were. They picked dates when the stock price was at a low point, allowing executives to reap outsize gains. More than 80 corporate officials have lost their jobs in the scandal.

    Brian Foley, a compensation consultant in White Plains, N.Y., said he believes Dr. McGuire's $620 million repayment represents the largest giveback related to executive-compensation abuses in history. "You have to applaud the sheer magnitude," Mr. Foley said. "On the other hand, he still walks away with a lot."

    Dr. McGuire retains about 24 million stock options that currently could be cashed in for a gain of roughly $800 million, on top of about $530 million in pay he pocketed while running UnitedHealth from 1991 to 2006.

    Continued in article

    The HealthSouth Settlement Does Not Include Ernst & Young

    From The Wall Street Journal Accounting Weekly Review on November 10, 2006

    TITLE: UnitedHealth Expects Probe to Result in 'Greater' Charges
    REPORTER: Steve Stecklow and Vanessa Fuhrmans
    DATE: Nov 09, 2006
    PAGE: B1
    TOPICS: Accounting, Accounting Changes and Error Corrections, Sarbanes-Oxley Act, Securities and Exchange Commission, Stock Options

    SUMMARY: "UnitedHealth Group Inc. said it would have to take charges related to its backdated stock options that will be 'significantly greater' than its previous estimates and expects the charges to impact more than 10 years of previously reported earnings."

    1.) Describe the options backdating scandal that has developed since March, 2006. If you are unfamiliar with the issue, you may click on the link for "Perfect Payday: Complete coverage" on the left hand side of the on-line article.

    2.) For how long has options backdating been going on at UnitedHealth? Have the accounting requirements remained the same throughout that period of time? Summarize the required accounting and other financial reporting practices for executive and employee stock options over the last 10 years.

    3.) Suppose that, once UnitedHealth finishes its review, the restatement of earnings nearly doubles to $500 million and that the restatement applies equally to each of the preceding 10 years. What accounting entry must be made to correct this $500 million error? What will be the ultimate impact on each year's earnings and on stockholders' equity at the end of each year? How will this correction be disclosed? In your answer, cite the accounting standards which require the treatment you present.

    4.) Click on "Read the full text" of UnitedHealth's Nov. 8 filing with the SEC on the right-hand side of the on-line article. What Form number did UnitedHealth file? Summarize the implications of the depth of the options backdating problem found at this company.

    5.) Refer to the related article. What role does the Public Accounting Oversight Board fill in assisting accountants to audit companies' accounting for stock options?

    Reviewed By: Judy Beckman, University of Rhode Island

    TITLE: Guidelines Set for How to Audit Stock Options
    REPORTER: Siobhan Hughes
    PAGE: A10 ISSUE: Oct 18, 2006

    "HealthSouth Agrees to $445 Million Settlement," AccountingWeb, October 2, 2006 ---

    HealthSouth Corp. announced on Wednesday that it will pay $445 million to settle several lawsuits that were filed against the company and some of its former directors after an accounting scandal.

    HealthSouth will pay $215 million in common stock and warrants, and its insurance carriers will pay $230 million in cash, the company said. Also, federal securities class-action plaintiffs will get 25 percent of any future judgments obtained by or on behalf of HealthSouth regarding certain claims against fired CEO Richard Scrushy, former auditors Ernst & Young, and the company’s former investment bank, UBS. Each party remains a defendant in the derivative actions and the federal securities class actions.

    A judge must approve the settlement, which is nearly the same as a preliminary settlement that was reached in February.

    "This settlement represents another significant milestone in HealthSouth's recovery and is a powerful symbol of the progress we have made as a company," said HealthSouth President and CEO Jay Grinney. HealthSouth, the Birmingham, Ala.-based rehabilitation and medical services chain, does not admit any wrongdoing in the settlement, nor does any other settling defendant, the company said.

    The settlement does not include Ernst & Young, UBS, Scrushy or any former HealthSouth officer who entered a guilty plea or was convicted of a crime in connection with the company's financial reporting activities ending in March 2003.

    Scrushy and more than a dozen top executives were accused of recording as much as $2.7 billion in bogus revenues on the company's books over six years. UBS and Ernst & Young have denied knowing about the fraud. Last year, Scrushy was acquitted of all criminal charges in the fraud. He was convicted of conspiracy, bribery and mail fraud charges in a separate government corruption trial.


    Traditional double-entry bookkeeping is becoming the Latin of business school

    December 4 message from Ed Scribner [escribne@NMSU.EDU] 


    [A new book called] Crack the Books [features] double-entry bookkeeping, not only for the general public but for those practitioners who have qualified with a less-than-perfect appreciation of its importance. … … some contemporary thinking argues that, in an IT age, the teaching of debits and credits is a waste of training time. For instance, Rick Elam of the AICPA has stated that “traditional double-entry bookkeeping is becoming the Latin of business school - interesting to study and useful from a historical perspective, but not in demand in everyday practice.”

    Despite such criticisms, June firmly believes double-entry accounting remains crucial. Taking the language analogy, she maintains it offers the key foundation. “Although Latin and double-entry accounting have been derided as immaterial for everyday business, both provide a knowledge platform. Even though few people speak Latin today, it’s the basis for many western European languages, including English, French, Spanish and Italian. Having a firm grounding in Latin can only enhance your ability to master these languages. Similarly, accounting IT is rooted in double-entry accounting. It provides the bedrock for understanding the workings of virtually all accounting information systems.”

    For June and Cecil, double-entry accounting is not an artificial, historic construct but the natural representation of business events. The fundamentals of accounting are the same whether a manual or computerized system is used. “A Euro amount is assigned to each impacted account; the processing system aggregates all those transactions that affect particular accounts. When processing is complete, balances are determined and presented as financial statements.”


    Crack the Books: Accounting for Non-Accountants will be available in Eason’s and all good bookshops in the New Year. It can also be ordered at 

    Career helpers for cubicle workers ---

    Bob Jensen's career helpers are at

    December 7, 2007 message from Bruce Mizrach []

    The Berkeley Electronic Press, together with editor Bruce Mizrach (Rutgers), is pleased to announce a new issue of Studies in Nonlinear Dynamics & Econometrics (SNDE). To view any of the articles in question, simply click on the links below (full citations and abstracts follow at bottom of message).


    Massimiliano De Santis "Movements in the Equity Premium: Evidence from a Time-Varying VAR".

    Deepankar Basu and Robert M. de Jong "Dynamic Multinomial Ordered Choice with an Application to the Estimation of Monetary Policy Rules".

    Maximo Camacho and Gabriel Perez Quiros "Jump-and-Rest Effect of U.S. Business Cycles".

    Antonis Michis and Theofanis Sapatinas "Wavelet Instruments for Efficiency Gains in Generalized Method of Moment Models".

    Frédérique Bec and Alexia Bastien "The Transmission of Aggregate Supply and Aggregate Demand Shocks in Japan: Has There Been a Structural Change?".


    To submit your next paper, visit and click Submit. Among the well-known authors whose work has appeared in SNDE are: Anthony C. Atkinson, Jess Benhabib, William Cleveland, Ray C. Fair, J. Doyne Farmer, Eric Ghysels, James Hamilton, Bruce Hansen, Alan Kirman, Blake LeBaron, Charles Nelson, Kazuo Nishimura, Ruey Tsay, Howell Tong, Halbert White, and Arnold Zellner.

    All papers by junior faculty members will be eligible for The Kenneth Arrow Prize for Junior Economists, and all papers by senior authors will be eligible for The Kenneth Arrow Prize for Senior Economists. See for additional details.




    Massimiliano De Santis (2007) "Movements in the Equity Premium: Evidence from a Time-Varying VAR", Studies in Nonlinear Dynamics & Econometrics: Vol. 11: No. 4, Article 1.


    Previous literature has recognized the importance of regime changes in the calculation of ex-ante equity premia. However, the methodologies used to estimate equity premia only allow for very restrictive forms of regime transitions. This paper addresses the issue by postulating an evolving model for the law of motion of dividend growth, consumption growth and dividend-price ratio. Model parameters are then used to compute conditional and unconditional U.S. equity premia. We substantially extend and confirm previous work on the declining equity premium, and uncover important macroeconomic factors driving the equity premium. We find that the equity premium has declined, particularly from 1950 to 1971 and from 1988 to 2000. Our results point to changing consumption volatility as an important priced factor. We find that volatility of consumption growth is a good indicator of economic uncertainty and, as such, its changes are reflected in expected returns, and are priced by the market. We also find that not accounting for parameter time variation induces large pricing errors, as too little variation in dividend yields is attributed to changes in expected dividend growth.


    Deepankar Basu and Robert M. de Jong (2007) "Dynamic Multinomial Ordered Choice with an Application to the Estimation of Monetary Policy Rules", Studies in Nonlinear Dynamics & Econometrics: Vol. 11: No. 4, Article 2.


    We present a novel specification of a dynamic multinomial ordered choice model, where the latent variable is a function of strictly stationary exogenous variables and lags of the choice variable. We prove that such a model with weakly dependent errors will have a strictly stationary solution which is L-2 near epoch dependent. We also derive consistency and asymptotic normality of the maximum likelihood estimator for a probit specification of the model. We illustrate a possible application of the model by estimating a discrete version of a robust "difference" monetary policy rule for the period 1990:2006 at a monthly frequency.


    Maximo Camacho and Gabriel Perez Quiros (2007) "Jump-and-Rest Effect of U.S. Business Cycles", Studies in Nonlinear Dynamics & Econometrics: Vol. 11: No. 4, Article 3.


    One of the most familiar empirical stylized facts about output dynamics in the United States is the positive autocorrelation of output growth. This paper shows that positive autocorrelation can be better captured by shifts between business cycle states rather than by the standard view of autoregressive coefficients. The result is extremely robust to different nonlinear alternative models and applies not only to output but also to the most relevant macroeconomic variables.


    Antonis Michis and Theofanis Sapatinas (2007) "Wavelet Instruments for Efficiency Gains in Generalized Method of Moment Models", Studies in Nonlinear Dynamics & Econometrics: Vol. 11: No. 4, Article 4.


    We propose a simple computational method in the context of generalized method of moments for improving the efficiency of regression coefficient estimates. The gains in efficiency arise by incorporating additional moment conditions in the estimation framework based on maximal overlap wavelet packet transforms of the continuous explanatory variables. A major advantage of the proposed method is that it does not require additional exogenous auxiliary information but relies on wavelet packet transforms of the existing continuous explanatory variables. Based on existing theory, we provide theoretical arguments for the proposed methodology, for both linear and non-linear models, and demonstrate its advantages with both an empirical application concerning two brand demand models and a Monte Carlo simulation study.


    Frédérique Bec and Alexia Bastien (2007) "The Transmission of Aggregate Supply and Aggregate Demand Shocks in Japan: Has There Been a Structural Change?", Studies in Nonlinear Dynamics & Econometrics: Vol. 11: No. 4, Article 5.


    Despite expansionary fiscal and monetary policies, the Japanese real economy has been stagnating since the bubble bursting in the early nineties. Within a multivariate setup, this paper proposes to test for and date a possible structural shift in the response of Japanese macroeconomic fluctuations to aggregate supply and aggregate demand shocks. The econometric methodology directly derives from Andrews (1993) and Bai, Lumsdaine and Stock (1998) theoretical results. Our empirical study from monthly post-1980 observations reveals i) a significant structural break in the end of 1991, and ii) a sharp decrease in the influence of demand shocks on Japanese output fluctuations after this date.


    Ways to Attract the Best People Into Accountancy Careers

    December 4, 2007 message from

    As you're probably aware, in June of this year Treasury Secretary Paulson established an Advisory Committee on the Auditing Profession to develop recommendations as to what can be done to sustain this profession, whose work is so critical to investor confidence in the capital markets. The Committee is examining ways to attract the best people to the profession, address concentration and competitive issues, and promote the long-term health of the private-sector auditing function.

    At the Committee's meeting yesterday in Washington, D.C., our Chairman and CEO, Jim Turley, presented testimony on behalf of Ernst & Young (a link is attached below). I thought you would be interested in his thoughts on some of the major issues facing the profession, including recruiting, and the world's financial markets - and of course I would be interested in your comments on these issues.

    Here is a link to a printed copy of the testimony: Jim Turley's ACAP Treasury Testimony

    Best Regards,


    Ellen J. Glazerman
    Executive Director,
    Ernst & Young Foundation Americas
    Director, University Relations
    Ernst & Young LLP
    5 Times Square, 6th Floor
    New York, NY 10036
    (Fax): 866-855-4960 


    "The Accounting Cycle:  Poor Performance of Credit Rating Agencies," by J. Edward Ketz, SmartPros, December 2007 ---

    Soon after Merrill Lynch disclosed its $8.4 billion write-down because of problems with collateralized debt obligations (CDOs) and other financial instruments relating to subprime mortgages, the credit rating agencies started downgrading the securities. But, this is like the proverbial soldier who watches a raging battle from afar; when the war is over, he proceeds to bayonet the wounded. 

    Merrill Lynch and other banks got into the CDO business several years ago. The CDOs received an imprimatur from agencies such as Moody's, Standard & Poor's, and Fitch. Some CDOs were even evaluated as investment grade securities. The analysts at Moody's, Standard & Poor's, and Fitch apparently ignored the risks involved in the subprime mortgage market as well as the risks in real estate prices.

    This segment generated lots of money for Merrill Lynch and the other banks. The CDO business brought in millions and millions of revenues. This line of business was at least as profitable for the bond rating agencies, too, as their ratings produced massive amounts of money.

    Not surprisingly, problems developed because the financial institutions were lending funds to marginal borrowers, those with less-than-stellar credentials for loan applicants. When some of these riskier borrowers defaulted on their mortgages, the CDOs started losing value. The credit rating agencies did nothing; presumably, they felt that the CDOs still had investment grade status.

    With the losses by Merrill Lynch out in the open, everybody knows not only that the CDOs have less fair value, but also that the credit raters aren't earning their keep. Unfortunately, members of Congress believe that they should hold investigations on the matter. I say unfortunate because such a move would be a waste of time, energy, and money.

    Recall the downfall of Enron and the high credit ratings that Enron received from the credit rating agencies. These agencies did not downgrade Enron's debt until after the 2001 third quarter results became public and Enron's stock price started its nosedive. When Congress passed the Sarbanes-Oxley Act in 2002, section 702(b) required the SEC to conduct a study of credit rating agencies to determine why these credit rating agencies did not act as useful watchdogs and warn the public about Enron's true situation. It accomplished little at the time; if Congress holds hearings now, nothing new will be learned. Until policy makers focus on the institution of credit ratings and follow the cash, they waste their time with investigations.

    Moody's and the other agencies make money by charging the business entities who are issuing debt. It doesn't take a genius to see the conflict of interest. The credit agencies lean on the issuer for more money or risk receiving a poor rating. Payment not only entitles one to a good rating, but also it gives one the privilege of not receiving a downgrade unless bad news becomes public.

    The SEC barely mentions this institutional feature in its "Report on the Roles and Function of Credit Rating Agencies in the Operation of the Securities Markets."

    This essay, written in January, 2003, practically ignores the problem. On page 41, the SEC report states, "The practice of issuers paying for their own ratings creates the potential for a conflict of interest." The SEC goes on to review comments by the large rating agencies themselves on how they manage this potential conflict of interest.

    The comments are pathetic. First, the SEC and the managers at credit rating agencies mangle the English language when they refuse to identify conflicts of interest for what they are. My dictionary defines conflict of interest as "the circumstance of a public officeholder, corporate officer, etc., whose personal interests might benefit from his or her official actions or influence." The term does not mean that they actually do benefit, but calls attention to the possibility. Calling such circumstances "potential conflicts of interests" merely attempts to push ethics aside. I can understand this behavior by the managers, but I don't comprehend the words of the SEC staff.

    Second, the comments rely heavily on the assertions of the credit rating agencies themselves. Managers of these agencies claim there is no problem, and of course the SEC should listen to them and accept every word as truth. Yeah, right!

    Third, on page 42 of the report, the SEC promises to explore whether these credit rating agencies "should implement procedures to manage potential conflicts of interest that arise when issuers [pay] for ratings." Either the SEC did not keep its promise or such actions are inadequate. Clearly, the credit rating agencies have not responded any differently to the CDO problem than they did with Enron's circumstances.

    Policy makers can reduce the problems by reducing the very real conflict of interests that perniciously raises its ugly head from time to time. The solution is to prohibit credit rating agencies to receive any funds from the issuers. If the ratings have any merit, then investors will be willing to pay for them.

    This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.

    Bob Jensen's threads on hiding debt with CDOs are at

    Bob Jensen's threads on credit rating industry frauds are at 

    Human Resource Calculators (cost of employee turnover, productivity losses, relocation losses, etc.) ---

    Bob Jensen's links to calculators ---

    Humor Between December 1 and December 31, 2007  ---  

    Humor Between November 1 and November 30, 2007 --- 

    Humor Between October 1 and October 31, 2007        ---  

    Humor Between September 1 and September 30, 2007 --- 


    Humor Between December 1 and December 31, 2007

    Forwarded by Team Carper



    NOW I HAVE A $2,500,000.00 HOME, A $45,000.00 CAR, NICE BIG BED AND PLASMA SCREEN TV,






    Forwarded by Team Carper

    KNOW THE SYMPTOMS.....PLEASE READ! Thank goodness there's a name for this disorder. Somehow I feel better, even though I have it!!

    Recently, I was diagnosed with A.AA.D.D. - Age Activated Attention Deficit Disorder. This is how it manifests:

    I decide to water my garden.

    As I turn on the hose in the driveway, I look over at my car and decide it needs washing.

    As I start toward the garage, I notice mail on the porch table that I brought up from the mail box earlier.

    I decide to go through the mail before I wash the car.

    I lay my car keys on the table, put the junk mail in the garbage can under the table, and notice that the can is full.

    So, I decide to put the bills back on the table and take out the garbage first.

    But then I think, since I'm going to be near the mailbox when I take out the garbage anyway, I may as well pay the bills first.

    I take my check book off the table, and see that there is only one check left.

    My extra checks are in my desk in the study, so I go inside the house to my desk where I find the can of Coke I'd been drinking.

    I'm going to look for my checks, but first I need to push the Coke aside so that I don't accidentally knock it over.

    The Coke is getting warm, and I decide to put it in the refrigerator to keep it cold.

    As I head toward the kitchen with the Coke, a vase of flowers on the counter catches my eye--they need water.

    I put the Coke on the counter and discover my reading glasses that I've been searching for all morning.

    I decide I better put them back on my desk, but first I'm going to water the flowers.

    I set the glasses back down on the counter, fill a container with water and suddenly spot the TV remote. Someone left it on the kitchen table.

    I realize that tonight when we go to watch TV, I'll be looking for the remote, but I won't remember that it's on the kitchen table, so I decide to put it back in the den where it belongs, but first I'll water the flowers.

    I pour some water in the flowers, but quite a bit of it spills on the floor.

    So, I set the remote back on the table, get some towels and wipe up the spill.

    Then, I head down the hall trying to remember what I was planning to do.

    At the end of the day:

    the car isn't washed

    the bills aren't paid

    there is a warm can of Coke sitting on the counter

    the flowers don't have enough water,

    there is still only 1 check in my check book,

    I can't find the remote,

    I can't find my glasses,

    and I don't remember what I did with the car keys.

    Then, when I try to figure out why nothing got done today, I'm really baffled because I know I was busy all day, and I'm really tired.

    I realize this is a serious problem, and I'll try to get some help for it, but first I'll check my e-mail....

    Do me a favor. Forward this message to everyone you know, because I don't remember who I've sent it to.

    Computer Stupidity ---

    Forwarded by Dick Haar

    Only in America drugstores make the sick walk all the way to the back of the store to get their prescriptions while healthy people can buy cigarettes at the front.

    Only in America people order double cheeseburgers, large fries, and a diet coke.

    Only in America banks leave both doors open and then chain the pens to the counters.

    Only in America we leave cars worth thousands of dollars in the driveway and put our useless junk in the garage.

    Only in America we buy hot dogs in packages of ten and buns in packages of eight.

    Only in America they have drive-up ATM machines with Braille lettering.

    EVER WONDER ....

    Why the sun lightens our hair,but darkens our skin ?

    Why women can't put on mascara with their mouth closed?

    Why don't you ever see the headline "Psychic Wins Lottery"?

    Why is "abbreviated" such a long word?

    Why is it that doctors call what they do "practice"?

    Why is lemon juice made with artificial flavor, and dishwashing liquid made with real lemons?

    Why is the man who invests all your money called a broker?

    Why is the time of day with the slowest traffic called rush hour?

    Why isn't there mouse-flavored cat food?

    Why didn't Noah swat those two mosquitoes?

    Why do they sterilize the needle for lethal injections?

    You know that indestructible black box that is used on airplanes? Why don't they make the whole plane out of that stuff?!

    Why don't sheep shrink when it rains?

    Why are they called apartments when they are all stuck together?

    If flying is so safe, why do they call the airport the terminal?

    Forwarded by Gene and Joan,

    Some are facts and some are urban legends.
    If you've nothing else to do, check out each one at


    The liquid inside young coconuts can be used as a substitute for Blood plasma. *****************************************************************************

    No piece of paper can be folded in half more than seven (7) times. Oh go ahead...I'll wait...~ *****************************************************************************

    Donkeys kill more people annually than plane crashes or shark attacks. *****************************************************************************

    You burn more calories sleeping than you do watching television. *****************************************************************************

    Oak trees do not produce acorns until they are fifty (50) years of age or older.

    ****************************************** ***********************************

    The first product to have a bar code was Wrigley's gum.


     The King of Hearts is the only king WITHOUT A MOUSTACHE

    ******************** *********************************************************

    American Airlines saved $40,000 in 1987 by eliminating one (1) olive from each salad served in first-class. *****************************************************************************

    Venus is the only planet that rotates clockwise. (Since Venus is normally associated with women,what does this tell you!) ****************************************************** ****************

    Apples, not caffeine, are more efficient at waking you up in the morning. *****************************************************************************

    Most dust particles in your house are made from DEAD SKIN! *****************************************************************************

    The first owner of the Marlboro Company died of lung cancer. </ SPAN> So did the first " Marlboro Man." *****************************************************************************

    Walt Disney was afraid OF MICE!




    The three most valuable brand names on earth: Marlboro, Coca Cola, and Budweiser, in that order. *****************************************************************************

    It is possible to lead a cow upstairs... but, not downstairs.


    A duck's quack doesn't echo, and no one knows why. (urban legend --- )


    Dentists have recommended that a toothbrush be kept at least six (6) feet away from a toilet to avoid airborne particles resulting from the flush. (I keep my toothbrush in the living room now!)

    Richard Millhouse Nixon was the first U.S. president whose name contains all the letters from the word "criminal." (who thinks up this stuff???) The second? William Jefferson Clinton

    (Please don't tell me you're SURPRISED!!!)


    And the best for last.....
    Turtles can breathe through their butts. (I know some people that breathe out but not in, don't YOU?)


    Did George Carlin write a list of hurricane rules ---

    Forwarded by Paula

    he U.S.S. Constitution (Old Ironsides), as a combat vessel, carried 48,600 gallons of fresh water for her crew of 475 officers and men. This was sufficient to last six months of sustained operations at sea. She carried no evaporators (i.e. fresh water distillers!).

    However, let it be noted that according to her ship's log, "On July 27, 1798, the U.S.S. Constitution sailed from Boston with a full complement of 475 officers and men, 48,600 gallons of fresh water, 7,400 cannon shot, 11,600 pounds of black powder and 79,400 gallons of rum."

    Her mission: "To destroy and harass English shipping."

    Making Jamaica on 6 October, she took on 826 pounds of flour and 68,300 gallons of rum.

    Then she headed for the Azores , arriving there 12 November. She provisioned with 550 pounds of beef and 64,300 gallons of Portuguese wine.

    On 18 November, she se t sail for England . In the ensuing days she defeated five British men-of-war and captured and scuttled 12 English merchant ships, salvaging only the rum aboard each.

    By 26 January, her powder and shot were exhausted. Nevertheless, although unarmed she made a night raid up the Firth of Clyde in Scotland . Her landing party captured a whisky distillery and transferred 40,000 gallons of single malt Scotch aboard by dawn. Then she headed home.

    The U.S.S. Constitution arrived in Boston on 20 February, 1799, with no cannon shot, no food, no powder, no rum, no wine, no whisky, and 38,600 gallons of water.

    Courtroom Testimony ---

    Partying Accountants (video links forwarded by David Albrecht)

    Bob Jensen's threads on accounting humor are at

    Why I Will Never Have a Girlfriend (mathematical reasoning) ---

    Forwarded by Valerie

    In wine there is wisdom, in beer there is freedom, in water there is bacteria.

    In a number of carefully controlled trials, scientists have demonstrated that if we drink 1 litre of water each day, at the end of the year we would have absorbed more than 1 kilo of Escherichia coli,(E. coli) - bacteria found in feces. In other words, we are consuming 1 kilo of poop.

    However, we do NOT run that risk when drinking wine & beer (ortequila, rum, whiskey or other liquor) since alcohol has to go through a purification process of boiling, filtering and/or fermenting.

    So remember:
    Water = Poop
    Wine = Health

    Therefore, it's better to drink wine and talk stupidly, than to drink water and be full of shit.

    There is no need to thank me for this valuable information. I'm doing it as a public service.

    Forwarded by Auntie Bev


    All the organs of the body were having a meeting, trying to decide who was the one in charge.

    'I should be in charge,' said the brain , 'Because I run all the body's systems, so without me nothing would happen.'

    'I should be in charge,' said the blood , 'Because I circulate oxygen all over so without me you'd all waste away.'

    'I should be in charge,' said the stomach,' Because I process food and give all of you energy.'

    'I should be in charge,' said the legs, 'because I carry the body wherever it needs to go.'

    'I should be in charge,' said the eyes, 'Because I allow the body to see where it goes.'

    'I should be in charge,' said the rectum, 'Because I'm responsible for waste removal.'

    All the other body parts laughed at the rectum And insulted him, so in a huff, he shut down tight. Within a few days, the brain had a terrible headache, the stomach was bloated, the legs got wobbly, the eyes got watery, and theblood Was toxic. They all decided that the rectum should be the boss . The Moral of the story? Even though the others do all the work...

    The asshole is usually in charge

    Top ten worst Christmas cracker jokes ever (these are tricky) ---

    Forwarded by Auntie Bev

    The Demographics of American Newspapers

    The Demographics of American Newspapers

    1. The Wall Street Journal is read by the people who run the country

    2. The Washington Post is read by people who think they run the


    3. The New York Times is read by people who think they should run the country and who are very good at crossword puzzles.

    4. USA Today is read by people who think they ought to run the country but don't really understand The New York Times. They do, however, like their statistics shown in pie charts.

    5. The Los Angeles Times is read by people who wouldn't mind running the country -- if they could find the time -- and if they didn't have to leave SouthernCalifornia to do it.

    6. The Boston Globe is read by people whose parents used to run the country and did a poor job of it , thank you very much.

    7. The New York Daily News is read by people who aren't too sure who's running the country and don't really care as long as they can get a seat on the train.

    8. The New York Post is read by people who don't care who is running the country as long as they do something really scandalous, preferably while intoxicated.

    9. The Miami Herald is read by people who are running another country but need the baseball scores.

    10. The San Francisco Chronicle is read by people who aren't sure if there is a country or that anyone is running it; but if so, they oppose all that they stand for. There are occasional exceptions if the leaders are handicapped minority feminist atheist dwarfs who also happen to be illegal aliens from any other country or galaxy, provided of course, that they are not Republicans.

    11. The National Enquirer is read by people trapped in line at the grocery store.

    12. The Oregonian is read by people who have recently caught a fish and need something in which to wrap it.

    Forwarded by Auntie Bev

    An old, tired-looking dog wandered into the yard. I could tell from his collar and well-fed belly that he had a home. He followed me into the house, down the hall, and fell asleep in a corner.

    An hour later, he went to the door, and I let him out. The next day he was back, resumed his position in the hall, and slept for an hour. This continued for several weeks. Curious, I pinned a note to his collar: "Every afternoon your dog comes to my house for a nap." The next day he arrived with a different note pinned to his collar: "He lives in a home with ten children -- he's trying to catch up on his sleep. Can I come with him tomorrow?"

    This is a repeat, but what the heck? It's the holiday season.

    Christmas Carols for Those Over the Edge

    01.         Schizophrenia --- Do You Hear What I Hear?

    02.         Multiple Personality Disorder --- We Three Kings Disoriented Are

    03.         Dementia --- I Think I'll be Home for Christmas If I Can Find Where Our Home Is?

    04.         Narcissism--- Hark the Herald Angels Are Singing About Me

    05.         Manic--Deck the Halls and Walls and House and Lawn and Streets and Stores and Office and Town and Cars and Buses and ...

    06.         Paranoid --- Santa Claus is Coming to Town to Get Me

    07.         Borderline Personality Disorder --- You Better Watch Out, I'm Gonna Cry, I'm Gonna Pout, Maybe I'll Tell You Why

    08.         Personality Disorder---Thoughts of Roasting on an Open Fire

    09.         Attention Deficit Disorder --- Silent Night, Holy oooh look at the Froggy - Can I have a Chocolate Why is France so Far Away?  

    10.        Obsessive Compulsive Disorder --- Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells, Jingle Bells.

    11.         Family Visitation at Rehab --- What Child is This?

    12.        San Francisco Syndrome --- I Saw Daddy Kissing Santa Claus.

    Forwarded by Dick Haar


     Law of Mechanical Repair
    After your hands become coated with grease, your nose will begin to itch or you'll have to pee. 

     Law of the Workshop
    Any tool, when dropped, will roll or slide to the least accessible location.

    Law of Probability
    The probability of being watched is directly proportional to the stupidity of your act. 

    Law of the Telephone
    If you dial a wrong number, you never get a busy signal.

    Law of the Alibi
    If you tell the boss you were late for work because you had a flat tire,  the very next morning you will have a flat tire.

    Variation Law
    If you change lines (or traffic lanes), the one you were in will start to move faster than the one you are in now (works every time).

    Law of the Bath
    When the body is fully immersed in water, the telephone rings.

    Law of Close Encounters
    The probability of meeting someone you know increases dramatically when you are with someone you don't want to be seen with.  

    Law of the Result
    When you try to prove to someone that a machine won't work, it will.

    Law of Biomechanics
    The severity of the itch is inversely proportional to your ability to reach and scratch it. 

    Law of the Theater
    At any event, the people whose seats are furthest from the aisle will arrive last.

    Law of Coffee
    As soon as you sit down to a cup of hot coffee, your boss will ask you to do something which will last until the coffee is cold. 

    Murphy's Law of Lockers
    If there are only two people in a locker room, they will have adjacent lockers.
    Law of Rugs/Carpets
    The chances of an open-faced jelly sandwich landing face down on a floor covering are directly correlated to the newness and cost of the carpet/rug. 

    Law of Location
    No matter where you go, there you are.

    Law of Logical Argument
    Anything is possible if you don't know what you are talking about.

    Brown's Law
    If the shoe fits, it's ugly.

    Oliver's Law
    A closed mouth gathers no feet.

    Wilson's Law
    As soon as you find a product that you really like, they will stop making it.  (this one is true every time!)

    Doctors' Law
    If you don't feel well, make an appointment to see a doctor, and by the time you get there you'll feel better.  Don't make an appointment and you'll remain sick 



    The year is 1907.  One hundred years ago.  What a difference a century makes! 
    Here are some statistics for the Year 1907 :
    ************ ********* ********* ******
     The average life expectancy was 47 years.
     Only 14 percent of the homes had a bathtub.
     Only 8 percent of the homes had a telephone.
     There were only 8,000 cars and only 144 miles of paved roads.
     The maximum speed limit in most cities was 10 mph.
     The tallest structure in the world was the Eiffel Tower!
     The average wage in 1907 was 22 cents per hour.
     The average worker made between $200 and $400 per year .
     A competent accountant could expect to earn $2000 per year,  A dentist $2,500 per year, a veterinarian between $1,500 and $4,000 per year, and a mechanical engineer about $5,000 per year.
    More than 95 percent of all births took place at HOME .
    Ninety percent of all doctors had NO COLLEGE EDUCATION! Instead, they attended so-called medical schools, many of which  were condemned in the press AND the government as "substandard. "
    Sugar cost four cents a pound.
    Eggs were fourteen cents a dozen.

    Coffee was fifteen cents a pound.
    Most women only washed their hair once a month, and used
    Borax or egg yolks for shampoo.
    Canada passed a law that prohibited poor people from entering into their country for any reason.
    Five leading causes of death were:
    1. Pneumonia and influenza  2. Tuberculosis  3. Diarrhea  4. Heart disease  5. Stroke
    The American flag had 45 stars.
    The population of Las Vegas , Nevada, was only 30!!!!
    Crossword puzzles, canned beer, and ice tea hadn't been invented yet.
    There was no Mother's Day or Father's Day.
    Two out of every 10 adults couldn't read or write.
    Only 6 percent of all Americans had graduated from high school.

     Marijuana, heroin, and morphine were all available over the counter at the local corner drugstores. Back then pharmacists said, "Heroin clears the complexion, gives buoyancy to the mind, regulates the stomach and bowels, and is, in fact, a perfect guardian of health." ( Shocking? DUH! )

    Eighteen percent of U.S. households had at least one full-time servant or domestic help.
    There were about 230 reported murders in the ENTIRE ! U.S.A. !
    Now I forwarded this from someone else without typing it myself, and sent it to you and others all over Canada & U.S.A
    Possibly the world, in a matter of seconds!
    Try to imagine what it may be like in another 100 years.
    Will it be for the better? I think I prefer graduating from high school in 1956 rather than 2056! People 100 years old probably prefer being born in 1907.

    Forwarded by Paula

    These appeared in earlier editions of New Bookmarks, but they're worth repeating.



    Just before the funeral services,

    the undertaker came up to the very elderly widow and asked,
    "How old was your husband?" "98," she replied.
    "Two years older than me"
    "So you're 96," the undertaker commented.
    She responded, "Hardly worth going home, is it?


    Reporters interviewing a 104-year-old woman:
    "And what do you think is the best thing
    about being 104?" the reporter asked.
    She simply replied, "No peer pressure."



    The nice thing about being senile is
    you can hide your own Easter eggs.


    I've sure gotten old!  
    I've had two bypass surgeries, a hip replacement,
    new knees, fought prostate cancer and diabetes
    I'm half blind,
    can't hear anything quieter than a jet engine,
    take 40 different medications that
    make me dizzy, winded, and subject to blackouts.
    Have bouts with dementia.
    Have poor circulation;
    hardly feel my hands and feet anymore.
    Can't remember if I'm 85 or 92.
    Have lost all my friends. But, thank God,
    I still have my driver's license.



    I feel like my body has gotten totally out of shape,
    so I got my doctor's permission to
    join a fitness club and start exercising.
    I decided to take an aerobics class for seniors.
    I bent, twisted, gyrated, jumped up and down,

     and perspired for an hour. But,
    by the time I got my leotards on,
    the class was over.


    An elderly woman decided to prepare her will and
    told her preacher she had two final requests.
    First, she wanted to be cremated, and second,
    she wanted her ashes scattered over Wal-Mart.
    "Wal-Mart?" the preacher exclaimed.

    "Why Wal-Mart?"
    "Then I'll be sure my daughters visit me twice a week"


    My memory's not as sharp as it used to be.
    Also, my memory's not as sharp as it used to be.


    Know how to prevent sagging?
    Just eat till the wrinkles fill out.


    It's scary when you start making the same noises
    as your coffee maker.

    These days about half the stuff
    in my shopping cart says,
    "For fast relief."


    Grant me the senility to forget the people
    I never liked anyway,
    the good fortune to run into the ones I do, and
    the eyesight to tell the difference.


    Now, I think you're supposed to share this with 5 or 6, maybe 10 others. Oh heck, give it to a bunch of your friends if you can remember who they are!
    Always Remember This:
    You don't stop laughing because you grow old,
    You grow old because you stop



    Forwarded by Dick Haar

    An interview with an 80-year-old woman

    The local news station was interviewing an 80-year-old lady because she had just gotten married -- for the fourth time.

    The interviewer asked her questions about her life, about what it felt like to be marrying again at 80, and then about her new husband's occupation.

    "He's a funeral director," she answered.

    "Interesting," the newsman thought.

    He then asked her if she wouldn't mind telling him a little about her first three husbands and what they did for a living.

    She paused for a few moments, needing time to reflect on all those years. After a short time, a smile came to her face and she answered proudly, explaining that she¢d first married a banker when she was in her early 20's, then a circus ringmaster when in her 40's, later on a preacher when in her 60's, and now in her 80's, a funeral director.

    The interviewer looked at her, quite astonished, and asked why she had married four men with such diverse careers.

    She smiled and explained, "I married one for the money, two for the show, three to get ready, and four to go."

    Courses for Men (taught by women) and Women (taught by men) ---

    And you think you've got a deviated septum!
    The Pug Factory --- factory.jpg

    Forwarded by Auntie Bev

    Why did the chicken cross the road?

    DR. PHIL: The problem we have here is that this chicken won't realize that he must first deal with the problem on 'THIS' side of the road before it goes after the problem on the 'OTHER SIDE' of the road. What we need to do is help him realize how stupid he's acting by not taking on his 'CURRENT' problems before adding 'NEW' problems.

    OPRAH : Well, I understand that the chicken is having problems, which is why he wants to cross this road so bad. So instead of having the chicken learn from his mistakes and take falls, which is a part of life, I'm going to give this chicken a car so that he can just drive across the road and not live his life like the rest of the chickens.

    GEORGE W. BUSH : We don't really care why the chicken crossed the road. We just want to know if the chicken is on our side of the road, or not. The chicken is either against us, or for us. There is no middle ground here.

    COLIN POWELL : Now to the left of the screen, you can clearly see the satellite image of the chicken crossing the road...

    ANDERSON COOPER - CNN: We have reason to believe there is a chicken, but we have not yet been allowed to have access to the other side of the road.

    JOHN KERRY : Although I voted to let the chicken cross the road, I am now against it! It was the wrong road to cross, and I was misled about the chicken's intentions. I am not for it now, and will remain against it.

    NANCY GRACE : That chicken crossed the road because he's GUILTY! You can see it in his eyes and the way he walks.

    PAT BUCHANAN: To steal the job of a decent, hardworking American.

    MARTHA STEWART : No one called me to warn me which way that chicken was going. I had a standing order at the Farmer's Market to sell my eggs when the price dropped to a certain level. No little bird gave me any insider information.

    DR SEUSS : Did the chicken cross the road? Did he cross it with a toad? Yes, the chicken crossed the road, but why it crossed I've not been told.

    ERNEST HEMINGWAY: To die in the rain. Alone.

    JERRY FALWELL: Because the chicken was gay! Can't you people see the plain truth?' That's why they call it the 'other side.' Yes, my friends, that chicken is gay. And if you eat that chicken, you will become gay too. I say we boycott all chickens until we sort out this abomination that the liberal media white washes with seemingly harmless phrases like 'the other side. That chicken should not be crossing the road. It's as plain and as simple as that.

    GRANDPA : In my day we didn't ask why the chicken crossed the road. Somebody told us the chicken crossed the road, and that was good enough.

    BARBARA WALTERS: Isn't that interesting? In a few moments, we will be listening to the chicken tell, for the first time, the heart warming story of how it experienced a serious case of molting, and went on to accomplish its life long dream of crossing the road.

    JOHN LENNON : Imagine all the chickens in the world crossing roads together, in peace.

    ARISTOTLE: It is the nature of chickens to cross the road.

    BILL GATES: I have just released eChicken2007, which will not only cross roads, but will lay eggs, file your important documents, and balance your check book. Internet Explorer is an integral part of eChicken. This new platform is much more stable and will never cra...#@&&^(C% ........ reboot.

    ALBERT EINSTEIN : Did the chicken really cross the road, or did the road move beneath the chicken?

    BILL CLINTON: I did not cross the road with THAT chicken. What is your definition of chicken?

    AL GORE : I invented the chicken!

    COLONEL SANDERS: Did I miss one?

    DICK CHENEY : Where's my gun?

    AL SHARPTON: Why are all the chickens white? We need some black chickens.

    Forwarded by Lynn

    A mother is driving a little girl to her friend's house for a play date.

    'Mommy,' the little girl asks, 'how old are you?'

    'Honey, you are not supposed to ask a lady her age,' the mother replied.

    'It's not polite.'

    'OK', the little girl says, 'How much do you weigh?'

    'Now really,' the mother says, 'those are personal questions and are really none of your business.'

    Undaunted, the little girl asks, 'Why did you and Daddy get a divorce?'

    'That is enough questions, young lady, honestly!'

    The exasperated mother walks away as the two friends begin to play.

    'My Mom won't tell me anything about her,' the little girl says to her friend.

    'Well,' says the friend, 'all you need to do is look at her drivers license. It is like a report card, it has everything on it.'

    Later that night the little girl says to her mother, 'I know how old you are, you are 32.'

    The mother is surprised and asks, 'How did you find that out?

    'I also know that you weigh 140 pounds.'

    The mother is past surprised and shocked now. 'How in heaven's name did you find that out?'

    'And,' the little girl says triumphantly,'I know why you and daddy got a divorce.'

    'Oh really?' the mother asks. 'Why?'

    'Because you got an F in sex.

    All this information is on her mother's drivers license.

    Forwarded by Paula

    (On September 17, 1994, Alabama's Heather Whitestone was selected as Miss America 1995.)
    Question: If you could live forever, would you and why?

    Answer: "I would not live forever, because we should not live forever, because if we were supposed to live forever, then we would live forever, but we cannot live forever, which is why I would not live forever," --
    Miss Alabama in the 1994 Miss USA contest .


    "Whenever I watch TV and see those poor starving kids all over the world, I can't help but cry. I mean I'd love to be skinny like that, but not with all those flies and death and stuff." --
    Mariah Carey


    "Smoking kills. If you're killed, you've lost a very important part of your life," --
    Brooke Shields, during an interview to become Spokesperson for federal anti-smoking campaign .


    "I've never had major knee surgery on any other part of my body," --
    Winston Bennett, University? of Kentucky basketball forward .


    "Outside of the killings, Washington has one of the lowest crime rates in the country," --
    Mayor Marion Barry, Washington, DC .

    ````` ``````````````````````

    "I'm not going to have some reporters pawing through our papers. We are the president." --
    Hillary Clinton commenting on the release of subpoenaed documents.


    "That lowdown scoundrel deserves to be kicked to death by a jackass, and I'm just the one to do it," --A congressional candidate in Texas .


    "Half this game is ninety percent mental." --Philadelphia Phillies manager, Danny Ozark


    "It isn't pollution that's harming the environment. It's the impurities in our air and water that are doing it." --
    Al Gore, Vice President

    And ...

    "We are ready for an unforeseen event that may or may not occur." -- Al Gore, VP


    "I love California . I practically grew up in Phoenix ." --
    Dan Quayle


    "We've got to pause and ask ourselves: How much clean air do we need ?" --
    Lee Iacocca


    "The word "genius" isn't applicable in football. A genius is a guy like Norman Einstein." ---
    Joe Theisman, NFL football quarterback & sports analyst.


    "We don't necessarily discriminate. We simply exclude certain types of people." --
    Colonel Gerald Wellman, ROTC Instrutor .


    "If we don't succeed, we run the risk of failure." --
    Bill Clinton, President


    "Traditionally, most of Australia 's imports come from overseas." --
    Keppel Enderbery


    "Your food stamps will be stopped effective March 1992 because we received notice that you passed away. May God bless you. You may reapply if there is a change in your circumstances." --
    Department of Social Services, Greenville , South Carolina


    "If somebody has a bad heart, they can plug this jack in at night as they go to bed and it will monitor their heart throughout the night. And the next morning, when they wake up dead, there'll be a record." --
    Mark S. Fowler, FCC Chairman

    Forwarded by Paula

    Sometimes newspaper editors state the obvious

    • If strike isn't settled quickly it may last a while
    • War dims hope for peace
    • Smokers are productive, but death cuts efficiency
    • Cold wave linked to temperatures
    • Child's death ruins couple's holiday
    • Blind woman gets new kidney from dad she hasn't seen in years
    • Man is fatally slain
    • Something went wrong in jet crash, experts say
    • Death causes loneliness, feeling of isolation

    Grammar often botches other headlines 

    • Squad helps dog bite victim
    • Dealers will hear car talk at noon
    • Enraged cow injures farmer with ax
    • Lawmen from Mexico barbecue guests
    • Miners refuse to work after death
    • Two sisters reunite after eighteen years at checkout counter

    Some become unintentionally suggestive

    • Queen Mary having bottom scraped
    • Prostitutes appeal to Pope
    • Panda mating fails - veterinarian takes over
    • NJ judge to rule on nude beach
    • Dr. Ruth to talk about sex with newspaper editors

    Forwarded by Paula

    This is an article submitted to a 1999 Louisville 
    Sentinel contest to find out who had the wildest 
    Christmas dinners. This won first prize. 
      As a joke, my brother used to hang a pair of panty 
    hose over his fireplace before Christmas. He said 
    all he wanted was for Santa to fill them. What they 
    about Santa checking the list twice must be true 
    because every Christmas morning, although Jay's 
    kids' stockings were overflowed, his poor pantyhose 
    hung sadly empty. 
      One year I decided to make his dream come true. 
    I put on sunglasses and went in search of an 
    inflatable love doll. They don't sell those things 
    at WalMart . I had to go to an adult bookstore downtown. 
    If you've never been in an X-rated store, don't 
    go. You'll only confuse yourself. I was there an 
    hour saying things like, "What does this do? You're 
    kidding me! Who would buy that?" Finally, I made  it 
    to the inflatable doll section. 
    I wanted to buy a standard, uncomplicated doll 
    could also substitute as a passenger in my 
    truck so I could use the car pool lane during rush 

       Finding what I wanted was difficult. Love Dolls 
    come in many different models. The top of the  line, 
    according to the side of the box, could do things 
    I'd only seen in a book on animal husbandry. I 
    settled for Lovable Louise. She was at the bottom of 
    the price scale. To call Louise a doll took a huge 
    of imagination. 

      On Christmas Eve and with the help of an old 
    bicycle pump, Louise came to life. 
    My sister-in-law was in on the plan and let me in 
    during the wee morning hours. Long after Santa had 
    come and gone, I filled the dangling pantyhose with 
    Louise's pliant legs and bottom. I also ate some 
    cookies and drank what remained of a glass of milk 
    on a nearby tray. I went home, and giggled for a 
    couple of hours. 

    The next morning my brother called to say that 
    Santa had been to his house and left a present that 
    had made him VERY happy but had left the dog 
    confused. She would bark, start to walk away, then 
    come back and bark some more. 
    We all agreed that Louise should remain in her 
    panty hose so the rest of the family could admire 
    her when they came over for the traditional 
    Christmas dinner. 
    My grandmother noticed Louise the moment she 
    walked in the door. "What the heck is that?" she 
    My brother quickly explained, "It's a doll." 
    "Who would play with something like that?" 
    Granny snapped. 
    I had several candidates in mind, but kept my 
    mouth shut. 
    "Where are her clothes?" Granny continued. 
    "Boy, that turkey sure smells nice Gran" Jay said, 
    to steer her into the dining room. 
    But Granny was relentless. "Why doesn't she have 
      Again, I could have answered, but why would I?  It 
    was Christmas and no one wanted to ride in the  back 
    of the ambulance saying, "Hang on Granny, hang on!" 
    My grandfather, a delightful old man with poor 
    eyesight, sidled up to me and said, "Hey, who's the 
    naked gal by the fireplace?" 
    I told him she was Jay's friend. 
      A few minutes later I noticed Grandpa by the 
    mantel, talking to Louise. Not just talking, but 
    actually flirting. It was then that we realized this 
    might be Grandpa's last Christmas at home. 
    The dinner went well. We made the usual small  talk 
    about who had died, who was dying, and who should be 
    killed, when suddenly Louise made a noise like my 
    father in the bathroom in the morning. Then she 
    from the panty hose, flew around the room 
    twice, and fell in a heap in front of the sofa. 
      The cat screamed. I passed cranberry sauce through 
    my nose, and Grandpa ran across the room, fell to 
    his knees, and began administering mouth-to-mouth 
    resuscitation. My brother fell back over his chair 
    and wet his pants. 
    Granny threw down her napkin, stomped out of the 
    , and sat in the car. 
      It was indeed a Christmas to treasure and 
    Later in my brother's garage, we conducted a 
    thorough examination to decide the cause of Louise's 
    collapse. We discovered that Louise had suffered 
    a hot ember to the back of her right thigh.  

     Fortunately, thanks to a wonder drug called duct 
    , we restored her to perfect health! 


    Forwarded by Amy Dunbar


    Love the Christmas party one!


    An investment banking lexicon: The post-credit squeeze edition
    Investment-speak is a universal language. From maximising shareholder value to full and fair offers, bankers are well versed in the art of keeping their clients happy.

    But four months into the credit crisis and their words have taken on a new meaning. Here is an explanation.

    Pre-squeeze: Poor cut of beef
    Post-squeeze: On the national education curriculum

    Pre-squeeze: Please pay back the money (no rush)
    Post-squeeze: Please get approval for all expenses above £50

    Pre-squeeze: 50 buy-out firms submit first-round bids
    Post-squeeze: The Malaysians are looking

    Pre-squeeze: Coveted transaction
    Post-squeeze: Distressed debt play

    Pre-squeeze: $50m for successfully delivering shareholder value
    Post-squeeze: $50m for destroying shareholder value

    Pre-squeeze: $10bn
    Post-squeeze: Z$300,000bn

    Pre-squeeze: Growing faster than the competition
    Post-squeeze: Not falling quite as quickly as the competition

    Pre-squeeze: Goldman launches billion-dollar fund
    Post-squeeze: Heathrow queues get longer

    Pre-squeeze: 8 x pro forma ebitda
    Post-squeeze: 4 x historic earnings

    Pre-squeeze: There is a hole in the pension book
    Post-squeeze: Due diligence to look diligent

    Pre-squeeze: Bollinger, Château Lafite, Nobu catering
    Post-squeeze: Glass of Chianti, dry roasted peanuts

    Pre-squeeze: Real deals by stretched bankers
    Post-squeeze: Stretched deals by virtual bankers

    Pre-squeeze: Risky, high-yield play
    Post-squeeze: Safe haven

    Pre-squeeze: We will take the highest offer
    Post-squeeze: Fire sale

    Forwarded by Moe


    A man in Topeka , Kansas decided to write a book about Churches around the country. He started by flying to San Francisco and started working east from there.

    Going to a very large church, he began taking photographs and making notes. He spotted a golden telephone on the vestibule wall and was intrigued with a sign, which read 'Calls: $10,000 a minute.'

    Seeking out the pastor he asked about the phone and the sign. The pastor answered that this golden phone is, in fact, a direct line to heaven and if he pays the price he can talk directly to God.

    The man thanked the pastor and continued on his way. As he continued to visit churches in Seattle , Dallas, St. Louis, Chicago, Milwaukee, and around the United States, he found more phones, with the same sign, and the same answer from each pastor.

    Finally, he arrived in Massachusetts. Upon entering a church in Boston, MA .. ........Behold - he saw the usual golden telephone.

    But THIS time, the sign read "Calls: .35 cents."

    Fascinated, he asked to talk to the pastor, "Reverend, I have been in cities all across the country and in each church I have found this golden telephone and have been told it is a direct line to Heaven and that I could talk to God, but in the other churches the cost was $10,000 a minute. Your sign reads only .35 cents a call. Why? Why?"

    The pastor, smiling benignly, replied :

    "Son, you're in Boston, Massachusetts now, home of the Boston Red Sox, the Patriots, Celtics, Bruins and Boston College ! "

    You're in God's Country, It's a local call.

    ( American by Birth - A BOSTON SPORT FAN by the grace of GOD ! )

    Humor Between December 1 and December 31, 2007  ---  

    Humor Between November 1 and November 30, 2007 --- 

    Humor Between October 1 and October 31, 2007        ---  

    Humor Between September 1 and September 30, 2007 --- 


    And that's the way it was on December 31, 2007 with a little help from my friends.


    Fraud Updates ---


    Facts about the earth in real time --- 

    Jesse's Wonderful Music for Romantics (You have to scroll down to the titles) ---

    International Accounting News (including the U.S.) and Double Entries ---
            Upcoming international accounting conferences ---
            Thousands of journal abstracts ---
    Deloitte's International Accounting News ---
    Association of International Accountants --- 

    Wikipedia has a rather nice summary of accounting software at
    Bob Jensen’s accounting software bookmarks are at

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---


    Free Harvard Classics ---
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    I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure University) --- 


    Bob Jensen's bookmarks for accounting newsletters are at 

    News Headlines for Accounting from --- 
    An unbelievable number of other news headlines categories in are at 


    Jack Anderson's Accounting Information Finder ---


    Gerald Trite's great set of links --- 


    The Finance Professor --- 


    Walt Mossberg's many answers to questions in technology ---


    How stuff works --- 


    Household and Other Heloise-Style Hints --- 


    Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at 
    Accompanying documentation can be found at and 


    Click on for a complete list of interviews with established leaders, creative thinkers and education technology experts in higher education from around the country.


    Professor Robert E. Jensen (Bob)
    190 Sunset Hill Road
    Sugar Hill, NH 03586
    Phone:  603-823-8482 








    November 30, 2007

    Bob Jensen's New Bookmarks Between November 1 and November 30, 2007
    Bob Jensen at Trinity University 

    For earlier editions of Tidbits go to
    For earlier editions of New Bookmarks go to 

    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

    Bob Jensen's Blogs ---
    Current and past editions of my newsletter called New Bookmarks ---
    Current and past editions of my newsletter called Tidbits ---
    Current and past editions of my newsletter called Fraud Updates ---

    Bob Jensen's past presentations and lectures ---   

    Bob Jensen's various threads ---
           (Also scroll down to the table at )

    Roles of a ListServ ---

    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

    Bob Jensen's Home Page is at

    CPA Examination ---

    Wikipedia has a rather nice summary of accounting software at

    Bob Jensen’s accounting software bookmarks are at

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---

    Accountancy Discussion ListServs:

    For an elaboration on the reasons you should join a ListServ (usually for free) go to
    AECM (Educators) 
    AECM is an email Listserv list which provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc

    Roles of a ListServ ---

    CPAS-L (Practitioners) 
    CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.
    Yahoo (Practitioners)
    This forum is for CPAs to discuss the activities of the AICPA. This can be anything  from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.
    This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.
    Business Valuation Group 
    This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM

    Recent Tidbits ---

    November 8      November 15     November 22    November 29     

    October 1          October 10        October 17        October 30  


    Tidbits Directory for Earlier Months and Years ---

    New Bookmarks Directory for Earlier Months and Years ---

    Bob Jensen's Threads ---

    Humor Between November 1 and November 30, 2007 --- 

    Humor Between October 1 and October 31, 2007 --- 

    Links to Documents on Fraud ---

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    Bob Jensen's links to free electronic literature, including free online textbooks ---

    Bob Jensen's links to free online video, music, and other audio ---

    Bob Jensen's documents on accounting theory are at 

    Bob Jensen's links to free course materials from major universities ---

    Bob Jensen's links to online education and training alternatives around the world ---

    Bob Jensen's links to electronic business, including computing and networking security, are at

    Bob Jensen's links to education technology and controversies ---

    Bob Jensen's home page ---

    Bob Jensen's complete set of Enron Updates are at

    Bob Jensen's threads on the Enron scandal are at

    Large International Accounting Firm History ---

    Accounting Software Updates for 2007

    Wikipedia has a rather nice summary of accounting software at

    Microsoft releases Office Accounting 2008 ---

    "Users Grade Tax Software," by Stanley Zarowin, Journal of Accountancy, October 2007 ---

    Newer software tools (in 2007) for financial analysis ---

    ACCPAC CFO (Comprehensive Financial Optimizer) is designed for small and medium-size enterprises and can help make business-planning decisions by modeling the impact of various options. This is accomplished by demonstrating the what-if outcomes of small changes. A roll forward feature prepares budgets or forecast reports in minutes. The program also generates a financial scorecard of key financial information and indicators.

    Customized Financial Analysis by BizBench provides financial benchmarking to determine how a company compares to others in its industry by using the Risk Management Association (RMA) database. It also highlights key ratios that need improvement and year-to-year trend analysis. A unique function, Back Calculation, calculates the profit targets or the appropriate asset base to support existing sales and profitability. Its DuPont Model Analysis demonstrates how each ratio affects return on equity.

    Financial Analysis CS reviews and compares a client’s financial position with business peers or industry standards. It also can compare multiple locations of a single business to determine which are most profitable. Users who subscribe to the RMA option can integrate with Financial Analysis CS, which then lets them provide aggregated financial indicators of peers or industry standards, showing clients how their businesses compare.

    iLumen regularly collects a client’s financial information to provide ongoing analysis. It also provides benchmarking information, comparing the client’s financial performance with industry peers. The system is Web-based and can monitor a client’s performance on a monthly, quarterly and annual basis. The network can upload a trial balance file directly from any accounting software program and provide charts, graphs and ratios that demonstrate a company’s performance for the period. Analysis tools are viewed through customized dashboards.

    PlanGuru by New Horizon Technologies can generate client-ready integrated balance sheets, income statements and cash-flow statements. The program includes tools for analyzing data, making projections, forecasting and budgeting. It also supports multiple resulting scenarios. The system can calculate up to 21 financial ratios as well as the breakeven point. PlanGuru uses a spreadsheet-style interface and wizards that guide users through data entry. It can import from Excel, QuickBooks, Peachtree and plain text files. It comes in professional and consultant editions. An add-on, called the Business Analyzer, calculates benchmarks.

    ProfitCents by Sageworks is Web-based, so it requires no software or updates. It integrates with QuickBooks, CCH, Caseware, Creative Solutions and Best Software applications. It also provides a wide variety of businesses analyses for nonprofits and sole proprietorships. The company offers free consulting, training and customer support. It’s also available in Spanish.

    ProfitSystem fx Profit Driver by CCH Tax and Accounting provides a wide range of financial diagnostics and analytics. It provides data in spreadsheet form and can calculate benchmarking against industry standards. The program can track up to 40 periods.

    Free General Ledger Software (Accounting) ---


    Profiles of Software Systems and Tools ---

    RiverGuide provides in-depth profiles, comparisons, and reviews of accounting software products, and would be a valuable resource for users of your site ---

    Accounting Software Ratings

    May 2, 2007 message from Jessica Valdes

    I am writing on behalf of, which is a site that lists accounting software reviews and ratings.  We only list qualified companies that are upstanding and reputable.  This will be a good resource to add to your site for accounting companies that are in search of vendors who offer accounting software.  I would like to know if you'd be interested in adding our link to your site.

    Please review this information and let me know if you are interested in such a relationship with our company. If I have contacted you in the past, my apologies.

    Title - Accounting Software Reviews and Ratings
    URL -
    Description - Free portal of reviews and ratings of accounting software to help companies consider options for selecting new software.

    Thanks and best regards!

    Jessica Valdes

    "Top Technologies for Accounting Pros Announced," SmartPros, June 11, 2007 ---

    Bob Jensen's threads on accounting software are at

    Continuing Education for Accountants

    From Smart Stops on the Web, Journal of Accountancy, November 2007 --- 





    This Smart Stop is part of the National Association of State Boards of Accountancy’s, which offers “tools for accountancy compliance.” CPAs can search CPE course providers, the National Registry of CPE Sponsor courses and quality assurance service courses, plus click on “Pilot Test CPE Courses” to try out courses for free. There’s also access to instructor resumes and in-house course providers. Click on the state you’re licensed in to find updated information on mandated continuing education requirements and links to your state’s board of accountancy.


    Check this site for free CPE podcasts, available as streaming audio or downloadable to your computer or audio player. Click on “Course Catalog” to download available podcasts and their supplementary PDFs, including a study guide and final exam questions. When you’re ready to take the exam, enroll and purchase the credits—your exam grading and certification is available immediately. Be sure to check if your state’s board of accountancy accepts these CCH self-study courses by clicking the “CPE Accreditation” link.


    Just starting your continuing education requirements? Test your skills and training needs with the site’s “Competency Self-Assessment Tool,” free for AICPA members, then search CPE courses by topic, level, job area or format, including CD-ROM and DVD. Check back often to see the month’s top sellers and new releases or to download catalogs for the “CPE Direct” program and “Staff Training Series.”


    Can’t keep up with your CPE hours? Launched in 2006, this site keeps accounting professionals and firms up-to-date on CPE hours and compliance. Registered users can record CPE credits, which are then compared to the requirements from each state’s board of accountancy and regulatory agencies. The service also provides status reports by jurisdiction and reporting period, as well as access to all of your CPE records in one location.



    Most accountancy associations, firms, and many colleges also offer CPE courses.

    Bob Jensen's threads for online training in general are at

    New IRS standard mileage rate climbs above 50 cents per mile
    The Internal Revenue Service has issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable.
    AccountingWeb, November 30, 2007 ---

    Bob Jensen's taxation helpers are at

    KPMG student survey shows money not top factor in job choice
    When choosing their first employer, college business students want career opportunities, not salary and benefits, according to a survey conducted by KPMG LLP, the audit, tax and advisory firm.
    AccountingWeb, November 30, 2007 ---

    Bob Jensen's career helpers are at

    What do you know about the flat tax?
    Are you for it or against it without knowing much about it?

    Jensen Comment
    I have to admit that I have some concerns in this regard, especially a problem we don't hear much about. At the moment wealthy and upper middle class Americans are willing to sacrifice high returns and take on higher investment risk by investing in tax-exempt (in terms of U.S. income tax) bonds/notes of American's schools, local government, and state government. These non-profit organizations thereby raise capital at considerably lower interest costs than individuals and business firms. If a truly flat tax replaces the income tax, how would these non-profit organizations such as schools avoid having oppressive increases in costs of capital to a point where quality of education, quality of roads, quality of municipal services, etc. are severely threatened? What incentives would investors have for continuing to invest in these nonprofit organizations? It would seemingly take an astronomical amount of Federal dollars to make up the difference and adjust for risk differentials in debt of municipalities and schools. Would the Feds then have to micromanage to a point where Washington DC decides if Lone Rock, Iowa gets a new school and if so, how much will be spent on Lone Rock's new school. We might, thereby, have more people working for the Federal Government than in the entire private sector. Or do we already have that?

    Southwest airlines provides great case material for accounting and finance professors who teach hedging and accounting for derivative financial instruments.

    Southwest airlines reported net earnings slightly below $500 million in 2005 and 2007.
    Is it possible for an airline to make more from buying fuel than from selling seats?
    Note that Southwest was hedging price risk and not speculating?

    Why didn't other airlines hedge fuel prices long term?
     Southwest Airlines owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years. Other major airlines passed on buying all but the shortest-term insurance against high fuel prices...

     Jeff Bailey, "An Airline Shrugs at Oil Prices," The New York Times, November 29, 2007 --- Click Here


    In particular instructors might focus on hedges that cost zero initially such as forwards, futures, and swaps as opposed to commodity options.

    Then questions should be asked about when Southwest is happy it hedged long-term versus unhappy it hedged fuel prices long-term.
    Why didn’t the other airlines do the same thing?

    Then ask what the journal entries are for some of the hedging contracts:  futures contracts versus forward contracts versus swaps versus options.

    In particular instructors might ask how hedges qualifying for FAS 133 and IAS 39 hedge accounting keep unrealized earnings out of net earnings until hedges are net settled. What are the journal entries when they are net settled?
    Note that the journal entries when hedges are net settled vary for futures versus forwards versus swaps versus options!

    For example, what is the most common way to speculate (as opposed to hedge) with bounded risk?
    Why are these derivatives generally less popular for hedging after FAS 133 and IAS 39?

    I provide examples in at the following links”

    My tutorials for FAS 133 and IAS 39 accounting are linked at

    Some video tutorials are available at

    Standard Setting and Securities Markets:  U.S. Versus Europe

    November 29, 2007 message from Pacter, Paul (CN - Hong Kong) [paupacter@DELOITTE.COM.HK]

    Some similarities to Chair of SEC, but some important differences. SEC has direct regulatory powers over securities markets, entities that offer securities in those markets, broker/dealers in securities, auditors, and others. SEC can impose penalties on those it regulates.

    In Europe there is no pan-European securities regulator equivalent to the SEC with direct regulatory powers similar to the SEC's. Rather, there are 27 securities regulators (one from each member state) who have that power. Here's a link to the list:

    There is a coordinating body of European securities regulators called CESR (the Committee of European Securities Regulators ( but CESR's role is advisory, not regulatory.

    When the European Parliament adopts legislation (such as securitieslegislation) the legislation first has to be transposed (legally adopted) into the national laws of the Member States. Commissioner McCreevy's role is to propose policies and propose legislation to adopt those policies in Europe, oversee implementation of the legislation in the 27 Member States (plus 3 EEA countries), and (through both persuasion and some legal authority) try to ensure consistent and coordinated implementation. The Commissioner also has outreach and liaison responsibilities outside the European Union. Because there is no pan-European counterpart to the SEC Chairman, Commissioner McCreevy generally handles top level policy liaison between the SEC and Europe.

    Like the Chair of the SEC, EU Commissioners are political appointees.

    Paul Pacter

    Bob Jensen's threads on accounting standard setting are at

    Key differences between U.S. and International Standards ---


    "Millionaire" Foiled in Attempted Bank Heist
    A man was arrested in Clearwater, South Carolina, trying to open a bank account with a bogus $1 million bill. The man allegedly handed the counterfeit bill to a teller and asked to open a new account. The teller refused to open the account and called the police.
    AccountingWeb, November 30, 2007 ---
    Jensen Comment
    I wonder if he'd have gotten away with it using ten bills where each has a picture of Woodrow Wilson.Answer
    The high-denomination bills were issued in a small size in 1929, along with the $1 through $100 denominations. Their designs were as follows ---

    Now that the dollar has been so devalued perhaps we should print million dollar bills.
    Whose picture should be on a million dollar U.S. bill?

    Perhaps a million dollar bill should carry the picture of the wealthiest president in history.
    Who should it be? Hoover? JFK?
    Buying power of the dollar over time must be considered---
    The set of possibilities is shown below:

    George Washington · John Adams · Thomas Jefferson · James Madison · James Monroe · John Quincy Adams · Andrew Jackson · Martin Van Buren · William Henry Harrison · John Tyler · James K. Polk · Zachary Taylor · Millard Fillmore · Franklin Pierce · James Buchanan · Abraham Lincoln · Andrew Johnson · Ulysses S. Grant · Rutherford B. Hayes · James A. Garfield · Chester A. Arthur · Grover Cleveland · Benjamin Harrison · Grover Cleveland · William McKinley · Theodore Roosevelt · William Howard Taft · Woodrow Wilson · Warren G. Harding · Calvin Coolidge · Herbert Hoover · Franklin D. Roosevelt · Harry S. Truman · Dwight D. Eisenhower · John F. Kennedy · Lyndon B. Johnson · Richard Nixon · Gerald Ford · Jimmy Carter · Ronald Reagan · George H. W. Bush · Bill Clinton · George W. Bush


    When do market investors become market makers?
    When "quants" become market makers instead of market players, it throws fair value accounting into a turmoil.

    November 23, 2007 message from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

    The subprime crisis has captured my attention, and on the chance that others on this listserv are interested in this area, I am sending this email about the paper, What Happened to the Quants in August 2007?  I assumed the hedge funds went down because of subprime investments, but it appears that was just one of many possible causes.  I would love to hear what others think, particularly about the possibility of regulatory reform (mentioned at the end below) ---

    The paper has 9011 abstract views and 4447 downloads.  Looks like a lot of people are interested in the hedge fund losses.

    The paper is fascinating.  Its objective is to suggest reasons for the hedge fund losses during the week of Aug 6,  2007.  The funds were quantitative, market-neutral funds. No major losses were reported in other hedge-fund sectors. The paper compares August 1998 (think LTCM collapse) with August 2007, and concludes the following:


    In August 1998, default of Russian government debt caused a flight to quality that ultimately resulted in the demise of LTCM and many other fixed-income arbitrage funds. This series of events caught even the most experienced traders by surprise because of the unrelated nature of Russian government debt and the broadly diversified portfolios of some of the most  successful fixed-income arbitrage funds. Similarly, the events of August 2007 caught some of the most experienced quantitative equity market-neutral managers by surprise. But August 2007 may be far more significant because it provides the first piece of evidence that problems in one corner of the financial system - possibly the sub-prime mortgage sector and related credit markets – can spill over so directly to a completely unrelated corner: long/short equity strategies. This is precisely the kind of ”shortcut" described in the theory of mathematical networks that generates the “small-world phenomenon" of Watts (1999) in which a small random shock in one part of the network can rapidly propagate throughout the entire network.

    The authors hypothesize an unwind of a large long/short equity portfolio, most likely a quantitative equity market-neutral portfolio.

    Likely factors contributing to the magnitude of the losses of this apparent unwind were: (a) the enormous growth in assets devoted to long/short equity strategies over the past decade and, more recently, to various 130/30 and other active-extension strategies; (b) the systematic decline in the profitability of quantitative equity market-neutral strategies, due to increasing competition, technological advances, and institutional and environmental changes such as decimalization, the decline in retail order flow, and the decline in equity-market volatility; (c) the increased leverage needed to maintain the levels of expected returns required by hedge-fund investors in the face of lower profitability; (d) the historical liquidity of U.S. equity markets and the general lack of awareness (at least prior to August 6, 2007) of just how crowded the long/short equity category had become; and (e) the unknown size and timing of new sub-prime-mortgage-related problems in credit markets, which created a climate of fear and panic, heightening the risk sensitivities of managers and investors across all markets and style categories.

    They also note that

     the timing of these losses - shortly after month-end of a very challenging month for many hedge-fund strategies - is also suggestive. The formal process of marking portfolios to market typically takes several business days after month-end, and August 7-9 may well be the first time managers and investors were forced to confront the extraordinary credit-related losses they suffered in July, which may have triggered the initial unwind of their more liquid investments, e.g., their equity portfolios, during this period.

    Question:  FAS 115 requires investment securities (actually only trading and available-for-sale securities) to be marked to market, but what is the driving force behind marking to market on a monthly basis?  Reporting to investors in the fund?

     Do the losses of August 2007 signal a breakdown in the basic economic relationships that yield attractive risk/reward profiles for such strategies, or is August 2007 an unavoidable and integral aspect of those risk/reward profiles? An instructive thought experiment is to consider a market-neutral portfolio strategy in which U.S. equities with odd-numbered CUSIP identifiers are held long and those with even-number CUSIPs are held short. Suppose such a portfolio strategy is quite popular and a

    number of large hedge funds have implemented it. Now imagine that one of these large hedge funds decides to liquidate its holdings because of some liquidity shock. Regardless of this portfolio's typical expected return during normal times, in the midst of a rapid and large unwind, all such portfolios will experience losses, with the magnitudes of those losses directly proportional to the size and speed of the unwind. Moreover, it is easy to see how such an unwind can generate losses for other types of portfolios, e.g., long-only portfolios of securities with prime-number CUSIPs, dedicated shortsellers that short only those securities with CUSIPs divisible by 10, etc. If a portfolio is of sufficient size, and it is based on a sufficiently popular strategy that is broadly implemented, then unwinding even a small fraction of it can cascade into a major market dislocation.

    . . .

    However, a successful investment strategy should include an assessment of the risk of ruin, and that risk should be managed appropriately. Moreover, the magnitude of tail risk should, in principle, be related to a strategy's expected return given the inevitable trade-off between risk and reward. Therefore, it is disingenuous to assert that “a strategy is successful except in the face of 25-standard-deviation events." Given the improbability of such events, we can only conclude that either the actual distribution of returns is extraordinarily leptokurtic, or the standard deviation is time-varying and exhibits occasional spikes.

    In particular, as Montier (2007) observed, risk has become “endogenous" in certain markets - particularly those that are recently flush with large inflows of assets - which is one of the reasons that the largest players can no longer assume that historical estimates of volatility and price impact are accurate measures of current risk exposures. Endogeneity is, in fact, an old economic concept illustrated by the well-known theory of imperfect competition: if an economic entity, or group of coordinated entities, is so large that it can unilaterally affect prices by its own actions, then the standard predictions of microeconomics under perfect competition no longer hold. Similarly, if a certain portfolio strategy is so popular that its liquidation can unilaterally affect the risks that it faces, then the standard tools of basic risk models such as Value-at-Risk and normal distributions no longer hold. In this respect, quantitative models may have failed in August 2007 by not adequately capturing the endogeneity of their risk exposures. Given the size and interconnectedness of the hedge-fund industry, we may require more sophisticated analytics to model the feedback implicit in current market dynamics.


    The authors commented several times on the lack of transparency in the hedge fund market. I found the authors’ comments on the need for  possible regulatory reform interesting.

    Given the role that hedge funds have begun to play in financial markets - namely, significant providers of liquidity and credit - they now impose externalities on the economy that are no longer negligible.  In this respect, hedge funds are becoming more like banks. The fact that the banking industry is so highly regulated is due to the enormous social externalities banks generate when they succeed, and when they fail. But unlike banks, hedge funds can decide to withdraw liquidity at a moment's notice, and while this may be benign if it occurs rarely and randomly, a coordinated withdrawal of liquidity among an entire sector of hedge funds could have disastrous consequences for the viability of the financial system if it occurs at the wrong time and in the wrong sector.

    November 23, 2007 reply from Bob Jensen

    Hi Amy,

    Why do bankers resist expanding FAS 159 into required accounting for all financial instruments?
    Misleading Financial Statements:  Bankers Refusing to Recognize and Shed "Zombie Loans"

    One worrying lesson for bankers and regulators everywhere to bear in mind is post-bubble Japan. In the 1990s its leading bankers not only hung onto their jobs; they also refused to recognise and shed bad debts, in effect keeping “zombie” loans on their books. That is one reason why the country's economy stagnated for so long. The quicker bankers are to recognise their losses, to sell assets that they are hoarding in the vain hope that prices will recover, and to make markets in such assets for their clients, the quicker the banking system will get back on its feet.
    The Economist, as quoted in Jim Mahar's blog on November 10, 2007 ---

    But there are questions in theory about fair value accounting!
    Bob Jensen's threads on fair value accounting are at


    I personally think the driving forces behind FAS 115 were tendencies of banks to not recognize those "zombie" investments and adequately disclose highly likely losses. Firstly I might note that FAS 115 adjusts available-for-sale (AFS) securities to fair value without impacting earnings volatility except in the case of securities traders. According to Paragraph 86 of FAS 115, the FASB wanted to require fair value accounting for all financial securities but got hung up on debt instruments (such as mortgage debt) that more commonly are not AFS  and more difficult to mark-to-market (i.e. debt is often more difficult to value due to not being traded with unique covenants and is more likely to be HTM, held-to-maturity). The FASB justification for FAS 115 can be found in Paragraphs 39-43, although the elaborations in Paragraphs 86-100 are enlightening. IFRS requirements are similar, although penalties for violating HTM classification are somewhat more onerous.

    An interesting November 12 video on the “cascade theory” of what might be termed quantitative models, like lemmings, cascading over a cliff ---

    In that sense the comparison of the LTCM disaster in 1998 with the August 2007 downfall seems to hold some water. Although the big losers in both instances were big and sophisticated investors who’re well aware of the unique risks of unregulated hedge funds, the externalities affecting Main Street (read that CREF investors) are very real. The LTCM fiasco could well have brought down equity markets in all of Wall Street --- 

    One of the hardcopy journals I read cover-to-cover each week is The Economist on October 25, 2007. The following is one of my favorite readable papers among the thousands of articles written about this controversy ---

    WHEN markets wobbled in August, almost all the media attention was focused on the credit crunch and the links to American mortgage loans. But at exactly the same time, another crisis was occurring at the core of the stockmarket.

    This crisis stemmed from the obscure world of quantitative, or quant-based, finance, which uses computer models to find attractive stocks and to identify overpriced shares. Suddenly, in August, the models went wrong.

    The incident revealed a problem at the heart of the financial system. In effect, the quant groups were acting as marketmakers, trading so often (some are aiming for transaction times in terms of milliseconds) that they set prices for everyone else. But unlike traditional marketmakers, quant funds are not obliged to make markets come rain or shine. And unlike marketmakers, they use a lot of leverage. This means that instead of providing liquidity in a crisis, the quants added to instability. There is a lesson there.

    In a way, the crisis stemmed from the quants' success. Many firms, such as the American hedge fund Renaissance Technologies, had done fantastically well and had been able to charge hefty fees. But if one firm can hire top mathematicians and use the latest technology, so can others. An arms race developed, with some trading faster and faster—even siting their computers closer to the exchanges in order to cut the time it took orders to travel down the wires.

    And as the computers sifted through the data, some strategies became overcrowded. A paper* by Amir Khandani and Andrew Lo of the Massachusetts Institute of Technology back-tested a proxy for a typical strategy, involving buying the previous day's losing stocks and selling the winners. Such a strategy would have delivered a daily return of 1.38% before (substantial) costs in 1995 but the return fell steadily to 0.15% a day last year.

    In the face of declining returns, the authors reckon, the natural response of managers would have been to increase leverage. But that, of course, increased their vulnerability when things went wrong.

    Both the MIT academics and a paper by Cliff Asness of AQR Capital Management, a leading quant group, agree that August's problems probably began when a diversified, or multi-strategy, hedge fund experienced losses in the credit markets. The fund sought to reduce its exposures but its credit positions were impossible to sell. So it cut its quant positions instead, since that merely involved selling highly liquid stocks.

    However, that selling pressure caused other quant funds to lose money as their favoured stocks fell in price. Those that were leveraged were naturally forced to reduce their positions as well. These waves of selling played havoc with the models. Quant investors thought they were aware of the risks of their strategy and had built diversified portfolios to avoid it. But the parts of the portfolio that were previously uncorrelated suddenly fell in tandem.

    In theory, quant funds could have been bold and borrowed more; after all, the stocks they thought were cheap had become even cheaper. The traders who took on the positions of Long-Term Capital Management (LTCM), after the hedge fund failed in 1998, ended up making money. But the example of LTCM, which went bust before it could be proved right, argued in favour of a more cautious approach. “We could have rolled the dice but that would have risked the business,” said one quant-fund manager. “I don't know of anyone that did so.”

    Avoiding that trap simply led quant investors into another. On August 10th, the stocks that quants had favoured suddenly rebounded. Those who had cut their positions most could not benefit from the rally. That category clearly included Goldman Sachs's Global Alpha hedge fund, which lost a remarkable 23% on the month.

    If it were just a few hedge funds, backed by rich people, losing money, it might not matter. But the funds had become too important: rather than adding stability, as marketmakers are supposed to do, they added volatility.

    Quants will adjust their models and clients will become more discerning; AQR's. Mr Asness says his firm will look harder for “unique” factors, that is, not used by other fund managers. But regulators should also reflect that markets are less stable than they assumed. The presence of leveraged traders such as quants at their heart means conditions can now turn, at the flick of a switch, from stability to panic.

    Bob Jensen's threads on fair value accounting are at
    When "quants" become market makers instead of market players, it throws fair value accounting into a turmoil.

    Complicated Accounting Rules for  Loan Commitments

    November 26, 2007 message from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

    I am trying to figure out how the table that discloses gains/losses on Level III assets relates to the writedowns reported in the 10-Qs for the third quarter for the large banks and broker-dealers that early adopted FAS 157.

    On 9-17-2007, the WSJ on C2 reported the following:

    “Lehman, a big player in the bond market hit hard by the recent trouble in the "subprime" business of issuing risky mortgages that has shaken the broader stock market, set the tone in terms of markdowns, taking a $700 million loss on assets that have fallen in value in recent months.”

    I looked at Lehman’s 10-Q for the third quarter ending 8-31-2007, and found the following in MD&A, p 54:

    Net revenues for our Fixed Income component of our Capital Markets business segment decreased 47% and 19% for

    the 2007 three and nine months, respectively. Our Capital Markets—Fixed Income businesses were the most

    affected by the market dislocations, risk re-pricing and de-levering that swept through the global capital markets

    during our third quarter. The adverse changes in the credit markets and continued correction in certain asset-backed

    security market segments impacted our valuations for certain inventory assets and lending commitments. We

    recorded very substantial valuation reductions, most significantly on leveraged loan commitments and residential

    mortgage-related positions. These losses were partly offset by large valuation gains relating to economic hedges and

    liabilities. The impact of these valuation adjustments was a net reduction to revenues in Capital Markets—Fixed Income of approximately $700 million.

    Question 1:

    Is it possible to determine specifically which assets were written down?  Footnote 4 discloses Levels I, II, and III assets/liabilities and  another table that shows realized/unrealized gains associated with only Level III assets.  I cannot tie the 700 to any number in that table.  Is that because the writedown is to assets other than Level III assets?

    Question 2:

    Are loan commitments recorded at the time of commitment or when the loan is executed?  I don’t understand how an unrealized loss on a loan commitment is booked?  DR loss CR loan commitment reserve for a loan that hasn’t been executed? 

    Question 2:

    Lehman doesn’t showing a column for netting in the Levels I, II, and III assets.  (For example, see Goldman Sachs and other broker-dealers who adopted FAS 157.)  Why is that?  Also, does the netting primarily affect Level II assets? For example, JPMorgan shows the following for Levels I, II, and III assets:

    306,966 Level 1

    926,649 Level 2


    Level 3





    Only the Level 2 assets could absorb the netting.  I looked at the Journal of Accountancy article on FAS 157 (November 2007), but I still couldn’t figure it out. 

    I would appreciate any guidance. 

    Amy Dunbar
    Department of Accounting
    School of Business
    University of Connecticut
    2100 Hillside Road, Unit 1041
    Storrs, CT 06269-1041
    land line: 860-742-0672
    cell: 860-208-2737


    November 28, 2007 reply from Bob Jensen

    Hi Amy,

    My answer to your Question 2 above is given at
    It would appear that your suggested journal entry is appropriate for an unhedged and an unbooked loan commitment. I think your entry only applies to losses and not gains in value. It roots clear back to the Principle of Conservatism in ARB 43 and would be used only in the case of relatively large and seriously probable losses. Under newer international standards, most loan commitments are booked.

    The journal entry would differ if the unbooked loan commitment was hedged. It would also differ if the loan commitment was booked initially (whether or not it was also hedged). There are new rules for booking versus not booking loan commitments under SAB 105, FAS 133, FAS 149, and IAS 39.

    I'm sorry that I'm of no help on your Questions 1 and 3. And if I thoroughly confused you and everybody else when answering your Question 2, I genuinely apologize. It's easy to mess up with FAS 133 and all its complicated amendments like FAS 138, FAS 149, and FAS 155. To this we add IAS 39 where differences from FAS 133 apply in this case.


    From Smart Stops on the Web, Journal of Accountancy, November 2007 --- 



    The SEC’s Office of the Chief Accountant (OCA) recently updated its guidance on auditor independence rules. The compilation of answers to frequently asked questions is divided into 10 categories, including partner rotation, audit committee communications, fee disclosures, and prohibited and non-audit services. However, the OCA advises that they not be taken as rules, regulations or official statements by the SEC. The site also provides contact information if you want to submit additional questions. Further guidance on the SEC’s auditor independence rules can be found on the Center for Audit Quality’s “Resources” page at


    Small firm and sole practitioners can find marketing trends and ideas for small companies, where, according to the site’s author, Patrick Schaber, “resources are thinner and time is at a premium.” With marketing experience at both small and large organizations, Schaber addresses the current hot topics in marketing—such as social marketing and search engine optimization. But you can also pick up tips for business-to-business marketing, branding, lead generation and online marketing, or read interviews with successful small businesses in the “Small Business Marketing in Action” series.

    E-FILE W-2s

    At this Smart Stop from the Social Security Administration, CPAs and enrolled agents can file W-2s on behalf of their clients and verify their employees’ names and Social Security numbers. Using this service, your clients will no longer need to sign a W-3 or mail in Copy A of paper W-2s. New to this paperless process? Follow the “Checklist for W-2 Filing.” You will need to register for a PIN and password but will not need separate login information for each of your clients. There are also tips on avoiding IRS and SSA reconciliation errors.


    From Smart Stops on the Web, Journal of Accountancy, October 2007 ---



    Whether you own a small business or work for one, this IRS site sorts out tax-related information so you don’t have to. There’s an A–Z index that lets you search by business type or by subject. It lists the necessary forms for each and links to information on starting up, closing down and everything in between. You also can sign up for the “e-News for Small Businesses” electronic newsletter or download complimentary tax products, including tax calendars and videos. And, of course, there’s plenty of guidance on e-filing and forms for both small businesses with employees and the self-employed.


    Got a beef with the IRS? The Taxpayer Advisory Panel, a federal advisory committee established under the authority of the Treasury Department, is a group of volunteers working to improve the Service. Its Web site features a comment box and phone number where citizens can make suggestions. You can also view taxpayer suggestions that have become proposals, which range from the general (improving the quality of customer service), to the picky (adding lines to forms) to the technical (expanding the third-party authorization On The Web time frame). Want to join the panel? There’s information on becoming a member in the FAQ section.


    Turn to this site for coverage of new tax legislation and analysis of its impact on taxpayers and tax professionals, plus comments on proposed tax law reform. Click on the “Full CCH Coverage Here” links for access to “Tax Briefing” PDFs, which include in-depth analyses of the legislations’ tax credits, deductions and effective dates. The site also offers “Quick Tax Facts” PDFs for several pieces of legislation, including the Small Business and Work Opportunity Act of 2007; Tax Relief and Health Care Act of 2006; and the Pension Protection Act of 2006.

    Bob Jensen's tax helpers are at



    Visit this site for a rundown of hot topics on the SEC’s radar—including internal control reporting divisions, XBRL initiatives and IFRS. You can access transcripts and webcasts of roundtable discussions on mutual recognition, the proxy process and hedge funds, as well as information on the SEC’s new Advisory Committee on Improvements to Financial Reporting (see “Seeking Clarity,” page 30). You also can revisit older topics such as auditor independence and corporate officer statements that have been retired to the “Archive” page (


    This Stop provides an online network for Hispanic entrepreneurs and business professionals. The job board, where you can post a resume or advertise a position, lets you search by location, job type, salary and languages required. The “Library” features weekly articles on working smarter and interviews with successful business owners. Members can read the site’s blog—offered in English and Spanish—or post social-networking profiles, then add friends interested in discussing business matters. Click on the “Office Party” tab to chat live with other Hispanic professionals.


    Find a new job or fill an open position at this Smart Stop for accounting, banking, finance and wealth management professionals. Users can search targeted job postings while employers and recruiters can browse for potential candidates by career level and accounting specialty. Click on “Career News and Advice” for original articles—including career news, advice and tips for marketing yourself—from the site’s editors, or check back daily for new posts on the CareerWire Blog (, such as “Recruiters Hunt in Association Directories” and “Ace the Interview at Age 50+.”


    This award-winning site from Gregory Price, CPA/CITP, CISA, CFE, director of consulting solutions at Pannell Kerr Forster of Texas P.C., features “insight, information and commentary on accounting and technology trends,” including coverage of professional conferences and software. On Fridays, Price posts installments from “PKF Texas—The Entrepreneur’s Playbook,” a series of best practices and tips from his BusinessMakers Radio Show. Audio files can be found on the Entrepreneur’s Playbook page of the PKF Texas Web site (





    It would really be a service to both academe and the accounting profession if an academic association or a university commenced to provide a "virtual classroom" much like the following that is available for psychology:

    AllPsych Online: The Virtual Psychology Classroom ---

    Bob Jensen's links to free online tutorials in other disciplines are at

    The Fall 2007 Edition of Accounting Education News (AEN from the American Accounting Association) ---

    Two important things to note:

    In his first American Accounting Association President's Message, Gary Previts mentions the Plumlee report on the dire shortage of accountancy doctoral students and provides a link to the AAA's new site providing resources for research and experimentation on "Future Accounting Faculty and Programs Projects" ---
    Note especially the Accounting PhD Program Info link with a picture) and the PhD Project link (at the bottom):

    Welcome to the preliminary posting of a new resource for the community participating in and supporting accounting programs, students, faculty, and by that connection practitioners of accounting. We plan to build this collection of resources for the broad community committed to a vital future for accounting education. This page is an initial step to creating a place where we can come together to gather resources and share data and ideas.
    Making A Difference: Careers in Academia
    Powerpoint slides created by Nancy Bagranoff and Stephanie Bryant for the 2007 Beta Alpha Psi Annual Meeting. Permission granted for use and adaptation with attribution.
    Accounting PhD Program Info

    New Research Projects by the AAA on the Trends and Characteristics of Accounting Faculty, Students, Curriculum, and Programs

    Part I: Future of Accounting Faculty Project (Report December, 2007)
    Part II: Future of Accounting Programs Project

    Part I will describe today's accounting academic workforce, via demographics, work patterns, productivity, and career progression of accounting faculty, as well as of faculty in selected peer disciplines using data from the national survey of postsecondary faculty (NSOPF) to establish trends, and a set of measures will be combined to benchmark the overall status of accounting against (approximately) 150 fields. This project will provide context and data to identify factors affecting the pipeline and workplace.

    Part II will focus on expanding understanding of the characteristics of accounting faculty, students, and accounting programs, and implications of their evolving environment. The need for the Part I project illustrates how essential it is for the discipline and profession of accounting that we establish a more standard and comprehensive process for collecting, analyzing, and reporting data about accounting students, doctoral students, faculty, curriculum, and programs.

    More Resources on the Changing Environment for Faculty:

    The Reshaping of America's Academic Workforce
    David W. Leslie, TIAA-CREF Institute Fellow
    The College of William and Mary
    TIAA Institute Research Dialogue Series, 2007

    Jim Hasselback's* 2007 Analysis of Accounting Faculty Birthdates
    *Copyrighted – requests for use to J. R. Hasselback

    • Among U.S. Accounting Academics -- 53.4% are 55 or older

    From the Integrated Postsecondary Education System (IPEDS)

    • 34.8% of all full-time faculty in the U.S. are non-tenure-track -- nearly 2 in 5 of all full-time appointments
    • Between 1993 and 2003 the proportion of all new full-time hires into "off-track" appointments increased each year from 50% to nearly 3 in 5 (58.6%)
    • Reported in J. Schuster & M. Finkelstein (Fall, 2006). "On the Brink: Assessing the Status of the American Faculty," Thought & Action 51-62.

    Supply and Demand for Accounting PhDs

    American Accounting Association PhD Supply/Demand Resource Page
    A collection of resources, links, and reports related to the pipeline of future Accounting faculty. Highlights include:

    • Report of the AAA/APLG Committee to Assess the Supply and Demand of Accounting PhDs
    • Link to the Doctoral Education Resource Center of AACSB International (Association to Advance Collegiate Schools of Business)
    • AICPA's Journal of Accountancy's article "Teaching for the Love of It"

    Deloitte Foundation Accounting Doctoral Student Survey

    Survey Results (Summer, 2007)
    Data collected by survey of attendees of the 2007 AAA/Deloitte J. Michael Cook Doctoral Consortium

    The PhD Project and Accounting Doctoral Students Association

    The PhD Project is an information clearinghouse created to increase the diversity of business school faculty by attracting African Americans, Hispanic Americans and Native Americans to business doctoral programs and by providing a network of peer support. In just 12 short years, the PhD Project has been the catalyst for a dramatic increase in the number of minority business school faculty—from 294 to 842, with approximately 380 more candidates currently immersed in doctoral studies.

    The PhD Project Accounting Doctoral Students Association is a voluntary association offering moral support and encouragement to African-American, Hispanic-American, and Native American Accounting Doctoral Students as their pursue their degrees and take their places in the teaching and research profession, and serve as mentors to new doctoral students.

    PhD Project Surveys of Students, Professors, and Deans
    Results of a survey among students to understand the impact of minority professors on minority and non-minority students.

    Accounting Firms Supporting the AAA and Accounting Programs, Faculty, and Students

    Related Organizations Sharing Interest in Accounting Faculty and Programs


    Professor Dan Deines at Kansas State University has a handful of Outstanding Educator Awards, including one from the AICPA. Beginning on Page 5 of the Fall 2007 edition of AEN, Dan discusses the Taylor Research and Consulting Group study of accounting education commissioned by the AICPA in 2002. The study identifies barriers to students that prevent many top students from majoring in accounting. Dan then describes a pilot program initiated by KSU in reaction to the Taylor Report. I think accounting educators outside KSU may attend some of the pilot program events.

    Bob Jensen's threads on the shortage of doctoral students in accountancy can be found at

    Human resource-related issues for the profession

    November 28, 2007 message from Paul Polinski [paulp_is@YAHOO.COM]

    The Treasury Advisory Committee on the Auditing Profession is holding an open meeting on December 3rd (which may also be webcast). The attached pdf file has an outline that details its agenda.

    Of special interest to the accounting academy (*not* just auditing faculty) is the section starting on page 9, section 2.4: Consider the state of accounting education and CPA licensing requirements.

    The Committee have identified accounting faculty and curricula as a top priority in addressing the human resource-related issues for the profession. The Committee is taking comments on their web site 

    on a continuing basis as the issues and recommendations are proposed, discussed, and debated. Although the committee's name includes "Auditing," the discussion will consider the entirety of the accounting curriculum, not just that which is auditing-related.

    I encourage everyone to keep up with the Committee and to actively participate.


    Bob Jensen's threads on accountancy careers are at

    Radical Changes on the Way in Financial Reporting

    Five General Categories of Aggregation
    "The Sums of All Parts: Redesigning Financials:  As part of radical changes to the income statement, balance sheet, and cash flow statement, FASB signs off on a series of new subtotals to be contained in each," byMarie Leone, CFO Magazine, November 14, 2007 ---

    In another large step towards the most dramatic overhaul of financial statements in decades, the Financial Accounting Standards Board Wednesday laid out a series of subtotal figures that companies would be required to include on their balance sheets, income statements and cash flow statements.

    The new look for financials will break all three statements into five general categories: business, discontinued operations, financing, income taxes, and equity (if needed). Each of those groupings will carry its own total. In addition, the business, financing, and income tax categories will be segmented into even more narrow sections, each of which will include a subtotal. For example, the business category will be broken down into operating assets, operating liabilities and a subtotal; and investing assets, investing liabilities, and a second subtotal.

    (Although FASB will not officially release its proposal until the second quarter of 2008, it has made public some initial peeks at the proposed format.)

    The addition of totals and subtotals is an extension of FASB's broader principle on disaggregating financial statement line items. It is the board's belief that separating line items into their components gives investors, creditors, analysts and other financial statement users a better view of a company's financial health. For example, the new format should make it easier for an investor to see how much cash a company generates by selling its products versus how much it generates by selling-off a business unit or through financial investments made by the corporate treasurer.

    FASB staffers say buy- and sell-side analysts typically scrutinize financial statements by breaking them down into categories similar to the ones the board is proposing.

    In keeping with its promise to strip accounting standards of complexity, the board also agreed to issue two overarching principles in its draft document on financial statement presentation. One principle instructs preparers to keep the category order consistent in each of the three financial statements. For example, if income tax is the last category shown in on the balance sheet, then it should also be the final category on the cash flow and income statement. "We're not going to tell you what order [to use], just that you should use the same order in all three statements," noted FASB Chairman Robert Herz during the meeting.

    In addition, the board wants companies to "clearly distinguish" between operating assets and operating liabilities, as well as short-term assets and liabilities and their long-term counterparts. But the board is not going to prescribe how that should be done. Regarding the issue of common sums, "the only requirement will be that totals and subtotals are segmented by activities," noted board member George Batavick, "the rest will be principles."

    Updating the look and functionality of financial statements is one of the joint projects that FASB is working on with the International Accounting Standards Board as the two organizations work to converge U.S. and global accounting rules. On Thursday, IASB will discuss the common totals issue and is expected to release its recommendations.

    FASB expects the draft proposal to spark a healthy debate among users and preparers, and staffers are planning for a four- to six-month comment period to follow its release. One issue that will have to be thrashed out, for example, is whether discontinued operations should be relegated to its own category, or run through the income statement or financing activities.

    To avoid any last-minute confusion with the Securities and Exchange Commission, Herz asked the FASB accountants working on the project to "touch base with the SEC staff just to get their input." Herz noted that last time the two groups discussed disaggregation principles, Scott Taub, not James Kroeker, was the SEC's deputy chief accountant.

    Jensen Comment
    Now is especially the time for accounting researchers to look into leading edge alternatives for visualizing data. My threads on that topic are at

    Bob Jensen's threads on accounting theory are at

    No Bottom Line

    Is a major overhaul of accounting standards on the way?

    There may no longer be the tried and untrusted earnings per share number to report!
    It would be interesting to see a documentation of the academic research, if any, that the FASB relied upon to commence this blockbuster initiative. I recommend that some astute researcher commence to probe into the thinking behind this proposal.

    "Profit as We Know It Could Be Lost With New Accounting Statements," by David Reilly, The Wall Street Journal, May 12, 2007; Page A1 ---

    Pretty soon the bottom line may not be, well, the bottom line.

    In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.

    It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.

    Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.


    Get a glimpse of what new financial statements could look like, according to an early draft recently provided by the Financial Accounting Standards Board to one of its advisory groups. The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.

    The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting -- from clerks to chief executives -- to relearn how to compile and analyze information that shows what is happening in a business.

    This is likely to come as a shock, even if many investors and executives acknowledge that net income has flaws. "If there was no bottom line, I'd want to have a sense of what other indicators I ought to be looking at to get a sense of the comprehensive health of the company," says Katrina Presti, a part-time independent health-care contractor and stay-at-home mom who is part of a 12-woman investment club in Pueblo, Colo. "Net income might be a false indicator, but what would I look at if it goes away?"

    The effort to redo financial statements reflects changes in who uses them and for what purposes. Financial statements were originally crafted with bankers and lenders in mind. Their biggest question: Is the business solvent and what's left if it fails? Stock investors care more about a business's current and future profits, so the net-income line takes on added significance for them.

    Indeed, that single profit number, particularly when it is divided by the number of shares outstanding, provides the most popular measure of a company's valuation: the price-to-earnings ratio. A company that trades at $10 a share, and which has net profit of $1 a share, has a P/E of 10.

    But giving that much power to one number has long been a recipe for fraud and stock-market excesses. Many major accounting scandals earlier this decade centered on manipulation of net income. The stock-market bubble of the 1990s was largely based on investors' assumption that net profit for stocks would grow rapidly for years to come. And the game of beating a quarterly earnings number became a distraction or worse for companies' managers and investors. Obviously it isn't known whether the new format would cut down on attempts to game the numbers, but companies would have to give a more detailed breakdown of what is going on.

    The goal of the accounting-rule makers is to better reflect how businesses are actually run and divert attention from the one number. "I know the world likes single bottom-line numbers and all of that, but complicated businesses are hard to translate into just one number," says Robert Herz, chairman of the Financial Accounting Standards Board, the U.S. rule-making body that is one of several groups working on the changes.

    At the same time, public companies today are more global than local, and as likely to be involved in services or lines of business that involve intellectual property such as software rather than the plants and equipment that defined the manufacturing age. "The income statement today looks a lot like it did when I started out in this profession," says William Parrett, the retiring CEO of accounting firm Deloitte Touche Tohmatsu, who started as a junior accountant in 1967. "But the kind of information that goes into it is completely different."

    Along the way, figures such as net income have become muddied. That is in part because more and more of the items used to calculate net profit are based on management estimates, such as the value of items that don't trade in active markets and the direction of interest rates. Also, over the years rule makers agreed to corporate demands to account for some things, such as day-to-day changes in the value of pension plans or financial instruments used to protect against changes in interest rates, in ways that keep them from causing swings in net income.

    Rule makers hope reformatting financial statements will address some of these issues, while giving investors more information about what is happening in different parts of a business to better assess its value. The project is being managed jointly by the FASB in the U.S. and the London-based International Accounting Standards Board, and involves accounting bodies in Japan, other parts of Asia and individual European nations.

    The entire process of adopting the revised approach could take a few years to play out, so much could yet change. Plus, once rule makers adopt the changes, they would have to be ratified by regulatory authorities, such as the Securities and Exchange Commission in the U.S. and the European Commission in Europe, before public companies would be required to follow them.

    As a first step, rule makers expect later this year to publish a document outlining their preliminary views on what new form financial statements might take. But already they have given hints of what's in store. In March, the FASB provided draft, new financial statements at the end of a 32-page handout for members of an advisory group. (See an example.)

    Although likely to change, this preview showed an income statement that has separate segments for the company's operating business, its financing activities, investing activities and tax payments. Each area has an income subtotal for that particular segment.

    There is also a "total comprehensive income" category that is wider ranging than net profit as it is known today, and so wouldn't be directly comparable. That is because this total would likely include gains and losses now kept in other parts of the financial statements. These include some currency fluctuations and changes in the value of financial instruments used to hedge against other items.

    Comprehensive income could also eventually include short-term changes in the value of corporate pension plans, which currently are smoothed out over a number of years. As a result, comprehensive income could be a lot more difficult to predict and could be volatile from quarter to quarter or year to year.

    As for the balance sheet, the new version would group assets and liabilities together according to similar categories of operating, investing and financing activities, although it does provide a section for shareholders equity. Currently, a balance sheet is broken down between assets and liabilities, rather than by operating categories.

    Such drastic change isn't likely to happen without a fight. Efforts to bring now-excluded figures into the income statement could prompt battles with companies that fear their profit will be subject to big swings. Companies may also balk at the expense involved.

    "The cost of this change could be monumental," says Gary John Previts, an accounting professor at Case Western Reserve University in Cleveland. "All the textbooks are going to have to change, every contract and every bank arrangement will have to change." Investors in Europe and Asia, meanwhile, have opposed the idea of dropping net profit as it appears today, David Tweedie, the IASB's chairman, said in an interview earlier this year.

    Analysts in the London office of UBS AG recently published a report arguing this very point -- that even if net income is a "simplistic measure," that doesn't mean it isn't a valid "starting point in valuation" and that "its widespread use is justification enough for its retention."

    Such opposition doesn't surprise many accounting experts. Net income is "the basis for bonuses and judgments about what a company's stock is worth," says Stephen A. Zeff, an accounting professor at Rice University. "I just don't know what the markets would do if companies stopped reporting a bottom line somewhere." In the U.S., professional investors and analysts have taken a more nuanced view, perhaps because the manipulation of numbers was more pronounced in U.S. markets.

    That said, net profit has been around for some time. The income statement in use today, along with the balance sheet, generally dates to the 1940s when the SEC laid out regulations on financial disclosure. But many companies have included net profit in one form or another since the 1800s.

    In its fourth annual report, General Electric Co. provided investors with a consolidated balance sheet and consolidated profit-and-loss account for the year ended Jan. 31, 1896. The company, whose board at the time included Thomas Edison, generated "profit of the year" -- what today would be called net income or net profit -- of $1,388,967.46.

    For the moment, net profit will probably exist in some form, although its days are likely numbered. "We've decided in the interim to keep a net-income subtotal, but that's all up for discussion," the FASB's Mr. Herz says.

    Bob Jensen's summary of accounting theory is at

    The nice thing about standards is that you have so many to choose from. Furthermore, if you do not like any of them, you can just wait for next year's model.
    Tanenbaum, "Computer Networks"

    Item 8 in a November 6, 2007 message from Tracey E. Sutherland []


    Through an Invitation to Comment, the AICPA Examinations Team is seeking input from accounting educators on proposed CPA Examination improvements, a multi-year project of the AICPA Board of Examiners (BOE). Invitation to Comment materials – a description of the planned improvements and a questionnaire – are available at the above website. The deadline for the receipt of completed questionnaires is DECEMBER 31, 2007.

    Jensen Comment
    This is a good time to vent criticisms that the CPA examination is rooted in part to outdated textbook material due to a requirement that exam questions be linked to outdated textbooks. According to recent messaging on the AECM, this is particularly problematic in the really outdated questions in Accounting Information Systems. It is also true in terms of recent standards FAS 133-159 where many of the textbooks are serious behind the times.

    I suggest that you state that authoritative literature available to the public on topics poorly covered in outdated or superficial textbooks be primary references for CPA examination questions. Now is a good time for some AECM lurkers to do something proactive.

    November 8, 2007 reply from Tracey Sutherland []
    Tracey is the Executive Director of the American Accounting Association

    Hello Bob,

    Thanks for notes on AEN to AECMers. Just FYI the Part I project below report on the status of the accounting faculty workforce will be completed before Christmas -- it should be an interesting analysis of our micro-climate within the larger context of the academy that our principle investigator David Leslie developed for the TIAA-CREF research report linked below (Reshaping of America's Academic Workforce). Preliminary draft indicates there will be some pertinent similarities and differences for the accounting discipline. Will keep you posted. Dan is doing journeyman's labor on the possibilities for an AP course in accounting as one of the avenues to changing the nature of accounting as taught in high schools -- lots of politics and complications there but a useful effort at building more understanding of the issue on both sides.

    Best regards, Tracey

    "FAS 157: Auditors are ready to assign fair value to financial assets," AccountingWeb, November 2007 ---

    When credit markets all but dried up as a result of the sub-prime mortgage crisis in the late summer, auditors of investment and commercial banks that elected to adopt Financial Accounting Standard 157, Fair Value Measurements, earlier than the effective date of November 15th were called upon to play a key role in determining the market value of mortgage-backed assets when few were being traded. Many of these banks had to report huge write-downs in the third quarter from declining assets values. But auditors of public companies have made it clear in three recently published white papers from their newly formed Center for Audit Quality that despite the severity of the current market crunch, they intend to apply the fair value standard consistently, and market problems will not influence their professional judgment about the quality of valuation models and assumptions used by banks.

    Continued in article

    Jensen Comment
    The following standards are especially pertinent to fair value accounting:
    FAS 105, 107, 115, 130, 133, 141, 142, 155, 157, 159
    FAS 157 is mainly a definitional standard. The key standard to date is FAS 159 that allows companies to cherry pick which contracts are to be carried at fair value and which are to be carried at amortized historical cost. To me FAS 159 is a terrible standard that can lead to all sorts of subjective manipulation, earnings management, and aggregation of apples and door knobs in summations of assets, liabilities, and earnings components. I think the FASB viewed FAS 159 as a politically-expedient way to expand fair value accounting into financial statements without having to fight the huge political battle with banks and other corporations who aggressively oppose required fair value accounting for all financial and derivative financial instruments.

    Why do bankers resist expanding FAS 159 into required accounting for all financial instruments?
    Misleading Financial Statements:  Bankers Refusing to Recognize and Shed "Zombie Loans"

    One worrying lesson for bankers and regulators everywhere to bear in mind is post-bubble Japan. In the 1990s its leading bankers not only hung onto their jobs; they also refused to recognise and shed bad debts, in effect keeping “zombie” loans on their books. That is one reason why the country's economy stagnated for so long. The quicker bankers are to recognise their losses, to sell assets that they are hoarding in the vain hope that prices will recover, and to make markets in such assets for their clients, the quicker the banking system will get back on its feet.
    The Economist, as quoted in Jim Mahar's blog on November 10, 2007 ---

    But there are questions in theory about fair value accounting!
    Bob Jensen's threads on fair value accounting are at

    Sixty-seven percent of American employees are living paycheck to paycheck, according to results released this week from the 2007 "Getting Paid In America" survey. The online survey by the American Payroll Association asked respondents how difficult it would be to meet their current financial obligations if their paycheck were delayed for a week. An overwhelming 31,640 of more than 47,000 respondents said they'd find it difficult to meet their financial obligations if their paycheck were delayed. This is a 2 percent increase from 2006 . . .
    AccountingWeb, September October 2006, 2007 ---

    Illustrated Cash Flow For Dummies ---
    Link forwarded by Jim Mahar


    How can the IRS tax earnings for services not rendered?
    There may be an incentive for faculty to begin early retirement at the end of the calendar year rather than at the end of the academic year in May or June.

    My second question concerns the annual limit on wages (that just moved up to $102,000) subject to Social Security taxes. Suppose a professor received an academic year salary of $150,000 in 2008 plus a tenure buyout of $300,000 for early retirement at age 56 (actually there's no obligation to retire before reaching 100 years of age or later). If her/his "wages" aggregate to $450,000 wouldn't the Social Security tax still be limited to the first $102,000? (Linda Pfingst later reminded me that the Medicare tax has no such capped-wages limitation.)


    "University Owes Social Security Taxes for Tenured-Faculty Buyouts, Court Says," by Goldie Blumenstyk, The Chronicle of Higher Education, November 5, 2007 --- Click Here

    A federal appeals court has ruled against the University of Pittsburgh’s argument that buyout payments to tenured professors who take early retirement are not subject to Social Security taxes. The court, in a 2-to-1 ruling, said the payments are taxable.

    The ruling centered heavily on the judges’ interpretation of tenure.

    The university had contended that such payments were not taxable as “wages” because they were given in exchange for the professors’ relinquishing their tenure rights. Pitt sought a refund for the $2-million in taxes that it paid from 1996 to 2001.

    But the Internal Revenue Service denied that request, and when the university sued, a U.S. district-court judge, Donetta Ambrose, ruled for the university as a matter of law. The federal government appealed that decision, paving the way for the ruling last week in which a three-judge panel of the U.S. Court of Appeals for the Third Circuit sided with the government.

    “Because tenure is a form of compensation for past services to the university, payments offered as a substitute for tenure are compensation and therefore taxable as wages,” two of the judges said in the majority opinion.

    In a dissent, Judge Anthony J. Scirica disagreed with the interpretation of tenure as merely a version of seniority but, rather, as the second part of an employment relationship with its own rights. As such, said Judge Scirica, “payments for the relinquishment of property right in tenure at the university were not remuneration for employment and were not subject” to taxation.

    As the opinion notes, the case marked the third time that a federal appeals court had taken up the question since 2001. In one instance the court found that such payments were taxable, and in another, that they were not.

    November 6, 2007 reply from Becky Miller [itsyourmom@HOTMAIL.COM]

    This series of cases really go to the issue of whether or not payments in cancellation of tenure rights are wages under Section 3121 of the Code or consideration for cancellation of a property right. Once you get to wages for 3121, you hit both the FICA and the Medicare taxes.

    As to the dissenting opinion, I am curious as to what rights exist in an employment arrangement that would trigger income other than compensation. I seem to recall some old tax theory about the fruit and the tree. Here the person is the tree and any consideration offered for their labor would be the fruit. I have to admit that I have a difficult time building a consistent theoretical argument that this is something other that wages.

    As to the question of subjecting payments for service NOT rendered to FICA and Medicare tax, that, also has a long tradition. For example, sick pay and vacation pay are subject to these taxes.


    Becky Miller 22339
    510 Street Pine Island, MN 55963

    November 7, 2007 reply from Bob Jensen

    Hi Becky,

    Interesting that you should use a tree and fruit analogy.

    Many, if not most, tenure buyouts are an effort by a college to rid itself of a fruitcake. In other words, the college no longer wants the services of a fruitcake professor. It’s interesting that the IRS wants to tax the tenure buyout as “wages for services” when in fact the college is buying the professor out to rid itself of her/his services. 

    What’s a fruitcake professor?
    Fruitcake professors come in different varieties. Some are showing signs of dementia. Some have a problem of moral turpitude that’s becoming an embarrassment to the college (I know of one senior professor of political science who pulled a condom out of his drawer and propositioned a female student who, to his unpleasant surprise, turned out to be the wife of a member of the Board of Trustees). Some fruitcakes are really lousy, and often negligent, teachers to a point where the college no longer wants them assigned to classes. A Chair in a leading School of Accountancy told me that she stopped assigning classes to a very senior accounting professor (even though he still received full pay) because he’d become just plain mean to women students in his classes. Presumably he thought that women were taking over the CPA profession and was not at all happy about it.

    Since it's so difficult to terminate a tenured professor, colleges generally prefer buyouts that are cheaper than litigation costs and/or avoid a lot of negative publicity for the college and the fruitcake.

    Bob Jensen

    Bob Jensen's taxation helpers are at

    Foreign Companies Listed in U.S. Securities Markets May Now Use International Accounting Standards
    The Securities and Exchange Commission has unanimously approved rule amendments under which financial statements from foreign private issuers in the U.S. will be accepted without reconciliation to U.S. Generally Accepted Accounting Principles only if they are prepared using International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
    "SEC relieves foreign companies of U.S. GAAP filing requirements," AccountingWeb, November 2007 ---

    The XBRL U.S. consortium completed its U.S. GAAP taxonomy, a key step necessary for the full implementation of interactive data technology for financial reporting. The Financial Accounting Foundation and critical stakeholder groups including analysts, public company preparers and software providers are reviewing the draft taxonomy before it is released for public review, said the SEC, which has contributed funding to the project. For more information, visit or ---

    From Smart Stops on the Web, Journal of Accountancy, October 2007 ---

    Visit this site for a rundown of hot topics on the SEC’s radar—including internal control reporting divisions, XBRL initiatives and IFRS. You can access transcripts and webcasts of roundtable discussions on mutual recognition, the proxy process and hedge funds, as well as information on the SEC’s new Advisory Committee on Improvements to Financial Reporting (see “Seeking Clarity,” page 30). You also can revisit older topics such as auditor independence and corporate officer statements that have been retired to the “Archive” page (

    "Interactive Data - Building XBRL into Accounting Information Systems," by Jerry Trites  ---

    Bob Jensen's threads on XBRL are embedded in the file at

    Bob Jensen's XBRL video tutorials are at

    Some Cutting Edge (and some not so new) Practice-Based Research for the Accountancy Profession

    "Management Accounting Research for the C-Suite:  Consider findings from cutting-edge research to take your company to the next level," by Cynthia Bolt-Lee, Journal of Accountancy, November 2007 ---

    This second installment in a series of columns on accounting research summarizes results from the field of management and cost accounting. The 2006 through June 2007 issues of five top-tier journals in management and cost accounting research were examined. Those publications included, alphabetically, Accounting, Organizations and Society; The Accounting Review; Contemporary Accounting Research; the Journal of Accounting Research; and Management Science.

    These summaries explain the implications of a wide range of research and give CPAs the opportunity to apply the results in day-to-day activities. Readers interested in more detail should review the full text of each article to explore the hypothesis, research process, statistical analysis, supporting theories and conclusions.

    Continued in article


    The Securities and Exchange Commission staff have published a report discussing the principal themes that emerged from its initial review of the disclosure of 350 public companies for compliance with the Commission’s new and enhanced rules for executive compensation and related disclosure.

    After completing the first stage of these reviews, the staff sent individualized comments to the companies. Two principal themes emerged from these reviews. First, companies should provide more focused disclosure of how and why they made specific executive compensation decisions. Second, the manner of presentation is important, and companies can use it to provide more direct, specific, clear and understandable executive compensation disclosure.

    John White, Director of the Division of Corporation Finance, stated, “Since the new principles-based rules became effective in late 2006, public companies have provided their investors with the clearest and most complete disclosure ever regarding how much they pay their executives and directors. Our individualized comments and our observations should help companies enhance their future executive compensation disclosure and better explain their compensation policies and decisions.” Several members of the Commission’s staff will provide further context to the staff report in public appearances this week. Chairman Cox will present the keynote address at the Center for Plain Language’s Symposium on Plain Language: Public Policy and Good Business on Oct. 12, 2007.

    Bob Jensen's threads on outrageous executive compensation are at

    Is Second Life catching on in academe?

    November 15, 2007 message from David Albrecht [albrecht@PROFALBRECHT.COM]

    I attended a session on Second Life today. My university has purchased an island and has erected a few buildings along with a huge sand box. Along with other Web 2.0 technologies, faculty are told that second life has many educational possibilities?

    Does it open up anything for accounting? Does anyone currently use it? How should it be used?

    Dave Albrecht
    Bowling Green State University

    November 15, 2007 from Bob Jensen

    Hi David,

    Steve Hornik at the University of Central Florida uses Second Life for accounting courses. He also has a YouTube video about his applications.

    Go to 

    His last email indicates that he's perhaps become a bit discouraged with it, although I don't want to put words in his mouth. You should contact him directly.

    Bob Jensen

    November 21, 2007  message from David Albrecht [albrecht@PROFALBRECHT.COM]

    This relates to a question I recently asked.

    David Albrecht

    CPAs Find an Island on Second Life (Nov. 21, 2007) By Michael Cohn, Editor-in-Chief, WebCPA

    Accounting firms are starting to go virtual and setting up shop on Second Life.

    A few weeks ago, I wrote about how futurist Edie Weiner recently predicted that accountants might need to start keeping track of money in Second Life's virtual currency, Linden dollars (see Accounting in Linden Dollars). I received a note in response to that column from Tom Hood, CEO of the Maryland Association of CPAs, pointing out that the association has already created a CPA Island in Second Life along with a Second Life Association of CPAs.

    The first accounting firm to go live on the virtual world was Baltimore-based KAWG&F. CPA Island includes a "chillin' grounds" for new and young professionals to network. There is also a Firm of the Future office that shows off leading-edge concepts for CPA firms, as well as an exhibition hall aimed at educators. MACPA is in the process of expanding its presence on Second Life even further and is at work on CPA Island 2.

    Firms need to reach out through venues like Second Life to attract young clients and recruit young accountants who are spending more and more of their time online, both at the office and during their leisure hours. Virtual worlds like Second Life have been attracting all manner of businesses, ranging from computer companies like Dell and Sun Microsystems to retailers like American Apparel to virtual real estate developers who specialize in creating homes on SL. Why not CPA firms too?

    Continued at: 

    November 22, 2007 reply from Bob Jensen

    Hi David,

    The FASB is also interested. You can read the following at

    The Financial Accounting Standards Board recently approached Bloomfield about studying how to create financial accounting standards that will assist investors as much as possible, he quickly turned to the virtual world for answers.

    "Theory Meets Practice Online: Researchers and academics are looking to online worlds such as Second Life to shed new light on old economic questions," by Francesca Di Meglio, Business Week, July 24, 2007 --- Click Here 

    In fact, many economics researchers, including Bloomfield, professor of accounting at Cornell's Johnson Graduate School of Management, are using the virtual environment to test ideas involving staples of economics such as game theory, the effects of regulation, and issues involving money. Since 1989, Bloomfield has been running experiments in the lab in which he creates small game economies to study narrow issues. But when the Financial Accounting Standards Board recently approached Bloomfield about studying how to create financial accounting standards that will assist investors as much as possible, he quickly turned to the virtual world for answers.

    "It would be very difficult to look at the complex issues that FASB is trying to address with eight people in a laboratory playing a very simple economic game," he says. "I started looking for how I could create a more realistic economy with more players dealing with a high degree of complexity. It didn't take me long to realize that people in virtual worlds are already doing just that."

    . . .

    At Indiana University, researcher Edward Castronova has posed the idea of creating multiple virtual economies to study the effects of different regulatory policies. At Indiana, Castronova is director of the Synthethic Worlds Initiative, a research center to study virtual worlds. "The opportunity is to conduct controlled research experiments at the level of all society, something social scientists have never been able to do before," the center's Web site notes (see, 5/1/06, "Virtual World, Virtual Economies").

    A virtual stock market is certainly not the only online entity that opens itself up to research. Marketers are already using the virtual world to test campaigns, packaging, and consumer satisfaction. Pepsi (PEP) famously tracks use of its products in Architects seek reaction to design. Starwood Hotels (HOT) test-marketed its new loft designs in Second Life (see, 8/23/06, "Starwood Hotels Explore Second Life First").

    Continued in article

    November 23, 2007 reply from Steven Hornik [shornik@BUS.UCF.EDU]

    Robert Bloomfiled has been conducting panel sessions in Second Life where discussions have ranged from the taxing virtual economies, financing activities and last week a discussion with Edward Castronova (all done withint Second Life).  On Nov. 26th, the discussion will be on Higher Education in Second Life.  You can view arhcived videos of these from SLCN.TV at  For those unfamiliar with SL this gives you an idea of one it's best features, bringing people together from all over the world to discuss ideas, compare the cost of doing this via SL as opposed to attending a conference!
    And here is a link to Robert's blog about the Metanomics series:
    Dr. Steven Hornik
    University of Central Florida
    College of Business Administration
    (407) 823-5739

    November 30, 2007 message from Carolyn Kotlas []


    INNOVATE, edited by James Morrison, UNC-Chapel Hill Professor Emeritus, is a peer-reviewed e-journal that began publication with the October/November 2004 issue. The journal covers cutting-edge research and practice in the field of using information technology tools to enhance teaching and learning. Readers can also comment on articles, share material with colleagues and friends, and participate in open forums.

    Innovate is soliciting manuscripts for a special issue on academics in virtual environments. This issue focuses on the use of Multi-User Virtual Environments (MUVEs) as an enhancement to education. A MUVE combines graphics and audio with the ability to communicate with multiple users in real time within the context of a 3-D virtual environment. MUVEs are not necessarily considered games, as programs like Second Life and There have no end goal or objective.

    For more information go to and click on the Academics in Virtual Environments paragraph.

    To submit a manuscript go to

    Bob Jensen's threads on edutainment and learning in virtual worlds are at

    Neutrality Concept in Accounting Standard Setting

    In Concepts Statement No. 2, the FASB asserts it should not issue a standard for the purpose of achieving some particular economic behavior. Among other things, this statement implies that the board should not set accounting standards in an attempt to bolster the economy or some industry sector. Ideally, scorekeeping should not affect how the game is played. But this is an impossible ideal since changes in rules for keeping score almost always change player behavior. Hence, accounting standards cannot be ideally neutral. The FASB, however, actively attempts not to not take political sides on changing behavior that favors certain political segments of society. In other words, the FASB still operates on the basis that fairness and transparency in the spirit of neutrality override politics. However, there is a huge gray zone that, in large measure, involves how companies, analysts, investors, creditors, and even the media react to new accounting rules. Sometimes they react in ways that are not anticipated by the FASB.

    Is there a problem with how GAAP covers one's Fannie?
    Would fair value accounting help in this situation?

    "Fannie Execs Defend Accounting Change Friday," by Marcy Gordon, Yahoo News, November 16, 2007 --- 

    Fannie Mae executives on Friday defended a change in the way the mortgage lender discloses losses on home loans amid concern from analysts that it could mask the true impact of the credit crisis on its bottom line.

    The chief financial officer and other executives of the government-sponsored company, which reported a $1.4 billion third-quarter loss last week, held a conference call with Wall Street analysts to explain the recent change.

    Analysts peppered the executives with questions in a skeptical tone. The way Fannie discloses its mortgage losses, addressed in an article published online by Fortune, raises extra concern among analysts given that Fannie Mae was racked by a $6.3 billion accounting scandal in 2004 that tarnished its reputation and brought government sanctions against it.

    Moreover, the skepticism from Wall Street comes as Fannie seeks approval from the government to raise the cap of its investment portfolio.

    The chief financial officer, Stephen Swad, said in the call that some of the $670 million in provisions for credit losses on soured home loans that Fannie Mae wrote off in the third quarter likely would be recovered.

    "We book what we book under (generally accepted accounting principles) and we provide this disclosure to help you understand it," Swad said.

    Shares of Fannie Mae fell $4.30, or 10 percent, to $38.74 on Friday, following a 10 percent drop the day before.

    "Fannie Shares Continue Plunge," by Mike Barris,  The Wall Street Journal, November 16, 2007 ---

    Shares of Fannie Mae skidded further Friday, after falling 10% Thursday amid worries over the way the mortgage giant reports credit losses and a gloomy outlook for the housing market.

    The latest decline in the company's share price came as Chief Financial Officer Stephen Swad on Friday attempted to alleviate investor concerns about the company's credit losses.

    In morning trading, Fannie shares were at $41.30, down $1.75, or 4%. The shares had fallen as much as 14% early in the day before recovering somewhat. Shares of Fannie's counterpart, Freddie Mac, also fell, down $1.98, or 4.8%, to $39.91.

    Thursday's drop came after Fortune magazine's Web site reported a change in the method Fannie uses to report credit losses.

    Last week, the nation's biggest investor in home-mortgage loans reported that its credit losses in the year's first nine months equaled 0.04% of the company's $2.8 trillion of mortgages and related securities owned or guaranteed, up from 0.018% a year earlier. That was in line with the company's forecast.

    But the company changed its method of presenting the figure, excluding unrealized losses on certain loans that were marked down to reflect current market conditions. Including those unrealized losses, the rate for this year's first nine months was 0.075%, up from 0.023% a year before.

    Fannie officials said the change was made to separate realized losses from ones that haven't been realized and depend on fluctuating market values for loans. A report from J.P. Morgan Chase & Co. analyst George Sacco said the new method is similar to that used by Freddie Mac. Fannie officials noted that both the realized and unrealized losses were reflected in the earnings reported last week.

    Fannie's stock had already been falling for a few weeks amid worries about how hard Fannie would be hurt by rising mortgage defaults. At an investment conference Thursday in New York, Wells Fargo & Co.'s chief executive, John Stumpf, predicted more pain for mortgage lenders in the year ahead as falling home prices cut the value of collateral, saying the nationwide decline in housing is the worst since the Great Depression.

    Thursday, Fannie shares dropped $4.78, or 10%, to $43.04.

    On Friday, Mr. Swad tried to explain further how the company was accounting for potential losses.

    Last week, Fannie Mae reported roughly $670 million in credit losses in the third quarter related to certain charge-offs recorded when delinquent loans were purchased from mortgage-backed securities trusts. Mr. Swad explained Friday that portions of the credit losses would likely be recovered.

    Though these third quarter losses were charged off, they are not considered realized losses, Mr. Swad said, because the loans backing these securities could still be "cured." Mr. Swad said the company was "required to take a charge when the market estimate is below our purchase price." The company's experience, he added, "has shown that the majority of these loans don't result in any realized losses." But he declined to be more specific about what percentage of the loans would eventually "cure."

    Fannie last week released earnings for the first three quarters of the year. It reported an additional unrealized loss of $955 million in the value of private-label securities backed by subprime and Alt-A mortgages through the end of the third quarter. This was in addition to $376 million the company had previously accounted as a loss for these securities this year.

    November 16, 2007 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

    For the record, there was no "accounting change" as per this headline. A headline of "Fannie Mae follows GAAP" probably wouldn't be quite as sexy but it would be 100% accurate. The company's clear explanation of what it is required to do under GAAP is covered in the conference call that is available on Fannie Mae's web site for those accounting aficionados who want to learn more about AICPA Statement of Position 03-03 that requires companies repurchasing loans to record them at fair value. So the answer to your question is that fair value accounting apparently only complicated analysts' understanding in this case.

    Denny Beresford

    November 17, 2007 reply from Bob Jensen

    Hi Denny,

    Your comment sheds a lot of light on this apparent gap between analyst expectations and GAAP rules in this case. The SEC, FASB, and the IASB are pushing hard and steady toward fair value accounting with FAS 155, 157, and 159 just being intermediary steps along the way. At least in this case, however, required fair value accounting is allegedly contributing to the plunge in Fannie Mae’s share values.

    This is another example of the unpredictability of the Neutrality Concept in standard setting. You point out (see below) that FASB seriously considers neutrality for every new standard and interpretation with the goal of having scorekeeping not affect how the game is played, but in athletics and business it is virtually impossible to change how something is scored without affecting policies and strategies. For example, when long shots in basketball commenced to earn three points rather than two points it fundamentally changed the game of basketball.

    Perhaps this is all an example of what you, in 1989, termed "relevant financial information may bring about damaging consequences." (see a quote from your article below). It would have been interesting if the media reporters in 2007 had cited your 1989 article in this beating Fannie Mae is now taking by adhering to GAAP.

    Bob Jensen

    "How well does the FASB consider the consequences of its work?" by Dennis Beresford, All Business, March 1, 1989 ---

    Neutrality is the quality that distinguishes technical decision-making from political decision-making. Neutrality is defined in FASB Concepts Statement 2 as the absence of bias that is intended to attain a predetermined result. Professor Paul B. W. Miller, who has held fellowships at both the FASB and the SEC, has written a paper titled: "Neutrality--The Forgotten Concept in Accounting Standards Setting." It is an excellent paper, but I take exception to his title. The FASB has not forgotten neutrality, even though some of its constituents may appear to have. Neutrality is written into our mission statement as a primary consideration. And the neutrality concept dominates every Board meeting discussion, every informal conversation, and every memorandum that is written at the FASB. As I have indicated, not even those who have a mandate to consider public policy matters have a firm grasp on the macroeconomic or the social consequences of their actions. The FASB has no mandate to consider public policy matters. It has said repeatedly that it is not qualified to adjudicate such matters and therefore does not seek such a mandate. Decisions on such matters properly reside in the United States Congress and with public agencies.

    The only mandate the FASB has, or wants, is to formulate unbiased standards that advance the art of financial reporting for the benefit of investors, creditors, and all other users of financial information. This means standards that result in information on which economic decisions can be based with a reasonable degree of confidence.

    A fear of information

    Unfortunately, there is sometimes a fear that reliable, relevant financial information may bring about damaging consequences. But damaging to whom? Our democracy is based on free dissemination of reliable information. Yes, at times that kind of information has had temporarily damaging consequences for certain parties. But on balance, considering all interests, and the future as well as the present, society has concluded in favor of freedom of information. Why should we fear it in financial reporting?

    Continued in article


    Bob Jensen's threads on standard setting are at

    Bob Jensen's threads on Accrual Accounting and Estimation are at

    Bob Jensen's threads on fair value accounting are at

    Bob Jensen's threads on Fannie Mae's enormous problem (the largest in history that led to the firing of KPMG from the audit and a multiple-year effort to restate financial statemetns) with applying FAS 133 ---


    There's a shelf of financial bestsellers whose titles now sound absurd: Ravi Batra's The Great Depression of 1990; James Glassman's Dow 36,000; Harry Figgie's Bankruptcy 1995: The Coming Collapse of America and How to Stop It. There’s BusinessWeek’s 1979 description of "the death of equities as a near permanent condition,
    Michael Lewis, "The Evolution of an Investor," Blaine-Lourd Profile, December 2007 ---
    As quoted by Jim Mahar in his Finance Professor Blog at

    As a group, professional money managers control more than 90 percent of the U.S. stock market. By definition, the money they invest yields returns equal to those of the market as a whole, minus whatever fees investors pay them for their services. This simple math, you might think, would lead investors to pay professional money managers less and less. Instead, they pay them more and more...Nobody knows which stock is going to go up. Nobody knows what the market as a whole is going to do, not even Warren Buffett. A handful of people with amazing track records isn’t evidence that people can game the market. Nobody knows which company will prove a good long-term investment. Even Buffett’s genius lies more in running businesses than in picking stocks. But in the investing world, that is ignored. Wall Street, with its army of brokers, analysts, and advisers funneling trillions of dollars into mutual funds, hedge funds, and private equity funds, is an elaborate fraud.
    Michael Lewis, "The Evolution of an Investor," Blaine-Lourd Profile, December 2007 ---
    As quoted by Jim Mahar in his Finance Professor Blog at


    "GM Will Book $39 Billion Charge Write-Down of Tax Credits Indicates That Profits Won't Come in Near Term," by John D. Stoll, The Wall Street Journal, November 7, 2007; Page A3 ---

    General Motors Corp. will take a $39 billion, noncash charge to write down deferred-tax credits, a signal that it expects to continue to struggle financially despite significant restructuring and cost cutting in the past two years.

    The deferred-tax assets stem from losses and could be used to offset taxes on current or future profits for a certain number of years.

    In after-hours trading, GM fell 2.9% to $35.14. Before the disclosure, its shares finished at $36.16, up 16 cents, or less than 1%, in New York Stock Exchange composite trading.

    GM, the world's largest auto maker in vehicle sales, was to report third-quarter financial results today. The company, which was stung by big losses in 2005 and 2006, said the write-down was triggered by three main issues: a string of adjusted losses in core North American operations and Germany over the past three years, weakness at its GMAC Financial Services unit, and the long duration of tax-deferred assets.

    GM had appeared to be making progress in stemming its losses. Its global automotive operations were profitable in the first half of the year. It recently signed a labor deal with the United Auto Workers that allows it to establish an independent trust to absorb its approximately $50 billion in hourly retiree health-care liabilities. The move promises to significantly reduce GM's cash health-care expenses and combine with other labor-cost cuts in creating a more profitable North American arm.

    If it returns to steady profits, GM could remove the valuation allowance and reclaim some or all of the $39 billion in deferred credits.

    For now, the massive charge promises to devastate GM's headline financial results for the third quarter, and for the year, likely leading to the worst annual loss in its 99-year history. Although the charge is an accounting loss that doesn't involve cash, it is still a staggering sum. By comparison, the company reported a total of $34 billion in net income from 1996 to 2004.

    GM will partially offset the charge with a gain of more than $5 billion related to the sale of its Allison Transmission unit.

    The charge follows more than $12 billion in losses since the beginning of 2005. GM has been scrambling to cut the size of its U.S. operation amid shrinking market share, rising costs and a rapidly globalizing auto industry. Its restructuring has been complicated by a slowdown in U.S. demand for automobiles and losses at GMAC.

    The lending giant lost $1.6 billion in the third quarter, the biggest quarterly setback since at least the 1960s. It made money on auto lending and insurance but was dragged down by a $1.8 billion setback at ResCap, its residential-mortgage business and a big player in subprime loans. GM's exposure is limited because it sold 51% of GMAC to Cerberus Capital Management LP last year. In the past, GMAC delivered dividends to GM, including more than $9 billion in the decade before the GMAC sale.

    The write-down isn't expected to affect GM's liquidity position, which stood at $27.2 billion as of June 30. GM has been selling noncore assets in recent years to pad its bank account. In addition, GM Chief Financial Officer Frederick "Fritz" Henderson said the write-down won't preclude it from using loss carry-forwards or other deferred-tax assets in the future. It is unclear whether GM's plunge deeper into negative shareholder-equity status will affect it's borrowing capabilities or credit rating.

    The latest disclosure underscores the challenge Chief Executive Officer Richard Wagoner faces in seeking a full-scale turnaround as GM hangs on to its No. 1 global-sales ranking over Toyota Motor Corp. by a thread. Delphi Corp., GM's top supplier, has failed in attempts to emerge from bankruptcy protection, so GM must wait indefinitely on cost savings it hopes to gain from a reorganized Delphi. Also, U.S. automobile demand has withered to the lowest point in a decade, and, as oil futures continue to escalate, pressure on high-profit trucks and SUVs remains firm.


    Denny Beresford provided a link to another reference --- Click Here

    November 7, 2008 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

    >So they think it is more likely than not that they will receive zero tax benefit from their tax loss carryforwards! 

    Hmmmmm, I doubt that is what GM thinks. As the news release stated, "In making such judgments, significant weight is given to evidence that can be objectively verified. A company's current or previous losses are given more weight than its future outlook, and a recent three-year historical cumulative loss is considered a significant factor that is difficult to overcome." FAS 109, P 23 states, "Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years."

    As an aside, the more-likely-than-not standard in FAS 109 existed before FIN 48 adopted the standard. FIN 48 doesn't talk about objective evidence wrt the MLTN standard.

    FIN 48, 6, states, "An enterprise shall initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. As used in this Interpretation, the term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. The more-likely than- not recognition threshold is a positive assertion that an enterprise believes it is entitled to the economic benefits associated with a tax position. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold shall consider the facts, circumstances, and information available at the reporting date.

    FIN 48, 7, states, "In assessing the more-likely-than-not criterion as required by paragraph 6 of this Interpretation: a. It shall be presumed that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. b. Technical merits of a tax position derive from sources of authorities in the tax law (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. When the past administrative practices and precedents of the taxing authority in its dealings with the enterprise or similar enterprises are widely understood, those practices and precedents shall be taken into account. c. Each tax position must be evaluated without consideration of the possibility of offset or aggregation with other positions."

    In an appendix, FIN 48, B46, states, "In considering the subsequent recognition of tax positions that do not initially meet the more-likely-than-not recognition threshold and the subsequent measurement of tax positions, the Board initially considered whether specific external events should be required to effect a change in judgment about the recognition of a tax position or the measurement of a recognized tax position. The Board concluded in the Exposure Draft that a change in estimate is a judgment that requires evaluation of all available facts and circumstances, not a specific triggering event. Some respondents to the Exposure Draft stated that the evidence supporting a change in judgment should be objectively verifiable and that a triggering event is normally required to subsequently recognize a tax benefit."

    Since this language wasn't put in the standard, I wonder if one could argue that the two MLTN standards are different. It would be interesting to be a fly on the wall as some of the debate goes on about uncertain tax positions.

    Amy Dunbar

    Also see "Accounting for Uncertainty" ---

    From The Wall Street Journal Accounting Weekly Review on November 9, 2007

    GM Will Book $39 Billion Charge
    The Wall Street Journal
    by John D. Stoll
    Nov 07, 2007
    Page: A3
    Click here to view the full article on ---

    TOPICS: Advanced Financial Accounting, Income Taxes

    SUMMARY: "General Motors Corp. will take a $39 billion, noncash charge to write down deferred tax assets, "...a signal that it expects to continue to struggle financially despite significant restructuring and cost cutting in the past two years."

    CLASSROOM APPLICATION: Use to cover accounting for deferred tax assets and a related valuation account.

    1.) Define the terms deferred tax assets, deferred tax liabilities, net operating loss carryforwards, and deferred tax credits.

    2.) Which of the above three items has General Motors recorded for a total of $39 billion? In your answer, comment on the opening statement in the article that GM will write-down its "deferred tax credits."

    3.) What is a valuation allowance against deferred tax assets? When must such an allowance be recorded under generally accepted accounting standards? Use GM's situation as an example in your answer.

    4.) GM states that its $39 billion write down was impacted by three factors. Explain how each of these factors bears on the determination of a valuation allowance against deferred tax assets. Be specific.

    5.) The author writes, "If it returns to steady profits, GM could remove the valuation allowance and reclaim some or all of the $39 billion in deferred credits," and that the write-down does not preclude GM from future use of its net operating loss carryforwards and deferred tax assets. Explain these statements, including the entries that will be recorded if the deferred tax assets are used in the future.

    Reviewed By: Judy Beckman, University of Rhode Island

    GM Statement on Noncash Charge
    by General Motors, via PRNewswire
    Nov 06, 2007
    Online Exclusive


    Bob Jensen's threads on accounting theory are at

    Bob Jensen's threads on FIN 48 are at

    "Decoding Business Profitability," by Lyn Denend quoting Mark Soliman, Stefan Reichelstein, and Madhav Rajan, Stanford Business Magazine, November 2007 ---

    For years, return on investment (ROI) and related financial accounting ratios have been widely used as key measures of business profitability. Now three Business School accounting professors have written an award-winning paper that shows the economic interpretation of the ROI metric requires more careful analysis.

    For more than 40 years, business professionals and academics have relied on ROI to infer a company’s economic rate of return, which is usually conceptualized as the internal rate of return of a firm’s investment projects. Many recognized that financial accounting is subject to biases that could skew the magnitude of the ROI ratio, but they tended to believe these effects would average out over time, thereby enabling parity between ROI and real economic return. On the other hand, when companies such as those in the oil industry have been accused of abusing their market power, as evidenced by excessive accounting profitability, they tried to explain away high accounting returns by claiming that standard metrics do not adequately measure real economic returns.

    “There wasn’t a precise mathematical understanding of the issue,” said Madhav Rajan, a professor of managerial accounting who collaborated on the study with Stefan Reichelstein, who also specializes in managerial accounting, and Mark Soliman, a financial accountant.

    The threesome developed a model that enabled them to examine analytically and empirically how a firm’s ROI was affected by two central variables: accounting conservatism and growth in new investments. They considered accounting to be conservative if it resulted in book values that were understated because investments were written off faster than they should be, given the under-lying pattern of project cash flows. Direct expensing of intangible investments is a prime example of such conservatism.

    The researchers found that accounting conservatism and past growth in investments jointly determined how ROI compared to the underlying economic profitability of a business. Given conservative accounting, higher growth tended to depress ROI, a decline that was accentuated by more conservative accounting rules. On the other hand, more conservative accounting increased ROI only if the rate of past growth in new investments was below some critical value, with the opposite effect emerging for growth rates above that critical value. To test the theoretical predictions of the model, the researchers used a data sample of 43,680 firm-year observations from 1982 to 2002.

    The result is a tool for “decoding the economic profitability of a firm given the accounting profitability reported in the ROI number,” Reichelstein said. Contrary to earlier examples and numerical illustrations in textbooks and the relevant literature, “we now have a much more systematic grasp of the linkage between accounting and economic return.”

    Both investors and managers can use the tool, “From a management perspective, it’s perfectly possible that one of your divisions has an ROI of 15 percent while another one has an ROI of 10 percent,” Reichelstein said. “You shouldn’t jump to the conclusion that the one giving you 15 percent is the one that’s adding more value to the business.” By applying the model, taking into account how rapidly both divisions have been growing and which has assets that may be more subject to a conservatism, management can more accurately determine the real economic profitability of both business groups.

    The research, which earned best paper awards when presented at two international accounting conferences, is published as “Conser-vatism, Growth, and Return on Investment,” in the September 2006 issue of the Journal of Accounting, Auditing, and Finance.

    November 2, 2007 reply from Nichols, Don [D.Nichols@TCU.EDU]

    I think that the Stanford Business Magazine has an incorrect citation. The article was published in Conservatism, Growth, and Return on Investment: Review of Accounting Studies, September, 2007.

    Don Nichols

    Bob Jensen's threads on return on investment (ROI) are at

    Misleading Financial Statements:  Bankers Refusing to Recognize and Shed "Zombie Loans"
    One worrying lesson for bankers and regulators everywhere to bear in mind is post-bubble Japan. In the 1990s its leading bankers not only hung onto their jobs; they also refused to recognise and shed bad debts, in effect keeping “zombie” loans on their books. That is one reason why the country's economy stagnated for so long. The quicker bankers are to recognise their losses, to sell assets that they are hoarding in the vain hope that prices will recover, and to make markets in such assets for their clients, the quicker the banking system will get back on its feet.
    The Economist, as quoted in Jim Mahar's blog on November 10, 2007 ---

    After the Collapse of Loan Markets Banks are Belatedly Taking Enormous Write Downs
    BTW one of the important stories that are coming out is the fact that this is affecting all tranches of the debt as even AAA rated debt is being marked down (which is why the rating agencies are concerned). The San Antonio Express News reminds us that conflicts of interest exist here too.
    Jime Mahar, November 10, 2007 ---

    Jensen Comment
    The FASB and the IASB are moving ever closer to fair value accounting for financial instruments. FAS 159 made it an option in FAS 159. One of the main reasons it's not required is the tremendous lobbying effort of the banking industry. Although many excuses are given resisting fair value accounting for financial instruments, I suspect that the main underlying reasons are those "Zombie" loans that are overvalued at historical costs on current financial statements.

    Daniel Covitz and Paul Harrison of the Federal Reserve Board found no evidence of credit agency conflicts of interest problems of credit agencies, but thier study is dated in 2003 and may not apply to the recent credit bubble and burst ---

    In September 2007 some U.S. Senators accused the rating agencies of conflicts of interest
    "Senators accuse rating agencies of conflicts of interest in market turmoil," Bloomberg News, September 26, 2007 ---
    Also see

    Bob Jensen's threads on fair value accounting are at

    Bob Jensen's Rotten to the Core threads are at

    Creative Accounting at Freddie Mac and the SEC Unhappiness Over This Creativity

    "The Accounting Cycle Freddie Mac's Scandal and the SEC's Judgment," by: J. Edward Ketz, SmartPros, November 2007 ---

    The financial reporting lies in the statements of Federal Home Loan Mortgage Corporation (Freddie Mac) came to light in 2003. The Securities and Exchange Commission recently issued a litigation release that attempts to put the affair behind us. Unfortunately, the SEC still cannot meet its goal of meting out punishment against the bad guys and only the bad guys.

    The SEC issued Litigation Release No. 20304 on Sept. 27. The SEC alleges that the corporation engaged in an accounting fraud from 2000 to 2002. The manipulation of earnings occurred by incorrectly accounting for various derivative instruments of the firm as well as manipulating the accounting for loan origination costs and reserves for losses. Freddie Mac will pay a $50 million fine. The four executives who conceived and executed this fraud were also punished. Their fines ranged from $65,000 to $250,000; they paid out disgorgement amounts that ranged from $29,227 to $150,000. More details are laid out in the SEC complaint in this matter.

    The fascinating thing about this accounting scandal is that it involved the understating of net income. In particular, the SEC contrasts the reported income with the restated net income (in billions of dollars):



    Reported Net Income

    Restated Net Income





    $ 1.119










    This fraud creates three problems for investors and creditors:

    The first consequence of the fraud is that it misleads capital providers with respect to the firm; the investment community will not think it as deserving as other organizations. The economy suffers a misallocation of resources.

    The second consequence of the fraud is that it supplies the corporate executives with incentives to engage in insider trading. The market thinks the business entity has the lower income and may bid down the stock price and the bond prices. The managers who are partaking in the fraud know that the earnings stream is actually higher and can profit from this knowledge illegally.

    The third consequence is that the market may misestimate the risk of the corporation and, in this case, that seems to provide the motivation for the accounting fraud. Corporate managers wanted to portray a picture of a steady, reliable company that was ever growing in resources and income. That picture was phony inasmuch as the true income stream is far more volatile than the reported earnings would indicate.

    This case is fascinating for another reason. The SEC continues to give miscreants a slap on the wrist while hitting the innocents with a massive fine. Yes, I said that the SEC continues to dote on the bad guys by only slapping their wrist. The largest fine plus disgorgement is only $400,000. For the salaries and stock options and perquisites that these guys got while working at Freddie Mac, the fines plus disgorgement amounts to a speeding ticket for those mortals with at most six-digit incomes. The fines are trivial. If the SEC wants to dissuade managers from committing accounting frauds, then they must impose meaningful and enormous fines and prison sentences. Petty and insubstantial fines imply that the SEC no longer cares for investors and creditors. And managers at other entities surely take notice.

    Continued in article

    Jensen Comment
    In the early days of FAS 133, Freddie Mac was not understating income. It did in fact do a terrible job of implementing accounting for derivative financial instruments, and Freddie has lots and lots of derivatives mostly for hedging interest rate risk ---

    A Free Harvard Business Review Archives Article

    "Why Budgeting Systems Fail:  One Management System is Not Enough," by Péter Horváth and Ralf Sauter, Harvard Business Review, September-October 2004 ---

    Accounting Theory:  The Vexing Problem of Contingent Liabilities and Environmental Risk

    From The Wall Street Journal Accounting Weekly Review on November 2, 2007

    BP Settles Charges, Submits to Watchdogs
    by Ann Davis, Amir Efrati, Matthew Dalton and Guy Chazan
    The Wall Street Journal

    Oct 26, 2007
    Page: A3
    Click here to view the full article on ---

    TOPICS: Advanced Financial Accounting, Contingent Liabilities, Environmental Cleanup Costs

    SUMMARY: "[British Petroleum] BP PLC put a host of legal threats behind it with far-reaching federal settlements yesterday [10/24/2007] and $373 million in fines and restitution...The British energy firm agreed to plead guilty to environmental crimes and agreed to a three-year probation connected to a fatal accident in Texas and an oil spill in Alaska." The article describes the expected impact on BP PLC's operations; the questions in this review focus on the company's Form 20-F contingent liability disclosures, including environmental and other contingent liabilities.

    CLASSROOM APPLICATION: Environmental liabilities and other contingencies are discussed in this article.

    1.) The article states that BP PLC (British Petroleum) "put a host of legal threats behind it" through a settlement with U.S. government authorities and fines. Summarize the legal issues facing the company and the settlement that was reached.

    2.) In general, where can you find information about the likely financial impact of legal and environmental issues facing any company? Describe the authoritative literature requiring disclosure of this information.

    3.) BP PLC uses the term "provisions" in their corporate balance sheet, rather than "contingent liabilities." What is the meaning of the term "provisions"?

    4.) Specifically investigate the extent of the legal and environmental issues facing BP PLC by examining their annual report filed on Form 20-F with the Securities and Exchange Commission, available at: 
    How extensive are the liabilities associated with these issues, as measured on December 31, 2006?

    5.) Examine footnote 40 to further investigate these liabilities. What are the 3 major categories of provisions for estimated liabilities recorded by BP PLC? How do they estimate the amounts recorded for these liabilities?

    6.) Which category of provisions do you think will be impacted by the settlement, based on the disclosures in the December 31, 2006, year end financial statements and the description of the settlement in the article?

    Reviewed By: Judy Beckman, University of Rhode Island

    Bob Jensen's threads on accounting for intangibles and contingencies are at

    The Grassley is Greener:  An Added Tax on Each Employed Skilled Immigrant
    Last week Mr. Grassley, the Iowa Republican, slipped an amendment into a spending bill that would tax businesses that hire skilled immigrants an additional $3,500 per visa to a total of $5,000 each. According to the National Foundation for American Policy, this represents a $3.1 billion tax increase over five years on some of America's fastest growing companies. Companies employing foreign professionals who are here on H-1B visas already pay $1,500 per individual. The fee was originally set at $500 in 1998, but at least past increases have also included a rise in the number of available visas. When Mr. Grassley floated this tax back in April, it would have been part of a Senate bill that lifted the H-1B visa cap by 50,000 and put in place an escalator provision that allowed market demand to determine future increases.
    "The Grassley Visa Tax," The Wall Street Journal, November 2, 2007; Page A12 ---


    Before reading this tidbit, you may want to read about creative accounting and earnings management at

    From Jim Mahar's blog on November 5, 2007 ---
    Does short-term debt lead to more "earnings management"?

    In another paper from the FMAs, Gupta and Fields look at whether more short term debt leads to more "earnings management."

    Does short-term debt lead to more "earnings management"?

    Short answer: YES.

    Longer answer:

    Intuitively the idea behind the paper is that if a firm has to go back to the capital markets, they do not want to do so when times are bad. Of course, sometimes times are bad. In those times, management may be tempted to "manage" earnings so that things do not appear as bad as they may be.

    The findings? Sure enough, managers seemingly manage their firm's earnings more when the firm has more short term debt.

    A few look-ins:

    From the Abstract (this is the best summary of the entire paper):
    "...results indicate that (i) firms with more current debt are more susceptible to managing earnings, (ii) this relation is stronger for firms facing debt market constraints (those without investment grade debt) and (iii) auditor characteristics such as auditor quality and tenure help diminish this relation...."

    Which fits intuition. Why?
    * The more the constraints, the more incentive the management has to manage earnings since if they do not, they may not be able to refinance.
    * Auditors would frown upon this behavior and the stronger the auditor, the less likely it is that the manager would manage earnings.

    How does this "earnings management" manifest itself? The most common way (although not the only way) that managers manipulate earnings is through the use of accruals . Thus, the authors examine this and find:
    "A one standard-deviation increase in short-term debt (total current liabilities) increases discretionary accruals by 1.69% and increase total accruals by 2.28%. Our evidence supports the idea that debt maturity significantly impacts the tendency of firms to manage earnings."
    Which is a really interesting finding!

    Bob Jensen's threads on fraud are at
    Bob Jensen's thread on cooking the books are at
    (The above module has been neglected by me. It is somewhat dated in terms of earnings restatements and there are broken links to old sites.)
    Bob Jensen's threads on accounting theory are at

    New York Sues Firm for Rigging Home Appraisals
    New York Attorney General Andrew Cuomo has initiated a lawsuit against a real estate appraisal unit of the Fortune 500 company First American Corp. He says the appraiser colluded with Washington Mutual to inflate home values.
    Chris Arnold, NPR, November 1, 2007 ---

    Bob Jensen's fraud updates are at


    The Securities and Exchange Commission recently filed civil fraud charges against Nortel Networks Corporation and its principal operating subsidiary Nortel Networks Limited (Nortel) alleging that Nortel engaged in accounting fraud from 2000 through 2003 to close gaps between its true performance, its internal targets and Wall Street expectations. Nortel is a Canadian manufacturer of telecommunications equipment.

    Without admitting or denying the Commission's charges, filed in the U.S. District Court for the Southern District of New York, Nortel has agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying a $35 million civil penalty, which the Commission will seek to place in a Fair Fund for distribution to affected shareholders. Nortel also has agreed to report periodically to the Commission's staff on its progress in implementing remedial measures and resolving an outstanding material weakness over its revenue recognition procedures.

    "This is an important fraud case involving conduct from 2000 through 2003," said Linda Thomsen, Director of the Commission's Division of Enforcement. "Since that time, under new leadership, Nortel has undertaken significant efforts to address the wrongdoing, remedy the harm and implement a remediation plan to prevent recurrence of the misconduct."

    Christopher Conte, an Associate Director of the Commission's Division of Enforcement, stated, "The settlement reached today reflects the seriousness of the company's past activity. Nortel's fraud was long-running, intentional and pervasive."

    According to the Commission's complaint, from late 2000 through January 2001, Nortel made changes to its revenue recognition policies that were not in conformity with U.S. Generally Accepted Accounting Principles (GAAP). The changes were made to fraudulently accelerate revenue into 2000 to meet its publicly announced revenue targets for the fourth quarter of 2000 and for that year. The complaint alleges that Nortel also selectively reversed certain revenue entries during the 2000 year-end closing process when its acceleration efforts pulled in more revenue than necessary to meet its targets. These actions, the complaint alleges, inflated Nortel's fourth quarter and fiscal year 2000 revenues by approximately $1.4 billion.

    The complaint further alleges that Nortel had improperly established, and was improperly maintaining, over $400 million in excess reserves by the time it announced its fiscal year 2002 financial results. According to the complaint, these reserve manipulations erased Nortel's fourth quarter 2002 pro forma profit and allowed it to report a loss instead so that Nortel would not show a profit earlier than it had previously forecast to the market. The complaint alleges that in the first and second quarters of 2003, Nortel improperly released approximately $500 million in excess reserves to boost its earnings and fabricate a return to profitability. These efforts turned Nortel's first quarter 2003 loss into a reported profit under GAAP, and largely erased its second quarter loss while generating a pro forma profit. According to the complaint, in both quarters Nortel's inflated earnings allowed it to pay tens of millions of dollars in so called "return to profitability" bonuses, largely to a select group of senior managers.

    In settling the matter, the Commission acknowledges Nortel's substantial remedial efforts and cooperation. After Nortel announced its first restatement, the Audit Committee of Nortel's Board of Directors launched an independent investigation which later uncovered the improper accounting. Nortel's Board took extensive remedial action that included promptly terminating employees responsible for the wrongdoing, restating its financial statements four times over four years, replacing its senior management, and instituting a comprehensive remediation program designed to ensure proper accounting and reporting practices. Nortel also shared the results of its independent investigation with the Commission.

    As part of the settlement, Nortel agrees to report to the Commission staff every quarter until it fully implements its remediation program, and the company and its outside auditor agree that the existing material weakness has been resolved.

    Nortel is a KPMG client. You can read more about KPMG at

    Bob Jensen's fraud updates are at

    International CPA Firms Want One Set of Standards --- The IASB Standards

    "Mind the GAAP," by James S. Turley, The Wall Street Journal, November 9, 2007; Page A18 ---

    I manage a firm with a presence in over 140 countries, and from my perspective it is clear that the fluidity of the world's capital markets is outstripping the reach and constraints of national regulatory approaches. The pace of change in capital markets begs for bold action. The willingness of the U.S. and other nations to embrace International Financial Reporting Standards and give up GAAP provides a glimpse of the prospect for more international collaboration -- rather than stand-alone national approaches -- in other areas of capital market regulation.

    True, it can be difficult for national representatives to relinquish direct control and embrace international collaboration, and the transition will have its share of hurdles. Many U.S. companies are not ready to make the change, and they have legitimate concerns about the degree to which judgments about international standards will be respected by regulators and the courts.

    In many countries, the shift to international standards is already underway. While English may be the dominant global language of business, IFRS -- not U.S. GAAP -- is becoming the dominant language for financial reporting. Today, more than 100 countries either require or permit IFRS as their accounting standard or base their own local standards on it. Canada shifts in 2011, while Brazil, Chile, India, Israel and Korea are among the countries that have also set a date for a move to IFRS.

    Robert Herz, chairman of the Financial Accounting Standards Board, recently suggested establishing a target date or dates for transitioning to IFRS, following a series of IFRS improvements. To take his suggestion a step further, the U.S. should reject a wait-and-see approach, go beyond the possibility of a switch and declare that it will adopt IFRS as of a date certain for all public companies filing in the U.S.

    Such a move would enable U.S. companies to begin preparing now and would provide impetus to confront needed legal and regulatory changes that would accompany the shift. It would motivate universities to train tomorrow's accountants in IFRS and promote similar moves by other jurisdictions to embrace these international standards instead of modifying them for local use. This would also help countries establish and work toward the improvement of a single standard, rather than devoting their energy to tweaking national standards to make them look more like IFRS.

    At Ernst & Young, we will weigh in with strong support for the SEC to set a certain date for a shift to IFRS. As SEC Chairman Christopher Cox has said, "Having a set of globally accepted accounting standards is critical to the rapidly accelerating global integration of the world's capital markets."

    Mr. Turley is chairman and CEO of Ernst & Young.

    Key differences between IFRS and FASB standards are discussed at
    Comparisons for other nations ---

    The best blog for tracking what's happening in this regard is at

    November 4, 2007 message from David Albrecht [albrecht@PROFALBRECHT.COM]

    I think this is a must read, but then I'm a financial reporting guy.

    David Albrecht Bowling Green

    Someone to Watch over Me: IASB Asks for an Overseer The International Accounting Standards Board wants someone to watch over it. Alan Rappeport, | US November 02, 2007

    The International Accounting Standards Board contends that it needs a committee to oversee its actions and make sure that it represents the public interest. IASB Chairman David Tweedie told editors on Thursday that the board will officially announce its plan for putting together such a group, and give further details next week.

    The creation of such a committee could help quell the anxiety felt within some European countries and companies that the new global accounting standards being developed jointly by IASB and the U.S.-based Financial Accounting Standards Board don't represent their interests. Currently, IASB's European constituents are proposing local or industry-specific exceptions to International Financial Reporting Standards, known as "carve-outs."

    "They feel slightly disenfranchised ... [wondering] what this group is doing floating around in global space just sticking laws onto us?" Tweedie said.

    Although he didn't say specifically how such a monitoring system might work, the IASB chairman said it could function similarly to the SEC's oversight of FASB. The committee could maintain equanimity over the varying interests represented on the standards board and could act as an "endorsement mechanism" or a "second check" to ensure that it operates in the public interest, according to Tweedie.

    Continued at


    November 4, 2007 message from David Albrecht [albrecht@PROFALBRECHT.COM]

    Oh, the beauty of it. US GAAP for years has been set up with the FASB overseen by the SEC. Recently, we saw the creation of the PCAOB to oversee the auditors, and the PCAOB is overseen by the SEC. The SEC, established by law with commissioners appointed by the President, oversees both the FASB and the PCAOB.

    Internationally, the band wagon is rolling unstoppably along behind the IASB. Now the IASB wants an overseer. My guess is that sometime soon we will see the crying out need for an international group to oversee the auditors, the PCAOBI (Public Company Accounting Oversight Board International, pronounced pah-KOBI Bryant, with the Bryant silent). Why not? The large firms are international, and they dominate the audit markets in most countries. I doubt that any governmental oversight group will ever have much control over them. Right now, governmental oversight is diffused, spread from country to country. Shouldn't international audit firms applying international accounting rules have international oversight?

    And who will be the oversight group for IASB and PCAOBI? And from where springs the authority to have any real power? The FASB plugs into the SEC's power outlet, so does the PCAOB. Would the IASB like to? It certainly is having difficulty maintaining control over its own rules in the face of EU carveouts. I suspect the carveouts will last a while, because the EU has its own power supply independent of the US. So, whose power supply will the IASB plug into, the SEC or the EU? Are there alternatives?

    Right now I guess we could say that the IASB is operating on broadcast power. It got a huge kick in popularity when the EU adopted its rules. With the carveouts I see the EU exerting its power, and if the IASB wishes to continue using EU's power, it had better fall in line and plug directly into the EU. But that won't go over so well with the rest of the world. The US has its own power supply and there are power generators in other parts of the world.

    My background is in political science, My original take on accounting rule harmonization was that irrevocable ceding of authority needs to be agreed to, or else rule harmonization would be as ineffective as the United Nations. The United Nations has never been effective because nations don't cede any real authority to it. It takes too much trust.

    Here, I think, is where the excrement will hit the rotary blade. Accounting rules make a difference, a supposition borne out around the world, time and time again, by governments exerting control over them. Does the US trust the EU? Does China or Japan trust the EU? No. Does anybody trust the EU? No. But then, does the EU trust anybody else? No. Nobody trusts anybody.

    Hence springs the IASB's search for its own power outlet. It won't find one because there isn't one.

    Militarily, the US and Europe combined to form NATO, and arguably NATO has been more effective than the UN in peacekeeping. Something similar needs to be created for IASB to plug into.

    In other words, I don't see true harmonization until the world's securities markets are brought under the control of an International Securities Market Group (perhaps called the International Securities & Exchange Commission), resulting from international treaty. I think that the discussion needs to expand to securities markets because I don't that sufficient power can be collected for only the IASB proposal for a power supply only for accounting rules. What about the auditors? What about the securities markets?

    But NATO hasn't been very effective, as some of its countries still act unilaterally (I won't even talk about the UN). Nobody will irrevocably cede its authority. Nor will it happen here with accounting rules. There just isn't enough trust.

    Consequently I think the new IASB idea will fly about the time that swine and pachyderms fly. However, if it does get off the ground, then I don't think it will ever be very effective.

    David Albrecht
    Bowling Green


    November 26, 2007 message from Miklos A. Vasarhelyi []

    HSBC in $45bn SIV bailout

    By Paul J Davies
    The New York Times
    Published: November 26 2007 12:59 | Last updated: November 26 2007 12:59

    HSBC has unveiled plans to take $45bn of mainly complex debt investments onto its balance sheet to end uncertainty surrounding its structured investment vehicles in the latest sign of the pressure banks are experiencing as a result of the credit squeeze.

    The UK-listed bank said its decision to bail out its structured investment vehicles (SIVs) would provide certainty for investors in the funds, for HSBC shareholders and for the bank and could help support the broader market by removing the threat of a fire sale of the assets its vehicle held.

    However, its decision to go it alone could be a blow for the US banks attempting to push through a US Treasury backed plan to create the so-called super SIV by taking a large potential collaborator out of the game.

    HSBC was a relative late-comer to the multi-billion dollar investment game that has been hobbled by this summer’s financial crisis, but it now hopes to pioneer an escape route from the mire in which so many banks are stuck.

    Stuart Gulliver, chief of its investment banking arm, said on Monday he believed HSBC’s restructuring plan for its $45bn (£22bn) in SIVs, the first of which it launched in the summer of 2005, would “set a benchmark and restore a degree of confidence to the SIV sector”.

    These vehicles have had little good news since western financial markets began to look increasingly gummed up in August. There has been only one successful restructuring to date and almost half a once-$400bn-plus market now faces downgrades from rating agencies.

    SIVs look to profit from the difference between cheap short-term funding in the commercial paper markets and the higher returns on financial company debt and complex debt products. But they have seen funding dry up and the value of their assets fall as investors fled from anything possibly tainted by the US subprime mortgage market.

    HSBC has decided that the funding issues in the broad SIV sector are not going to be resolved for some time. Without action, its two vehicles – known as Cullinan and Asscher – would be likely to breach the common SIV covenants that would force a firesale of its holdings.

    The threat of such firesales is part of the vicious circle helping to still further depress the values of the common assets all SIVs hold.

    “The market needs these decisive steps to restore faith,” HSBC said on Monday. “It will help the market because our SIVs’ assets are no longer hanging over it, they’re off the table.”

    The bank insists its move also helps its shareholders, mainly because it provides certainty at no great cost, arguing: “What is the alternative? If you’re going to let these vehicles go, what is the litigation risk from [SIV] investors? That is untested.”

    While the bank will take $45bn of SIV assets on to its balance sheet, the junior investors who bear the risk of the first losses from those assets are expected to remain in place in two new vehicles – albeit probably having taken some kind of loss in the restructuring and earning a lower return.

    The ongoing presence of these investors means the bank expects no material impact on its earnings and only a limited impact on its regulatory capital base.

    The alternative for junior investors in the two SIVs is to retain holdings in vehicles that HSBC said it could not guarantee would be able to raise funding. By implication, the bank will do little else to support any rump SIVs or investors holding out in them.


    Money managers fight for new credit lines - Nov-24

    Credit squeeze lifts Intermediate Capital - Nov-23

    In depth: Subprime and the credit crisis - Aug-16

    Editorial comment: Squeeze continues - Nov-20

    3i rides credit squeeze to lift returns 37% - Nov-09

    Lex: Mezzanine debt - Oct-18


    Normally I avoid forwarding of advertising messages, especially for expensive products that appear to be overpriced. But this may be of interest to many of you to order for your library or on your library's free interlibrary-loan service.

    November 6, 2007 message from Amy Cole []

    I enclose details of our latest US Accounting Report.

    Our Accountancy in the United States industry profile is an essential resource for top-level data and analysis covering the accountancy industry.

    It includes detailed data on market size and segmentation, plus textual and graphical analysis of the key trends and competitive landscape, leading companies and demographic information. 

    Scope: - Contains an executive summary and data on value, volume and/or segmentation - Provides textual analysis of the industry's recent performance and future prospects - Incorporates in-depth five forces competitive environment analysis and scorecards - Includes a five-year forecast of the industry - The leading companies are profiled with supporting key financial metrics - Supported by the key macroeconomic and demographic data affecting the market

    Highlights: - Detailed information is included on market size, measured by value and/or volume - Five forces scorecards provide an accessible yet in depth view of the market's competitive landscape

    Why you should buy this report: - Spot future trends and developments - Inform your business decisions - Add weight to presentations and marketing materials - Save time carrying out entry-level research

    For a complete overview of this report click on: 

    Report Index:

    CHAPTER 1 Market Overview 1.1 Market Definition 1.2 Research Highlights 1.3 Market Analysis

    CHAPTER 2 Market Value

    CHAPTER 3 Market Segmentation I

    CHAPTER 4 Market Segmentation II

    CHAPTER 5 Five Forces Analysis 5.1 Buyer Power 5.2 Supplier Power 5.3 New Entrants 5.4 Substitutes 5.5 Rivarly

    CHAPTER 6 Leading Companies 6.1 Deloitte Touche Tohmatsu 6.2 Ernst & Young International 6.3 KPMG International

    CHAPTER 7 Market Forecasts 7.1 Market Value Forecast

    CHAPTER 8 Macroeconomic Indicators

    CHAPTER 9 Appendix 9.1 Methodology 9.2 Industry Associations 9.3 Related Our Research


    Electronic : EUR 268

    Ordering - Three easy ways to place your order:

    1] Order online at 

    2] Order by fax: Print an Order form from 
    and Fax to +353 1 4100 980

    3] Order by mail: Print an Order form from 
    and post to Research and Markets Ltd. Guinness Center, Taylors Lane, Dublin 8. Ireland.

    Related report also available from Research and Markets:

    Accountancy: Global Industry Guide - 

    Thank you for your consideration.

    Best Regards,

    Amy Cole Senior Manager Research and Markets Ltd 

    Subscribe: Click on 
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  • Humor Between November 1 and November 30, 2007

    Saturday Night Live Clips from the 1980s ---

    John McCain sings Barbara Streisand ---

    Gilda Radner -- Nadia Comaneci ---

    Gilda Radner - Emily Litela: Substitute Teacher ---

    Gilda Radner - Lets Talk Dirty To The Animals ---

    A Tribute to the Incredible Gilda Radner ---

    Britney Spears singing Everytime at saturday night live ---
    I want them to play Britney Spears at my funeral. This way I won't feel so bad about being dead, and everyone there will know there is something worse than Death.
    Gary Numan

    Saturday Night Live , Lohan / Hilary Duff / Avril Lavigne ---

    Paul McCartney Saturday Night Live May 17, 1980 ---

    Stompin' Tom Connors - Sudbury Saturday Night (Live 2005) ---

    How to be a Good Wife ---

    With Pictures
    In a politically correct age, they seem like outrageous anachronisms. And there is no doubt these adverts - many taken from the first half of the last century - reveal just how much women used to be caricatured as downtrodden housewives or hair-brained office girls. Now, a new book - You Mean A Woman Can Open It?: The Woman's Place In The Classic Age Of Advertising - brings together images which would surely cause a howl of protest if they were released today.
    "The outrageously politically incorrect adverts from the time equality forgot," London Daily Mail, November 28, 2007 --- Click Here

    Accountants Like Their Figures
    November 28, 2007 message from Linda A. Kidwell []

    This is a real advertisement from The Journal of Accountancy in 1951.  I came across it looking for the earliest article on the fraud triangle.  Wow!  Have times changed!  (well maybe only the business interpretation of the ad).


    Linda Kidwell

    Bumper Stickers for the Elderly ---

    Funny Signs ---

    Computer Stupidities ---

    Forwarded by a Neighbor

    The Maid asked for a raise.
    The Madam was very upset about this and asked: "Now Maria, why do you want an increase?"
    Maria: "Well Madam, there are three reasons why I want an increase. The first is that I iron better than you."
    Madam: "Who said you iron better than me?"
    Maria: "The Master said so."
    Madam: "Oh."
    Maria: "The second reason is that I am a better cook than you."
    Madam: "Nonsense, who said you were a better cook than I?"
    Maria: "The Master did."
    Madam: "Oh."
    Maria: "My third reason is that I am a better lover than you."
    Madam (very upset now): "Did the Master say so as well?"
    Maria: "No Madam, the gardener did


    Jensen Comment
    Perhaps Maria is really Lady Chatterly ---

    Forwarded by James Don

    I don't know if you have seen these before--they have been circulating for a while. If you have not seen them I thought you might get a laugh out of them.

    These sentences are reported to have actually appeared in church bulletins or were announced in church services:

    (Summer, 2006 Release)


    The Fasting & Prayer Conference includes meals.


    The sermon this morning: 'Jesus Walks on the Water.'

    The sermon tonight: 'Searching for Jesus.'


    Ladies, don't forget the rummage sale. It's a chance to get rid of those things not worth keeping around the house.

    Bring your husbands.


    Remember in prayer the many who are sick of our community. Smile at someone who is hard to love. Say 'Hell' to someone who doesn't care much about you.


    Don't let worry kill you off - let the Church help.


    Miss Charlene Mason sang 'I will not pass this way again,' giving obvious pleasure to the congregation.


    For those of you who have children and don't know it, we have a nursery downstairs.


    Next Thursday there will be tryouts for the choir.

    They need all the help they can get.


    Irving Benson and Jessie Carter were married on October 24 in the church. So ends a friendship that began in their school days.


    A bean supper will be held on Tuesday evening in the church hall. Music will follow.


    At the evening service tonight, the sermon topic will be 'What Is Hell?'

    Come early and listen to our choir practice.


    Eight new choir robes are currently needed due to the addition of several new members and to the deterioration of some older ones.

    Scouts are saving aluminium cans, bottles and other items to be recycled. Proceeds will be used to cripple children.


    Please place your donation in the envelope along with the deceased person you want remembered.


    The church will host an evening of fine dining, super entertainment and gracious hostility.


    Potluck supper Sunday at 5:00 PM - prayer and medication to follow.


    The ladies of the Church have cast off clothing of every kind.

    They may be seen in the basement on Friday afternoon.


    This evening at 7 PM there will be a hymn singing in the park across from the Church. Bring a blanket and come prepared to sin.


    Ladies Bible Study will be held Thursday morning at 10 AM. All ladies are invited to lunch in the Fellowship Hall after the B. S. is done.


    The pastor would appreciate it if the ladies of the congregation would lend him their electric girdles for the pancake breakfast next Sunday.


    Low Self Esteem Support Group will meet Thursday at 7 PM. Please use the back door.


    The eighth-graders will be presenting Shakespeare's Hamlet in the Church basement Friday at 7 PM. The congregation is invited to attend this tragedy.


    Weight Watchers will meet at 7 PM at the First Presbyterian Church. Please use large double door at the side entrance.


    The Associate Minister unveiled the church's new tithing campaign slogan last Sunday: 'I Upped My Pledge - Up Yours.'

    Forwarded by Auntie Bev

    Once again, The Washington Post has published the winning submissions to its yearly neologisms, in which readers are asked to supply alternate meanings for common words.

    The winners are:

    1. Coffee (n.), the person upon whom one coughs.

    2. Flabbergasted (adj.), appalled over how much weight you have gained.

    3. Abdicate (v.), to give up all hope of ever having a flat stomach.

    4. Esplanade (v.), to attempt an explanation while drunk.

    5. Willy-nilly (adj.), impotent.

    6. Negligent (adj.), describes a condition in which you absentmindedly answer the door in your nightgown.

    7. Lymph (v.), to walk with a lisp.

    8. Gargoyle (n.), olive-flavored mouthwash.

    9. Flatulence (n.) emergency vehicle that picks you up after you are run over by a steamroller.

    10. Balderdash (n.), a rapidly receding hairline.

    11. Testicle (n.), a humorous question on an exam.

    12. Rectitude (n.), the formal, dignified bearing adopted by proctologists.

    13. Pokemon (n), a Rastafarian proctologist.

    14. Oyster (n.), a person who sprinkles his conversation with Yiddishisms.

    15. Frisbeetarianism (n.), The belief that, when you die, your Soul flies up onto the roof and gets stuck there.

    16. Circumvent (n.), an opening in the front of boxer shorts worn by Jewish men.

    The Washington Post's Style Invitational also asked readers to take any word from the dictionary, alter it by adding, subtracting, or changing one letter, and supply a new definition.

    Here are this year's winners:

    1. Bozone (n.): The substance surrounding stupid people that stops bright ideas from penetrating. The bozone layer, unfortunately, shows little sign of breaking down in the near future.

    2. Foreploy (v): Any misrepresentation about yourself for the purpose of getting laid.

    3. Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite period.

    4. Giraffiti (n): Vandalism spray-painted very, very high.

    5. Sarchasm (n): The gulf between the author of sarcastic wit and the person who doesn't get it.

    6. Inoculatte (v): To take coffee intravenously when you are running late.

    7. Hipatitis (n): Terminal coolness.

    8. Osteopornosis (n): A degenerate disease.

    9. Karmageddon (n): Its like, when everybody is sending off all these really bad vibes, right? And then, like, the Earth explodes and it's like, a serious bummer.

    10 Decafalon (n.): The grueling event of getting through the day consuming only things that are good for you.

    11. Glibido (v): All talk and no action.

    12. Dopeler effect (n): The tendency of stupid ideas to seem smarter when they come at you rapidly.

    13. Arachnoleptic fit (n.): The frantic dance performed just after you've accidentally walked through a spider web.

    14. Beelzebug (n.): Satan in the form of a mosquito that gets into your bedroom at three in the morning and cannot be cast out.

    15. Caterpallor (n.): The color you turn after finding half a grub in the fruit you're eating.

    And the pick of the literature:

    16. Ignoranus (n): A person who's both stupid and an a-hole.

    Forwarded by Gene and Joan


    A nice, calm and respectable lady went into the pharmacy, walked up to the pharmacist, looked straight into his eyes, and said, "I would like to buy some cyanide."

    The pharmacist asked, "Why in the world do you need cyanide?"

    The lady replied, "I need it to poison my husband."

    The pharmacist's eyes got big and he exclaimed, "Lord have mercy! I can't give you cyanide to kill your husband. That's against the law! I'll lose my license! They'll throw both of us in jail! All kinds of bad things will happen. Absolutely not! You CANNOT have any cyanide!"

    The lady reached into her purse and pulled out a picture of her husband in bed with the pharmacist's wife.

    The pharmacist looked at the picture and replied, "Well now, that's different. You didn't tell me you had a prescription."

    Forwarded by Paula

    Forget Rednecks, here is what Jeff Foxworthy has to say about folks from Texas ...

    You May Live In Texas IF:

    If someone in a Lowe's store offers you assistance and they don't work there, you may live in Texas

    If you've worn shorts and a parka at the same time, you may live in Texas .

    If you've had a lengthy telephone conversation with someone who dialed a wrong number, you may live in Texas .

    If "Vacation" means going anywhere south of Dallas for the weekend, you may live in Texas .

    If you measure distance in hours, you may live in Texas

    If you know several people who have hit a deer more than once, you may live in Texas .

    If you install security lights on your house and garage, but leave both unlocked, you may live in Texas .

    If you carry jumper cables in your car and your wife knows how to use them, you may live in Texas .

    If the speed limit on the highway is 55 mph -- you're going 80 and everybody is passing you, you may live in Texas

    If you find 60 degrees "a little chilly", you may live in Texas .

    Forwarded by Dick Haar

    Political Correctness is a doctrine, fostered by a delusional, illogical, liberal minority and rabidly promoted by an unscrupulous mainstream media, which holds forth the proposition that it is entirely possible to pick up a t _ _d by the clean end.

    Teachers' Notes in Report Cards

    Forwarded by Gene and Joan

    These are supposedly actual comments made on students' report cards by teachers   In the New York City public school system. All teachers were purportedly reprimanded. Who knows? But they're funny anyway. They might also have been comments on RateMyProfessor ---    

    01 Since my last report, your child has reached rock bottom and has started to dig.     

    02. I would not allow this student to breed.     

    03. Your child has delusions of adequacy.     

    04. Your son is depriving a village some where of an 'idiot'.      

    05. Your son sets low personal standards, and then consistently fails to achieve them.     

    06. The student has a "full six-pack" but lacks the plastic thing to hold it all together.     

    07. This child has been working with glue too much.     

    08. When your daughter's IQ reaches 50, she should sell.     

    09. The gates are down, the lights are flashing, but the train isn't coming.   

    10. If this student were any more stupid, he'd have to be watered  --- Twice a week.     

    11. It's impossible to believe the sperm that created this child, beat out 1,000,000 others .  

    12. The wheel is turning, but the hamster is definitely dead.  

    Forwarded by Moe

    Four Worms and a Lesson

    A minister decided that a visual demonstration would add emphasis to his Sunday sermon.

    Four worms were placed into four separate jars.

    The first worm was put into a container of alcohol. The second worm was put into a container of cigarette smoke. The third worm was put into a container of chocolate syrup. The fourth worm was put into a container of good clean soil.

    At the conclusion of the sermon, the Minister reported the following results:

    The first worm in alcohol - Dead.

    The second worm in cigarette smoke - Dead.

    Third worm in chocolate syrup - Dead.

    Fourth worm in good clean soil - Alive.

    So the Minister asked the congregation -

    What can you learn from this demonstration?

    Maxine was sitting in the back, quickly raised her hand and said,

    "As long as you drink, smoke and eat chocolate, you won't have worms!"

    Forwarded by Paula

    To all you dog lovers out there and those who understand the difference between Yankees and Southerners...

    A Translation Of Yankee Dogs To Southern Dawgs

    (Yankee) German Shepherd Dog
    (Southern) Poh-leece Dawg.

    (Yankee) Poodle
    (Southern) Circus Dawg.

    (Yankee) St. Bernard
    (Southern) "Thank Gawd, Here Comes The Whiskey Dawg."

    (Yankee) Doberman Pinscher
    (Southern-2 versions) Bad Dawg, or Dobimin Pinches.

    (Yankee) Beagle
    (Southern) Rabbit Dawg.

    (Yankee) Rottweiler
    (Southern) Bad Dawg AND Mean As Heck Dawg. Good dawg to guard the still.

    (Yankee) Yellow Lab
    (Southern) Ol' Yeller Dawg.

    (Yankee) Black Lab
    (Southern) Duck fetchin' Dawg.

    (Yankee) Greyhound
    (Southern) Greased Lightnin' Dawg.

    (Yankee) Malinois
    (Southern) Another kind of Poh-leece Dawg.

    (Yankee) Blue Ticks, Red Bones, etc.
    (Southern) Prize Coon Dawgs.

    (Yankee) Pekinese
    (Southern) Mop Dawg.

    (Yankee) Chinese Crested
    (Southern) Nekkid Dawg.

    (Yankee) Dachshund (
    Southern) Wienie Dawg.

    (Yankee) Siberian Husky
    (Southern) Sled-Pullin' Dawg.

    (Yankee) Bouvier, Komondor
    (Southern) "What The Heck Kinda Dawg Is That?"

    (Yankee) Great Dane, Mastiff
    (Southern) Danged BIG Dawg.

    (Yankee) Any dog that raids the hen house (Southern) Egg-Suckin' Dawg.

    (Yankee) Any lazy dog
    (Southern) Good fer nothin' Dawg.

    (Yankee) Any dog that's dead & buried & gone to Rainbow Bridge
    (Southern) Best danged Dawg I ever had.


    Forwarded by Auntie Bev

    Reporters interviewing a 104-year-old woman: 'And what do you think is the best thing about being 104?' the reporter asked. She simply replied, 'No peer pressure.'

    The nice thing about being senile is you can hide your own Easter eggs

    I've sure gotten old! I've had two bypass surgeries, a hip replacement, new knees, fought prostate cancer and diabetes. I'm half blind, can't hear anything quieter than a jet engine, take 40 different medications that make me dizzy, winded, and subject to blackouts. Have bouts with dementia. Have poor circulation; hardly feel my hands and feet anymore. Can't remember if I'm 85 or 92. Have lost all my friends. But, thank God, I still have my driver's license.

    I feel like my body has gotten totally out of shape, so I got my doctor's permission to join a fitness club and start exercising. I decided to take an aerobics class for seniors. I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, by the time I got my leotards on, the class was over.

    An elderly woman decided to prepare her will and told her preacher she had two final requests. First, she wanted to be cremated, and second, she wanted her ashes scattered over Wal-Mart.
    'Wal-Mart?' the preacher exclaimed. 'Why Wal-Mart?'
    'Then I'll be sure my daughters visit me twice a week.'


    My memory's not as sharp as it used to be. Also, my memory's not as sharp as it used to be.

    Know how to prevent sagging? Just eat till the wrinkles fill out.


    It's scary when you start making the same noises as your coffee maker.


    These days about half the stuff in my shopping cart says, 'For fast relief.'


    Remember: You don't stop laughing because you grow old, You grow old because you stop laughing.

    --- THE SENILITY PRAYER : Grant me the senility to forget the people I never liked anyway, the good fortune to run into the ones I do, and the eyesight to tell the difference.


    Celebrities Without Makeup (video) ---

    Celebrities With Two Names ---

    Maxine's Living will forwarded by Paula

    Last night my girlfriend and I were sitting in the den and I said to her, “I never want to live in a vegetative state, dependent on some machine and fluids from a bottle to keep me alive. That would be no quality of life at all. If that ever happens, just pull the plug.”

    So she got up, unplugged the computer, and threw out my wine.

    Forwarded by a neighbor

         The tribal wisdom of the Dakota Indians, passed on from generation to generation says that "When you discover that you are riding a dead horse, the best strategy is to dismount."

          However, in government, education, and in corporate America, more
    advanced strategies are often employed, such as:

          1. Buying a stronger whip.
          2. Changing riders.
          3. Appointing a committee to study the horse.
          4. Arranging to visit other countries to see how other cultures
              ride dead horses.
          5. Lowering the standards so that dead horses can be included.
          6. Reclassifying the dead horse as living-impaired.
          7. Hiring outside contractors to ride the dead horse.
          8. Harnessing several dead horses together
          9. Providing additional funding and/or training to increase dead
              horse's performance.
        10. Rewriting the expected performance requirements for all horses.

    And of course...

          Promoting the dead horse to a management position.


    And that's the way it was on November 30, 2007 with a little help from my friends.


    Fraud Updates ---


    Facts about the earth in real time --- 

    Jesse's Wonderful Music for Romantics (You have to scroll down to the titles) ---

    International Accounting News (including the U.S.) and Double Entries ---
            Upcoming international accounting conferences ---
            Thousands of journal abstracts ---
    Deloitte's International Accounting News ---
    Association of International Accountants --- 

    Wikipedia has a rather nice summary of accounting software at
    Bob Jensen’s accounting software bookmarks are at

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---


    Free Harvard Classics ---
    Free Education and Research Videos from Harvard University ---


    I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure University) --- 


    Bob Jensen's bookmarks for accounting newsletters are at 

    News Headlines for Accounting from --- 
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    Professor Robert E. Jensen (Bob)
    190 Sunset Hill Road
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    October 31, 2007

    Bob Jensen's New Bookmarks between October 1 and October 31, 2007
    Bob Jensen at Trinity University 

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    AECM (Educators) 
    AECM is an email Listserv list which provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc

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    CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.
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    This forum is for CPAs to discuss the activities of the AICPA. This can be anything  from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.
    This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.
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    Congratulations to Kathy Eddy and Gary Previts
    The American Institute of Certified Public Accountants (AICPA) this week awarded Kathy Eddy, CPA, former Chairman, and Professor Gary John Previts, CPA, PhD, former member of its governing Council and Board of Directors, the 2007 Gold Medal for Distinguished Service. The award recognizes those individuals whose influence on accounting as a whole is especially notable in comparison to other profession leaders. It is the highest award granted by the AICPA.
    Accounitng Education, October 25, 2007 ---

    Jensen Comment
    Gary Previts is a noted accounting historian and a professor of accounting at Case Western. He is the current President of the American Accounting Association ---
    My wife is grateful for the prayer books he frequently sends to her.

    Accountants talk a lot about "intangibles" and accountant inability to usefully measure intangibles of companies. Economists also talk about intangibles and economist inability build successful models incorporating intangibles and externalities that give rise to troublesome non-convexities in mathematical optimization.

    What is the World Bank's definition that gives rise to a claim that "the average American has access to over $418,000 in intangible wealth, while the stay-at-home Mexican's intangible wealth is just $34,000?"

    "The Secrets of Intangible Wealth:  For once the World Bank says something smart about the real causes of prosperity," by Ronald Bailey, Reason Magazine, October 5, 2007 ---

    A Mexican migrant to the U.S. is five times more productive than one who stays home. Why is that?

    The answer is not the obvious one: This country has more machinery or tools or natural resources. Instead, according to some remarkable but largely ignored research—by the World Bank, of all places—it is because the average American has access to over $418,000 in intangible wealth, while the stay-at-home Mexican's intangible wealth is just $34,000.

    But what is intangible wealth, and how on earth is it measured? And what does it mean for the world's people—poor and rich? That's where the story gets even more interesting.

    Two years ago the World Bank's environmental economics department set out to assess the relative contributions of various kinds of capital to economic development. Its study, "Where is the Wealth of Nations?: Measuring Capital for the 21st Century," began by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal and mineral resources), cropland, pasture land, forested areas and protected areas. Produced, or built, capital is what many of us think of when we think of capital: the sum of machinery, equipment, and structures (including infrastructure) and urban land.

    But once the value of all these are added up, the economists found something big was still missing: the vast majority of world's wealth! If one simply adds up the current value of a country's natural resources and produced, or built, capital, there's no way that can account for that country's level of income.

    The rest is the result of "intangible" factors—such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth. In fact, the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."

    Once one takes into account all of the world's natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

    What the World Bank economists have brilliantly done is quantify the intangible value of education and social institutions. According to their regression analyses, for example, the rule of law explains 57 percent of countries' intangible capital. Education accounts for 36 percent.

    The rule-of-law index was devised using several hundred individual variables measuring perceptions of governance, drawn from 25 separate data sources constructed by 18 different organizations. The latter include civil society groups (Freedom House), political and business risk-rating agencies (Economist Intelligence Unit) and think tanks (International Budget Project Open Budget Index).

    Switzerland scores 99.5 out of 100 on the rule-of-law index and the U.S. hits 91.8. By contrast, Nigeria's score is a pitiful 5.8; Burundi's 4.3; and Ethiopia's 16.4. The members of the Organization for Economic Cooperation and Development—30 wealthy developed countries—have an average score of 90, while sub-Saharan Africa's is a dismal 28.

    The natural wealth in rich countries like the U.S. is a tiny proportion of their overall wealth—typically 1 percent to 3 percent—yet they derive more value from what they have. Cropland, pastures and forests are more valuable in rich countries because they can be combined with other capital like machinery and strong property rights to produce more value. Machinery, buildings, roads and so forth account for 17% of the rich countries' total wealth.

    Overall, the average per capita wealth in the rich Organization for Economic Cooperation Development (OECD) countries is $440,000, consisting of $10,000 in natural capital, $76,000 in produced capital, and a whopping $354,000 in intangible capital. (Switzerland has the highest per capita wealth, at $648,000. The U.S. is fourth at $513,000.)

    By comparison, the World Bank study finds that total wealth for the low income countries averages $7,216 per person. That consists of $2,075 in natural capital, $1,150 in produced capital and $3,991 in intangible capital. The countries with the lowest per capita wealth are Ethiopia ($1,965), Nigeria ($2,748), and Burundi ($2,859).

    In fact, some countries are so badly run, that they actually have negative intangible capital. Through rampant corruption and failing school systems, Nigeria and the Democratic Republic of the Congo are destroying their intangible capital and ensuring that their people will be poorer in the future.

    In the U.S., according to the World Bank study, natural capital is $15,000 per person, produced capital is $80,000 and intangible capital is $418,000. And thus, considering common measure used to compare countries, its annual purchasing power parity GDP per capita is $43,800. By contrast, oil-rich Mexico's total natural capital per person is $8,500 ($6,000 due to oil), produced capital is $19,000 and intangible capita is $34,500—a total of $62,000 per person. Yet its GDP per capita is $10,700. When a Mexican, or for that matter, a South Asian or African, walks across our border, they gain immediate access to intangible capital worth $418,000 per person. Who wouldn't walk across the border in such circumstances?

    The World Bank study bolsters the deep insights of the late development economist Peter Bauer. In his brilliant 1972 book Dissent on Development, Bauer wrote: "If all conditions for development other than capital are present, capital will soon be generated locally or will be available . . . from abroad. . . . If, however, the conditions for development are not present, then aid . . . will be necessarily unproductive and therefore ineffective. Thus, if the mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, it will not occur even with aid."

    The World Bank's pathbreaking "Where is the Wealth of Nations?" convincingly demonstrates that the "mainsprings of development" are the rule of law and a good school system. The big question that its researchers don't answer is: How can the people of the developing world rid themselves of the kleptocrats who loot their countries and keep them poor

    Ronald Bailey is Reason's science correspondent. His most recent book, Liberation Biology: The Scientific and Moral Case for the Biotech Revolution, is available from Prometheus Books.

    Also see "Our Intangible Riches:  World Bank economist Kirk Hamilton on the planet's real wealth," Reason Magazine, August/September 2007 ---

    Also see

    The entire World Bank study (184 pages) can be downloaded free from

    Bob Jensen's threads on intangibles from the standpoint of accounting theory and practice are at

    Intangibles ---

    Externalities ---

    Trivia Question
    The fact that open source and free Office Software is getting closer and closer to quality of MS Office (Word, Excel, PowerPoint, etc.) software is still not really threatening Microsoft's worldwide monopoly for its relatively expensive MS Office software. What is the main intangible that gives MS Office products such value in world markets?

    Jensen's Opinion
    I think the main intangible here is the cost of retraining over 90% of the computer users of the world. Related to this is the difficulty students and "white-collar workers" will encounter if they do not know how to use MS Office software when seeking employment. Whereas most of drivers can drive rental cars of most any manufacturer,  computer users who cannot "drive" Excel, Word, PowerPoint, etc. face tremendous barriers that give rise to the main intangible asset of Microsoft Corporation. Organizations spent billions in training that gave rise to billions in intangible assets of Microsoft. What's interesting is the fact that Microsoft's main intangible asset came from the dollars spent by customers rather than Microsoft itself.

    From SmartPros on October 29, 2007

    In his inaugural speech, Randy Fletchall, a partner with Ernst & Young LLP, spoke of the responsibilities of the CPA profession and its contributions to society. He addressed the need to recruit more diverse individuals and young people into the profession and, just as important, encourage them to stay once they have entered it.
    Full story and link to speech ---

    Bob Jensen's threads on CPA professionalism are at

    From The Wall Street Journal Accounting Weekly Review on October 26, 2007

    Inside Wal-Mart's Bid to Slash State Taxes
    The Wall Street Journal
    by Jesse Drucker
    Oct 23, 2007
    Page: A1

    Click here to view the full article on ---

    TOPICS: Tax Avoidance, Tax Evasion, Tax Laws, Tax Planning, Tax Shelters, Taxation

    SUMMARY: Wal-Mart's effective state tax rate is approximately half the average state tax rate on corporate income according to information presented in a graph associated with this article. "Big companies hardly ever discuss how outside accountants, lawyers and investment bankers help them cut their tax bills. But Ernst & Young's contributions to Wal-Mart's state-tax minimization project are outlined in a raft of documents filed in recent months in North Carolina state court. The material, which includes company emails and memos, provides a rare window into accountants' role in generating tax-reduction ideas at one major company. In court papers, Wal-Mart has said that some transactions implemented by Ernst & Young were intended to cut taxes, but also to more efficiently manage its real estate and potentially help raise capital. The case in North Carolina state court stems from an arrangement involving establishing a real-estate investment trust and transferring real estate assets to that entity. The REIT is not taxed as long as 90% of its income is paid out to shareholders, in this case, Wal-Mart itself. Wal-Mart then deducted the rental payments for the real estate, and the result is avoidance of tax on a significant portion of income.

    CLASSROOM APPLICATION: Courses in taxation may use the article to add coverage of state tax issues with great detail provided in the article. Auditing courses may use the article to discuss business risk implications from two different units of a public accounting firm and to discuss changes in the types of services that may be provided by a public accounting firm to an audit client.

    1.) From what documents did the author of this article base his report? Why were those documents filed in North Carolina state courts?

    2.) The real-estate investment trust strategy described in the summary to this review and in the article is being challenged by North Carolina and other states as an abusive tax shelter. What is the basis for that characterization? In your answer, comment on the notion of a "business purpose test."

    3.) What is an "engagement letter"? How might the scope of the work described in this letter impact the business purpose test described above?

    4.) The author writes that "compared with many other large multinational companies, Wal-Mart has a small presence in foreign countries with low tax rates, reducing opportunities to shift income overseas for tax purposes." How do companies "shift income" among operations in different locations?

    5.) Ernst & Young served as both Wal-Mart's auditors and its advisor on the tax issues described in this article. How does this arrangement impact an auditor's work?

    6.) Suppose you are a partner with E&Y in audit and assurance services. What are your concerns about statements made in documents submitted to Wal-Mart such as the one which is quoted in the article that "this is a very aggressive strategy with considerable risk."

    7.) What are "cookie-cutter tax shelters [that were] mass marketed by accounting and law firms"? How do these plans differ from "individually-tailored tax-cutting strategies"?

    Reviewed By: Judy Beckman, University of Rhode Island


    From The Wall Street Journal Accounting Weekly Review on October 26, 2007

    American Express Sets Aside More for Losses
    The Wall Street Journal
    by Lingling Wei
    Oct 23, 2007
    Page: A2
    Click here to view the full article on ---

    TOPICS: Accounting, Allowance For Doubtful Accounts, Bad Debts

    SUMMARY: American Express and other card-issuing firms have increased loan loss reserves in the third quarter ended 9/30/2007 as they have seen increases in write-off and delinquency rates. American Express Company's third-quarter profit increased 10% over third-quarter 2006 results after increasing provisions for loan losses on its U.S. card business by 44% in that same time period. Analysts are downgrading their views on the stocks of card-issuing companies both because of potentially deteriorating credit and expected reduction in use of charge and credit cards due to reduced consumer spending.

    CLASSROOM APPLICATION: This is an excellent article to frame discussion of allowances for uncollectible accounts.

    1.) Summarize the accounting for estimated uncollectible accounts. In your answer, define the terms used for account titles as well as the terms "provisions" and "reserves" used in the article.

    2.) American Express indicated that factors which contributed to the 44% increase in bad debt expense included increasing write-off and delinquency rates. Specifically explain how these two items impact the determination of the allowance for doubtful accounts and bad debt expense. In your answer, also define the phrase "aging of accounts receivable."

    3.) "Although American Express historically has been best known for its charge cards...the company has seen strong growth in its credit-card portfolio..." How does this change in business strategy affect the estimate for uncollectible accounts?

    4.) Consider again American Express's changed business strategy. How does that strategy impact analysts' views of its business, for example, the view expressed by Lehman Brothers analyst Bruce Harting?

    Reviewed By: Judy Beckman, University of Rhode Island


    Lynn Brewer versus Sherron Watkins Whistleblowers at Enron

    October 14, 2007 message from


    There was a terrific story in Friday's edition of USA that unmasks a phony whistle blower at Enron who has established an "ethics institute." Sorry I'm out of town and don't have the link but I'm sure you can find it easily. Cynthia Cooper, who was a real hero in uncovering the WorldCom fraud, is coming out with a book in early December that is a grat read.


    October 15. 2007 reply from Bob Jensen

    Thanks Denny.

    Lynn Brewer was never enough of a player to even mention in my threads on the Enron scandal ---

    I’m glad Brewer and her book are being discredited ---
    Fortunately she was not a fourth woman on the cover of Time Magazine in 2002 (see below)
    Here's what USA Today did to Lynn Brewer:
              Halloween Hangman (interactive video, hit the buttons)  ---

    I hope Lynn Brewer is added to Jude Werra's "Liars Index" (See Below for “Executives Making It by Faking It”)
    But then again Lynn Brewer even lied about being an executive at Enron

     I’m sure you know that Sherron Watkins was an executive VP whistleblower at Enron who had more dirty words in her vocabulary than a rap star. The failure of Arthur Andersen’s top brass to act on her disclosures about Fastow’s SPE frauds became a huge embarrassment all the way to the top of Andersen.

    "Time Names Whistle-Blowers as Persons of the Year 2002", Reuters, December 22, 2002 --- 

    Time Magazine named a trio of women whistle-blowers as its Persons of the Year on Sunday, praising their roles in unearthing malfeasance that eroded public confidence in their institutions.

    Two of the women, Sherron Watkins, a vice president at Enron Corp., and Cynthia Cooper of WorldCom Inc., uncovered massive accounting fraud at their respective companies, which both went bankrupt.

    The third, Coleen Rowley, is an agent for the Federal Bureau of Investigation. In May, she wrote a scathing 13-page memo to FBI Director Robert Muller detailing how supervisors at a Minneapolis, Minnesota field office brushed aside her requests to investigate Zacarias Moussaoui, the so-called "20th hijacker" in the Sept. 11th attacks, weeks before the attacks occurred.

    "It came down to did we want to recognize a phenomenon that helped correct some of the problems we've had over the last year and celebrate three ordinary people that did extraordinary things," said Time managing editor Jim Kelly.

    Other people considered by the magazine, which hits stores on Monday, included President Bush, al Qaeda leader Osama bin Laden, Vice President Dick Cheney and New York attorney general Eliot Spitzer.

    Bush was seen by some as the front-runner, especially after he led his party to a mid-term electoral upset in November that cemented the party's majority in Congress.

    However, Kelly said "some of (Bush's) own goals: the capture of Osama bin Laden, the unseating of Saddam Hussein, the revival of a sluggish economy, haven't happened yet. There was a sense of bigger things to come, and it might be wise to see how things played out," he added.

    Watkins, 43, is a former accountant best known for a blunt, prescient 7-page memo to Enron chairman Kenneth Lay in 2001 that uncovered questionable accounting and warned that the company could "implode in a wave of accounting scandals."

    Her letter came to light during a post-mortem inquiry conducted by Congress after the company declared bankruptcy.

    Cooper undertook a one-woman crusade inside telecommunications behemoth WorldCom, when she discovered that the company had disguised $3.8 billion in losses through improper accounting.

    When the scandal came to light in June after the company declared bankruptcy, jittery investors laid siege to global stock markets.

    FBI agent and lawyer Rowley's secret memo was leaked to the press in May. Weeks before Sept. 11, Rowley suspected Moussaoui might have ties to radical activities and bin Laden, and she asked supervisors for clearance to search his computer.

    Her letter sharply criticized the agency's hidebound culture and its decision-makers, and gave rise to new inquiries over the intelligence-gathering failures of Sept. 11.

    Bob Jensen's threads on the Enron and Worldcom scandals are at --- 

    Bob Jensen's threads on whistle blowing are at

    Woman Stole $2.89 Million, Bought Clothes, Shoes, Jewelry Former CFO Stole Money Over Eight Years
    A Greenville County woman is going to prison after pleading guilty to stealing millions from her employer to finance her shopping addiction. Brenda Rivard pleaded guilty to eight counts of breach of trust and two counts of credit card fraud. The crimes took place between January 1998 and December 2005 when Rivard was CFO of Lube USA. Rivard stole the money by transferring more funds than necessary into the payroll account. She would then spend the excess money by writing herself checks from the payroll account. She also spent about $180,000 using the corporate American Express card on personal items, most notably purchased from Nieman Marcus. Lube USA is a privately-owned company headquartered in Japan that was formed in 1987. The company makes lubricating equipment for the manufacturing industry. The Greenville company is a distributor of the company. Prosecutor Sylvia Harrison said, "She then falsified the bank statements that were sent back to Japan. They had no idea that she was taking this money." . . . To recoup their losses, Lube USA found liquidators to buy the clothing, jewelry, purses and shoes. Rivard was also able to return one piece of jewelry for a refund, and she paid some restitution by taking a second mortgage on her home.
    WYFF Greenville, October 31, 2007 ---

    Bob Jensen's fraud updates are at

    "Ex-CPA convicted of not paying taxes," by Bill Rankin The Atlanta Journal-Constitution , October 31, 2007 ---

    Sherry Peel Jackson, a former IRS revenue agent and certified public accountant, told a federal jury Tuesday she was sure she did not have to file income tax returns.

    But after less than 30 minutes of deliberations, the jury convicted Jackson of failing to file income tax returns from 2000 through 2004. The Stone Mountain woman faces a maximum of four years in prison. She will be sentenced early next year.

    Jackson, 45, did not fit the typical profile of a criminal defendant. She worked as a revenue agent from 1988 to 1995 and then as an accountant.

    But in July 2000, Jackson testified, she began to question whether she had to pay income taxes. By the following year, she decided she was not going to file a tax return.

    Sitting at the witness stand, with large books of federal regulations and the tax code in front of her, Jackson said she could not find any section of the tax code that held her liable for income taxes.

    "I'd done a lot of research and I was just about sure," she testified. "I did not have to file an income tax return."

    During cross-examination, assistant U.S. Attorney Richard Langway read Section 1 of the tax code to Jackson, who is married. A tax is imposed on "every married individual," Langway read, asking Jackson how she could not be an individual.

    "I couldn't find the definition of 'individual,' " Jackson replied.

    Lowell H. Becraft Jr., one of Jackson's attorneys, told jurors they should not convict her of willfully disobeying the law because Jackson had a "good faith" reason to believe she did not have to file taxes. He reminded the jury Jackson attended Tuskegee University in Alabama and the University of Georgia, raised a family and lived the life of an ordinary American.

    "You may have never heard of this before," Becraft said. "To you, it may sound wild. It may sound crazy. ... But she believes she's not required to file tax returns."

    Langway called Jackson's reasoning "cockamamie" and "absurd."

    "She's an 'individual' —- she knows that," Langway said. "You should disbelieve everything she said."

    Bob Jensen's fraud updates are at

    Are accounting education curricula meeting the information technology preferences of large firms that employ the largest proportion of top gradating students, most of whom are in college for five years because of the 150-credit requirement to sit for the CPA examination?

    Ed Scribner forwarded the following reference:
    "Technology generation upgrades: Are educators and employers on the same page?" AccountingWeb, October 16, 2007 --- Click Here
    The article is a reprint of a paper published in the Pennsylvania CPA Journal by Susan C. Borkowski, Rose Marie L. Bukics, and Jeannie Welsh 

    Jensen Comment
    The general conclusion is that educators and employers are not on the same page, especially AIS instructors. Employers generally seek higher level knowledge of ERP systems, large database systems such as Oracle, and systems control issues. Instructors tend to teach from traditional textbooks that are out of date and provide little input for competency in the higher level knowledge areas.
    For example, read about ERP systems at
    Read about database systems at

    The paper does not delve into reasons and excuses for this incongruence between expected and provided AIS/IT skills of graduating accounting majors. For example, serious teaching of ERP requires instructors who have hands on experience with ERP systems. Finding instructors with such skills is about are probable as winning a Megabucks lottery. In fact finding instructors with AIS skills in general is very difficult. Most are teaching AIS after bootstrapping themselves with some lower-level textbooks and playing around with Quickbooks, Great Plains, Peachtree, or some other relatively easy to use accounting software.

    Many AIS courses end up wanting or having to contain MS Excel and MS Access because the curriculum did not provide sufficient content in prerequisite MIS courses for AIS courses. The general conclusion of the article is as follows:

    We all recognize that IT continues to grow in its use and applications, and is constantly changing. This presents a continual challenge for educators to deliver the very best students, with the very best skill sets, to the marketplace. To solve this conundrum, accounting firms and educators need to maintain close and frequent consultation to make sure everyone is on the same page with respect to providing the right exposure to the right technology.

    I don't think the problem is so much knowing what employers want as it is in finding and affording instructors who can deliver the courses that employers wish we had in colleges.

    There are a few, very few, programs that dogood jobs with such things as ERP and database systems. I have a badly out of date page on this at
    Especially note the email messages at the bottom of the document.

    October 23, 2007 reply from Ed Scribner [escribne@NMSU.EDU]


    Despite prominent mention of IT controls, ERP, and several other things in the article, the authors stress advanced Excel skills above all, saying that “all the practitioners we interviewed” said if new hires came in knowing Excel, they could “hit the ground running” and focus on learning firm-specific technology.

    Although I have a hard time viewing Excel as an accounting system, the AIS course always seems to take the heat for any perceived shortage of Excel coverage (or any other computer-related skill such as the use of audit software). Not surprisingly, the only syllabi the authors examine are AIS syllabi. (In fairness, they did ask an open-ended question on where in the curriculum students acquire Excel expertise). I don’t think the one AIS course that most schools offer to undergraduates should be depended on “for all that computer stuff.”

    Ed Scribner
    New Mexico State University
    Las Cruces, NM, USA

    October 23, 2007 reply from JP Morgan [brian.a.mahoney@JPMCHASE.COM]

    As a "consumer" of accounting students, advanced EXCEL skills are a prerequisite for a graduate hoping to land a job in our department. If a graduate had advanced ACCESS skills under her/his belt, they could write their own ticket in any tax department that must handle a large volume of data. Further, they would be gold to accounting and consulting firms.

    By the way, here is a brain teaser for graduate tax students who want to develop their ACCESS and/or EXCEL skills. Have them develop a system for doing the tax accounting for equity straddles. Include a mix of qualified and non-qualified covered call options.



    Brian A. Mahoney, CPA, MST, MATh
    Vice President J.P. Morgan Worldwide Securities Services
    73 Tremont Street - Floor 8 Boston, MA 02108
    Phone#:617-557-8602 Fax#:617-607-9190

    October 23, 2007 reply from Dan Stone, Univ. of Kentucky [dstone@UKY.EDU]

    Interesting thread on the content of AIS courses. I just finished prepping and delivering a CPA review course module related to Information Technology (IT). This content is now ~ 25% of the "Business Environment & Concepts" section of the CPA exam.

    Much of the IT content of the CPA exam is based in 1980ish technology (some examples: detailed questions on batch processing methods, indexed sequential access storage methods). Very little of this content relates to ERP and database systems. It is an interesting exercise to contrast the IT CPA exam content with the AICPA's annual top 10 technology issues list. There is, in my reading, essentially no overlap here. Emerging and current IT practice issues in professional accounting seem quite distant from the CPA exam content.

    Perhaps one reason for this outdated IT content on the CPA exam is that CPA exam questions are created and submitted by volunteers. It seems unlikely that volunteers would be at the cutting edge of IT issues in accounting.

    So perhaps the "retro" IT CPA exam content is another reason why IT in AIS courses lags current needs and technologies? And perhaps the current process of generating CPA exam questions (by volunteers) doesn't partially explain the "retro" IT content on the CPA exam?


    Dan Stone Univ. of Kentucky

    October 23, 2007 reply from Glen L Gray [glen.gray@CSUN.EDU]

    There are two semi-related points here:

    (1) Excel. If you surveyed real world accountant in any discipline (audit, tax, bookkeeping, etc.) if they use Excel as part of their job, something close to 100% would say yes. That would lead me to conclude the last place to teach Excel is in an AIS class. Instead, Excel should be embedded in the financial accounting, managerial accounting, tax, and audit classes.

    (2) ERP and other advanced IS topics. Sometimes students are smarter than we think--at least when it comes to understanding the market. If I (a professor type) stand in front of accounting students and say you guys should really know an ERP package, IT controls, a CAATs program, and how to write an SQL query or at least an Access query; and then they go a meet-the-firms night and talk to practitioners and the students asks if it is important to have those skills; I predict 8 out of 10 partners will say something like "Oh, we have have a separate group that does that stuff. You might want to ask them." That statement carries much more weight than my speech with the students.

    I've had this discussion many times with Big 4 partners who have an interest in IT. They tell me we should teach more heavy duty IT stuff. I say that is not the message my students hear from your recruiters. The partner then shrugs his shoulders and says I know.

    Glen L. Gray, PhD, CPA
    Accounting & Information Systems,
    COBAE California State University,
    Northridge Northridge, CA 91330-8372
    818.677.2461 (messages)

    October 24, 2007 reply from Randy Kuhn [jkuhn@BUS.UCF.EDU]

    As a “practitioner” for 10 years, I managed an SAP configuration group for a $3 billion division of Siemens that consisted entirely of accounting and finance majors. Not a single one of us walked in the door with any experience with an ERP package straight out of college. As a manager, I could only dream of such a case and how quickly a student could be brought up to speed to our particular uses if he/she had even only been exposed to some of the core principles of ERPs.

    While a manager in Big Four public accounting I was in that “other” group that dealt with IT issues. Unfortunately, Glen’s experience with on campus recruiting tends to be the norm. There are so few IT audit managers in the marketplace that they rarely can visit campus. Their busy season auditing internal controls and IT systems starts in the early third quarter when the audit and tax folks are on campus recruiting so rarely is there anyone with an IT slant talking to students. Personally, I believe the issue at hand is the fact that the mainstream groups, particularly financial auditors, resist learning anything about technology and then turn around and complain there are not enough folks in the firm that know IT to perform an adequate audit. A base level of IT knowledge should be incorporated into the toolset of financial auditors, starting with the AIS course in college. They are the ones that ultimately make the decision (with advice from IT auditors) whether an IT weakness is material or not and must be reported to the world. Frankly, they cannot just audit around the “black box” anymore. Due to a severe lack of IT audit staff, I frequently used staff from financial audit and tax on my audit support engagements. As they were familiar with basic segregation of duties, I would teach them a little about security access in the accounting system and have them audit access rights. Then I would slip in some basic business process IT controls like three-way matching configuration. That freed up my IT audit staff (usually meaning me) to focus on more technical areas like firewall configuration. All in all, I do feel confident this generation of students feels much more at ease with technology and are more than willing to be learn and use basic IT skills.

    Finally, I have to agree with Glen about Excel. The AIS course should not be a “get to know Excel” exercise. Every aspect of accounting in practice uses Excel and the skill should be incorporated into the core curriculum allowing AIS to focus on broader IT issues. You really cannot be an effective accountant without knowledge of Excel, particularly when every other person in the department is using the software.

    -Randy Kuhn, CPA, CISA, MBA, PhD (one day in the future)

    October 25, 2007 reply from Barbara Scofield [scofield@GSM.UDALLAS.EDU]

    I have a colleague who told me she submitted CPA questions on IT and she was required to provide a tie for each question and answer to a current textbook. The point was that by requiring a textbook presence of the topic, the content was reasonable to expect students to know. So, textbooks will continue to provide outdated content because it is on the CPA exam and the CPA exam will continue to test outdated content because it is in the textbook.

    Hopefully someone will respond with first hand information.

    Barbara W. Scofield, PhD, CPA
    Director, Financial Accounting Concentration and Associate Professor of Accounting
    College of Business
    University of Dallas
    1845 E. Northgate Ave.
    Irving, TX 75062
    972-721-5034 (office)
    817-275-7730 (home)
    972-721-4007 (fax) 

    October 25, 2007 reply from Mackey, James [mackey@CSUS.EDU]

    Hi Barbara:

    You are right on. We are in a death spiral. The textbook authors respond to the professional examination and now the professional examination responds to the textbook authors. What a mess!

    jim mackey

    Microsoft Corporation Financial Performance Pivot Tables

    November 1, 2007 message from Eileen Taylor [eileen_taylor@NCSU.EDU]

    I'm looking for class materials that teach Excel 2007.

    I usually go through an Excel tutorial in class that covers a variety of topics including: Pivot tables, VLOOKUP, forms, sorting, filtering, etc.

    Given the change to Excel 2007, I thought it would be a good time to update my tutorial. Does anyone have an Excel 2007-compatible tutorial that they wouldn't mind sharing? Alternatively, perhaps someone has an online resource.

    Thanks, Eileen

    Eileen Z. Taylor, PhD
    Assistant Professor,
    Department of Accounting
    North Carolina State University
    Campus Box 8113, Nelson Hall
    Raleigh, NC 27695-8113

    November 1, 2007 reply from Bob Jensen

    Hi Eileen,

    I don't have Excel 2007 installed on my computer.

    However, your students might gain from the video tutorials listed in the following site:

    They might also benefit from the Microsoft Pivot Tables for both the entire history of financial performance of Microsoft Corporation (since its inception to its 2007 annual report) and the "What if" Microsoft pro forma interactive pivot tables that can be downloaded from the following site:

    You might also note the Financial Analysis PowerPoint file at the following site:

    I'm looking forward to the completion of your listserv project with Uday.

    Bob Jensen

    Spreadsheet mistakes News Stories ---
    Public reports of spreadsheet errors collated by the European Spreadsheet Risks Interest Group (EuSpRIG). The stories are added as discovered and so are not in chronological order. We try to list only verified stories with a quantified error or documented impact. At the bottom of the page are some miscellaneous news items. And of course we cannot list the unpublished reports!

    October 25, 2007 message from Roger Debreceny [Roger@DEBRECENY.COM]

    My colleague, Ray Panko, is one of the leading researchers in the area of spreadsheet risk and errors. His pages at  are a very useful resource on this area. Check out his recent working paper and the earlier paper that was published in the Communications of the AIS.

    The PwC white paper on spreadsheet risks, published in 2004 (based in part on Ray's research, btw) has become an unofficial bible in the IT assurance community. Many IT auditors use this to guide their audit plans.

    For larger corporations, there would be tens of thousands of spreadsheets involved in some aspect of the close considering branches, divisions and the like. A standard audit might look at some tiny proportion of those spreadsheets -- of course, this is all subject to materiality and only a handful of those spreadsheets could give rise to material misstatements. But we know that error rates in spreadsheets are very high -- when I was a regional controller with 20 something subsidiaries and doing the close with Lotus 123 Release 1A (yes, I know -- that was in the last millenium) I had built such complex formulae and macros, I very much doubt I could have audited my own spreadsheets let alone have an external auditor audit the suite of spreadsheets.

    In the intervening 20 years, things have got better in some respects and worse in others .. there are now tools to allow auditing of spreadsheets and monitoring of network drives for spreadsheets (I'll come back to this in a moment). But with more and more analysts and accountants within firms that can and do write in VBA and with much enhanced spreadsheet functionality, the complexity of spreadsheets has become increasingly risky, from a control perspective. I wonder just how many mark to model and mark to market calculations are done in spreadsheets?

    Getting control over spreadsheets is just like any risk analysis and control problem in the IT world .. we first need to know the extent of the problem.

    When IT auditors work on this, they will first scan all the hard disks in the firm (SCANXLS is one such tool) -- the answers are usually astounding.

    Then triage the problem. Replace the highest risk spreadsheets (say 10%) with applications running under proper change management control. For the next band (say another 10%), risk assess and quality control the individual spreadsheet -- perhaps moving the spreadsheet under proper change managemetn control although this is exceedingly difficult in an end-user environment.

    And for the balance, hope that there are not too many egregious errors. Of course, this has to be supplemented by proper policies and procedures that govern the use of spreadsheets in critical areas.

    A useful document that touches on this is the ITGI's Control Objectives for SOX -- but we are certainly short of good guidance in this area.

    Roger D



    Lessons Not Learned from Enron
    Bad SPE Accounting Rules are Still Dogging Us

    From The Wall Street Journal Accounting Weekly Review on October 19, 2007

    Call to Brave for $100 Billion Rescue
    by David Reilly
    The Wall Street Journal

    Oct 16, 2007
    Page: C1
    Click here to view the full article on

    TOPICS: Advanced Financial Accounting, Securitization

    SUMMARY: This article addresses a proposed bailout plan for $100 billion of commercial paper to maintain liquidity in credit markets that have faced turmoil since July 2007, and the fact that this bailout "...raises two crucial questions: Why didn't investors see the problems coming? And how could they have happened in the first place?" The author emphasizes that post-Enron accounting rules "...were supposed to prevent companies from burying risks in off-balance sheet vehicles." He argues that the new rules still allow for some off-balance sheet entities and that "...the new rules in some ways made it even harder for investors to figure out what was going on."

    CLASSROOM APPLICATION: The bailout plan is a response to risks and losses associated with special purpose entities (SPEs) that qualified for non-consolidation under Statement of Financial Accounting Standards 140, Accounting for Transfers and Servicing of financial Assets and Extinguishments of Liabilities, and Financial Interpretation (FIN) 46(R), Consolidation of Variable Interest Entities.

    1.) Summarize the plan to guarantee liquidity in commercial paper markets as described in the related article. In your answer, define the term structured investment vehicles (SIVs).

    2.) The author writes that SIVs "...don't get recorded on banks books...." What does this mean? Present your answer in terms of treatment of qualifying special purpose entities (SPEs) under Statement of Financial Accounting Standards 140, Accounting for Transfers and Servicing Financial Assets and Extinguishments of Liabilities.

    3.) The author argues that current accounting standards make it difficult for investors to figure out what was going on in markets that now need bailing out. Explain this argument. In your answer, comment on the quotations from Citigroup's financial statements as provided in the article.

    4.) How might reliance on "principles-based" versus "rules-based" accounting standards contribute to solving the reporting dilemmas described in this article?

    5.) How might the use of more "principles-based standards" potentially add more "fuel to the fire" of problems associated with these special purpose entities?

    Reviewed By: Judy Beckman, University of Rhode Island

    Call to Brave to $100 Billion Rescue: Banks Seek Investors for Fund to Shore Up Commercial Paper
    by Carrick Mollenkamp, Deborah Solomon and Craig Karmin
    The Wall Street Journal
    Oct 16, 2007
    Page: C1

    Plan to Save Banks Depends on Cooperation of Investors
    by David Reilly
    The Wall Street Journal
    Oct 15, 2007
    Page: C1

    Bob Jensen's threads on SPE scandals and the subsequent FASB Interpretation 46(R) can be found at

    Bob Jensen's threads on accounting theory are at

    How are auditors dealing with fair market value accounting and credit market issues?

    From The Wall Street Journal Accounting Weekly Review on October 19, 2007

    With New, United Voice, Auditors Stand Ground on How to Treat Crunch
    by David Reilly
    The Wall Street Journal

    Oct 17, 2007
    Page: C1
    Click here to view the full article on

    TOPICS: Audit Quality, Auditing, Auditing Services, Auditor Independence, Auditor/Client Disagreements, Banking, Fair Value Accounting

    SUMMARY: The article discusses three papers issued by the Center for Audit Quality on the recent issues in credit markets. The topics included the use of market prices for hard-to-trade securities and issues of banks' exposure to losses in off-balance-sheet entities. Organization of the Center for Audit Quality is discussed, along with reaction to the purpose of this entity from Lynn Turner, former Chief Accountant at the SEC, and an academic researcher at the University of Tennessee, Joseph Carcello.

    CLASSROOM APPLICATION: The article may be used to discuss the current credit market issues in an auditing class as well as a financial reporting class.

    1.) Based on discussions in the article and on information at its web site (see discuss the purpose and organization of the Center for Audit Quality.

    2.) What is self-regulation of the auditing profession? When did auditors lose the ability to self-regulate?

    3.) Some reactions described in this article are positive about the role that is being played by the Center for Audit Quality, while others are negative. Which view do you hold? Support your position.

    4.) Summarize concerns with the complexity of financial reporting guidance in the U.S. How might the work from the Center for Audit Quality contribute to that complexity? How might its work alleviate the issue of complexity in reporting standards?

    Reviewed By: Judy Beckman, University of Rhode Island

    Auditors to Street: Use Market Price
    by David Reilly and Randall Smith
    The Wall Street Journal
    Sep 18, 2007
    Page: C2

    Bob Jensen's threads on fair value accounting are at

    Also see

    "Executives: Making It by Faking It:  Wisconsin headhunter Jude Werra's "Liars Index" of faked résumé claims hit a five-year high in the first half of 2007," Business Week, by Joseph Daniel McCool, Business Week, October 4, 2007 --- Click Here 

    . . . Jude Werra. The president of Brookfield (Wis.)-based Jude M. Werra & Associates has spent the better part of 25 years documenting executive résumé fraud, credentials inflation, and the misrepresentation of executive educational credentials. It's something that has kept Werra pretty busy over the years, given the prevalence of such management-level chicanery and the fact that so many ambitious and transition-minded individuals have convinced themselves that it's their credentials—real or otherwise—that matter most.

    Stopping at Nothing to Get to the Top Werra's semiannual barometer of executive résumé deception—his very own "Liars Index"—hit a five-year high, based on his review of résumés he received during the first half of 2007. He figures that about 16% of executive résumés contain false academic claims and/or material omissions relating to educational experience. That was up five percentage points from the levels he witnessed between July and December of last year.

    And when you account for the fudging of claims of experience unrelated to academic degrees earned, it's easy to see why executive headhunters generally acknowledge that as many as one-third of management-level résumés contain errors, exaggerations, material omissions, and/or blatant falsehoods.

    Some people will stop at almost nothing to get to where they want in their career. Still, Werra wonders why otherwise experienced executives would inflate their credentials or otherwise mislead with their résumé, in light of the potential career-ending consequences.

    Checking References Isn't Enough Given the alarming levels to which they do attempt to mislead, he constantly reminds hiring organizations that it's critical that they verify what they read on résumés, even at the executive level. What's even more alarming—and more prevalent than people falsifying their backgrounds and qualifications—is the number of hiring organizations who fail to conduct a rigorous background check on their new management recruits. Far too many organizations figure that checking a few references is enough.

    And even the most thorough reference checks won't uncover false claims that predate those references' own professional interactions with the individual executive. It's quite possible that a fabrication of one's education, certifications, and experience is what got the executive his first management job many years ago, leaving the trail cold unless it's reopened during the course of a diligent background check.

    When it comes to executive-level hiring that's going to cost the organization into the high six figures, at minimum, when you factor in headhunting fees, the new executive's salary, and benefits, it becomes a matter of caveat emptor.

    Let the Hiring Company Beware And while it may be tempting to believe that an executive recruiter will uncover any issues during the courtship process, it's ultimately up to the hiring organization to know exactly who it is that's being hired. Sure, misrepresentation will cost the unscrupulous executive, but it can also wreak havoc on a company's brand, workforce, and external relations teams.

    Beyond the boundaries of checking claims made by an individual on his or her résumé, the hiring organization can trust that engaging the services of a professional background-screening consultant will pay off. These consultants often come with significant experience in law enforcement, and they can help uncover such things as criminal convictions, unpaid child support, and other hidden issues that should influence the hiring decision.

    A thorough background check is an important insurance policy for the recruiting process, and headhunters will tell you that your organization risks getting burned if an executive it hires has, at any time in his or her past, decided to assume the risks of playing with fire.

    Given the high cost of a bad executive hire, today's organizations simply can't afford not to do their homework.

    An example of how to front load income under GAAP
    Mr. Wallison is correct about their motivations: "holding mortgages is profitable -- much more so than creating pools of mortgages and selling . . . to investors." However, much of that reported profit is illusory. Generally accepted accounting principles (GAAP) do a poor job of reflecting economic reality in this case. While they do have a funding cost advantage, most of their reported profit is simply "phantom income," that is, front-loaded income. By funding mortgages with a mix of short-term bullet bonds and longer-term callable bonds, GAAP front-loads income. There is fixed coupon income from the mortgages over 30 years, but the cost of funding rises over time as the shorter-term, lower-cost debt matures.
    Jerry Hartzog, "Fannie and Freddie's 'Phantom Income'," The Wall Street Journal, October 6, 2007; Page A19 ---

    Bob Jensen's threads on accounting revenue reporting issues are at

    A Double Standard:  Companies are still playing games with executive stock option expense reporting
    Sen. Carl Levin, D.-Mich., introduced legislation Friday to bar companies from reporting tax deductions for stock option expenses to the Internal Revenue Service that far exceed what they disclose to shareholders as expenses. A Senate investigation this summer found that U.S. public companies between December 2004 and June 2005 legally avoided billions of dollars in taxes by claiming $43 billion more in tax deductions for options awards than the compensation for options recorded on their books. His bill would require the corporate tax deduction for stock option compensation equal stock option expenses reported to the Securities and Exchange Commission.
    "Senator Aims to Cut Option Deductions," SmartPros, October 1, 2007 ---

    "Toll of the stock options scandal heavy in 2006:  More prosecutions are expected to be brought next year," by Marcy Gordon, SeattlePi, December 27, 2006 ---

    Eighteen chief executives swept out. More than 100 public companies under federal investigation and more than $5 billion in profits erased by restatements. Indictments so far: five former top executives at two companies, Brocade Communications Systems Inc. and Comverse Technology Inc. The toll of the stock options timing affair -- corporate America's scandal of the year -- has been heavy. Federal officials say more prosecutions will be brought in 2007 over manipulation of the timing of stock option grants to enrich top company executives.

    The toll of the stock options timing affair -- corporate America's scandal of the year -- has been heavy. Federal officials say more prosecutions will be brought in 2007 over manipulation of the timing of stock option grants to enrich top company executives.

    Nearly every business day, more companies report federal or internal investigations. New lawsuits by shareholders are filed. More businesses disclose that because past option grants may have distorted their financial results, they may have to restate earnings.

    Next year could well bring more restatements, and companies' stock could be stripped from public trading because reviews of options grants made them late in filing their quarterly financial reports.

    The Justice Department will "continue to be engaged for perhaps years to come, as we work these cases out," U.S. Attorney Kevin Ryan, who heads a task force in Northern California pursuing options timing cases, said recently at a gathering of attorneys. "The final chapter hasn't been written yet."

    Many of the companies ensnared in the scandal are in Silicon Valley's high-tech industry, where stock options for employees created legions of millionaires in the dot-com era.

    The prized perks allow executives and employees to buy shares of their company's stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price -- and pocket the difference.

    Among the wide swath of companies caught up in internal or government investigations: Apple Computer Inc., Barnes & Noble Inc., Caremark Rx Inc., Issaquah-based Costco Wholesale Corp., Seattle-based F5 Networks, Gap Inc., The Home Depot Inc., McAfee Inc., Monster Worldwide Inc., Restoration Hardware Inc., Staples Inc. and UnitedHealth Group Inc.

    Some prominent executives at blue-chip companies have lost their jobs in the affair, including former UnitedHealth CEO William McGuire, who engineered the company's ascent from a regional health insurer into the nation's second-largest.

    Continued in article

    Bob Jensen's threads on employee stock option accounting are at

    Winners of KPMG's Integrity/Ethics Videos Contest ---

    AccountingWeb invites professors to submit/obtain questions for a Weekly AccountingWeb Quiz ---

    AccountingWEB is pleased to announce its weekly accounting quiz, now appearing in the Student Zone area of the AccountingWEB site. Just click Student Zone at the left of any AccountingWEB page (or click the Student Zone link at the bottom of this story) to access the weekly quiz and to be eligible for great prizes!

    Accounting professors from across the country are participating in Test Your Knowledge, submitting their favorite quiz questions to see if they can stump the AccountingWEB audience. Each Monday, a new quiz will appear. The winners from the previous week will be announced in each Tuesday's Weekly Business Bite, a free news wire to which you can subscribe.

    The top ten winners each week will receive AccountingWEB t-shirts. In the event that more than 10 participants get all the questions correct, a drawing will be held among the winners to select the 10 t-shirt recipients.

    Only one entry is allowed per person, per quiz, however you can enter the new quiz each week, even if you are a winner of a previous quiz.

    So dust off your accounting rules and enter this week's quiz TODAY!

    Note that AccountingWeb now has a "Student Zone" at
    There's also a "Lecture Hall" at
    AccountingWeb Humor
    A useful set of accounting links is provided at
    I added these to my bookmarks at

    Jensen Comment
    Accounting instructors may want to add some of these questions to their test banks. Or they may want their students to take these weekly quizzes as part of a course (possibly only for non-credit practice and fun).

    Recently I added some of my old theory exam questions and problems (heavy on FAS 133 and IAS 39) under "Exam Material" at
    Most of my questions and problems are probably too specialized for an AccountingWeb Quiz. But they may help advanced students learn more about theory.

    CPA Firms Have a Stake in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc

    "Can Shareholders Sue Third Parties?" by Nick Timiraos, The Wall Street Journal,  October 6, 2007; Page A19 ---

    Wall Street's attention turns to the Supreme Court this coming week when it considers whether shareholders can sue third parties accused of aiding a U.S. corporation that defrauds its investors.

    The case, Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., pits defrauded investors of a cable company against two of the company's suppliers and could be worth billions of dollars to U.S. businesses by defining the liability of third parties -- accountants, bankers, lawyers or suppliers.

    Stoneridge presents the biggest securities-litigation court clash in a generation. The case may also determine the fate of Enron Corp. investors' $40 billion lawsuit against the failed company's bankers.

    The Securities and Exchange Commission sided with investors and warned that a ruling against them could make it harder for shareholders to recoup losses from securities frauds. But the Department of Justice, at President Bush's urging, supported businesses in a brief that cited the chilling effect a deluge of litigation would have on investment in U.S. companies.

    Here's a closer look:

    What prompted the lawsuit? Charter Communications Inc. used transactions with two suppliers, Scientific-Atlanta and Motorola Inc., in a manner that inflated the cable provider's revenue. That helped land three senior Charter executives in jail and prompted lawsuits against both Charter and the suppliers. Stoneridge, a Charter investor, says the suppliers should be held liable for being involved in the scheme, but the suppliers say they didn't directly deceive the market and had no say in how Charter accounted for the transactions.

    Last year, the Eighth Circuit Court of Appeals dismissed Stoneridge's claims against the suppliers, citing "potentially far-reaching duties and uncertainties for those engaged in day-to-day business dealings." Meanwhile, the SEC reached a settlement with Scientific-Atlanta and Motorola of $20 million and $25 million, respectively, for similar transactions they made with another cable company.

    The Supreme Court ruled in a 1994 case that only primary actors directly involved in making fraudulent statements could be held liable in private class-action lawsuits. Six of the current justices were on the court then, and they split evenly.

    What implications could the ruling have on U.S. markets? On the plaintiffs side are the SEC, prominent congressional leaders of both parties, more than 30 state attorneys general, labor unions and several state pension funds who warn that, should they lose, third parties will face little consequence no matter how reprehensible their conduct.

    The Justice Department, the U.S. Chamber of Commerce, and groups representing 600 banks and financial-services firms have taken the opposite side. They argue that the SEC, which can still sue third parties to recover investors' losses, provides enough of a check against wrongdoing.

    How has securities-litigation risk increased? The number of class-action securities lawsuits has decreased in each of the past four years, but the value of settlements nearly tripled last year, excluding the Enron settlement, according to data from Stanford Law School's Securities Class Action Clearinghouse. Companies have paid nine to 10 times more to investors in private class-action lawsuits than they have to federal regulators.

    How has the court treated similar cases? Last term, the Roberts Court made rulings in favor of businesses that limited damages and shielded corporations from the costs of litigation or made it harder to bring lawsuits against companies.

    * * * Facts

    • In their Supreme Court filing, 33 state attorneys general sided with investors and referenced the Enron scandal 55 times.

    • A win for Stoneridge Investment Partners could be ironic: one of its funds remains heavily invested in Cisco Systems Inc., the parent company of Scientific-Atlanta.

    • Nearly one-third of all securities lawsuits were filed against the high-tech sector last year, making it the most-frequently sued industry group.

    • Kansas became the first state to pass a comprehensive securities law in 1911, called a "blue-sky law" because nothing backed up fraudulent schemes except miles of blue sky.

    • Fourteen cases settled for amounts of $100 million or more last year, compared with nine cases in 2005 and seven cases in 2004. Settlements against Enron ($7.2 billion), WorldCom ($6.2 billion) and Cendant ($3.5 billion) account for nearly half of all "megasettlements," or lawsuits in excess of $100 million.


    More than 180 stock options backdating scandals have been investigated.
    Back dated options awards are equivalent to betting on yesterday's football games

    "$117.5 Million Settlement Reported in Options Case," The New York Times, October 15, 2007 ---

    The software maker Mercury Interactive has agreed to pay $117.5 million to settle an investor lawsuit over the company’s stock options award practices, a lawyer for the plaintiffs said today.

    The settlement with Mercury, now owned by Hewlett-Packard, is believed to be the biggest in any stock options backdating case to date, said Joel Bernstein, an attorney at the firm of Labaton Sucharow LLP, who represents investors in the lawsuit.

    Many investor lawsuits have resulted from the options scandal in corporate America, in which more than 180 companies have been investigated by authorities or have conducted internal inquiries into whether they manipulated grants to make them more valuable for top executives.

    In one legal settlement last month, Rambus agreed to pay $18 million to resolve an investor lawsuit related to its accounting for option grants.

    The Mercury settlement, which was reached in principle among the parties but is still subject to court approval, would resolve a lawsuit filed in August 2005.

    H.P. said in a statement that it had agreed to a settlement but did not provide details.

    Continued in article.

    Bob Jensen's threads on FAS 123(R) are at

    "Accounting for Uncertainty (FIN 48)," by Damon M. Fleming and Gerald E. Whittenburg, Journal of Accountancy, October 2007 --- ---

    FASB Interpretation no. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, sets the threshold for recognizing the benefits of tax return positions in financial statements as “more likely than not” (greater than 50%) to be sustained by a taxing authority. The effect is most pronounced where the uncertainty arises in the timing, amount or validity of a deduction.

    Thresholds applicable to tax practitioners have been revised from a “realistic possibility” to “more likely than not” that a tax position will be sustained, as set forth in the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007 that was signed into law in May.

    A third threshold, that a tax position possesses a “reasonable basis” in tax law, has been regarded as reflecting 25% certainty. In addition, taxpayers are subject to penalties if an understatement of liability is caused by a position that lacks “substantial authority,” a threshold for which no percentage of certainty has been established but has been regarded as between the reasonable-basis and more-likely-than-not standards.

    Being familiar with the different thresholds for the reporting of uncertain tax positions can help CPAs effectively advocate for their clients’ tax positions and be impartial in financial reporting.

    Bob Jensen's threads on FIN 48 are at

    "Assessing Fraud Risk," by Joseph T. Wells and John D. Gill, Journal of Accountancy, October 2007 ---

    Every organization faces some risk of fraud from within. Fraud exposure can be classified into three broad categories: asset misappropriation, corruption and fraudulent financial statements.

    Answering the following 15 questions is a good starting point for sizing up a company’s vulnerability to fraud and creating an action plan for lessening the risks. The questions are based on information from the 2007 edition of the Fraud Examiners Manual published by the Association of Certified Fraud Examiners.

    1. Do one or two key employees appear to dominate the company?

    If control is centered in the hands of a few key employees, those individuals should be under heightened scrutiny for compliance with internal controls and other policies and procedures.

    2. Do any key employees appear to have a close association with vendors?

    Employees with a close relationship to a vendor should be prohibited from approving transactions with that vendor. Alternatively, transactions between these parties should be reviewed on a regular basis for compliance with internal controls.

    3. Do any key employees have outside business interests that might conflict with their job duties?

    Take the example of a 32-year-old sales representative who started a software company using his employer’s time, equipment and facilities. The software company he worked for discovered that the employee demonstrated his own products to the company’s customers. Ultimately, the employee diverted $500,000 in business away from his employer.

    The example illustrates why key employees should provide annual financial disclosures that list outside business interests. Many companies, particularly publicly traded companies, require such disclosures. Interests that conflict with the organization’s interests should be prohibited. Organizations should implement an explicit policy that forbids employee business activities that directly compete with the operations of the organization.

    Employees who have something to hide may lie or omit key facts on the disclosure form, but requiring the step still has advantages, such as making it easier to fire workers who fail to reveal potential conflicts. If an employer can show that an employee had such an interest and failed to disclose it on an annual reporting form, the employee can be fired simply for failing to follow company policy.

    4. Does the organization conduct pre-employment background checks to identify previous dishonest or unethical behavior?

    Organizations should conduct pre-employment background checks before offering employment to any key applicant. The scope of a background check varies by position, but a general list to consider includes: criminal records and convictions; Social Security number verification; credit history; previous employment; employment references; personal references; education verification; professional license verification; driver’s license verification and driving history check; and civil records and judgments. Employers should ensure that legal requirements are met for the use of and access to the information.

    For companies that have failed to do background checks, post-hire screenings may be appropriate in some cases, but should be conducted on the advice of legal counsel. A number of legal issues come into play when employers consider screening workers who are already on the job.

    5. Does the organization educate employees about the importance of ethics and anti-fraud programs?

    All employees should receive training on the ethics and anti-fraud policies of the organization. The employees should sign an acknowledgement that they have received the training and understand the policies.

    6. Does the organization provide an anonymous way to report suspected violations of the ethics and anti-fraud policies?

    Organizations should provide employees, vendors and customers with a confidential system for reporting suspected violations of the ethics and anti-fraud policies. According to the 2006 ACFE Report to the Nation on Occupational Fraud and Abuse, frauds are most commonly detected by a tip. The greatest percentage of those tips comes from employees of the victim organization.

    In one instance, an anonymous tip received by a fraud hotline thwarted a fraud scheme that had drained approximately $580,000 from a business. The caller reported that the company’s accounts payable manager was approving fictitious invoices from his own outside company. The tip clued in company management to the scheme and brought an abrupt end to the manager’s windfall. The fraudster was terminated and arrested. The company ultimately recouped most of its losses.

    7. Is job or assignment rotation mandatory for employees who handle cash receipts and accounting duties?

    Job or assignment rotation should be considered for employees who work with cash receipts and accounting duties. The frequency of the rotation depends on the individual’s responsibilities and the number of people available for the revolving duties.

    8. Has the company established positive pay controls with its bank by supplying the bank with a daily list of checks issued and authorized for payment?

    One method for a company to help prevent check fraud is to establish positive pay controls by supplying its banks with a daily list of checks issued and authorized for payment. Banks verify items presented for payment against the company’s list and reject items that don’t appear on the list.

    The use of those controls foiled a fraud attempt by an employee and his accomplice, who worked for a check-printing company. The accomplice printed blank checks with the account number belonging to the perpetrator’s employer. The perpetrator then wrote more than $100,000 worth of forgeries on the counterfeit checks.

    When the checks were presented to the bank for payment, they did not appear on the organization’s list of expected payments. The bank refused to cash them. The organization was notified, and the fraudsters were arrested.

    9. Are refunds, voids and discounts evaluated on a routine basis to identify patterns of activity among employees, departments, shifts or merchandise?

    Companies should routinely evaluate those transactions to search for patterns of activity that might signal fraud.

    10. Are purchasing and receiving functions separate from invoice processing, accounts payable and general ledger functions?

    Segregation of duties is an important control. The failure to segregate these duties allowed one large, publicly traded company to be duped by a member of its managerial staff. The individual managed a remote location of the company and was authorized to order supplies and approve vendor invoices for payment. For more than a year, the manager routinely added personal items and supplies for his own business to orders made on behalf of his employer. The orders often included a strange mix of items. For instance, technical supplies and home furnishings were purchased in the same order.

    In addition to ordering personal items, the employee changed the delivery address for certain supplies so they were shipped directly to his home or side business. Because the manager was in a position to approve his own purchases, he could get away with such blatantly obvious frauds. The scheme cost his employer approximately $300,000 in unnecessary purchases.

    11. Is the employee payroll list periodically reviewed for duplicate or missing Social Security numbers?

    Organizations should check the employee payroll list periodically for duplicate or missing Social Security numbers that may indicate a ghost employee or overlapping payments to current employees.

    12. Are there policies and procedures addressing the identification, classification and handling of proprietary information?

    To help prevent the theft and misuse of intellectual property, the company should implement policies and procedures addressing the identification, classification and handling of proprietary information.

    13. Do employees who have access to proprietary information sign nondisclosure agreements?

    All employees who have access to proprietary information should sign nondisclosure agreements. It is easier to sue for breach of a nondisclosure agreement than it is to sue for theft of information. Nondisclosure agreements afford companies legal options for the use of nonpublic information, not simply for information that is considered a trade secret.

    In most states, companies without nondisclosure agreements may be limited to suing for theft of trade secret information.

    14. Is there a company policy that addresses the receipt of gifts, discounts and services offered by a supplier or customer?

    Organizations should implement a policy that sets ground rules about employees accepting gifts, discounts and services offered by a supplier or customer. If no explicit policy is in place, employees may find themselves in ambiguous situations without clear ethical guidelines.

    For example, a city commissioner negotiated a land development deal with a group of private investors. After the deal was approved, the commissioner and his wife were rewarded by one of the investors with an all-expenses-paid international vacation.

    While the promise of the trip may have influenced the commissioner’s negotiations, this would be difficult to prove. However, had a clear policy regarding the receipt of gifts been implemented and enforced, the commissioner would have known that accepting the free vacation was a violation of the rules. The ambiguity of the situation would have been avoided.

    15. Are the organization’s financial goals and objectives realistic?

    Closely monitor compliance with internal controls over financial reporting if the financial goals and objectives appear to be unrealistic. Establish realistic financial goals and objectives for the organization. Common justifications for financial statement fraud include a desire to obtain bonuses linked to goals or frustration with objectives that were unachievable through normal means.

    Joseph T. Wells, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners and a contributing editor to the JofA. His e-mail address is
     John D. Gill, J.D., CFE, is research director for the Association of Certified Fraud Examiners. His e-mail address is 

    Bob Jensen's Fraud Updates are at

    Free Retail Software Comparisons

    October 11, 2007 message from Houston Neal []

    Hi Bob,

    I just came across your Trinity University website and think it looks great. You present links to several different accounting software websites that are complementary to ours.

    I am with the website Retail Software Advice

    ( We are a free resource that helps retailers find the right software for their businesses. It would likely be a good fit with your accounting, finance, and business section bookmarks.

    Would you be willing to post a link to us? We would really appreciate it. Please feel free to email or call with any questions.

    Thank you,

    Houston Neal


    Software Advice
    Phone: 815-919-9403


    Bob Jensen's threads on software are at the following two sites:

    Software Updates and Reviews ---

    Software Reviews ---

    When is fraud discovery good for cash flow?

    "Profits Aren’t Real, but the Refund Is," by Kyle Whitmire, The New York Times, October 21, 2007 ---

    HealthSouth, the Alabama-based chain of rehabilitation hospitals, announced a $440 million tax refund from the I.R.S. last week. The refund was for money that the company overpaid for an accounting error — that is, if you call a $2.7 billion fraud an error. The company paid those taxes on profits that were not real.

    Federal investigators exposed the huge accounting fraud at the company in 2003. More than a dozen executives pleaded guilty to participating in the scheme, although the HealthSouth chief executive, Richard M. Scrushy, was acquitted on similar charges in 2005. (Mr. Scrushy is currently in prison on an unrelated federal bribery conviction.)

    During Mr. Scrushy’s trial, his former chief financial officers explained that the fraud occurred because even though HealthSouth was profitable, there was pressure to show more profits to meet Wall Street’s expectations. When the company’s actual earnings were not enough to make tax payments on fabricated profits, the company had to borrow money to make up the difference.

    Since the fraud became public, HealthSouth has wrestled with debt caused by the repercussions from the fraud. At the beginning of this year, the company was about $3.6 billion in debt. Since then, HealthSouth has paid down about $1 billion of that, and the tax rebate will reduce the debt further, the company said last week. KYLE


    "Scrushy Is Convicted in Bribery Case: Prosecutors Savor Victory Over HealthSouth Ex-CEO After '05 Fraud Acquittal," by Valerie Bauerlein, The Wall Street Journal, June 30, 2006; Page A3 ---

    HealthSouth was an Ernst & Young client ---

    Tax Whistleblower 7623:  More Trouble for Ernst & Young Tax Shelter Clients
    The Ferraro Law Firm has submitted the first known $1 billion Tax Whistleblower submission to the newly created IRS Whistleblower Office. The IRS specifically created the Whistleblower Office to assist in identifying and capturing uncollected tax revenue from individuals and corporations typically assisted by clever law firms, accounting firms and banks. Tax whistleblower cases under section 7623 are a new arrow in the Commissioner's quiver to close the tax gap, which the GAO estimates to be approximately $345 billion each year. The submission involves a Fortune 500 company that entered into a series of transactions to improperly reduce its taxes by over $1 billion. The company was represented by Ernst & Young LLP, an established law firm and multiple name-brand banks. The identity of the whistleblower is strictly confidential to protect the individual and the identities of the law firm, banks and company are confidential at this stage to aid in the evaluation of the submission. This submission comes after an E&Y employee pled guilty to one count of conspiracy to commit tax fraud, and four E&Y tax partners have been indicted for their role in the sale of fraudulent tax shelters. "The tax law is not always black and white and taxpayers are all too often more than willing to use an extreme interpretation that drastically reduces taxes. There is not necessarily an element of fraud and people at these companies know the weak spots in their positions," said founding partner, James L. Ferraro. Given the recent modifications made to section 7623 of the Internal Revenue Code, the potential award in this case could exceed $300 million.
    Accounting Education, October 25, 2007 ---

    "Former Ernst & Young Clients Sue Over Tax Shelters," AccountingWeb, April 12, 2006 --- 

    Bob Jensen's threads on whistle blowing are at

    Bob Jensen's threads on Ernst & Young are at

    How to funnel subsidies to a few politically connected

    October 29, 2007 message from David Cay Johnston []

    Professor Jensen,

    You have cited some of my work at your web pages and so I wanted to make you aware of my forthcoming book FREE LUNCH, which follows on the work in PERFECTLY LEGAL, a national best seller, winner of the Investigative Book of the Year award and widely used as a college text in accounting, business and law schools.

    FREE LUNCH examines money flows that would not be captured by following the flow of funds across government and corporate books. It shows entire industries that derive all of their profits from these subtle and sometimes hidden subsidies and how policies that supposedly opened markets to competition and "deregulated" thwarted the market, induced higher prices and funneled money from the many to the few. For example, I show how a single major company gets a half billion dollars a year in free labor which is delivered in a way that, unintentionally, benefits criminals.

    I hope you will take an interest in FREE LUNCH, which will be out Dec. 27, and consider it for your students.


    David Cay Johnston Reporter The New York Times
    212.556.3605 office 585.473.8704 home office 

    Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill) Coming Dec. 27 from Portfolio Books

    Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich and Cheat Everybody Else NYTimes Bestseller 2004 Book of the Year medal awarded by Investigative Reporters & Editors (IRE)

    Bob Jensen's fraud updates are at

    Bob Jensen's "Rotten to the Core" threads are at

    "Fraud Affects Four Out of Five Companies," SmartPros, September 27, 2007 ---  

    Four out of five companies have suffered from corporate fraud in the past three years, according to a survey from risk consulting firm Kroll.

    New technologies, new investors and expansion into new overseas markets have opened the door to different forms of fraud, the report concludes. In some sectors, more than a fifth of companies have lost more than $1m.

    “As our society has become more reliant on information technology, increased globalization and greater interconnectedness, certain exposures have expanded right along with them,” according to Jules Kroll, founder of the company. “Dramatically new exposures such as ID theft, various IT crimes, and false reporting by asset managers were rarely seen 25 years ago.”

    The report draws on a survey by the Economist Intelligence Unit of 900 senior executives worldwide. It reveals:

    Theft of physical assets or stock, which was experienced by 34 percent of surveyed respondents, is particularly widespread. In addition, a fifth of companies suffered from information theft, self-dealing, financial mismanagement, internal financial fraud, procurement fraud, or corruption and bribery.

    The average cost due to fraud to large companies –with annual revenues of more than $5bn – was more than $20m, with about 1 in 10 losing more than $100m. More than a fifth of all companies in some sectors had lost more than $1m – healthcare, pharmaceuticals and biotechnology; construction, engineering and infrastructure; and financial services.

    Theft, loss of or attack on information are the biggest concerns to companies when asked how they assess their future risk, with 20 percent of respondents describing themselves as highly vulnerable. More than 30 percent believe that IT complexity has increased their exposure to fraud.

    Continued in article

    Bob Jensen's fraud updates are at

    A Listing of Some Hedge Accounting Restatements for 2005 (see Page 3 of the online version)
    "Lost in the Maze Problems with hedge accounting caused a wave of restatements in 2005:  Are FASB's rules too hard to follow, or are companies simply too lax?" by Linda Corman, CFO Magazine, May 2005 ---

    Alternative approaches to testing hedge effectiveness under SFAS No. 133 ---

    Scroll down to "Ineffectiveness" under the I-terms at

    From The Wall Street Journal Accounting Weekly Review on October 5, 2007

    Virtuous Losses
    by WSJ Editors; Review & Outlook Page
    The Wall Street Journal

    Oct 02, 2007
    Page: A16
    Click here to view the full article on

    TOPICS: Accounting, Accounting Theory, Advanced Financial Accounting, Bonds, Debt, Impairment

    SUMMARY: The editors laud UBS AG and Citigroup "for their announcements...that they'll soon take big writedowns for their mortgage bets." They react this way on the premise that "one question haunting the markets during the subprime meltdown has been where the financial bodies are buried." Similar reactions are evident for UBS and Citigroup shareholders; the companies' share prices both rose following the announcements. The editors conclude by offering evidence that credit markets are stabilizing and state that "by being forthright now, the banks can aid the process of bringing buyers back to the debt markets."

    CLASSROOM APPLICATION: This article can be used to cover write-downs due to impairment losses on mortgage assets as well as to discuss debtholders as users of financial markets. The situation also could be described as a "big bath" write-down to clean house now while times are bad in credit markets in general and, at least for UBS, while corporate leadership is new.

    1.) In the opinion page article, the editors argue that "marking asset to market is...better for the financial system as a whole, rather than hiding losses on the balance sheet and hoping for a rebound." What does this statement mean? In your answer, define the terms "historical cost" and "mark to market." Also, address the notion that a loss could be included in a balance sheet account.

    2.) Refer to the related articles. What are the assets on which losses were taken at UBS and Citigroup?

    3.) Some might argue that the losses being recorded by Citigroup and UBS AG constitute a "big bath" to pave the way for improving reported results in the future. How does a current writedown help to improve reported results in the future? What current circumstances at each of these firms and in the general economy might allow for taking this approach to writedowns?

    4.) Refer again to the opinion page article's conclusion that reporting losses now "can aid the process of bringing buyers back to the debt markets." Should financial reporting have a specific outcome, such as improving numbers of credit market participants, as its objective? Support your answer.

    Reviewed By: Judy Beckman, University of Rhode Island

  • Question
    Why am I not laughing? Is it because I taught accounting for 40 years?

    Actually the fact that a lowered credit rating can lead to a realized gain should make sense even to a finance professor. Consider the following scenario:

    1. I sell a bond and record a liability for $100,000 that matures in ten years.
    2. My credit rating gets lowered the next day.
    3. I buy back the bond for $90,000 (the market value of the bond declines because of my lowered credit rating)
    4. I've made a $10,000 cash profit in one day because of a lowered credit rating
    5. I wonder if a finance professor can comprehend that this is a gain.
    6. I wonder if Moody's can understand that this is a very high quality earnings since its cash in the bank.

    Now what if I don't sell the bond but adopt the fair value accounting option for financial instruments under FAS 159. I did not realize a cash profit if I still owe $100,000 when the bond eventually matures. But the reason I report an unrealized holding gain follows the same logic as if I bought back the bond today. That's what the "fair value option" under FAS 159 is all about.

    If Moody's does not treat unrealized holding gains and losses as high-quality, core earnings, more power to them.

    Finance students who've taken four courses in accounting may not laugh because they understand why sometimes credit rating gains are high quality and sometimes low quality will not laugh because they understand why. But they may not understand why their finance professor is laughing.

    Bob Jensen's tutorials on fair value accounting are at the following two links:


    Will “Minsky Moments” become “Minsky Accounting?”

    As both the FASB in the U.S. and the IASB international standards boards march ever onward toward "fair value" accounting by replacing historical costs with current values (mark-to-market accounting), it will plunge corporate accountants and their CPA auditors ever deeper into current value estimation. Financial statements will become increasingly volatile and fictional with market movements. It is becoming clear that the efficient markets hypothesis that drives much of the theory behind fair value accounting is increasingly on shaky ground.

    Especially problematic are moments in time like now (2007) when the bubble burst on subprime mortgage borrowing and investing that has caused tremors throughout the world of banking and investing and risk sharing. And once again, the ghost of long departed John Maynard Keynes seems to have risen from the grave. There's material for a great Stephen King horror novel here.

    It is time for accounting standard setters who set such new standards as FAS 157 and FAS 159 to dust off some old economics books and seriously consider whether they understand the theoretical underpinnings of new and pending fair value standards moving closer to show time. You can read more fair value accounting controversies in my work-in-process PowerPoint file called 10FairValue.ppt at

    Aside from badly mixing my metaphors here, the fundamental problem is that unrealized fair values painting rosy financial performance (as the speculative roller coaster rises with breath taking thrill toward the crest) become unrealized losses as the roller coaster swoops downward toward “Minsky Moments.” It's a fundamental problem in fair value accounting because an enormous portion of reported earnings on the way up become sheer Minsky mincemeat (before investments are sold and liabilities are not settled) and diabolical garbage on the way down. In other words in these boom/bust market cycles, financial statements (certified by independent auditors under new fair value accounting standards) become increasingly hypothetical fantasy replacing accustomed facts rooted in transactional accounting.

    Fair value standard setters are plunging accounting into the realm of economic theory that is itself less uncertain than astrology. It's time to rethink some of that Chicago School economic theory that we've taken for granted because of all the Nobel Prizes awarded to Chicago School economists.


    Did John Maynard Keynes rise from the grave?

    "In Time of Tumult, Obscure Economist Gains Currency:  Mr. Minsky Long Argued Markets Were Crisis Prone; His 'Moment' Has Arrived," by Justin Lahart, The Wall Street Journal, August 18, 2007; Page A1 ---

    The recent market turmoil is rocking investors around the globe. But it is raising the stock of one person: a little-known economist whose views have suddenly become very popular.

    Hyman Minsky, who died more than a decade ago, spent much of his career advancing the idea that financial systems are inherently susceptible to bouts of speculation that, if they last long enough, end in crises. At a time when many economists were coming to believe in the efficiency of markets, Mr. Minsky was considered somewhat of a radical for his stress on their tendency toward excess and upheaval.

    Today, his views are reverberating from New York to Hong Kong as economists and traders try to understand what's happening in the markets. The Levy Economics Institute of Bard College, where Mr. Minsky worked for the last six years of his life, is planning to reprint two books by the economist -- one on John Maynard Keynes, the other on unstable economies. The latter book was being offered on the Internet for thousands of dollars.

    Christopher Wood, a widely read Hong Kong-based analyst for CLSA Group, told his clients that recent cash injections by central banks designed "to prevent, or at least delay, a 'Minsky moment,' is evidence of market failure."

    Indeed, the Minsky moment has become a fashionable catch phrase on Wall Street. It refers to the time when over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets and demand for cash that can force central bankers to lend a hand.

    Mr. Minsky, who died in 1996 at the age of 77, was a tall man with unruly hair who wore unpressed suits. He approached the world as "one big research tank," says Diana Minsky, his daughter, an art history professor at Bard. "Economics was an integrated part of his life. It wasn't isolated. There wasn't a sense that work was something he did at the office."

    She recalls how, on a trip to a village in Italy to meet friends, Mr. Minsky ended up interviewing workers at a glove maker to understand how small-scale capitalism worked in the local economy.

    Although he was born in Chicago, Mr. Minsky didn't have many fans in the "Chicago School" of economists, who believed that markets were efficient. A follower of the economist John Maynard Keynes, he died just before a decade of financial crises in Asia, Russia, tech stocks, corporate credit and now mortgage debt, began to lend credence to his ideas.

    Following those periods of tumult, more investors turned to the investment classic "Manias, Panics, and Crashes: A History of Financial Crises," by Charles Kindleberger, a professor at the Massachusetts Institute of Technology who leaned heavily on Mr. Minsky's work.

    Mr. Kindleberger showed that financial crises unfolded the way that Mr. Minsky said they would. Though a loyal follower, Mr. Kindleberger described Mr. Minsky as "a man with a reputation among monetary theorists for being particularly pessimistic, even lugubrious, in his emphasis on the fragility of the monetary system and its propensity to disaster."

    At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote.

    When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived.

    "We are in the midst of a Minsky moment, bordering on a Minsky meltdown," says Paul McCulley, an economist and fund manager at Pacific Investment Management Co., the world's largest bond-fund manager, in an email exchange.

    The housing market is a case in point, says Investment Technology Group Inc. economist Robert Barbera, who first met Mr. Minsky in the late 1980s. When home buyers were expected to have a down payment of 10% or 20% to qualify for a mortgage, and to provide income documentation that showed they'd be able to make payments, there was minimal risk. But as home prices rose, and speculators entered the market, lenders relaxed their guard and began offering loans with no money down and little or no documentation.

    Once home prices stalled and, in many of the more-speculative markets, fell, there was a big problem.

    "If you're lending to home buyers with 20% down and house prices fall by 2%, so what?" Mr. Barbera says. If most of a lender's portfolio is tied up in loans to buyers who "don't put anything down and house prices fall by 2%, you're bankrupt," he says.

    Several money managers are laying claim to spotting the Minsky moment first. "I featured him about 18 months ago," says Jeremy Grantham, chairman of GMO LLC, which manages $150 billion in assets. He pointed to a note in early 2006 when he wrote that investors had become too comfortable that financial markets were safe, and consequently were taking on too much risk, just as Mr. Minsky predicted. "Guinea pigs of the world unite. We have nothing to lose but our shirts," he concluded.

    It was Mr. McCulley at Pacific Investment, though, who coined the phrase "Minsky moment" during the Russian debt crisis in 1998.

    Continued in article

    Bob Jensen's fair value PowerPoint show ---

    August 18, 2007 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]


    I thought we could all enjoy the following Keynes quotes:

    1. "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

    2. How prophetic he was:

    "The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems / the problems of life and of human relations, of creation and behavior and religion."

    3. How wonderfully Keynes anticipated stuff in games played by Bayesian players and stuff in self-fulfilling equilibria (which yielded three "Nobel" prizes), all without introducing any mathematics or economic mumbo jumbo:

    "Successful investing is anticipating the anticipations of others."

    4. The accountics folks might enjoy the following:

    "The difficulty lies not so much in developing new ideas as in escaping from old ones."

    "If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid."

    "When the facts change, I change my mind. What do you do, sir?"

    5. This should thrill tax folks:

    "The avoidance of taxes is the only intellectual pursuit that still carries any reward."


    August 20, 2007 reply from Paul Williams [Paul_Williams@NCSU.EDU]

    Apparently no economist ever dies -- they just come in and out of fashion. In George Akerlof's presidential address to the AEA in January 2006 ("The Missing Motivation in Macroeconomics") he concludes: "This lecture has shown that the early Keynesians got a great deal of the working of the economic system right in ways that are denied by the five neutralities (assumptions of the positivists).

    As quoted from Keynes earlier, they based their models on "our knowledge of human nature and from the detailed facts of experience."" Thus the recent interest in "norms" by Shyam Sunder and the urgency to provide "econonmic" explanations for "norms." So the very FIRST plenary speaker at the, Joe Henrich, at the Chicago 2007 AAA meeting, regaled us with his "evidence" that market integrated societies produce people who are more trusting and fair- minded because people from Missouri divide the spoils in a game that no one ever plays in their real lives more equitably than a hunter- gatherer from New Guinea for whom the game may have an entirely different meaning than someone from St.Louis (a synchresis, perhaps).

    Given that the integration of societies by "markets" represents the blink of an eye in evolutionary time (even for humans) one might consider that perhaps what makes Missourians different from hunter- gatherers is that they come from a Christian tradition that predates market integration by a couple thousand years (a tradition of Christian agape?).

    Linguists have long remarked that language is impossible without trust (how else can I believe that words mean what I am told they mean or how do I avoid starvation at birth unless I "trust" my mother? We are born trusting). Yet we get this facile rendering with regression equations of Adam Smith's argument stood completely on its head. For Smith markets were a possibility only within a society that was already integrated (in Smith's case by the kirk's dispositon of a stern Calvanist morality).

    Mike Royko (the columnist for the Chicago Tribune) once opined that he had finally figured out economic theory, to wit, "Economics says that almost anything can happen, and it usually does." The end of history? I bet not.


    Where can you find facts about taxation?

    October 7, 2007 message from JOHN STANCIL [jstancil@VERIZON.NET]

  • I realize that the IRS is pretty tight with its data, even in aggregated form. However, does anyone know if there is an internet source where you can obtain certain tax facts – such as the amount of charitable contributions claimed on individual returns, the dollar amount of earned income credit, the amount of productive activity deductions taken on a year to year basis?

    Any help would be appreciated.

    John Stancil

    Florida Southern College

  • October 8, 2007 reply from Bob Jensen

    When in doubt, always start with Wikipedia --- 
    It goes without saying that you must be suspicious of questionable items in any Wikipedia module. However, the above link is quite good on this topic. As with most Wikipedia modules, both the Reference (Notes) links and the Discussion sections are very important.

    The Notes section (near the bottom) in this case leads to OECD sites such as the National Accounts site ---,2647,en_2825_495684_1_1_1_1_1,00.html

    The Discussion tab (near the top) leads to an extensive table of contents of discussions.


    Here are a few other sites to check out:

    Bob Jensen’s statistical data links --- 

    FirstGov --- 

    Great IRS site links (not necessarily data table links):

    FAQs and answers --- 

    Tax Fraud Alerts from the IRS ---,,id=121259,00.html 

    Tax Scams ---

    Bob Jensen's taxation helpers ---


    PwC Internal Audit Study Reveals Trends

    "Internal Audit 2012" identifies major trends that will likely shape the world of internal audit over the next five years. The study, which was based on interview and survey data from chief audit executives of Fortune 250 companies, found that the controls-focused approach that has dominated internal auditing is expected to diminish in relevance over the coming years. The central finding of the study is that over the next five years, internal audit leaders must re-define the function's value proposition. Based on the study, PwC has determined that a "risk-centric" internal audit model would provide assurance on the effectiveness of risk management in addition to controls assurance. This additional level of assurance would help internal audit align itself more closely with the organization's maturing risk management capabilities. The study also highlighted five trends that will have the greatest impact on the internal audit profession in the coming years -- globalization, changes in risk management, advances in technology, talent and organizational issues, and changing internal audit roles.
    SmartPros, October 1, 2007 ---

    The PwC study is available at

    CFO Bonuses Tied to SOX Material Weaknesses

    October 31, 2007 message from David Albrecht [albrecht@PROFALBRECHT.COM]

    Sometimes I come across an article that makes me go, "Hmmm, I didn't know that. Very interesting." That's my comment about this

    Material Weakness: A Pain in the Bonus

    When a company's material-weakness disclosures rise, the CFO's bonus falls, according to a new study. Alan Rappeport, | US October 30, 2007

    While the pay of chief executive officers may be based on bold metrics like their companies' bottom lines, CFO compensation requires a more intricate calculus. For finance chiefs, the key factor these days is internal controls.

    A new study by Udi Hoitash, Rani Hoitash and Karla Johnstone, accounting professors at Rutgers University, Bentley College, and the University of Wisconsin at Madison, argues that CFO compensation in a post-Sarbanes-Oxley world hinges strongly on material weaknesses of internal controls, accounting expertise, and a CFO's relationship with the board.

    Since Sarbox was enacted in 2002, companies have sought CFOs with more technical experience, particularly in accounting and auditing. Because of the more demanding set of skills needed to be a CFO, their pay has increased. According to the study, the average finance chief earns a base salary of $316,932 and an average bonus of $222,764. Charged with certifying accurate financials, CFOs who knowingly make mistakes can be fined millions of dollars and face prison. The greater responsibility comes with bigger rewards, but also more painful penalties for mistakes.

    Observing 635 CFOs in 2005, the authors find that when a company's material-weakness disclosures increase, finance chiefs feel a pain in their bonuses. The effect is made worse if the CFO has previous experience as an internal auditor. Although internal-audit experience is prized in the new regulatory world, it also comes with greater expectations.

    "These results imply that boards and compensation committees hold higher expectations for CFOs with greater expertise and internal corporate reputation relative to other CFOs," the study said.

    continued in article at: 

    David Albrecht


    From The Wall Street Journal Accounting Weekly Review on October 12, 2007

    Bond Tumult Is Jostling Auction-Rate Securities
    by Randall Smith and Shefali Anand
    The Wall Street Journal

    Oct 05, 2007
    Page: C2
    Click here to view the full article on ---

    TOPICS: Advanced Financial Accounting, Investment Banking

    SUMMARY: Auction-rate securities are used by corporations and other investors to "earn a bit more money on their spare cash than a traditional money-market account would offer." The August market for these securities dried up as investors took "paper losses" on some of these securities they previously thought of as very safe. "Almost half of auction-rate esecurities are backed by bonds from municipalities....[and] student loans accounted for an additional 27%.... Some of the $2.5 billion in issues underwritten by Deutsche Bank experienced failed auctions within a month or two of first being issued, saddling investors with short-term paper losses....When an auction fails, investors will either not be able to sell the securities at all or [will be required to sell] at a loss."

    CLASSROOM APPLICATION: This article follows another effect of the recent turmoil in credit markets. Questions ask students to identify where these assets would be classified (either as cash equivalents or as marketable securities) and to identify the appropriate accounting for the losses on these short-term investments.

    1.) Based on the description in the article, what are auction-rate securities? For what purposes do corporations use these short-term investments?

    2.) How do you think that holders of these short-term investments should classify them in their corporate balance sheets? In your answer, define the phrases "cash and cash equivalents," marketable securities, and investments.

    3.) How did the turmoil in credit markets affect the ability of holders of auction-rate securities to sell these short-term investments? Given the purpose of these short-term investments, why do you think that problem caused some panic in this market?

    4.) The article mentions Xethanol Corporation experiencing a loss on these securities. Was this a realized loss or an unrealized loss? How will this loss be accounted for?

    5.) Access Xethanol Corporation's 10-Q filing with the SEC for the quarter ended June 30, 2007, filed on August 14, 2007. How much of these types of investments did the company hold at June 30, 2007? Describe the company's disclosures about these securities, including specifying the footnote. (Hint: you may access the SEC filing by clicking on the company name in the on-line version of the article to bring up the WSJ on-line company information, then clicking on SEC filings on the left-hand side of the web page, then selecting the appropriate filing.)

    6.) Based on the disclosures made, do you think the company expected to liquidate their investment in August, 2007?

    7.) Access the company's Form 8-K filing with the SEC on September 21, 2007. Why did the company experience the $1.5 million loss described in this filing and in the WSJ article? What is a Form 8-K filing and why did the company decide to file this item with the SEC?

    Reviewed By: Judy Beckman, University of Rhode Island


    From The Wall Street Journal Accounting Weekly Review on October 5, 2007

    Seeking Sweet Savings
    by Julie Jargon
    The Wall Street Journal

    Oct 02, 2007
    Page: B1
    Click here to view the full article on

    TOPICS: Accounting, Cost Accounting, Cost Management, Research & Development

    SUMMARY: H.J. Heinz has been facing increasing costs of ingredients in its ketchup: tomatoes, due to farming costs, and corn syrup, due to increasing world demand for ethanol and grain-fed meats. Heinz has been unable to increase prices sufficiently to cover these cost increases. In response, the company is focusing R&D efforts on producing sweeter and thicker tomatoes (and to improving its machinery to handle the thicker tomatoes) in order to reduce the need for syrup in its ketchup. Note: the company comments on the research and development costs in Item 2 of the MD&A and under Operating Results by Segment in its 10Q filed with the SEC on August 24, 2007

    CLASSROOM APPLICATION: The article provides an excellent description that can be used to support teaching accounting for research and development with a product that students will readily understand. As well, the article covers measures of costs, and the topic of costs driving R&D efforts, that can be used for a management or cost accounting course.

    1.) "At Heinz, overall costs for ingredients rose 4.7% in the quarter ending Aug. 1." In general, how are costs of ingredients monitored in a cost accounting system?

    2.) Cite the specific costs that have increased in the case of Heinz's production of ketchup. Describe how each of these costs would be, or might not be, evident in Heinz's cost accounting system.

    3.) How has the monitoring of costs driven research and development activities at the company? In your answer, define the terms research and development with reference to appropriate authoritative literature.

    4.) From the article, list examples of activities that can be categorized as research and as development; at least one example from each category must be given.

    5.) Heinz increased its R&D budget by 40% over three years and used some of the funds to "purchase more land adjacent to its Stockton research farm." Under authoritative accounting literature, how must this purchase of land be accounted for?

    Reviewed By: Judy Beckman, University of Rhode Island

    Heinz Posts 5.8% Rise in Net Income on New Product Sales, Marketing
    by Mike Barris
    Aug 24, 2007

    WSJ Video of the World Bank's Ranking of the Best and Worst Places to Do Business --- Click Here

    Top Nations out of 178 Countries That Welcome Foreign Operations:

    Low Ranking Countries Highlighted in the Videos:

    "Doing Business 2008: Making a Difference," International Finance Corporation ---   

    If you’re into accounting theory, you may like Ira’s reply at the bottom of this message.

    What's your opinion regarding the Shortcut Method allowed in FAS 133 but not in IAS 39?
    If companies meet the strict tests for the Shortcut Method in FAS 133, they can avoid period-to-period hedge effectiveness testing for interest rate swaps. The FASB is now considering changing these tests. I would prefer that the FASB eliminate the Shortcut Method entirely.

    October 4, 2007 message from Attorney XXXXX

    Bob Jensen:

    As your website(s) keep coming up as an "authority" in the subject area of FAS 133, you might want to pre-date (September 21, 2007) and submit to FASB any comment letter of substance on DIG Implementation Issue E23 - revising the cash-flows short-cut method per website invitation: 

    New—FASB Issues Proposal to Clarify the "Shortcut Method" of Hedge Accounting (Posted: 07/24/07) News Release

    Although I submitted "late," mine was still "accepted" and posted as #35 on the list -

    I'm also hoping Ira Kawaller of  also submits something as both his and your names keep coming up on Google-searches on the subject.

    I'm only an independent consultant working on a project, and as such, I submitted a single-issue item snafu I've been experiencing in the general area - perhaps yours could be more extensive.

    Second message on October 5, 2007

    Ira, Bob, et. al.:

    In addition to potential late submissions on the FASB website (below original e-mail), do either of you know of, or can suggest any, commercial software to set-in-place and track a plain vanilla Cash-Flows Macro Interest Rate Swap showing the long-haul method?

    I'm consulting at a sub-prime mortgage management firm and they want to roll-up $1/2 Billion of their variable debt to a single fixed-interest cash-flow hedge - as a Macro Interest Rate Swap. While they already have a counter-party whose software they might be using, but I'm sort-of shopping-around for them as well.

    Due to the uncertainties surrounding the short-cut method, we're going long-haul (at this point!). As the verdict is pending on the short-cut method (see Morgan Stanley's E23 Comment -  where they "ceased" all their short cut hedge programs, as well as KPMG's, where even-if short-cut is used, long-haul would still be needed to track ineffectiveness -  ), and since it's only a "basic" cash-flows interest-rate swap, we figure on moving ahead and using the long-haul method to track the entirety of it.

    I know we can't have our cake and eat it too - i.e. once a "fixed" rate is established by the hedge, it too can "sink" in the market, where we can't simultaneously hedge the cash-flows risk and the fair-value risk of the completed hedge - but I'll leave that to the macro-economists to figure-out.

    Suggestions or comments welcome - please feel free to forward to others who might be able to help, even commercial vendors, so I know what prices the long-haul tracking will cost (I know! I know! - it'll probably be more costly than the ineffectiveness that's being tracked anyway - but we're just trying to play-by-the-rules in an uncertain regulatory environment!).




    October 7, 2007 reply from Bob Jensen

    Hi Albert,


    I’m not sure I can add much more to the Shortcut method that the FASB has not already considered. Actually, I would like to do away with the Shortcut method since it applied only to interest rate swaps and does not conform to IAS 39.

    Your request for information about software inspired me to update my somewhat neglected module on software under the S-terms at
    (Scroll down to “Software.”

    I discuss ineffectiveness testing under the I-terms at

    A bit of a review is provided at

    Alternative approaches to testing hedge effectiveness under SFAS No. 133 --- z

    A Listing of Some Hedge Accounting Restatements for 2005 (see Page 3 of the online version)
    "Lost in the Maze Problems with hedge accounting caused a wave of restatements in 2005:  Are FASB's rules too hard to follow, or are companies simply too lax?" by Linda Corman, CFO Magazine, May 2005 ---

    Alternative approaches to testing hedge effectiveness under SFAS No. 133 ---

    Derivatives One has some basic free tools ---

    There are a number of commercial vendors of FAS 133 and IAS 39 compliance software. A sampling is shown below:

    FinancialCAD --- 

    FinancialCAD provides software and services that support the valuation and risk management of financial securities and derivatives that is essential for banks, corporate treasuries and asset management firms. FinancialCAD’s industry standard financial analytics are a key component in FinancialCAD solutions that are used by over 25,000 professionals in 60 countries.

    Also see

    COMSOL ---

    INNSINC ---

    FUTRAK workstation offers all of the features necessary to significantly reduce the time required to manage your hedging activities, provide management with all the control tools necessary to comply with SarbOx 404, satisfy auditors with documentary evidence needed to justify your company's use of derivative hedge accounting, and eliminate earnings volatility.

    Also see

    Hedge Trackers ---

    TPG Software ---

    MBRM ---

    Allegro (especially good for energy companies) ---

    Sunguard Bancware ---

    Treasury Compliance ---

    October 8, 2007 reply from IRA KAWALLER []
    Jensen Note:  Ira has been a member of the FASB's Derivative Implementation Group (DIG) since its inception.

    Bob -

    I’m a bit surprised that you favor disallowing shortcut.

    I don’t have a problem with that perspective for cash flow hedges, but I do for fair value hedges.

    The problem for FV hedges is that long haul doesn’t work. Over the life of fixed rate debt – typically issued at par and being redeemed at par, the change in FV over the life of the debt is zero. The results of a swap, on the other hand will be whatever the sum of the cash flows happens to be – but certainly not zero. The only way FV hedges can work is if you ignore swap settlements, but that’s crazy. The fact is, swaps don’t offset the changes in the FV of the debt they’re used to hedge unless the swaps are sized on a duration basis. That’s what bond portfolio managers do, but it’s not what corporate treasurers do. For hedges that are designed to synthesize variable rate debt, a one-to-one sizing is appropriate, but unless you use shortcut, there’s little chance that you’ll be able to pass retrospective effectiveness tests.

    Hope all is well.

    Ira Kawaller


    Bob Jensen's threads on the Shortcut Method are under the S-terms at
    (Scroll down to "Shortcut Method")

    Bob Jensen's FAS 133 and IAS 39 tutorials are at the following two sites:

    I still say do away with the Shortcut Method until the IASB allows it in IAS 39.
    Of course banks and other corporations in the U.S. would hit the ceiling


    Humor Between October 1 and October 31, 2007

    Forwarded by Paula

    An 80-year old man goes for a physical. All of his tests come back with normal results. The doctor says, "Chuck, everything looks great! How are you doing mentally and emotionally? Are you at peace with God?"

    Chuck replies, "God and I are tight. He knows I have poor eyesight, so he's fixed it so when I get up in the middle of the night to go to the bathroom, POOF! the light goes on. When I'm done, POOF! the light goes off."

    "WOW, that's incredible," the doctor says.

    A little later in the day, the doctor calls Chuck's wife. "Ethel," he says, "George is doing fine! But, I had to call you as I am in awe of his relationship with God. Is it true that when he gets up during the night, POOF! the light goes on in the bathroom and when he's done POOF! the light goes off?"

    "Oh, my God!" Ethel exclaims, "He's peeing in the refrigerator again!"

    Old Quips from Paula


    Two blondes living in Oklahoma were sitting on a bench talking, and one blonde says to the other, "Which do you think is farther away... Florida or the moon?" The other blonde turns and says "Helloooooooooo, can you see Florida ?????"


    A blonde pushes her BMW into a gas station. She tells the mechanic it died. After he works on it for a few minutes, it is idling smoothly. She says, "What's the story?" He replies, "Just crap in the carburetor" She asks, "How often do I have to do that?"


    A police officer stops a blonde for speeding and asks her very nicely if he could see her license. She replied in a huff, "I wish you guys would get your act together. Just yesterday you take away my license and then today you expect me to show it to you!"


    There's this blonde out for a walk. She comes to a river and sees another blonde on the opposite bank. "Yoo-hoo!" she shouts, "How can I get to the other side?" The second blonde looks up the river then down the river and shouts back, "You ARE on the other side."


    A gorgeous young redhead goes into the doctor's office and said that her body hurt wherever she touched it. "Impossible!" says the doctor. "Show me." The redhead took her finger, pushed on her left shoulder and screamed, then she pushed her elbow and screamed even more. She pushed her knee and screamed; likewise she pushed her ankle and screamed. Everywhere she touched made her scream. The doctor said, "You're not really a redhead, are you? "Well, no" she said, "I'm actually a blonde." "I thought so," the doctor said. "Your finger is broken."


    A highway patrolman pulled alongside a speeding car on the freeway. Glancing at the car, he was astounded to see that the blonde behind the wheel was knitting! Realizing that she was oblivious to his flashing lights and siren, the trooper cranked down his window, turned on his bullhorn and yelled, "PULL OVER!" "NO!" the blonde yelled back, "IT'S A SCARF!"


    A Russian, an American, and a Blonde were talking one day. The Russian said, "We were the first in space!" The American said, "We were the first on the moon!" T he Blonde said, "So what? We're going to be the first on the sun!" The Russian and the American looked at each other and shook their heads. "You can't land on the sun, you idiot! You'll burn up!" said the Russian. To which the Blonde replied, "We're not stupid, you know. We're going at night!"


    A blonde was playing Trivial Pursuit one night. It was her turn. She rolled the dice and she landed on Science & Nature. Her question was, "If you are in a vacuum and someone calls your name, can you hear it?" She thought for a time and then asked, "Is it on or off?"

    Some new answers forwarded by Paula

    Why did the chicken cross the road?

    DR. PHIL: The problem we have here is that this chicken won't realize that he must first deal with the problem on "THIS" side of the road before it goes after the problem on the "OTHER SIDE" of the road. What we need to do is help him realize how stupid he's acting by not taking on his "CURRENT" problems before adding new problems.

    OPRAH: Well I understand that the chicken is having problems, which is why he wants to cross this road so bad. So instead of having the chicken learn from his mistakes and take falls, which is a part of life, I'm going to give this chicken a car so that he can just drive across the road and not live his life like the rest of the chickens.

    GEORGE W BUSH: We don't really care why the chicken crossed the road. We just want to know if the chicken is on our side of the road, or not. The chicken is either against us, or for us. There is no middle ground here.

    COLIN POWELL: Now to the left of the screen, you can clearly see the satellite image of the chicken crossing the road...

    ANDERSON COOPER - CNN: We have reason to believe there is a chicken, but we have not yet been allowed to have access to the other side of the road.

    JOHN KERRY: Although I voted to let the chicken cross the road, I am now against it! It was the wrong road to cross, and I was misled about the chicken's intentions. I am not for it now, and will remain against it.

    NANCY GRACE: That chicken crossed the road because he's GUILTY! You can see it in his eyes and the way he walks.

    PAT BUCHANAN: To steal the job of a decent, hardworking American.

    MARTHA STEWART: No one called me to warn me which way that chicken was going. I had a standing order at the Farmer's Market to sell my eggs when the price dropped to a certain level. No little bird gave me any insider information.

    DR SEUSS: Did the chicken cross the road? Did he cross it with a toad? Yes, the chicken crossed the road, but why it crossed I've not been told.

    ERNEST HEMINGWAY: To die in the rain. Alone.

    JERRY FALWELL: Because the chicken was gay! Can't you people see the plain truth in front of your face? The chicken was going to the "other side." That's why they call it the "other side." Yes, my friends, that chicken is gay. And if you eat that chicken, you will become gay too. I say we boycott all chickens until we sort out this bomination that the liberal media whitewashes with seemingly harmless phrases like "the other side." That chicken should not be crossing the road. It's as plain and simple as that!

    GRANDPA: In my day we didn't ask why the chicken crossed the road. Somebody told us the chicken crossed the road, and that was good enough.

    BARBARA WALTERS : Isn't that interesting? In a few moments, we will be listening to the chicken tell, for the first time, the heart warming story of how it experienced a serious case of molting, and went on to accomplish its life long dream of crossing the road

    JOHN LENNON: Imagine all the chickens in the world crossing roads together, in peace.

    ARISTOTLE: It is the nature of chickens to cross the road.

    BILL GATES: I have just released eChicken2006, which will not only cross roads, but will lay eggs, file your important documents, and balance your check book. Internet Explorer is an integral part of eChicken. This new platform is much more stable and will never cra...#@&&^( C \ .... reboot .

    ALBERT EINSTEIN: Did the chicken really cross the road, or did the road move beneath the chicken?

    BILL CLINTON: I did not cross the road with THAT chicken. What is your definition of chicken?

    AL GORE: I invented the chicken!

    COLONEL SANDERS: Did I miss one?!


    Forwarded by Barb

    A  good piece of chocolate has about 200 calories. As I enjoy two servings per night, and a few more on weekends, I consume 3,500 calories of chocolate in a week, which equals one pound of weight per week.


    In the last 3 1/2 years, I have had a chocolate caloric intake of about 180 pounds. I weigh only 165 pounds, so without chocolate, I would have wasted away to nothing about three months ago!

    I owe my life to chocolate.

    AccountingWeb Humor ---

    Windows Error Messages Forwarded by Auntie Bev ---

    Forwarded by Auntie Bev

    Reporters interviewing a 104-year-old woman: 'And what do you think is the best thing about being 104?' the reporter asked. She simply replied, 'No peer pressure.'

    The nice thing about being senile is you can hide your own Easter eggs

    I've sure gotten old! I've had two bypass surgeries, a hip replacement, new knees, fought prostate cancer and diabetes. I'm half blind, can't hear anything quieter than a jet engine, take 40 different medications that make me dizzy, winded, and subject to blackouts. Have bouts with dementia. Have poor circulation; hardly feel my hands and feet anymore. Can't remember if I'm 85 or 92. Have lost all my friends. But, thank God, I still have my driver's license.

    I feel like my body has gotten totally out of shape, so I got my doctor's permission to join a fitness club and start exercising. I decided to take an aerobics class for seniors. I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, by the time I got my leotards on, the class was over.

    An elderly woman decided to prepare her will and told her preacher she had two final requests. First, she wanted to be cremated, and second, she wanted her ashes scattered over Wal-Mart.
    'Wal-Mart?' the preacher exclaimed. 'Why Wal-Mart?'
    'Then I'll be sure my daughters visit me twice a week.'


    My memory's not as sharp as it used to be. Also, my memory's not as sharp as it used to be.

    Know how to prevent sagging? Just eat till the wrinkles fill out.


    It's scary when you start making the same noises as your coffee maker.


    These days about half the stuff in my shopping cart says, 'For fast relief.'


    Remember: You don't stop laughing because you grow old, You grow old because you stop laughing.

    --- THE SENILITY PRAYER : Grant me the senility to forget the people I never liked anyway, the good fortune to run into the ones I do, and the eyesight to tell the difference.

    Forwarded by Paula

    An extremely modest man was in the hospital for a series of tests, the last of which had left his bodily systems extremely upset. Upon making several false alarm trips to the bathroom, he decided the latest episode was another false alarm and stayed put. He suddenly filled his bed with diarrhea and was embarrassed beyond his ability to remain rational. In a complete loss of

    composure he jumped out of bed, gathered up the bed sheets and threw them out the hospital window.

    A drunk was walking by the hospital when the sheets landed on him. He started yelling, cursing, and swinging his arms violently trying to get the unknown things off, and ended up with the soiled sheets in a tangled pile at his feet. As the drunk stood there, unsteady on his feet, staring down at the sheets, a hospital security guard, barely containing his laughter, and who had watched the whole incident, walked up and asked, "What the heck is going on here?"

    The drunk, still staring down, replied, "I think I just beat the crap out of a ghost!"

    Happy Halloween!

    Forwarded by Paula

    Two delicate blossoms of Southern femininity, one from Mississippi and the other from Texas, were conversing on the porch swing of a large white-columned mansion.

    The Mississippian said, "When my first child was born, my husband built this beautiful mansion for me." The Texan lady commented, "Well, isn't that nice?"

    The lady from Mississippi continued, "When my second child was born, my husband bought me that fine Cadillac automobile you see parked in the drive."

    Again, the Texas lady commented, "Well, isn't that nice?"

    The first woman boasted, "Then, when my third child was born, my husband bought me this exquisite diamond bracelet."

    Yet again, the Texas lady commented, "Well, isn't that nice?"

    The first woman then asked her companion, "What did you husband buy for you when you had your first child?"

    The Texas lady replied, "My husband sent me to charm school."

    "Charm school!" the first woman cried. "Land sakes, child, what on Earth for?"

    The Texas lady responded, "So that instead of saying, 'who gives a crap,' I learned to say, 'Well, isn't that nice?'"

    Forwarded by Bob Overn

     An Iowa farmer got in his pickup and drove to a neighboring farm and knocked at the door. A young boy, about 9, opened the door.

    "Is yer Dad home?" the farmer asked.

    "No sir, he ain't," the boy replied. "He went into town."

    "Well said the farmer, "is yer Mom here?"

     "No, sir, she ain't here neither. She went into town with Dad."

    "How about your brother, Howard? Is he here?"

     "He went with Mom and Dad."

    The farmer stood there for a few minutes, shifting from one foot to the other and mumbling to himself.

    "Is there anything I can do fer ya?" the boy asked politely. "I knows where all the tools are, if you want to borry one . . . Or maybe I could take a message fer Dad."

     "Well," said the farmer uncomfortably, "I really wanted to talk to yer Dad. It's about your brother Howard getting my daughter, Melissa Mae, pregnant."

    The boy considered for a moment. "You would have to talk to Pa about that he finally conceded. "If it helps you any, I know that Pa charges $50 for the bull and $25 for the hog, but, I really don't know how much he gets fer Howard."


    Bob Hope quips forwarded by Paula

    May 29, 1903 - July 27, 2003

    ON TURNING 70 "You still chase women, but only downhill".

    ON TURNING 80 "That's the time of your life when even your birthday suit needs pressing."

    ON TURNING 90 "You know you're getting old when the candles cost more than the cake."

    ON TURNING 100 " I don't feel old. In fact I don't feel anything until noon . Then it's time for my nap."

    ON GIVING UP HIS EARLY CAREER, BOXING "I ruined my hands in the ring ... The referee kept stepping on them."

    ON NEVER WINNING AN OSCAR "Welcome to the Academy Awards or, as it's called at my home, 'Passover'."

    ON GOLF "Golf is my profession. Show business is just to pay the green fees."

    ON PRESIDENTS " I have performed for 12 presidents and entertained only six."

    ON WHY HE CHOSE SHOWBIZ FOR HIS CAREER " When I was born, the doctor said to my mother, 'Congratulations. You have an eight-pound ham'."

    ON RECEIVING THE CONGRESSIONAL GOLD MEDAL "I feel very humble, but I think I have the strength of character to fight it."

    ON HIS FAMILY'S EARLY POVERTY "Four of us slept in the one bed. When it got cold, mother threw on another brother."

    ON HIS SIX BROTHERS "That's how I learned to dance. Waiting for the bathroom."

    ON HIS EARLY FAILURES " I would not have had anything to eat if it wasn't for the stuff the audience threw at me."

    ON GOING TO HEAVEN "I've done benefits for ALL religions. I'd hate to blow the hereafter on a technicality."

    Forwarded by Dick Haar

    A wonderful Message by George Carlin:

    The paradox of our time in history is that we have taller buildings but shorter tempers, wider Freeways , but narrower viewpoints. We spend more, but have less, we buy more, but enjoy less. We have bigger houses and smaller families, more conveniences, but less time. We have more degrees but less sense, more knowledge, but less judgment, more experts, yet more problems, more medicine, but less wellness.

    We drink too much, smoke too much, spend too recklessly, laugh too little, drive too fast, get too angry, stay up too late, get up too tired, read too little, watch TV too much , and pray too seldom.

    We have multiplied our possessions, but reduced our values. We talk too much, love too seldom, and hate too often.

    We've learned how to make a living, but not a life. We've added years to life not life to years. We've been all the way to the moon and back, but have trouble crossing the street to meet a new neighbor. We conquered outer space but not inner space. We've done larger things, but not better things.

    We've cleaned up the air, but polluted the soul. We've conquered the atom, but not our prejudice. We write more, but learn less. We plan more, but accomplish less. We've learned to rush, but not to wait. We build more computers to hold more information, to produce more copies than ever, but we communicate less and less.

    These are the times of fast foods and slow digestion, big men and small character, steep profits and shallow relationships. These are the days of two incomes but more divorce, fancier houses, but broken homes. These are days of quick trips, disposable diapers, throwaway morality, one night stands, overweight bodies, and pills that do everything from cheer, to quiet, to kill. It is a time when there is much in the showroom window and nothing in the stockroom. A time when technology can bring this letter to you, and a time when you can choose either to share this insight, or to just hit delete...

    Remember; spend some time with your loved ones, because they are not going to be around forever. Remember, say a kind word to someone who looks up to you in awe, because that little person soon will grow up and leave your side.

    Remember, to give a warm hug to the one next to you, because that is the only treasure you can give with your heart and it doesn't cost a cent.

    Remember, to say, 'I love you' to your partner and your loved ones, but most of all mean it. A kiss and an embrace will mend hurt when it comes from deep inside of you.

    Remember to hold hands and cherish the moment for someday that person will not be there again. Give time to love, give time to speak! AND give time to share the precious thoughts in your mind.


    Life is not measured by the number of breaths we take, but by the moments that take our breath away.

    If you don't send this to at least 8 people....Who cares?

    George Carlin

    And that's the way it was on October 31, 2007 with a little help from my friends.


    Fraud Updates ---


    Facts about the earth in real time --- 

    Jesse's Wonderful Music for Romantics (You have to scroll down to the titles) ---

    International Accounting News (including the U.S.) and Double Entries ---
            Upcoming international accounting conferences ---
            Thousands of journal abstracts ---
    Deloitte's International Accounting News ---
    Association of International Accountants --- 

    Free Harvard Classics ---
    Free Education and Research Videos from Harvard University ---


    I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure University) --- 


    Bob Jensen's bookmarks for accounting newsletters are at 

    News Headlines for Accounting from --- 
    An unbelievable number of other news headlines categories in are at 


    Jack Anderson's Accounting Information Finder ---


    Gerald Trite's great set of links --- 


    The Finance Professor --- 


    Walt Mossberg's many answers to questions in technology ---


    How stuff works --- 


    Household and Other Heloise-Style Hints --- 


    Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at 
    Accompanying documentation can be found at and 


    Click on for a complete list of interviews with established leaders, creative thinkers and education technology experts in higher education from around the country.


    Professor Robert E. Jensen (Bob)
    190 Sunset Hill Road
    Sugar Hill, NH 03586
    Phone:  603-823-8482 




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