March 31, 2008

Bob Jensen's New Bookmarks on March 31, 2008
Bob Jensen at Trinity University 

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

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

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

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

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

Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm

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

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

CPA Examination --- http://en.wikipedia.org/wiki/Cpa_examination

Wikipedia has a rather nice summary of accounting software at http://en.wikipedia.org/wiki/Accounting_software

Bob Jensen's accounting history summary --- http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Bob Jensen's accounting theory summary --- http://www.trinity.edu/rjensen/Theory.htm

Tom Selling's blog The Accounting Onion (great on theory and practice) --- http://accountingonion.typepad.com/

XBRL Networking --- http://xbrlnetwork.ning.com/

Accountancy Discussion ListServs:

For an elaboration on the reasons you should join a ListServ (usually for free) go to   http://www.trinity.edu/rjensen/ListServRoles.htm

AECM (Educators)  http://pacioli.loyola.edu/aecm/  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 --- http://www.trinity.edu/rjensen/ListServRoles.htm

CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/  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)  http://groups.yahoo.com/group/xyztalk 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.

AccountantsWorld  http://accountantsworld.com/forums/default.asp?scope=1  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 BusValGroup-subscribe@topica.com  This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM]

Tidbits Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm

New Bookmarks Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/Bookurl.htm

Fraud Updates is now available at http://www.trinity.edu/rjensen/FraudUpdates.htm

Links to my other fraud modules can be found at http://www.trinity.edu/rjensen/Fraud.htm

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

Humor Between March 1 and March 31, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor033108

Humor Between February 1 and February 29, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor022908   

Humor Between January 1 and January 31, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor013108  

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

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

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

Large International Accounting Firm History --- http://en.wikipedia.org/wiki/Big_Four_auditors

Global Perspectives on Accounting Education --- http://gpae.bryant.edu/%7Egpae/content.htm

Economic Stimulus Payments Information Center
Starting in May, the Treasury will begin sending economic stimulus payments to more than 130 million households. To receive a payment, taxpayers must have a valid Social Security number, $3,000 of income and file a 2007 federal tax return. IRS will take care of the rest. Eligible taxpayers will receive between $300 to $600 if single or $600 to $1,200 if married filing jointly. Millions of retires, disabled veterans and low-wage earners who usually are exempt from filing a tax return must do so this year in order to receive a stimulus payment. But there are more details to know about. Find out more here and visit this page regularly for the latest updates.
From the IRS:  Economic Stimulus Payments Information Center --- http://www.irs.gov/irs/article/0,,id=177937,00.html
Jensen Comment
Although I think this is a horrible Keynesian tinkering with the economy by a deficit-bound government that cannot afford this election-year give away, there are some important things to know about the latest economic stimulus program. For example, not everyone or every family is eligible for a check. For those who don't normally file, a tax return (Form 1040A) must be filed on or before April 15, 2008 to get a check

Taxpayers in my viewpoint should opt for the electronic payments option to avoid mix ups or theft in mail delivery. Also beware of scam artists who phone or write claiming to be from the IRS. The IRS anticipates an explosion of scams trying to get at your stimulus payment. The good news from a business standpoint is that the scam artists will spend the money. The bad news is that it’s your money that might get scammed.

Index --- http://www.irs.gov/irs/article/0,,id=177937,00.html
|The Basics | Scenarios | Frequently Asked Questions Social Security | Veterans Benefits | Low Income |
| Scam Alert News Releases, Audio, Fact Sheets and Legal Guidance |

Troubling Student Reports on Revenue Recognition

March 1, 2008 message from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

March 2, 2008 reply from Bob Jensen

Hi Denny,

My threads on the revenue recognition mess are at http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 

In particular I find Bill and Hold issues vexing since they so often arise to deceive about revenue --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#BillAndHold 

My threads on the AIG mess are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds 
There's some useful source material here for student assignments and papers.

"Research on Accounting Should Learn From the Past," by Michael H. Granof and Stephen A. Zeff, Chronicle of Higher Education, March 21, 2008 --- http://chronicle.com/weekly/v54/i28/28a03401.htm?utm_source=cr&utm_medium=en

Starting in the 1960s, academic research on accounting became methodologically supercharged — far more quantitative and analytical than in previous decades. The results, however, have been paradoxical. The new paradigms have greatly increased our understanding of how financial information affects the decisions of investors as well as managers. At the same time, those models have crowded out other forms of investigation. The result is that professors of accounting have contributed little to the establishment of new practices and standards, have failed to perform a needed role as a watchdog of the profession, and have created a disconnect between their teaching and their research.

Before the 1960s, accounting research was primarily descriptive. Researchers described existing standards and practices and suggested ways in which they could be improved. Their findings were taken seriously by standard-setting boards, CPA's, and corporate officers.

A confluence of developments in the 1960s markedly changed the nature of research — and, as a consequence, its impact on practice. First, computers emerged as a means of collecting and analyzing vast amounts of information, especially stock prices and data drawn from corporate financial statements. Second, academic accountants themselves recognized the limitations of their methodologies. Argument, they realized, was no substitute for empirical evidence. Third, owing to criticism that their research was decidedly second rate because it was insufficiently analytical, business faculties sought academic respectability by employing the methods of disciplines like econometrics, psychology, statistics, and mathematics.

In response to those developments, professors of accounting not only established new journals that were restricted to metric-based research, but they limited existing academic publications to that type of inquiry. The most influential of the new journals was the Journal of Accounting Research, first published in 1963 and sponsored by the University of Chicago Graduate School of Business.

Acknowledging the primacy of the journals, business-school chairmen and deans increasingly confined the rewards of publication exclusively to those publications' contributors. That policy was applied initially at the business schools at private colleges that had the strongest M.B.A. programs. Then ambitious business schools at public institutions followed the lead of the private schools, even when the public schools had strong undergraduate and master's programs in accounting with successful traditions of practice-oriented research.

The unintended consequence has been that interesting and researchable questions in accounting are essentially being ignored. By confining the major thrust in research to phenomena that can be mathematically modeled or derived from electronic databases, academic accountants have failed to advance the profession in ways that are expected of them and of which they are capable.

Academic research has unquestionably broadened the views of standards setters as to the role of accounting information and how it affects the decisions of individual investors as well as the capital markets. Nevertheless, it has had scant influence on the standards themselves.

The research is hamstrung by restrictive and sometimes artificial assumptions. For example, researchers may construct mathematical models of optimum compensation contracts between an owner and a manager. But contrary to all that we know about human behavior, the models typically posit each of the parties to the arrangement as a "rational" economic being — one devoid of motivations other than to maximize pecuniary returns.

Moreover, research is limited to the homogenized content of electronic databases, which tell us, for example, the prices at which shares were traded but give no insight into the decision processes of either the buyers or the sellers. The research is thus unable to capture the essence of the human behavior that is of interest to accountants and standard setters.

Further, accounting researchers usually look backward rather than forward. They examine the impact of a standard only after it has been issued. And once a rule-making authority issues a standard, that authority seldom modifies it. Accounting is probably the only profession in which academic journals will publish empirical studies only if they have statistical validity. Medical journals, for example, routinely report on promising new procedures that have not yet withstood rigorous statistical scrutiny.

Floyd Norris, the chief financial correspondent of The New York Times, titled a 2006 speech to the American Accounting Association "Where Is the Next Abe Briloff?" Abe Briloff is a rare academic accountant. He has devoted his career to examining the financial statements of publicly traded companies and censuring firms that he believes have engaged in abusive accounting practices. Most of his work has been published in Barron's and in several books — almost none in academic journals. An accounting gadfly in the mold of Ralph Nader, he has criticized existing accounting practices in a way that has not only embarrassed the miscreants but has caused the rule-making authorities to issue new and more-rigorous standards. As Norris correctly suggested in his talk, if the academic community had produced more Abe Briloffs, there would have been fewer corporate accounting meltdowns.

The narrow focus of today's research has also resulted in a disconnect between research and teaching. Because of the difficulty of conducting publishable research in certain areas — such as taxation, managerial accounting, government accounting, and auditing — Ph.D. candidates avoid choosing them as specialties. Thus, even though those areas are central to any degree program in accounting, there is a shortage of faculty members sufficiently knowledgeable to teach them.

To be sure, some accounting research, particularly that pertaining to the efficiency of capital markets, has found its way into both the classroom and textbooks — but mainly in select M.B.A. programs and the textbooks used in those courses. There is little evidence that the research has had more than a marginal influence on what is taught in mainstream accounting courses.

What needs to be done? First, and most significantly, journal editors, department chairs, business-school deans, and promotion-and-tenure committees need to rethink the criteria for what constitutes appropriate accounting research. That is not to suggest that they should diminish the importance of the currently accepted modes or that they should lower their standards. But they need to expand the set of research methods to encompass those that, in other disciplines, are respected for their scientific standing. The methods include historical and field studies, policy analysis, surveys, and international comparisons when, as with empirical and analytical research, they otherwise meet the tests of sound scholarship.

Second, chairmen, deans, and promotion and merit-review committees must expand the criteria they use in assessing the research component of faculty performance. They must have the courage to establish criteria for what constitutes meritorious research that are consistent with their own institutions' unique characters and comparative advantages, rather than imitating the norms believed to be used in schools ranked higher in magazine and newspaper polls. In this regard, they must acknowledge that accounting departments, unlike other business disciplines such as finance and marketing, are associated with a well-defined and recognized profession. Accounting faculties, therefore, have a special obligation to conduct research that is of interest and relevance to the profession. The current accounting model was designed mainly for the industrial era, when property, plant, and equipment were companies' major assets. Today, intangibles such as brand values and intellectual capital are of overwhelming importance as assets, yet they are largely absent from company balance sheets. Academics must play a role in reforming the accounting model to fit the new postindustrial environment.

Third, Ph.D. programs must ensure that young accounting researchers are conversant with the fundamental issues that have arisen in the accounting discipline and with a broad range of research methodologies. The accounting literature did not begin in the second half of the 1960s. The books and articles written by accounting scholars from the 1920s through the 1960s can help to frame and put into perspective the questions that researchers are now studying.

For example, W.A. Paton and A.C. Littleton's 1940 monograph, An Introduction to Corporate Accounting Standards, profoundly shaped the debates of the day and greatly influenced how accounting was taught at universities. Today, however, many, if not most, accounting academics are ignorant of that literature. What they know of it is mainly from textbooks, which themselves evince little knowledge of the path-breaking work of earlier years. All of that leads to superficiality in teaching and to research without a connection to the past.

We fervently hope that the research pendulum will soon swing back from the narrow lines of inquiry that dominate today's leading journals to a rediscovery of the richness of what accounting research can be. For that to occur, deans and the current generation of academic accountants must give it a push.

Michael H. Granof is a professor of accounting at the McCombs School of Business at the University of Texas at Austin. Stephen A. Zeff is a professor of accounting at the Jesse H. Jones Graduate School of Management at Rice University.

March 18, 2008 reply from Paul Williams [Paul_Williams@NCSU.EDU]

Steve Zeff has been saying this since his stint as editor of The Accounting Review (TAR); nobody has listened. Zeff famously wrote at least two editorials published in TAR over 30 years ago that lamented the colonization of the accounting academy by the intellectually unwashed. He and Bill Cooper wrote a comment on Kinney's tutorial on how to do accounting research and it was rudely rejected by TAR. It gained a new life only when Tony Tinker published it as part of an issue of Critical Perspectives in Accounting devoted to the problem of dogma in accounting research.

It has only been since less subdued voices have been raised (outright rudeness has been the hallmark of those who transformed accounting into the empirical sub-discipline of a sub-discipline for which empirical work is irrelevant) that any movement has occurred. Judy Rayburn's diversity initiative and her invitation for Anthony Hopwood to give the Presidential address at the D.C. AAA meeting came only after many years of persistent unsubdued pointing out of things that were uncomfortable for the comfortable to confront.

Paul Williams
paul_williams@ncsu.edu 
(919)515-4436

Bob Jensen's threads on these matters are at the following links:

http://www.trinity.edu/rjensen/Theory01.htm#AcademicsVersusProfession

http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

http://www.trinity.edu/rjensen/Theory01.htm#Replication

“An Analysis of the Evolution of Research Contributions by The Accounting Review: 1926-2005,” by Jean Heck and Robert E. Jensen, Accounting Historians Journal, Volume 34, No. 2, December 2007, pp. 109-142.

This citation was forwarded by Don Ramsey
"Why business ignores the (research of) business schools," by Michael Skapinker, Financial Times, January 7, 2008

Chief executives, on the other hand, pay little attention to what business schools do or say. As long ago as 1993, Donald Hambrick, then president of the US-based Academy of Management, described the business academics' summer conference as "an incestuous closed loop", at which professors "come to talk with each other". Not much has changed. In the current edition of The Academy of Management Journal.

. . .

They have chosen an auspicious occasion on which to beat themselves up: this year is The Academy of Management Journal's 50th anniversary. A scroll through the most recent issues demonstrates why managers may be giving the Journal a miss. "A multi-level investigation of antecedents and consequences of team member boundary spanning behaviour" is the title of one article.

Why do business academics write like this? The academics themselves offer several reasons. First, to win tenure in a US university, you need to publish in prestigious peer-reviewed journals. Accessibility is not the key to academic advancement.

Similar pressures apply elsewhere. In France and Australia, academics receive bonuses for placing articles in the top academic publications. The UK's Research Assessment Exercise, which evaluates university research and ties funding to the outcome, encourages similarly arcane work.

But even without these incentives, many business school faculty prefer to adorn their work with scholarly tables, statistics and jargon because it makes them feel like real academics. Within the university world, business schools suffer from a long-standing inferiority complex.

The professors offer several remedies. Academic business journals should accept fact-based articles, without demanding that they propound a new theory. Professor Hambrick says that academics in other fields "don't feel the need to sprinkle mentions of theory on every page, like so much aromatic incense or holy water".

Others talk of the need for academics to spend more time talking to managers about the kind of research they would find useful.

As well-meaning as these suggestions are, I suspect the business school academics are missing something. Law, medical and engineering schools are subject to the same academic pressures as business schools - to publish in prestigious peer-reviewed journals and to buttress their work with the expected academic vocabulary.

March 17, 2008 reply from David Fordham, James Madison University [fordhadr@JMU.EDU]

In response to Don Ramsay's quote from the Skapinker article: "The reason that real-life lawyers, doctors and engineers have no problem with their [respective academics'] research is not because they are smarter than business people, but because their research assists them in what they do" ---

So the problem is that business professors are not publishing studies that are relevant to what the business practitioners need? Our research doesn't assist our practitioners in what they do? Hmmmm.

Question: could the problem (IF it's a problem) be traced back, beyond the business professors, to the "gatekeepers" (read: reviewers and editors) who control the publishing arm of the field? Could it be that professors really are interested in engaging in relevant and applicable research, but this stuff never gets publishined in the "journals that count" because the *criteria* used by reviewers (to judge whether the work is acceptable for publication) is fatally flawed?

This is in the front of my mind because I am revising one more time a paper in which the reviewers say the paper is "interesting", "intriguing", "applicable", "enlightening","revelant to practice", "could materially improve" accounting education, and even "is well-written", ... but they then condemn the paper to rejection or revision saying "it needs more thorough development of theoretical underpinnings", in other words, more Greek letters and diagrams with arrows. The ideas in this paper won a national award in a practitioner journal, but academic reviewers repeatedly reject it, even when it's explained in a way designed to directly assist educators.

My post here isn't the sour grapes it sounds like... I don't mind playing the game now and then (and although I'm at the point where one more pub isn't worth too much effort anymore, I honestly enjoy the exercise). But I figured that perhaps flawed publication criteria might indeed be responsible for the observed effect of business practitioners (and accountants in particular) ignoring academic publishing. Just another thought.

This begs the next question: what SHOULD be the criteria used for academic publishing? (criteria is plural, by the way...)

Another paper tiger from...

David Fordham
James Madison University

March 20, 2008 reply from Ramsey, Donald [dramsey@UDC.EDU]

It would probably by too simplistic to suggest that faculty at research institutions should publish primarily in academic journals, and those at "teaching" institutions in practitioner journals.

Also, too naive to hope that university tenure committees of any institutions, faced with limited budgets and various forms of campus politics, would agree with any deans' recommendations based on practitioner journals.

Do non-practice fields, let's say History or English, have any such thing as practitioner journals? Second-tier and lower academic journals, I suppose. So maybe academics is the only game in town at the university level. But what about tenure based on music performance, for example? Or medicine or law, as the original article implied? Is it the endowments of medical or law schools that may give them some independence in tenure decisions?

If assessment of student outcomes is the present crest of the wave, will the next wave be assessment of the value of academic peer-reviewed journals compared to appropriate publishing objectives?

Donald D. Ramsey
University of the District of Columbia

March 20, 2008 reply from Bob Jensen

Hi Don,

The paradox is that good research (defined as new knowledge) for practitioners is actually much more difficult than accountics research published in academic journals.

Accountics research takes many more years of preparation (math, statistics, econometrics, psychometrics) to prepare to do accountics research. But the actual research itself is ploddingly methodical rather than Eureka! The contribution to knowledge is often described by the accountics researchers themselves as epsilon (asymptotically speaking).

But practitioner research (defined as new knowledge) requires much more creativity and discovery happenstance, serendipity, luck, or what have you. Professors do publish quite often in practitioner journals, but their contribution is generally in terms of scholarship rather than new knowledge.

The one exception is survey research that technically speaking often is new knowledge. But the majority of surveys published by professors in practitioner journals is not all that exciting (at least not to me).

Bob Jensen

You can read about accountics research at http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

"The Rap on Accounting Education: 
Are colleges focused too much on preparing students for public accounting and not enough for their later corporate careers?" by David McCann, CFO Magazine, March 19, 2008 --- http://cfo.com/article.cfm/10875359/c_10879801
Link forwarded by Glen Gray

Question
Were accountants responsible for the dotcom bubble and burst at the turn of the Century?

Jensen Answer
The article below fails to directly mention where auditors contributed the most to the 1990's bubble. The auditors were allowing clients to get away with murder in terms of recognizing revenue that should never have been recognized. The dotcom companies were not yet making profits but were full of promise as the bubble filled with hot air. In financial reporting (especially in pro forma reporting) dotcom companies shifted the attention from profit growth to revenue growth. But much of the revenue growth they got away with reporting was due to bad judgment on the part of their auditors. Corrections finally began to appear after the EITF belatedly made some bright line decisions --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

I give auditors F grades when auditing the hot air balloons of dotcom companies. This shows what can happen when we let judgment overtake some of the bright line rules in accounting standards. Auditors were supposed to have "principles" when they had no bright lines to follow. The auditing firms demonstrated their lack of professional principles in the 1990s.
 

"Were accountants responsible for the dotcom bubble and burst?" AccountingWeb's U.K. Site, March 11, 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=104768

"Were accountants responsible for the dotcom bubble and burst?" This worrying allegation emerged from a question two weeks ago at the ICAEW IT Faculty annual lecture.

During a thought-provoking talk on Second Life and related issues, Clive Holtham mentioned the dotcom bubble, which prompted the pointed follow-up question from one audience member.

The answer was that they weren't - which accorded with the general audience reaction. The reason? Accountants, Holtham argued, had not made the investment and business decisions that fuelled the boom and led to the bust.

Some would argue that this is exactly why accountancy, perhaps more than accountants, was responsible. Why weren't accountants more involved in these decisions? We would surely expect accountants to have been stressing the need to temper the wild enthusiasm with a bit of solid business analysis. It's hard to escape the conclusion that accountants either didn't put forward the right arguments, or were not sufficiently influential. Accountants either lacked the confidence to participate forcefully enough in the debate, or were viewed as not knowing enough about IT.

Either way, it suggests that the main accountancy bodies had allowed a major change in business to occur without preparing their members to deal competently and confidently with it. If technology had been seen as a natural competency of an accountant, accountants might have been more able to fight their corner over the excesses of the dotcom era.

Anyway, that was years ago. Surely things have changed. The recent AccountingWEB/National B2B Centre survey on accountants' involvement in ebusiness was introduced in the following terms: "In spirit accountants would like to get involved with ebusiness, but the reality of their current knowledge and workload means that only a small minority are able to help clients take advantage of new technology opportunities."

It's unfair to blame the accountants themselves. Their workload is a significant factor. Government has been piling regulation after regulation upon them and it must be a struggle to keep up with just what they consider their core skills and knowledge. Ethically, you would not expect accountants to offer advice in areas in which they do not consider themselves adequately qualified. Technology is such a vast and rapidly moving area that it's pretty hard for most full time IT professionals to keep up, let alone accountants with their myriad other responsibilities. Yet the need, and opportunity, certainly seems to be there. Various government initiatives in the past have sought to identify sources of competent advice to help companies succeed in ebusiness.

Usually, articles about accountants doing more in the field of IT elicit comments about "leaving it to the IT professionals". The worry is that accountants may not know enough to be able to do so confidently and therefore they withdraw from any involvement - this is what the AccountingWeb/NB2BC survey seems to suggest is happening. This is in nobody's interest. Businesses may fail to exploit key opportunities, accountants will lose out on income and probably credibility, and IT specialists will have fewer clients. A more ebusiness-confident accountancy profession should be able not only to offer advice itself, but also to recommend, trust and work with specialists where required.

To achieve this it's vital that the professional bodies help their members more than they are doing currently. What seems to be missing is a set of boundaries. What exactly do accountants need to know about IT and ebusiness in order to be able to confidently and competently advise their clients? How can you, as an accountant, assess your competence in this vital area?

It's not as if this is anything new, The International Federation of Accountants (IFAC) has been working on a revised Education Practice Statement regarding 'Information Technology for Professional Accountants' for years and in October 2007 released International Education Practice Statement 2 (IEPS 2) after consultation with accountancy bodies worldwide. This sets out "IT knowledge and competency requirements" for the qualification process, but also for continuing professional development.

So should accountants be more active in advising on ebusiness? Should they do it themselves or work with specialists? And are the professional bodies doing enough to help their members in this, and other IT related, areas? We look forward to hearing the views of AccountingWEB members so that we can carry this debate forward.

March 12, 2008 reply from Ed Scribner [escribne@NMSU.EDU]

Interestingly, most of the criticism of accountants during the dotcom bubble was not for allowing premature revenue recognition but, to the contrary, for failure to allow recording of internally developed goodwill. Dotcoms were reporting losses that critics at the time said should have been profits because of the purported existence of unrecognized intangible future benefit. (BTW, I always remember Denny’s term for pro forma reporting—EBS (everything but bad stuff).)

Ed

March 12, 2008 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Ed,

Let me play the devil's advocate (and here I really AM the devil). I look forward to your witty repartee.

I think the root cause of the dot-com (and much else that has happened) is the tax law provision that limited the tax deductibility of executive compensation to $1 million.

This led to perverse incentives on the part of the managers to fiddle with the financial statements to maximize the price at which IPOs could be floated.

As John Coffee has stated in his book Gatekeepers, "when one pays the CEOs with stock options, one is using a high octane fuel that creates incentives for short-term financial manipulation and accounting gamesmanship".

The dot-com bust is an expemplar for the worst in the American and European corporate governance.

On the one hand, it is an example of American system of perverse incentives for financial statement manipulation (which is addressed by SOx and the corporation codes only peripherally) fueled by non-cash executive compensation. On the other hand, it is an example of a typical European fraud in the sense of the "insiders'" (primarily the venture capitalists, greed (which European laws have addressed in the past).

The consequences of non-cash executive compensation, in my opinion, is the scourge of the American corporate scene, that is destroying the employee morale, perceived equity of the "system", the good old-fashioned idea that each pay one's dues to the society, and ultimately our way of life in the United States. To give just one example, the following is the data on the CEO compensation as a multiple of average employee compensation in various countries:

531:1 USA
25:1 UK
21:1 Canada
16:1 France
11.1 Germany
10:1 Japan __________________
Source: Gatekeepers, by John Coffee.

Shouldn't we be surprised that social unrest and crime in the US is so low? Shouldn't we auditors be paranoid (and not just sceptical) of the machinations of management?

And one would have to a fool to think that this is the "equilibrium" market situation, decided by millions of the 'homo economicus' persuasion in the "market"..

Goodwill is almost a red herring in this equation. Its recognition would only fuel the perverse incentives of managers. Financial statements for most firms of the dot-com variety are already a fiction; goodwill accounting is just one more dose of fictionitis.

Respectfully submitted,

Jagdish S. Gangolly,
Associate Professor ( j.gangolly@albany.edu )
Chairperson, Department of Accounting & Law, School of Business
Director, PhD Program in Information Science, College of Computing & Information
State University of New York at Albany, Albany, NY 12222.
Phone: (518) 442-4949 URL: http://www.albany.edu/acc/gangolly

March 12, 2008 reply from Bob Jensen

With all due respects to Ed and Jagdish, I still think that inflated revenue reporting and other creative accounting ploys led to a bubble of artificially inflated stock prices of dotcom companies. It was more than the "premature revenue recognition" that Ed mentions. It was reporting of questionable revenues that would never be realized in cash. For example dotcomA contracts with dotcomB, dotcomC, ..., dotcomZ to trade advertising space on Websites and vice versa for all combinations of contracting dotcom companies. Each company counts the trade at estimated value as revenue and expense even though there will never be any cash flows for these advertising trades.

The dotcom companies did not inflate profits with this move but they dramatically inflated revenues which was all they cared about since the investing public never expected them to show a profit early on. You can read about how bad this bartering scam became --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Issue02
And auditors let the dotcom companies get away with this scam until EITF 99-17 made auditors finally recognize the errors of their ways.

Other revenue inflation scams and questions raised in the following issues resolved by by various EITF pronouncements --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

Revenue Issue: Gross versus Net

Issue 01: Should a company that acts as a distributor or reseller of products or services record revenues as gross or net?
Examples of Creatively Reporting at Gross:

Priceline.com brokered airline tickets online and included the full price of the ticket as Priceline.com revenues. This greatly inflated revenues relative to traditional ticket brokers and travel agents who only included commissions as revenue.

eBay.com included the entire price of auctioned items into its revenue even though it had no ownership or credit risk for items auctioned online.

Land's End issued discount coupons (e.g., 20% off the price), recorded sales at the full price, and then charged the price discount to marketing expense.

Issue 02: Should a company that swaps website advertising with another company record advertising revenue and expense?

Issue 03: Should discounts or rebates offered to purchasers of personal computers in combination with Internet service contracts be treated as a reduction of revenues or as a marketing expense?

Issue 04: Should shipping and handling fees collected from customers be included in revenues or netted against shipping expense?

Discounts and rebates are traditionally deducted from gross revenues to arrive at a net revenue figure that is the basis of revenue reporting. Internet companies, however, did not always follow this treatment. Discounts and rebates have been reflected as operating expenses rather than as reductions of revenue.

Handling fees and pricing rebates throughout accounting history could not be included in revenues since the writing of the first accounting textbook. Auditors knew this very well from the history of accounting, but it took EITF 00-14 in Year 2000 to remind auditors that this bit of history applied to dotcom companies as well as mainstream clients.

Definition of Software

Issue 07: Should the accounting for products distributed via the Internet, such as music, follow pronouncements regarding software development or those of the music industry?

Issue 08: Should the costs of website development be expensed similar to software developed for internal use in accordance with SOP 98-1?

Revenue Recognition

Issue 9: How should an Internet auction site account for up-front and back-end fees?

Issue 10: How should arrangements that include the right to use software stored on another company’s hardware be accounted for?

Issue 11: How should revenues associated with providing access to, or maintenance of, a website, or publishing information on a website, be accounted for?

Issue 12: How should advertising revenue contingent upon “hits,” “viewings,” or “click-throughs” be accounted for?

Issue 13: How should “point” and other loyalty programs be accounted for?

Prepaid/Intangible Assets vs. Period Costs

Issue 14: How should a company assess the impairment of capitalized Internet distribution costs?

Issue 15: How should up-front payments made in exchange for certain advertising services provided over a period of time be accounted for?

Issue 16: How should investments in building up a customer or membership base be accounted for?

Miscellaneous Issues

Issue 17: Does the accounting by holders for financial instruments with exercisability terms that are variable-based future events, such an IPO, fall under the provisions of SFAS 133?

Issue 18: Should Internet operations be treated as a separate operating segment in accordance with SFAS 131?

Issue 19: Should there be more comparability between Internet companies in the classification of expenses by category?

Issue 20: How should companies account for on-line coupons?

In nearly every instance dotcom companies were inflating the promise of their new companies with creative accounting blessed by their auditors until the EITF and other FASB pronouncements set some bright lines that auditors had to stand behind. The investing public was nearly always misled by both the audited financial statements and the pro forma statements of dotcom companies in the 1990s. Then the bubble burst, in part, by bright line setting by the EITF and the FASB.

Bob Jensen's threads on e-Commerce and e-Business accounting issues are at http://www.trinity.edu/rjensen/ecommerce/000start.htm

Especially note the revenue recognition issues at http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 

Microsoft's Shiny New Toy Photosynth is an application that's still a work in progress.
It is dazzling, but what is it for?
Jeffrey McIntyre, MIT's Technology Review, March/April 2008 --- http://www.technologyreview.com/Infotech/20203/?nlid=915&a=f
Watch Photosynth stitch photos together
View the images and see how it works

Jensen Comment
It struck me that if a company's financial report could be visualized in a photograph then Photosynth might be used to stitch various financial reports together.

Bob Jensen's threads on visualization of multivariate data are at http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 --- http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.
Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

Question
When is the purpose of reclassifying loans as "Held-to-Maturity" for purposes of stabilizing earnings rather than a true strategy to hold those notes to maturity, especially when the value of those notes is plunging daily? "Even analysts think so. "If you thought the accounting for investments in debt and equity securities was unnecessarily complex, the accounting for loans will make your head spin,"

"Is Fair-Value Accounting Always Fair?" Matt A. Greenberg, The Wall Street Journal, March 5, 2008; Page A15 --- http://online.wsj.com/article/SB120468197325912303.html?mod=todays_us_page_one

Is Fair-Value Accounting Always Fair? March 5, 2008; Page A15 Regarding "Wave of Write-Offs Rattles Market" by David Reilly (page one, March 1): Thirty years ago, no accounting principle was more accepted than that assets are worth what they cost, absent proof of a permanent impairment of value. When such impairment was understood and confirmed, the carrying value was adjusted.

Today, I see the overzealous accounting profession calling for long-term assets, those which the owners do not intend to sell, nor have need to sell, being forced to mark such assets to market on a regular basis. While this may make sense for equities, where market values tend to reflect economic reality or assets which may need to be sold in the normal course of operating the business, it makes no sense for assets intended to be held to maturity. The marking of long-term complex financial instruments where market values are temporarily depressed and meaningless for the longer term is terribly destructive. In many cases, the only market prices available are distressed sellers or some thin index which is regularly shorted by investment professionals.

These are not real values, and marking to these prices causes unnecessary volatility and contractions in capital which restrict the ability of financial institutions to operate and grow. Perhaps the accounting profession is trying to overcompensate for its failures in the Enron fiasco and other similar cases, and to prevent lawsuits. Fair-value accounting, particularly for long-term complex instruments that do not trade in liquid markets, is illogical and destructive and should be re-examined immediately.

Jensen Comment
One problem here is bank's want it both ways. The want to classify investments and loans as "held-to-maturity" (HTM) so that they can avoid having to carry them at fair value such as allowed in FAS 115. However, bands want to classify them as HTM but want to sell them when fair value hits trigger points. Hence a lot of those "HTM" securities are not HTM after all.

From The Wall Street Journal Accounting Weekly Review on February 29, 2008

Banks Use Quirk as Leverage Over Brokers in Loan Fallout by David Reilly The Wall Street Journal Feb 27, 2008 Page: C1 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB120407667879295385.html?mod=djem_jiewr_AC   TOPICS: Accounting, Advanced Financial Accounting, Banking, Fair Value Accounting, Investment Banking, Investments, Loan Loss Allowance SUMMARY: "Leveraged loans for buyouts were originally made with the idea that banks and brokers would quickly sell them to investors." That approach proved impossible when markets froze in August 2007. "Among banks, Citigroup and J.P. Morgan have the most at stake, with $43 billion and $26.4 billion in exposures, respectively....among brokers, Goldman has the biggest leveraged-loan exposure, at $26 billion, followed by Lehman Brothers...with $23.8 billion....By reclassifying (to held-to-maturity) some of the loans they hold, banks can avoid marking these loans to market, unlike brokerages which have to price these assets" at current market value at each balance sheet date. "J.P. Morgan...Chief Executive James Dimon said during a January conference call...[that] the bank reclassified loans...because it believed that at current depressed prices, some of its leveraged loans 'may be terrific long-term assets to hold.' That said, the more favorable accounting treatment doesn't hurt, either." CLASSROOM APPLICATION: Accounting for investments versus loans is the main topic in the article. The article refers to market value (fair value) measurement, lower or cost-or-market and the cost method as applied to held-to-maturity investments. QUESTIONS:  1.) Three methods of valuing loans and investments -- fair value, lower of cost or market and cost basis -- are described in the article, without using these terms. Summarize how each of these methods is described in the article. 2.) Why do banks and investment brokerage houses face different requirements in accounting for loans they have offered in leveraged buyout transactions? 3.) How might a bank face fewer reported losses by using the cost method of valuing loans than the fair value method? In your answer, comment on the possibility that the bank may have to report allowances for uncollectibility of these loans. 4.) What is the significance of J.P. Morgan Chief executive James Dimon's statement that "at current depressed prices, some of its leveraged loans 'may be terrific long-term assets to hold'?"   Reviewed By: Judy Beckman, University of Rhode Island

"Banks Use Quirk as Leverage Over Brokers in Loan Fallout," by David Reilly, The Wall Street Journal, February 27, 2008; Page C1 --- http://online.wsj.com/article/SB120407667879295385.html?mod=djem_jiewr_AC 

When it comes to losses on "leveraged loans" -- a big source of worry for investors in financial firms -- banks may have an advantage over their brokerage-house rivals in weathering the storm.

Thanks to a quirk in accounting rules, banks such as J.P. Morgan Chase & Co. don't always have to book losses immediately on those loans even as brokers like Goldman Sachs Group Inc. are forced to take hits right away.

Leveraged loans -- used by companies, usually with low credit ratings, and often to fund buyouts -- were originally made with the idea that banks and brokers would quickly sell them to investors. When markets froze in August, institutions found themselves stuck with billions of these loans that they couldn't unload.

That led to losses last fall as financial firms were forced in many cases to mark these loans down by about 5%. The market for these loans is again struggling, and prices are falling further -- in some cases to about, or even less than, 90 cents on the dollar -- which will likely lead to another round of losses at financial firms.

This makes it more likely some banks will look to shield at least part of their holdings from the swings in market prices. By reclassifying some of the loans they hold, banks can avoid marking these loans to market, unlike brokerages, which have to price these assets at whatever investors say they are worth.

This isn't to say that banks will be able to entirely sidestep losses stemming from leveraged loans issued to fund huge corporate buyouts. But any kind of shock absorber would be welcome, given the depressed market conditions now.

Still, while the accounting peculiarity may give banks an edge, it could also pose a danger to their investors, analysts warn. That is because investors could be lulled into complacency when it comes to the size and scope of the hits that the banks may face.

Banks and brokers have nearly $200 billion in leveraged-loan exposure. Given recent falls in market prices of these loans, that could lead to $10 billion to $14 billion in write-downs, Oppenheimer analyst Meredith Whitney estimated in a recent note.

Among banks, Citigroup and J.P. Morgan have the most at stake, with $43 billion and $26.4 billion in exposures, respectively, as of the end of last year. Among brokers, Goldman has the biggest leveraged-loan exposure, at $26 billion, followed by Lehman Brothers Holdings Inc. with $23.8 billion.

The fact that a bank and a broker holding the same kind of loan could see very different effects highlights what some analysts feel is a major flaw in the accounting for leveraged loans. Brokers for years have argued that banks should also be required to assess the values of all their financial assets using market prices.

The differing approaches also underscore that even as the use of so-called market values cause some firms to quickly recognize big losses -- even if there are growing questions about the reliability of these values in frozen markets -- not every financial player always has to measure up against this same yardstick.

Seem strange? Even analysts think so. "If you thought the accounting for investments in debt and equity securities was unnecessarily complex, the accounting for loans will make your head spin," Credit Suisse accounting analyst David Zion wrote in a recent research note looking at issues surrounding loans.

J.P. Morgan, for example, said last month that it had reclassified about $5 billion of $26 billion in leveraged loans it holds. J.P. Morgan declined to comment beyond what Chief Executive James Dimon said during a January conference call. At that time, he said the bank reclassified the loans this way because it believed that at current depressed prices, some of its leveraged loans "may be terrific long-term assets to hold."

That said, the more favorable accounting treatment doesn't hurt, either. Here is how it works: Companies either classify loans as being "held for sale" or as investments, sometimes referred to as "holding to maturity." Loans held for sale are carried at whichever is lower: the original cost or the current market value. That is similar to "marking to market prices." Any losses are taken in the current period.

But the value of loans held for investment doesn't change with every uptick or downtick in the market. Instead, such loans are said to be held at their cost, although they are initially marked to market prices if a firm is reclassifying them from held for sale.

The big benefit is that holding loans for investment reduces volatility. Brokers like Goldman, Lehman, Morgan Stanley or Merrill Lynch & Co., on the other hand, have to mark just about everything they hold to market prices. So the firms -- which together have about $91 billion in leveraged-loan exposure, according to Oppenheimer -- take losses right away.

This isn't to say banks completely avoid losses on loans held for investment. Mr. Dimon said in the bank's conference call that while it wouldn't mark the reclassified loans to market prices, it would "have to build up proper loan-loss reserves against those, and we would fully disclose that so there's no issue about what that did to the company."

But in checking to see whether the value of a held-for-investment loan is impaired, a bank would look to see if there has been a change in the credit rating of an issuer, if the issuer has fallen behind in interest payments or if it looks like a delinquency could be looming.

A bank wouldn't necessarily have to consider what the loan would fetch if sold in the market today, analysts say. That view, which reflects market perceptions, is what is causing big losses at many firms today. So looking only to credit quality could prove to be advantageous.

Three Articles from the American Bankers Association on Fair Value Accounting (as of the end of 2007) --- http://www.cs.trinity.edu/~rjensen/Calgary/CD/FairValue/AmericanBankersAssn/

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Question
Since the Enron and Worldcom scandals and the meltdown of their auditing firm (Anderson), audit fees have sky rocketed.
What has this money really bought in the way of improved quality of audits?

"Watching the detectives:  The subprime crisis should teach us to keep a much closer eye on company auditors from now on." by Prem Sikka, The Guardian, March 14, 2008 --- http://commentisfree.guardian.co.uk/prem_sikka_/2008/03/watching_the_detectives.html

Company auditors, the private police force of capitalism, make millions of pounds in fees from company audits. And company audits are used to get easy access to senior management and sell a variety of consultancy services.

But fee dependence, weak laws and self-interest inevitably compromise impulses for penetrating audits. The inevitable outcome is worthless audit reports.

Carlyle Capital Corporation, a Guernsey-registered hedge fund with debts of £11bn, has become the latest casualty of the deepening credit crisis - and the effects will ripple throughout the financial world.

Questions are now being asked about the financial health of its parent company, the Carlyle Group, which has more than $75bn (£37bn) under its management.

But as the crisis spreads, questions also need to be asked about auditors, who are the eyes and ears of regulators and markets. For the Carlyle episode once again draws attention to duff audit reports.

. . .

On February 27 2008, Carlyle Capital Corporation published its annual accounts for the year to December 31 2007. These accounts were audited by the Guernsey office of PricewaterhouseCoopers, the world's biggest accounting firm, which boasts revenues of $25bn.

Amid one of the biggest credit crises, the accounts claimed on page five), that the directors were "satisfied that the Group has adequate resources to continue to operate as a going concern for the foreseeable future".

The auditors were satisfied, too, and on 27 February 2008 gave the company a clean bill of health (page 6).

Less than two weeks later, on March 9 2008, Carlyle announced that it was discussing its precarious financial position with its lenders. And on March 12, the company announced that it "has not been able to reach a mutually beneficial agreement to stabilize its financing".

The company says (page 24) that it paid $2.5m in fees "principally ... to our independent auditors, our external legal counsel, and our internal audit service provider".

Yet In less than two weeks, the mirage of assurance offered by auditors vanished.

And the case of Carlyle Capital Corporation is surpassed by Thornburg Mortgage, America's second-largest independent mortgage provider. Its accounts for the year to December 31 2007 were audited by KPMG, another giant accounting firm, with global revenues of nearly $20bn. On February 27 2008, KPMG gave the accounts a clean bill of health; barely six days later, the company explained that it was experiencing financial turbulence and renegotiating its financial position. Auditors decided to retract their opinion.

On March 7, a press release from Thornburg said it had "received a letter, dated March 4 2008, from its independent auditor, KPMG LLP, stating that their audit report, dated February 27 2008, on the company's consolidated financial statements as of December 31 2007, and 2006, and for the two-year period ended December 31 2007, which is included in the company's Annual Report on Form 10-K for 2007, should no longer be relied upon."

These episodes raise serious questions about the quality of audit work. Why are we paying auditors millions of pounds in fees, especially as audit reports seem to have a shelf life of less than two weeks, and even auditors themselves apparently lack confidence in their own work?

Despite the rising financial gloom, auditors were silent on the subprime crisis. Now, in the middle of the credit crunch, they are found to have issued audit reports of little value.

Auditors can be kept on the straight and narrow by the threat of lawsuits for shoddy work. But that threat has been diluted by a series of liability concessions in the US, the UK and elsewhere. These have eroded economic incentives to deliver penetrating audits. The erosion of liability pressures has made it extremely difficult to sue negligent auditors, and they are now a law unto themselves. The inevitable result is the publication of worthless audit reports.

The auditing industry continues to fail. Yet that is of little comfort to people who may lose their savings, jobs, pensions and investments. This private police force of capitalism has failed again and again to police financial institutions, and that task must now fall upon the regulators.

Continued in article

Andy Bailey has some interesting comments about audit professionalism at http://www.trinity.edu/rjensen/Bailey2008.htm 

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

From McGraw-Hill in 2008
Architect's Square Foot Costbook --- https://www.bnibooks.com/botw/archSqFt08orderForm.asp?kcode=204W

From The Wall Street Journal Accounting Weekly Review, March 7, 2008

Wave of Write-Offs Rattles Market by David Reilly The Wall Street Journal Mar 01, 2008 Page: A1 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB120432957846104273.html?mod=djem_jiewr_AC   TOPICS: Accounting, Financial Accounting, Financial Accounting Standards Board, Financial Analysis, Financial Reporting, Financial Statement Analysis, Standard Setting SUMMARY: "The massive write-downs that financial firms are posting have begun to spur a backlash among some investors and executives, who are blaming accounting rules for exaggerating the losses and are seeking new, more forgiving ways to value investments." The article quotes comments by Ben Bernancke to the Senate banking committee saying that he doesn't know how to "fix" this accounting issue and that accountants must "make the best judgment they can." Also quoted are comments by FASB Chairman, Bob Herz. CLASSROOM APPLICATION: Use the article to discuss the various influences on accounting standards setting: Economic consequences of accounting choices, the political pressures that can arise, and the desire to uphold qualitative characteristics in financial reporting. The related article is a 'Letter to the Editor' written by a Westport, CT, investment advisor with approximately $230 million in assets under management. QUESTIONS:  1.) Define the concept of "valuation" in accounting, the historical cost basis, and fair-value accounting. Provide examples in which each of these bases of reporting is used in financial statements. 2.) How is fair value accounting potentially contributing to the effects of losses reported by financial institutions? 3.) In responding to questions by the Senate banking committee, Federal Reserve Chairman Ben Bernanke says he does not know how to fix accounting issues arising from reporting on a fair-value basis and that "..accountants need to make the best judgment they can." What accountants are responsible for making judgments about whether to use the historical cost basis or fair-value basis for accounting valuations? 4.) On what basis do accountants decide which is the appropriate model for valuation in financial statements? In your answer, define the conceptual framework in financial accounting and reporting and it's associated qualitative characteristics. 5.) What are the economic consequences of accounting policy choice? List one argument made in the main article or the related one which exemplifies this concern with the economic consequences of accounting policy choice. 6.) FASB Chairman Bob Herz acknowledges "the difficulty investors and companies are facing" but also argues that the alternative to fair-value reporting is to pretend "...that things aren't decreasing in value" and that company managements at times like these would "... say they think it's going to recover." Do you think that historical cost reporting works in this fashion?   Reviewed By: Judy Beckman, University of Rhode Island

"Wave of Write-Offs Rattles Market:  Accounting Rules Blasted as Dow Falls; A $600 Billion Toll?" by David Reilly, The Wall Street Journal, March 1, 2008; Page A1 --- http://online.wsj.com/article/SB120432957846104273.html?mod=djem_jiewr_AC

The massive write-downs that financial firms are posting have begun to spur a backlash among some investors and executives, who are blaming accounting rules for exaggerating the losses and are seeking new, more forgiving ways to value investments.

The rules -- which last made headlines back in the Enron era -- require companies to value many of the securities they hold at whatever price prevails in the market, no matter how sharply those prices swing.

Some analysts and executives argue this triggers a domino effect. The market falls, forcing banks to take write-offs, pushing the market lower, causing more write-offs.

The rules' supporters, however, make a stark counter-argument: They can help prevent the U.S. from suffering the kind of malaise that gripped Japan in the 1990s -- as banks there sat on mountains of dud loans for years without writing them down.

This debate gained new urgency Friday as the Dow Jones Industrial Average fell 315 points, or 2.5%. Driving stocks lower was insurance giant American International Group Inc.'s announcement of an $11.1 billion write-down that led the firm to post a $5.3 billion loss for the fourth quarter, the biggest loss in the firm's 89-year history.

Also rattling investors was a report by UBS that said losses among financial institutions could top $600 billion as the turmoil in global credit markets continues to unfold.

No one, including the chairman of the Federal Reserve, Ben Bernanke, knows with certainty what would be a better approach than using market prices for valuing holdings like these. "I don't know how to fix it," Mr. Bernanke said during testimony Thursday before the Senate banking committee. "I don't know what to do about it."

Mr. Bernanke added that "I think the accountants need to make the best judgment they can."

Despite the grim developments, many investors actually doubt that firms like AIG will suffer the full force of the losses they are now booking. Instead, these investors argue that the market has overreacted and will recover once the current panic subsides.

Indeed, Martin Sullivan, AIG's chief executive, said Friday on the firm's conference call that he doesn't expect the losses to be permanent. "We are obviously witnessing and living through extraordinary market conditions," he said. "We are trying, as are many others, to value very complex instruments."

Tumult also spread further in the normally staid market for municipal bonds -- debt issued by states and municipalities -- which is suffering one of its biggest crises in its history. Several hedge funds were hit with big losses after betting wrong on the direction of muni-bond prices, and as traders rushed to sell and exit their positions, portions of the market effectively froze.

On Friday, muni-bond-prices fell for a 13th straight day, pushing yields significantly higher. (Bond yields move in the opposite direction as price.)

For hundreds of muni-bond issuers, ranging from New York's Port Authority to the North Texas Tollway Authority, this tumult could cause borrowing costs to soar. That's a particular problem at a time when tax revenues are coming under strain from a slowing economy.

AIG's argument that its write-downs were "unrealized" -- in other words, they may never actually result in a true charge to the company -- echoes points made by a number of other major financial firms. It's a sore point because companies feel they are being forced to take big financial hits on holdings that they have no intention of actually selling at current prices.

The firms argue they are strong enough to simply keep the holdings in their portfolios until the crisis passes. Forcing companies to value securities based on what they would fetch if sold today "is an attempt to apply liquidation accounting to a going concern," said Charles Thayer of Chartwell Capital, a financial advisory.

The market-value accounting approach is "exaggerating" the market turmoil, leading to write-downs that are "excessive," said Neal Soss, chief economist at Credit Suisse. "Many people would take the view that price and ultimately value have disconnected."

Even analysts who are generally supportive of the market-value approach acknowledge it can make things tougher for investors in the current environment. It "increases the volatility of the accounts and it makes comparisons from quarter to quarter difficult," said Jeremy Perler of RiskMetrics Group, a research and strategy firm. "It certainly turns the world on end a little bit.

Alternative accounting strategies don't offer much for markets to cling to. One alternative is to value a security based on what the buyer originally paid for it. However, that risks giving investors outdated information.

The use of pricing models that don't pay heed to market values was discredited after Enron Corp. used them to book phantom profits earlier this decade.

Enron, for example, would book a profit on a contract to buy or sell energy years in the future based on its own expectations of how much the contract would be worth over time. But Enron never tried to gauge what others in the market might think the contracts were worth.

As the Fed chairman acknowledged in his recent Senate testimony, a move away from market values could in fact worsen current market turmoil. "The risk on other side is that if you do too much forbearance, or delay mark-to-market, that the suspicion will arise among investors that you're hiding something," Mr. Bernanke said.

Buyers are already lacking trust and that has been a reason they have balked at buying securities that were typically seen as safe havens.

But these market seizures are what have made market values so contentious. Robert Herz, chairman of the body that sets the accounting rules governing the use of market values, the Financial Accounting Standards Board, acknowledged the difficulty investors and companies are facing.

"But you tell me what a better answer is," he said. "Is just pretending that things aren't decreasing in value a better answer? Should you just let everybody say they think it's going to recover?"

Others who favor the use of market values say that for all its imperfections, it also imposes discipline on companies. "It forces you to realistically confront what's happening to you much quicker, so it plays a useful purpose," said Sen. Jack Reed (D., R.I.), a member of the Senate banking committee.

Japan stands out as an example of how ignoring problems can lead to years-long stagnation. "Look at Japan, where they ignored write-downs at all their financial institutions when loans went bad," said Jeff Mahoney, general counsel at the Council for Institutional Investors.

In addition, companies don't always have the luxury of waiting out a storm until assets recover the long-term value that executives believe exists. Sometimes market crises force their hands. Freddie Mac, for instance, sold $45 billion of assets last fall to help the company meet regulatory capital requirements.

Investors can no longer take a firm's survival for granted in today's environment. Fed Chairman Bernanke in his testimony noted that it wouldn't be surprising if there were some bank failures due to the current market crisis.

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

"Among Different Classes of Equity:  Valuation models can be tailored to unique financing structures." by Andrew C. Smith and Jason C. Laurent, Journal of Accouintancy, March 2008 --- http://www.aicpa.org/pubs/jofa/mar2008/allocating_value.htm 

EXECUTIVE SUMMARY
It is essential for board members, executive officers, CFOs, auditors and private equity investors to comprehend option-pricing models used to determine the per-share values of common and preferred shares.

The AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, describes three methods of allocating value between preferred and common equity, which include:

Current Value Method (“CVM”) Probability Weighted Expected Return Method (“PWERM”) Option-Pricing Method (“OPM”)

OPM, which is based on the Black-Scholes model, is a common method for allocating equity value between common and preferred shares.

Valuation models must be tailored to the specific facts and circumstances of the equity in the company being valued.

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

Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

"CHECKLIST Implementing Enterprise Risk Management," Journal of Accountancy, March 2008 --- http://www.aicpa.org/pubs/jofa/mar2008/chklist.htm

"The Accounting Cycle Arbitrary and Capricious Rules: Lease Accounting -- FAS 13 v. IAS 17," by: J. Edward Ketz, SmartPros, March 2008 --- http://accounting.smartpros.com/x61146.xml

One of the main arguments against a rules-based accounting standards-setting system is that resulting rules are sometimes arbitrary; correspondingly, proponents of principles-based accounting claim that resulting standards will not be arbitrary, but rather logical, consistent, transparent, and informative to financial statement users. Lease accounting is often presented as an exemplar of this point. Since the IASB standards are purportedly principles-based, let's compare the FASB rule against the international accounting rule -- er, principle -- and look at the differences. FAS 13 versus IAS 17.

IAS 17 classifies leases as finance leases or operating leases, but this is mere words. Finance leases correspond to the Financial Accounting Standards Board's capital leases. There are five criteria for determining whether a lease is a finance lease; they are:

The lease transfers ownership to the lessee; The lease contains a bargain purchase option to purchase that is expected to be exercised; The lease is for the major part of the economic life of the asset; The present value of the minimum lease payments amounts to substantially all of the fair value of the leased asset; Only the lessee can use the leased asset. The first four criteria correspond strongly with those of FASB; the last one is also contained in FAS 13 even though it is not specifically included as one of the criterion to determine whether a lease is a capital lease.

Critics are correct inasmuch as FASB included bright lines in criteria 3 and 4 (the 75 percent and the 90 percent thresholds), whereas IASB did not. One wonders, however, whether that change eliminates or enhances arbitrariness in financial reporting. True, FASB chose thresholds that cannot be defended while IASB does not contain them. The upshot might be to move the threshold from the standard-setter to the preparer and the auditor, without the investor's being privy to the debate. For example, the preparer might have a lease in which the present value of the minimum lease payments amounts to (say) 95 percent of the fair value of the asset and argues for operating lease treatment. What power and authority does an auditor have to challenge that assertion?

Yes, FAS 13 contains bright lines that are inherently arbitrary, as no economic theory supports the 75 percent or the 90 percent thresholds. But, the lack of bright lines does not solve the issue at all -- it merely shifts the decision about the threshold from the standard-setter to the preparer and to the auditor. This adds subjectivity to the determination of an appropriate cutoff point between what is a capital or an operating lease. Unfortunately, this reality places the decision in the hands of the one being evaluated by the investment community, and the last decade has shown us what happens when we entrust accounting policy making to managers.

To my way of thinking, the arbitrariness in FAS 13 is significantly less than the arbitrariness inherent in IAS 17. To say it another way, the transparency of FASB's arbitrariness to the investment community trumps the opaqueness of IASB's rule.

The present value of the lease is calculated with the interest rate implicit in the lease, if practicable; otherwise, the present value is determined with the business enterprise's incremental borrowing rate. Notice that IASB thereby allows financial engineering by the managers of the entity. Managers can argue that they do not know and cannot find out the implicit rate, obtain a lower present value of the leased item, and then be in a better position to argue that the lease is an operating lease. IASB's position conceptually is no better than FASB's on this point.

IASB defines assets and liabilities as follow:

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

These definitions are not substantially different from FASB's definitions. Most importantly, notice that if one is truly principled, he or she must conclude that leased items are assets and lease obligations are liabilities. There is no room for operating leases if managers or auditors are adhering to the principles imbedded in the definitions that IASB gives assets and liabilities.

Both FASB and IASB have ignored their own conceptual frameworks in FAS 13 and IAS 17. Under both sets of definitions, leased items are assets and lease obligations are liabilities. The only logical conclusion for FASB and IASB is to require capitalization of all leases.

. . .

FAS 13 is one of the most deficient standards ever issued by FASB. Yet, IAS 17 contains most of the same errors and shortcomings. Its only improvement -- removal of the bright lines -- is actually a detriment because it assists managers in their efforts to obfuscate meaningful communications with investors and creditors. If that's the best example of principles-based accounting, give me rules any day.

March 19, 2008 reply from Zane Swanson [zswanson@EMPORIA.EDU]

We discussed attributes of principles vs. rules based standards in my accounting theory class at the beginning of the semester. Upon reflection of the students' discussion and writing, the one thing that I would emphasize to the discussion is that accountants need to consider the issue from a perspective that the firms present the information to the statement users. Users definitely need comparability and they need understandability. With respect to the average firm in an specific industry, most accounting professionals will formulate statements and render opinions in a manner consistent with relevant reports for the users. As with our students, 1% of them cause 95% of our problems. In this standards' situation, the "Enron" exceptions cause the trouble. Those are the firms that slant the presentation by circumventing the transparent disclosure intention of the rule-based system. In my opinion of a principle-based system, the accounting professional's judgment of "exceptions" becomes more critical than in rules-based system. The "exceptions from the norm" in principle-based situations appear to me to have increased audit risk for the user to appreciate the accounting professionals judgment (even assuming the professionals exercise due diligence in the principles standard system).

Zane Swanson

Professor Zane Swanson
Department of ACIS
Emporia State University
1200 Commercial St.
Emporia, KS 66801
(620)-341-5087

March 19, 2008 reply from Bob Jensen

Hi Zane,

Even today it’s hard for firms to go toe-to-toe with their clients, especially the biggest clients of any local office.

What a relief it must be for auditors to point to bright lines in FASB and SEC rules that make some disputes non-negotiable and free of worry that the client will get better deal from a “less principled” local office competitor of the audit firm.

And when there are bright lines auditors cannot weasel out of some mistakes or hanky pank in auditing. For example, Andersen’s Carl Bass and Enron’s whistle blowing Sherron Watkins knew a bright line had been crossed by not having the requisite three percent (it was only three percent in those days) outside equity ownership in some of Andy Fastow’s SPEs. Without such a bright line, Andersen auditors could simply fudge their “principles.” As it turned out Duncan did fudge and Andersen brass caved in to Duncan’s request to have Carl Bass removed from the Enron audit. But down deep they all knew they’d crossed over the bright lines. You can read more about this by taking the quiz at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm 

Auditors and their clients can make a lot more “fudge” with principles-based standards!

Bob Jensen

March 20, 2008 reply from Zane Swanson [zswanson@EMPORIA.EDU]

Hi Bob,

I also agree bright lines are a good idea to address the normal easily identifiable concerns of auditor/client relations (your three percent example is right on target). From a financial statement user perspective, I am still concerned about situations where professional judgement is involved in firm situations which are quite different from their industry norms. For example, there has been great discussion about FIN48 with respect to the more-likely-than-not deferred tax asset amounts. In particular, these "estimates' will present challenging principles-type judgements when the circumstances are complex beyond "normal" firm/industry situations. I wonder how many users will understand the judgements in those situations and how "bright line" measures will identify effective the professional accounting treatments when judgement is a key issue.

Regards,

Zane

 

Bob Jensen's threads on rules-based versus principles-based standards are at http://www.trinity.edu/rjensen/Theory01.htm#Principles-Based

Question
What is cookie jar accounting and why is it generally a bad thing in financial reporting?

Answer
Cookie jar is more formally known as earnings reserve accounting where management manipulates the timings of earnings and expenses usually to smooth reported earnings and prevent shocks up and down in the perceived stability of the company. European companies in the past notoriously put deferred earnings in "cookie jars" so as to picture themselves as solid by covering bad times with deferrals out of the cookie jar that mitigate the bad news and vice versa for good times. The problem with too much in the way of a good time (in terms of financial reporting) is that accelerated growth rates in one year cannot generally be maintained every year and it may be a bad thing, in the eyes of management, to have investors expecting high rates of growth in revenues and earnings every year.

What's wrong with cookie jar reporting is that it allows management wide latitude in discretionary reporting that is a major concern to both investors and standard setters. Accounting reports become obsolete when they mix stale cookies from the cookie jar with fresh sweets and lemon balls of the current period.

Also see http://en.wikipedia.org/wiki/Cookie_jar_accounting

You can read more about FAS 106 at http://www.fasb.org/st/index.shtml
Scroll down to FAS 106 on "Employers' Accounting for Postretirement Benefits Other Than Pensions"
 

"FAS 106: Will the SEC Allow GM to Have the Largest Earnings Cookie Jar in History?" by Tom Selling, The Accounting Onion, March 13, 2008 --- http://accountingonion.typepad.com/theaccountingonion/2008/03/gm-holding-work.html

 

---

Note: This post was published about 12 hours prior to publication of Justin Hyde's article on the same topic in the Detroit Free Press.  Justin was the one who brought the topic to my attention, and I made the decision to write this post after a conversation with him.  I thank him for allowing me to go ahead with publication, even though his own article would be appearing later.

---

In an earlier post, I expressed my strong suspicion that top managers at General Motors were utilizing big bath accounting.  By 'big bath', I mean a violation of GAAP that permits delayed recognition of relatively small losses over time, so as to recognize the whole enchilada in some later period.  For some reason that others may wish to ponder, managers prefer the big bang to the accounting equivalent of death by a thousand cuts.  In GM's case, they appear to have improperly delayed as much as $11 billion in writedowns of their deferred tax assets.

Now comes another enormous red flag out of GM's public disclosures.  In fact, the numbers -- in the neighborhood of $50 billion -- make the big bath look like a glass of water.  This new one is of the 'cookie jar' variety: the improper deferral of a gain so as to spread its sweet goodness to the benefit of many subsequent accounting periods.  But, sad to say, this tale has another annoying twist: if GM doesn't get SEC approval for the accounting they are aiming for, they can -- for no other good reason -- opt out of their recent milestone agreement with the United Auto Workers.   

How this Opportunity for Accounting Shenanigans Came to Be

Before I get into the sordid details of the current situation, some background information may help.  GM has an 'OPEB' ('Other Post-Employment Benefit') liability on its balance sheet that is somewhat north of $50B.  It represents the present value of estimated future payments to employees as reimbursement of health care costs during their retirement years. In all, the plans cover about 500,000 current and retired employees. I have read that the expected future payments add about $1,600 to GM's per-vehicle cost, which is about eight times the cost incurred by foreign competitors (who benefit from more generous state-sponsored health care programs).  Note 15 to the financial statements in GM's 2007 10-K indicate that they spent in the neighborhood of $6 billion on retiree health care costs in that year.

Yuck. How did GM let itself get eaten alive by an OPEB in the first place?  The story starts with accounting standards -- or more accurately, the appalling lack thereof.  FAS 106, though significantly flawed, filled a gap in GAAP, but it was birthed only in 1990 -- long after the horses galloped through the open barn door.  My recollection from reading the financial press in the years just preceding is that corporate America was already buried under approximately $1trillion in off-balance sheet liabilities relating to retiree health care costs.  Why did management keep them off-balance sheet?  Because they could.  Why did managers let the liabilities get to be so humongous?  Because they were off-balance sheet.   

Let me explain.  When negotiating with unions, companies could either grant wage rate increases that would affect the bottom line starting at Day 1, or provide deferred compensation that would not hit the income statement for decades.  Such was the case with retiree health care benefits prior to FAS 106.  The "generally accepted" accounting prior to then was "pay as you go."  In other words, you expensed only that portion paid out to employees and their health care providers.  Actual payments (and thus, expenses) at the outset were low because so few of the employees to whom benefits were promised were old enough to begin receiving them.  By the time FAS 106 came to require accrual of benefits as the employees earned them, the unionized rust belt was already awash in unfunded, gold-plated retiree health care plans.  To make matters worse, health care costs looked like they might increase faster than inflation forever.

Back to Now

Late last year, GM and the UAW entered into a compromise ('Settlement Agreement') whereby GM gave its commitment (albeit with an escape clause I shall address anon) to pre-fund, in 2010, its $50 billion accumulated retiree health care obligation.  In exchange, GM would be relieved of any future obligation to make payments, except for funding annual plan shortfalls up to a paltry $165 million per year for the next 20 years.  (The UAW thinks that GM's money should last them 80 years, but that's another story.) 

$165 million? What's up with that?  The numbers I gave you earlier make it abundantly clear that it's but a drop in the bucket compared to the expected plan costs and the number of employees in the plan.  If we assume that expenditures are the current amounts paid by GM and ignore inflation, $165 million amounts to about 10 days worth of coverage. If we further assume that there are about 1 million beneficiaries (retirees plus spouses), that's a safety net of only $165 per beneficiary. That would be like a safety net made of thin-sliced swiss cheese. 

As to the real purpose of the $165 million, it's much akin to a fly on a cow's hindquarter: maybe just enough to get the 'right' accounting -- or to get the cow toswish her tail.  The 'right' accounting for GM is "negative plan amendment" treatment under FAS 106, or else they're gonna pick up their marbles and go home. 

And just what is negative plan amendment accounting?  It's a cookie jar reserve.  Basically, the accounting treatment of transactions of this ilk boil down to three possibilities:

• Settlement: The liability would be taken off the books, and a gain (around $50 billion) would be recorded in 2010 when the settlement occurs.   The GM-UAW agreement looks like a settlement and quacks like a settlement, but FAS 106 (para. 90) defines a settlement as "...a transaction that (a) is an irrevocable action, (b) relieves the employer ... of primary responsibility ... and (c) eliminates significant [emphasis supplied] risks related to the obligation and the assets used to effect the settlement."  Thus, the result of settlement accounting would be no cookie jar: just a blob of earnings that can't be used to juice any earnings-based compensation of top management.
• Negative plan amendment:  Even though a plan amendment immediately affects the calculation of the liability recorded on the balance sheet, FAS 106 requires that it be deferred and recognized over the time that current employees become eligible for retirement (para. 55).  If that amortization period is, say, 20 years, then negative plan amendment accounting creates an earnings cookie jar to be drawn on at the rate of $2.5 billion per year.
• Partial Settlement: GM is insisting that the recognized liability be written down to about $1.5 billion, the present value of a 19-year annuity of $165 million per year.  It is conceivable that one could find that GM is exposed to more risk than that amount, and that, therefore, the liability should be higher. 

Section 21 of the Settlement Agreement (Exhibit 10(m) of the 10-K), is where stated that GM can hold up the agreement if they can't get the liability on their balance sheet down to $1.5 billion.  Both settlement and negative plan amendment accounting will do that, and there is some chance that the Settlement Agreement may qualify for neither.  That's the scenario under which everybody has to sit down and renegotiate.   However, a presentation that GM gave to analysts reveals that the brass ring is negative plan amendment accounting.  That's where the measly $165 million comes in; it's supposed to be just enough to be considered "significant." They want the SEC to say that because of it, settlement accounting is not appropriate, and that accounting as a negative plan amendment is the result.  It's a ridiculous charade, well-hidden by the following 10-K disclosure appearing under the caption "Risk Factors":

"We are relying on the implementation of the Settlement Agreement to make a significant reduction in our OPEB liability. Under certain circumstances, however, it may not be possible to implement the Settlement Agreement. The implementation of the Settlement Agreement is contingent on our securing satisfactory accounting treatment for our obligations to the covered group for retiree medical benefits, which we plan to discuss with the staff of the SEC. If, based on those discussions, we believe that the accounting may be some treatment other than settlement or a substantive negative plan amendment that would be reasonably satisfactory to us, we will attempt to restructure the Settlement Agreement with the UAW to obtain such accounting treatment, but if we cannot accomplish such a restructuring the Settlement Agreement will terminate...."

I have a couple of things to say about this disclosure:

• First, the possibility of not getting the accounting treatment one wants is not a risk factor.  Risk factors have to do with the possibility of real losses; paper losses are just that -- unless, perhaps, recognizing a paper loss has an indirect real effect like tripping a loan covenant.  In fact, the SEC has said as much quite recently, and I wrote about it here.  I admit to not having read the 10-K completely (I do have a life), but I can't see that the accounting treatment has any such indirect effects.  If there were any, that surely is a substantive risk factor, and should have been disclosed. 
• Second, what does Section 21 of the Settlement Agreement and the risk factor disclosure say to providers of capital about the focus of GM's management on the real business of running a car company?  Exactly why is a particular accounting result is so darn important that they're willing to go back to the table with the UAW in order to get it?  Everything else equal, you gotta expect that in a renegotiation GM will end up giving more to the UAW; they will get nothing more in return than a new "economic substance" to run up the SEC's flagpole.

When the ball is in the SEC's court, what will they do with it?  It doesn't appear that anyone at the SEC has lifted a finger to follow up on GM's $11 billion big bath deferred tax asset charge, and I don't expect they will.  My money says the fix is in for this one, too.  The only question is how Chief Accountant Conrad Hewitt is going to fall over himself to give GM the negative plan amendment accounting they crave, resulting in what may be the largest legitimized accounting cookie jar in history. 

I've been blogging about financial reporting for a little over six months now, and so far I haven't had to overly tax my brain to find something to write about once or twice a week.  For whatever reason(s), there are many tales of wealth destruction that begin with a bad accounting rule.  Vast destruction of shareholder wealth ensues by the deliberate actions of managers who realize they can paper over their self-serving behavior with rosy short-term earnings reports.    The cases of retiree health care costs at company's like GM are particularly notable because it takes multiple manager and employee turnovers spanning decades to merely begin the process of exterminating the termites eating away at shareholder wealth and employee job security. 

The GM case is particularly emblematic of corporate governance run amok because the older generations of managers skimmed accounting cream going into questionable deals with unions when more discipline was called for; now, the latest generation is trying to do the same on the back end.  As they go about their business of re-arranging the deck chairs, current management seems to be doing quite well for themselves.  It is even more certain that their scheming progenitors have retired and shielded themselves with ironclad contracts, signed and sealed by board members who effectively serve at the pleasure of the CEO.  Those managers became rich while at the same time bequeathing their legacy of unsustainable labor costs.

March 15, 2008 reply from Peters, James M [jpeters@NMHU.EDU]

I have always found these discussions highly superficial because they don't get down to the actual accounting involved. "Cookie jar" reserves most commonly come from overly pessimistic valuation judgments that management must make under GAAP. The classics are the valuation reserves accounts receivable (allowance for doubtful accounts), inventories (under the lower of cost of market rule), tax assets, and warrantees. On other side are decisions when to recognize or defer revenues. However, GAAP has guidelines for all these issues and auditors also have guidelines they follow. Thus, the idea that managers have unlimited discretion to put "cookies" in a "jar" is pure fiction. Also, if you want to complain about "cookie jar reserves," then you should be talking about the specific GAAP feature that allows them. These "hand waivy" discussions accomplish nothing and indicate to me that the people writing them have never actually thought deeply about the sources of these reserves and the possible "fixes."

Jim Peters

March 15, 2008 reply from Tom Selling [tom.selling@GROVESITE.COM]

When I wrote my blog post on GM, I made a distinction in my mind between "cookie jar reserves" and "rainy day reserves." I realize that this is not the way that Arthur Levitt used the term in his famous “Numbers Game” speech, but these are mere euphemisms, and I thought the distinction was useful for the purpose of my post.

As to “unlimited discretion”, I don’t see how that is a necessary condition for earnings management – it’s more a matter of degree. As to the auditor’s role, let’s get real here; how much is D&T going to push back against GM? I was at the SEC, and I actually do know how the accounting can happen. Just like when ATT needed the SEC to bless their pooling of interests accounting when they acquired NCR, even though it couldn’t be shoe-horned into APB 16, D&T will be more than happy to let the SEC decide whether GM can get the accounting they want.

As to tax and other reasons -- as I stated in my post, if those were considerations they should have been disclosed in the 10-K as part of the relatively new Item 1A. (See Reg. S-K, Item 503(c)).

Tom Selling

March 15, 2008 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Bob,

Your main objection to "cookie jar" (I prefer to call it "piggy bank" accounting) seems to be that one can "manipulate" income. Unfortunately, accounting period "income" is a fiction created by accounting and economists.

Don't we, in our personal lives, put away something for a rainy day and then dip into such "reserves" when the rainy day arrives? What is wrong with it when the companies do the same thing, so long as they are required to fund such reserves?

When reserve accounting is permitted, the income reported is likely to reflect the long term prospects for the company, or a sort of moving average of incomes over the planning horizon. In my humble opinion that would be a far more accurate number for "income".

We accountants often think that the world exists to satisfy our fetish for encapsulating all that happened during an "accounting period" into one fictional number we call "income".

The deadly combination of the concepts of "accounting period" and a fictional "income" that we have created will expose the corporate world to incalculable hazards by way of manipulation of financial statements.

At the risk of sounding like a broken record, I'll repeat what I have said many times. In the early days of the SEC there was a "battle" between the accountants and the attorneys as to the importance of disclosures as opposed to measurement. We accountants won the battle in favour of measurement. With all that has happened since the early thirties, we may have won the battle, but we may be on the brink of losing the war (fair reporting).

With warm regards,

Jagdish

Reply from Bob Jensen

Hi Jagdish,

I wonder if a company could keep dipping into its cookie jar to report earnings for years after it's dead and buried. Existing shareholders could thereby recoup some of their losses long after the company ceased producing goods and services.

The cookie jar might be a disaster for income tax reporting because it allows for interest free deferrals of taxes for many years or at least until the GOP gets on its feet again.

Or put another way the New England Patriots could've won the 2008 Super Bowl if their unused reserves in points exceeded the reserves of the NY Giants. Or John Kerry might be able to win the Democratic Nomination in 2008 if he has enough reserve delegates from Year 2004.

The problem with reserve accounting is that it can distort current performance with ancient history. To some extent we do that already with accruals like depreciation, but at least sophisticated investors and analysts know the rules (standards) that apply to all companies. Cookie jar accounting is generally associated with customized (for one company only) secret reserves that allow management to do their own scorekeeping. If we allow cookie jar accounting with full faith in management to provide its own customized scores why use accounting scores at all? Why not just let management tell us that this year performance relative to last year was 27 points to 24 points. Each company can thereby devise its own point system and secret rules for assigning points.

Obviously I'm exaggerating, and I do understand your position on this Jagdish.  However, I for one lose all faith in accounting if management can reserve ancient history points to fudge current performance scores. But I would like the Patriots to be declared Super Bowl winners on the basis of accumulated reserve points from prior seasons. They might not even have to play the game.

Bob Jensen

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/Theory01.htm

March 15, 2008 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU] 

Bob and Jim,

I think my thinking on this topic were partially expressed by Jim.

Reserves are fine so long as they are funded and are not secret. When reserves are funded and not secretive, they are not in a cookie jar but in a piggy bank. It is only when they are secretive that they become cookies.

A good example is a dividend equalisation reserve or asset replacement reserves, where you appropriate retained earnings and put the amount in a fund by seggregating the associated assets. I don;t think they are very popular now.

A short article (http://ezinearticles.com/?Secret-Reserves&id=616062) describes some examples of secret reserves. In fact they should be the staples of Auditing courses except that since they do not fit into the textbook risk models of auditing, are often ignored in classes. For example, in auditing we always teach that the risk is in overvaluation of assets and therefore the most important assertion tested is 'existence, and that since the primary risk in case of liabilities is one of understatement, the most important assertion to be tested is 'completeness. Textbooks rarely mention the risk at the other tail, namely, the risk of secret reserves created by lack of support for the opposite assertions -- completeness for assets and existence for liabilities.

The only risk of such secret reserves are that they violate SEC rules and existing GAAP. I do not know of a single company in history that went under because they had secret reserves.

It is just that they do not fit our fixation with a single indicator of income which we have failed to define objectively (the idea of income is incorrigible in the sense of Art Thomas).

The examples are,

1. By under valuation of assets much below their cost or market value, such as investment, stock in trade, etc.

2. By not writing up the value of an asset, the price of which has permanently gone up.

3. By creating excessive reserve for bad and doubtful debts or discount on sundry debtors.

4. By providing, excessive depreciation on fixed assets.

5. By writing down goodwill to a nominal value.

6. By omitting some of the assets altogether from balance sheet.

7. By changing capital expenditure to revenue account and thus showing the value of assets to be less than their actual value.

8. By overvaluing the liabilities.

9. By the inclusion of fictitious liabilities.

10. By showing contingent liabilities as actual liabilities.

I think Jim was saying that there are protections against the above by way of GAAP and GAAS. Jim, let me know if I am right.

Regards to both,

Jagdish

May 16, 2008 reply from

March 16, 2008 reply from Richard C. Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

--- Jim Peters wrote:

By the way, if you want to cover a classic example, check out Lucent Technology's use of their tax asset valuation allowance beginning in 2001. I hope the following table comes out in the e-mail, but it shows that they incurred a sharp increase in their tax assets in 2001 and then wrote substantially all of them off in 2002, only one year later. The numbers are in millions so we are talking billions. The vast majority of their tax assets were NOL's carryforwards that won't expire for 20 years. So, do you think they won't make enough taxable income over the next 20 years to recover at least some, if not all, of these NOL's? You can see the valuation allowance steadily dropping from 2003 on when they started making money and cashing in the NOL's. The get a boost of nearly $1 billion in earnings from this, which, for them, was nearly 50% of their net income in 2004 and 2005. Their "hidden reserves" are very obvious by doing this simple side calculation based on their footnote disclosures.

---

For someone who says "I have always found these discussions highly superficial because they don't get down to the actual accounting involved" and "These "hand waivy (sic)" discussions accomplish nothing and indicate to me that the people writing them have never actually thought deeply about the sources of these reserves",

your own example seems both superficial and hand wavy. First, according to
http://www.sec.gov/Archives/edgar/data/1006240/000095012306015189/y27905exv13.htm#324
(Or Click Here )

over $1.7 billion of Lucent's deferred tax asset arises from credit carryovers and state & foreign loss carryovers, some of which expire as early as 2007. Second, the provisions that lead to these carryovers (net operating loss carryovers, foreign tax credit carryovers, alternative minimum tax considerations, section 382 limitations, etc.) interact in complicated ways. For all their federal NOL carryovers, for example, Lucent had a positive current tax expense for federal, state, and foreign purposes in 2006. This suggests that their ability to use these carryovers is more constrained than you suggest. Third, the ability to recover "some" of their NOLs in the future does not mean a firm can avoid recording a valuation allowance for the full deferred tax asset. Suppose a firm has a $1 billion deferred tax asset, and believes that 48% of the time it will use all of it in the future and 52% of the time it will use none of it in the future. Even though its expected future tax benefit is $480 million, GAAP requires the firm to record a $1 billion valuation allowance under the "more likely than not" criterion.

I have no opinion as to whether Lucent's valuation allowance is too high, too low, or just right. Sensible people understand that strong claims require strong evidence. What evidence--not conjecture, not speculation, evidence--which requires a detailed understanding of Lucent's federal, state, and foreign tax situations, and the interactions among them, as well as expectations about Lucent's performance well into the future--can you present to support your claims that their valuation allowance for 2006 or any prior year is inconsistent with GAAP?

Richard C. Sansing
Professor of Accounting
Tuck School of Business at Dartmouth
100 Tuck Hall Hanover, NH 03755

March 17, 2008 reply from Bob Jensen

Hi Jim and Jagdish,

When is a cookie jar reserve secret? I would contend that manipulation of bad debt reserves is sometimes a secret and devious practice even though the reserve itself is not secret. A great example of the secrecy employed is provided in "iMergent Practicing 'Cookie Jar Accounting'?" November 6, 2006 ---
http://seekingalpha.com/article/19914-imergent-practicing-cookie-jar-accounting

In our last comments on iMergent, we promised further discussion of the company’s accounting vulnerabilities. When a short seller calls “accounting irregularities” on a company, they might just be accused of pounding the table on their own position. Yet, when the company in question is currently the subject of numerous Attorney General Investigations, a Formal SEC Investigation, and a business that Forbes Magazine singled out this month as a paradigm for dirty companies on the AMEX, a warning of accounting irregularities begs to be given additional weight.

Stocklemon believes that iMergent is guilty of using cookie jar accounting to pad current earnings. This “voodoo” accounting employed by iMergent could be the reason why the company has lost all coverage from major brokerage houses and is now reports numbers to the public without independent scrutiny.

Cookie Jar Accounting defined: Investopedia , Investorwords.

First Hand Caught in the Cookie Jar

In 2005, iMergent confessed a huge restatement of prior earnings, and rolled up a mass of prior years’ unreported losses. The losses were due to overestimating collectability of receivables from its installment contract sales to its typically poor quality credit risk customers.

Hidden by these massive adjustments were their repeated acts of “cookie jar” accounting, where they shuttled dollars in and out of receivables, reserves, and net profit, as necessary to massage their earnings for the benefit of shareholders.

As the stock tanked from 25 to 4 last year, iMergent issued these multi-year restatements under the cover of late filing and the absence of a conference call to discuss them.

For a “normal” company, a massive confession/restatement like this one would be an opportunity to “clean house”, to sweep out the closets, dump out all the bad news and take a fresh start.

Not iMergent. They simply used the revision of their entire accounting policy and all the confusion created by a set of massive one-time adjustments (which obstruct investors’ ability to draw meaningful comps to prior periods) to start a whole new cookie jar.

Most cookie jar accounting serves to “smooth earnings” and, although subtle, is banned corporate behavior. But cookie jars also have a more sinister use – misleading investors to believe there is a pattern of increasing earnings when actually the business is stagnant or declining. With the amount of complaints online and government regulation along with dissatisfied customers, it does not take Warren Buffet to figure out this is a terminal business model.

And now, the other hand… This strategy only works until the cookie jar runs out… and the jar at iMergent is running low.

In a call with First Albany (before they dropped coverage), management of iMergent was astoundingly candid about the company’s reserve policy. They implied that the company was at times over-reserving against bad debt, which could, in future periods improve earnings. SEC files show the agency was curious enough about this to inquire further as to its validity.

In the company's reply to SEC questions, they clarified how exactly the reserves are figured out and also supplied statistics for defaults. This Rosetta Stone, posted on the SEC website not more than 2 weeks ago. The company explained the issue to the SEC with facts it had never previously disclosed to investors.

Their better credits (the "A"s) defaulted at a 26% rate and the lower quality credits (the "B"s) defaulted at a 53% rate. The company also stated that they didn't make a determination of reserves when finance receivables were perfected (created), rather they would look at the pool of receivables at quarter-end and then determine what reserve level was appropriate. The result was that when the prior reserve was deemed higher than necessary, the recently added reserves would get a lower reserve allocated -- which has the direct result of improving non-GAAP earnings!

Hidden under the massive restatements of June 2005, an anomaly appears which raises serious questions about IIG's use of reserves to benefit future earnings. Buried in the restatement, and not explicitly disclosed, IIG reserved an astounding 79% of revenues for bad debt reserves, dropping their new contracts written (from which the reserve has been deducted) to a historic low $14.6 million. This made their loss for the quarter even worse (because of the restatement it was already gigantic, so nobody noticed).

It also created a brand new cookie jar to pad future quarters. Strangely, at the same time, the company, explaining why their sales conversion rate had dropped, stated that new policy changes were resulting in increased credit quality. This is contradictory to a reserve rate nearly double its historical levels. Stocklemon believes iMergent’s current results have been benefiting from the new cookie jar.

As recently as March 2005 the company stated that the eventual default rate for finance receivables was 47%, which begs the question as to why higher reserves were ever materially above that. The company refuses to update the overall default rate, as they say it won't impact GAAP earnings. True enough, but it directly impacts non-GAAP earnings. Since the September 2005 quarter with a 57.5% reserve ratio, the company has grown gross receivables by $14.8 million, yet reserves have only grown by $1.2 million for an 8% suggested reserve ratio. While the company will suggest that that is mainly due to losing the lower quality credits (which we showed may have been artificially created last year) it suggests very strongly that the company was using those higher reserves to benefit current earnings.

In fact, were the ending June 2006 reserve materially higher, it would have had a dramatic impact on non-GAAP earnings as demonstrated by this table: Most companies would report non-GAAP so as to give a clear picture of profitability without options expenses or goodwill. iMergent wants you to focus on non- GAAP so you do not factor in their customer with a 550 FICO Score who may or may not pay 18% interest on his “software loan”.

Picture not shown

Therefore, it is the opinion of Stocklemon that if this company reserved properly, their NON-GAAP would be 24% lower than their GAAP earnings.

Receivables still not visible

Imergent’s receivables and reserves accounting can only be relied upon if the company’s cash is indeed “unrestricted” and the receivables are real. Considering the company they sold their receivables to:

1) was set up with a Storesonline Website

2) doesn’t seem to have any factoring business beyond iMergent

3) runs out of a 2000 sq ft house in Incline Village NV

4) bought the receivables on a “non-recourse” basis, but still periodically puts bad contracts back to iMergent for “replacement”
 

...this transaction fails to dispel the questions looming over the quality of iMergent’s receivables.

History repeats?

Imergent bears very strong resemblance to former Stocklemon subject Housevalues.com (SOLD). At the heart of both is an accounting model that systematically leaves out certain key metrics needed by the investing public to determine the true health of the company. Add to that an unending litany of consumer complaints, and you have the reason for the reporting omissions – an unsustainable business model – the last thing management wants to admit.

When Stocklemon reported on Housevalues.com, the stock was $15 a share and Avondale and Piper both had lofty price targets on the stock. Today it is $5.65, trading not far above its cash.

In contrast to Housevalues.com, iMergent has no analyst coverage. There’s no independent scrutiny holding management to a standard of reporting sufficient to shed light on their real business operations.

Continued in article

The history of cookie jar accounting is rooted so deeply in “secret reserves” that I generally think of secret reserves as part and parcel to cookie jar accounting as I learned about it. Newer standards have made it more difficult to hide reserves, especially standards making it more difficult not to consolidate subsidiary companies.

Some references on this history of secret reserves include the following:

 Financial Statement Analysis in Europe, by J.M. Samuels, R.E. Brayshaw and J.M. Craner (Chapman & Hall, London, 1995)
These authors discuss how common it was and still is in Europe to manage earnings with secret reserves, especially in Germany and Switzerland.

The Applied Theory of Accounts, by Paul-Joseph Esquerre --- Click Here

 

Secret Accounting in New Zealand:  P&O and the Union Steam Ship Company, 1917-1936, by Christopher  J. Napier --- Click Here

Proceedings of the Fourth International Congress on Accounting Author(s) of Review: A. C. Littleton The Accounting Review, Vol. 9, No. 1 (Mar., 1934), pp. 102-103 --- Click Here

Bob Jensen

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/Theory01.htm

Question
Did Clemson hide a cookie jar in order to increase revenue?

"Lawsuit Says Clemson U. Hid Cash Reserves While Increasing Tuition," by Charles Huckabee, Chronicle of Higher Education, March 17, 2008 --- http://chronicle.com/news/article/4147/lawsuit-says-clemson-u-hid-cash-reserves-while-increasing-tuition?utm_source=at&utm_medium=en 

A former executive secretary to Clemson University’s Board of Trustees alleges in a lawsuit that top officials of the public university hid $80-million in cash reserves from legislators while requesting more money from the state and increasing tuition, The State, a newspaper in Columbia, S.C., reported today.

The board’s chairman, Leon J. (Bill) Hendrix Jr., denied the allegations in the lawsuit, which was filed by Chalmers Eugene Troutman III, and described Mr. Troutman as a “disgruntled former employee.” Mr. Troutman says in the lawsuit that he was fired last August after he encouraged the trustees to spend down the cash reserves.

The university’s chief public-affairs officer, Catherine T. Sams, declined to comment on the suit but told the newspaper that Clemson’s financial practices were open and were audited annually. As of last June, she said, the university had $79.1-million in unrestricted funds, adding that “unrestricted does not mean uncommitted.” The money is available to “cover expenditures and plans that extend beyond the end of a fiscal year,” she said.

Mr. Troutman is seeking lost pay, actual and punitive damages, and reinstatement as executive secretary. A hearing on his lawsuit is scheduled this week before Judge Matthew J. Perry Jr. in the U.S. District Court in Columbia. Since 2001, in-state tuition at Clemson has risen from $5,090 to $9,870, the newspaper reported.

Bob Jensen's threads on cookie jar accounting are at http://www.trinity.edu/rjensen/Theory01.htm#CookieJar

"Fair dues:  Corporate tax dodging places a greater burden on those least able to pay. It's time we made the multinationals play by new rules," by Prem Sikka, The Guardian, March 4, 2008 --- http://commentisfree.guardian.co.uk/prem_sikka_/2008/03/fair_dues.html

Corporations are engaged in a relentless race-to-the-bottom. Companies boost their profits and executive remuneration by diluting or abandoning employee pension schemes and tax contributions.

The UK state pension is already one of the lowest in the western world and amount to just 17% of average earnings, compared to an average of 57% for the European Union. Nearly 30,000 pensioners die each winter because they cannot afford to heat their homes. In a United Nations study of child welfare in 21 major countries, the UK was ranked last. Yet companies and their advisers rarely reflect on their latest tax dodge and the social squalor that they create.

HSBC infrastructure, 3iInfrastructure and Babcock and Brown Partnerships are the latest examples of Private Finance Initiative (PFI) companies creating elaborate corporate offshore structures to avoid tax. No additional wealth or economic activity is created, but the financial engineering results in low taxes to enrich a few. In the age of reverse socialism, companies are happy for the taxpayers to finance the cost of policing, security, courts, trade consuls, subsidies, embassies and the environmental clean-up, as long as they can avoid the costs. Normal people continue to bear of cost of this corporate welfare programme.

Successive governments have done little to check the race-to-the-bottom. The UK is the world's biggest sponsor of tax havens, often known as Crown Dependencies and Overseas Territories. Their secrecy, low regulation and low tax have made them a magnet for the tax avoidance and the rules avoidance industries. The UK is legally and morally responsible for their good governance, but has done little to improve regulation or public accountability. The Treasury select committee should examine the governance of these boltholes. Given the increasing role of UK-sponsored tax havens in global tax avoidance, a special select committee could be formed to examine their role.

The PFI companies are paid by the tax payer, but by locating their operations in tax havens, they have eroded the UK tax base. As a result, normal people have to bear a higher burden of taxes. Corporate affairs remain shrouded in secrecy. Local and central governments are the biggest spenders and should not award any public contract to companies located in tax havens. As full details of these entities are not publicly known, it is inappropriate to give them any public monies. The successful bidders for public contracts should guarantee that they would remain in the UK for the entire duration of the contract.

In a globalised world, companies are easily able to establish residence and control in tax havens. As companies are taxed on the basis of their residence and control, they are easily able to avoid taxes in the places where they generate profits. Thus the PFI companies make money in the UK, but avoid taxes by claiming to be resident elsewhere. The easiest way of tackling this is to change the basis of taxation and tax them according to their economic activity: that is, they should pay tax in the UK on the basis of the profits made in the UK. Such an approach often known as "apportionment formula (pdf)" is already applied by states within the US and can be applied by EU member states to counter this erosion of tax authorities.

Public information and disclosure is another way of checking this relentless descent to the bottom. All companies bidding for significant public contracts should be required to explain the taxes that they have paid in the five preceding years. Indeed, company tax returns should be publicly available so that concerned citizens can see the tax avoidance schemes and alert the authorities.

All multinational companies should be required to adopt what is known as the country-by-country approach (pdf). Under this, they would be required to publish a table showing the jurisdictions from which they operate, together with income, profits, assets, liabilities, tax and employees in each. This would help to mobilise questions about corporate structures and tax avoidance. Thus we might see, for example, that News Corporation has lots of economic activity in the UK but pays little or no tax.

Continued in article

Question
What is the winner in the debate between "rote learning" and 'inquiry-based" methods of learning mathematics?
Is there an analogy here in the debate between "rules-based" standards and "principles-based" standards of accounting?

"Washington Legislature Gets an Earful About Freshmen's Woeful Math," by Paula Wasley, Chronicle of Higher Education, March 4, 2008 --- http://chronicle.com/news/article/4083/washington-legislature-gets-an-earful-about-freshmens-woeful-math?utm_source=at&utm_medium=en

Sixty professors at the University of Washington have signed an open letter to the Legislature complaining that college freshmen struggle to solve middle-school-level mathematics problems and are “confounded by simple algebra,” the Associated Press reports.

The faculty members hope that the letter, which was distributed to legislators late last week, will influence efforts to revise statewide math standards for public schools.

Some petitioners worry that the state’s new guidelines for math curricula will be shaped primarily by education experts who tend to favor “inquiry-based” methods of instruction that focus on underlying mathematical concepts rather than rote learning of formulas.

Such methods don’t work, contends Clifford F. Mass, a professor of atmospheric sciences at Washington, and have led to an increase in the number of students taking remedial math classes in college.

Not everyone sees the situation as so dire. No professors in the university’s College of Education signed the letter, and, according to an official in the office of the state superintendent of public instruction, the latest data indicate that only 2 percent of Washington public high-school students end up in remedial classes in college.

“Washington math isn’t a disaster,” Ginger Warfield, a lecturer in the university’s math department told the AP. “By many measures, we’re fine, and relative to the rest of the country, we’re much better.”

Jensen Comment
The phrase "relative to the rest of the country" doesn't give Washington much hope in its K-12 math education. That sigh of relief does not take any state very far.

"The race is not always to the richest," The Economist, December 6, 2007 ---
http://www.economist.com/world/international/displaystory.cfm?story_id=10251324

SPOOKED by the effects of globalisation on their low-skilled citizens, rich countries have been pouring money and political energy into education. In the United States, it has been proclaimed that no child will be left behind. Whether this programme, launched by George Bush in 2002, has raised standards will be a big issue in the 2008 presidential election. Next year Britain will introduce ambitious new qualifications, combining academic and vocational study. For the industrial countries of the Organisation for Economic Co-operation and Development (OECD), average spending on primary and secondary schooling rose by almost two-fifths in real terms between 1995 and 2004.

Oddly, this has had little measurable effect. The latest report from the OECD's Programme for International Student Assessment shows average attainment staying largely flat. This tome, just published, compares the reading, mathematical and scientific progress of 400,000 15-year-olds in the 30 OECD countries and 27 others, covering 87% of the world economy. Its predecessors in 2000 and 2003 focused on reading and maths respectively. This time science took centre stage.

At the top are some old stars: Finland as usual did best for all-round excellence, followed by South Korea (which did best in reading) and Hong Kong; Canada and Taiwan were strong but slightly patchier, followed by Australia and Japan. At the bottom, Mexico, still the weakest performer in the OECD, showed gains in maths; Chile did best in Latin America.

There is bad news for the United States: average performance was poor by world standards. Its schools serve strong students only moderately well, and do downright poorly with the large numbers of weak students. A quarter of 15-year-olds do not even reach basic levels of scientific competence (against an OECD average of a fifth). According to Andreas Schleicher, the OECD's head of education research, Americans are only now realising the scale of the task they face. Some individual states would welcome a separate assessment.

. . .

Letting schools run themselves seems to boost a country's position in this high-stakes international tournament: giving school principals the power to control budgets, set incentives and decide whom to hire and how much to pay them. Publishing school results helps, too. More important than either, though, are high-quality teachers: a common factor among all the best performers is that teachers are drawn from the top ranks of graduates.

Another common theme is that rising educational tides seem to lift all boats. In general—the United States and Britain may be exceptions—countries do well either by children of all abilities, or by none. Those where many do well are also those where few fall behind. A new feature in this year's study is an attempt to work out how differences between schools, as opposed to differences within them, determine performance (see chart). Variation between schools is big in Germany (to be expected, as most schools select children on ground of ability). But results also vary in some countries (like Japan) with nominally comprehensive systems. In top-performing Finland, by contrast, the differences between schools are nearly trivial.

Continued in article

Too Much Need for Remedial Education in College --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#RemedialNeeds

RedRover Launches Auditing Tool for Excel
RedRover Audit is designed for those who build, review, or certify Excel spreadsheets. The software visually guides reviewers through a structured process or audit, tracks progress cell by cell, and enables point-and-click navigation to flagged cells. Groups are able to work together to track and review approvals cell by cell for improved audit compliance. "Companies spend thousands of dollars and hours each year to audit their financial and operational spreadsheets. Unfortunately, these costs are rising because of the widespread ramifications spreadsheet errors can have in terms of lost revenue or harm to a company’s reputation," said Matthew Johnen, chief executive officer of RedRover Software Inc. "RedRover Audit renews confidence in spreadsheet content. This powerful and intuitive spreadsheet auditing tool reduces risk and ensures better compliance with corporate policies or regulatory requirements."
SmartPros, February 29, 2008 --- http://accounting.smartpros.com/x60923.xml

A free 30-day trial version is available and it is priced at $695. For more information: www.redroversoftware.com 

Former KPMG Partner Pfaff Indicted in Tax-Shelter Case
Former KPMG LLP tax partner Robert Pfaff has been charged in a new two-count criminal indictment over alleged fraudulent tax-shelter transactions in the U.S. and the Northern Mariana Islands, according to court papers made public yesterday. Mr. Pfaff, who was at KPMG from 1993 to August 1997, was charged with conspiracy and obstructing or impeding the due administration of the Internal Revenue laws, according to the indictment. The government also separately filed a civil forfeiture action, seeking nearly $1.84 million related to fee income Mr. Pfaff allegedly received as a result of the shelters' implementation.
Chad Bray, The Wall Street Journal, March 19, 2008 --- http://online.wsj.com/article/SB120589548197447523.html?mod=todays_us_page_one

Bob Jensen's threads on KPMG are at http://www.trinity.edu/rjensen/fraud001.htm#KPMG

Question
What do the department store chains WT Grant and Target possibly have in common?

Answer
WT Grant had a huge chain of departments stores across the United States. It declared bankruptcy in the sharp 1973 recession largely because of a build up of accounts receivable losses. Now in 2008 Target Corporation is in a somewhat similar bind.

In 1980 Largay and Stickney (Financial Analysts Journal) published a great comparison of WT Grant's cash flow statements versus income statements. I used this study for years in some of my accounting courses. It's a classic for giving students an appreciation of cash flow statements! The study is discussed and cited (with exhibits) at http://www.sap-hefte.de/download/dateien/1239/070_leseprobe.pdf
It also shows the limitations of the current ratio in financial analysis and the problem of inventory buildup when analyzing the reported bottom line net income.

From The Wall Street Journal Accounting Weekly Review on March 14, 2008

"Is Target Corp.'s Credit Too Generous? Retailer's Loans Rose 29% From Year Earlier As Others' Books Shrink," By Peter Eavis, The Wall Street Journal, March 11, 2008; Page C1 --- http://online.wsj.com/article/SB120519491886425757.html?mod=djem_jiewr_AC

Ben Bernanke must love retailer Target Corp., because its credit-card business is one of the few operations in the country that has strongly increased lending in the face of the credit crunch.

Now, though, some analysts are wondering whether the torrid expansion of the card business in the current tough environment could lead to higher-than-expected bad loans.

At the end of Target's fiscal fourth quarter, which ended Feb. 2, the company had $8.62 billion of loans outstanding on its Visa cards, which can be used at other retailers as well as Target, and its private-label cards, which are for purchases at Target only.

That total was up 29% from the $6.71 billion a year earlier -- and the growth rate was even greater than the 25% year-on-year rise posted in the fiscal third quarter. The card business has been responsible for a large part of the retailer's overall earnings growth.

Other credit-card lenders' loan books have either shrunk or grown much more slowly. For instance, Discover Financial Services' U.S. credit-card business reported a 5% annual increase in loans in its fiscal fourth quarter, ended Nov. 30. Loans outstanding at Capital One Financial Corp.'s U.S. card business declined 2.8% in its fourth quarter, while Citigroup Inc.'s rose 3.6% and J.P. Morgan Chase & Co.'s was up 3%.

Some fear that Target has lent too much at a time when a slowing economy makes it harder for borrowers to repay. And that it may be attracting struggling borrowers who can't get as much credit as they would like from other companies.

"Target appears to have pursued very aggressive credit growth at the wrong time," says William Ryan, consumer-credit analyst at Portales Partners, a New York-based research firm.

Not so, says Target's chief financial officer, Douglas Scovanner. The growth in the credit-card portfolio "is absolutely not a function of a loosening of credit standards or a lowering of credit quality in our portfolio," he says.

For several years, critics have been predicting a blowup in Target's credit business. It never happened. And Mr. Scovanner notes that the company has yet to report credit losses that exceed company forecasts. He expects that to remain the case this year and predicts the company will report credit losses of about 7% of loans this year, up from 5.9% in the last fiscal year. Discover's credit losses were 3.82% of loans in its latest fiscal year, while Capital One's were 2.88%.

Last year, Target made a choice to significantly increase its credit-card loans because it identified more borrowers that it felt comfortable lending to, Mr. Scovanner says. He adds that the loans likely won't increase at high rates in the near future from their level at the end of the latest fiscal year.

"Target has a proven track record of managing its credit business," says Robert Botard, analyst for the AIM Diversified Dividend Fund, which holds Target shares. "Because of that track record, it's difficult to bet against them."

But bears think this could be the point at which Target stumbles, because the high growth in its card portfolio has happened just as the economy has slowed and lenders have become tight-fisted. And if problems were to arise in the credit-card operations, they would happen at a time when the weak economy is slamming retail operations as well.

Target's stock is up 2.5% this year, while the Standard & Poor's 500 index has slumped 13%. At a price/earnings ratio of 14.4 times expected per-share earnings for 2008, Target shares also trade above the market's multiple of 12.9 times. Yesterday, at 4 p.m. in New York Stock Exchange composite trading, Target shares fell 77 cents, or 1.5%, to $51.23.

Investors often buy retailers to bet on an economic recovery, but Target may look less attractive to those sorts of buyers if it is grappling with problems in its credit-card operations. Target's pretax earnings rose by $128 million in the latest fiscal year. The lion's share of the increase -- $103 million -- came from the credit-card business.

And Mr. Ryan at Portales expects Target's credit losses to be considerably higher than the company predicts. Indeed, the high growth may make it harder to see credit deterioration that already is happening, he says.

Continued in article

Fishy Politics Leads to Fishy Accounting

"Shrimp Shame," by Greg Bushford, The Wall Street Journal, March 6, 2008 ---
http://online.wsj.com/article/SB120475150477614511.html?mod=djemEditorialPage

A three-judge World Trade Organization panel has ruled America's method for taxing shrimp imports out of line with the country's WTO obligations. What happens next will say a lot about the credibility of American leadership in promoting free trade.

The new WTO ruling is the latest twist in a politically charged case involving some $2 billion in annual shrimp exports to the U.S., counting not just India and Thailand -- the two countries pressing the current litigation -- but also China, Vietnam, Brazil and Ecuador. Three years ago, the U.S. Commerce Department slapped punitive duties ranging from 4% to 113% on shrimp from the six countries, alleging that they had been "dumping" their seafood delicacies in the U.S. at "unfairly" low prices.

That move was bad enough. But then U.S. Customs officials made matters worse by rolling out a novel accounting trick. Customs decided that shrimp imports from the six involved countries would be subject to a newfangled policy concoction called "continuous bonds."

In practice, that meant that an importer who planned to bring in, say, $100 million annually in shrimp subject to a 6% antidumping tariff would normally be required to post a $6 million cash deposit to cover the expected duties. On top of that, the importer would pay a $50,000 surety bond as "insurance" that payment can be made, in case import duties -- which can subsequently be raised or lowered by Commerce officials -- exceed the expected amount that year. Such bonds are backed by credit lines extended by the duty payer's banks.

But the new continuous-bond policy morphed the traditional $50,000 bonds into a bond equal to the expected-duty deposit over again -- meaning in the example above a bond of $6 million, in addition to the $6 million cash deposit importers already had to put up. While Customs was aiming at foreign exporters, the agency ended up squeezing the American importers who normally pay the duties.

For importers, the continuous bonds have been a continuous nightmare. They've been forced by lenders to scramble to obtain enormous annual credit lines, secured by putting up a portion of their businesses as collateral. Whether or not the importers end up having to borrow against their credit lines, the burdensome bonds constrain their ability to raise capital to re-invest in their businesses, as assets against which they could ordinarily borrow are already tied up. Predictably, some U.S. shrimp importers have been forced to exit the business, as their credit lines have been over-extended.

Customs officials justified the new policy -- which was announced without official prior notice in the Federal Register, and thus with no opportunity for affected importers to comment publicly -- as necessary to prevent possibly shady shrimp importers from failing to ante up duties when they are calculated at year's end. Such evasions had occurred in previous antidumping cases involving Vietnamese catfish and Chinese crawfish.

But when the National Fisheries Institute, whose members import some 80% of the seafood that Americans eat, challenged the Customs' paperwork burdens in the New York-based U.S. Court of International Trade, evidence of unsavory political calculations surfaced. Citing the agency's internal documents, U.S. Judge Timothy Stanceu found that Customs officials had been motivated "by domestic political pressures to take action directed against the shrimp importing industry." The bureaucrats had calculated that lawmakers from shrimp-producing states wielded more influence on important congressional committees than did representatives from shrimp-importing states. Despite that finding, the case is still wending its way through the federal courts.

Continued in article

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

Old accounting professors have fun thinking back to their days contemplating the difference between stock splits and stock dividends and treasury stock when they (as students) were green as grass in intermediate accounting courses. Always remember that a firm cannot profit from purchasing or selling or splitting its own shares, or at least that's the chapter and verse of those old textbooks. Nor can a company get hedge accounting for cash flow and value risks  in its own equity shares under FAS 133 and IAS 39. Accounting theory is tricky business!

From The Wall Street Journal Accounting Weekly Review on February 29, 2008

IBM Plots Another Share Buyback by William M. Bulkeley The Wall Street Journal Feb 27, 2008 Page: B2 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB120404278177393945.html?mod=djem_jiewr_AC   TOPICS: Accounting, Advanced Financial Accounting, Dividends, Stock Price Effects, Tax Avoidance, Taxation SUMMARY: IBM "...has spent $46.2 billion the last five years on repurchasing its shares--a sum equal to about 30% of its current market capitalization...and more than twice the $20 billion it spent on acquisitions during that period." As well, the article refers to IBM's use of borrowing through a foreign subsidiary for stock purchases after structuring the transaction to avoid U.S. taxes on repatriated earnings under IRS section 367 (b). That technique was known as "Killer B" and is now prohibited by the IRS. CLASSROOM APPLICATION: The article covers the range of issues related to intermediate accounting courses' discussions of treasury stock and stockholders' equity, including dividends. QUESTIONS:  1.) In general, how are stock buybacks, or treasury stock purchases, accounted for? You may present the answer to this question in the form of summary journal entries, with comments. 2.) Refer to IBM's consolidated financial statements for the year ended December 31, 2007, available at http://www.sec.gov/Archives/edgar/data/51143/000104746908001731/a2181836zex-13.htm (Alternatively, you may click on the live link to International Business Machines in the on-line article, click on SEC filings on the left hand side of the page, click on the link to the 10-K filed on 02/27/2008, select the fourth item in the table of submitted documents (Exhibit 13) and scroll to the financial statements section beginning on page 58.) What financial statement shows information about the treasury stock purchases that IBM has made? Summarize the activity shown for the years 2005 through 2007 and describe how that information was used in the article. 3.) How extensive is the amount of IBM's treasury stock held relative to the shares still outstanding? State your answer in terms of shares outstanding and dollar amounts shown in the financial statements. From which financial statement(s) do you obtain this information? 4.) Has the amount of shares repurchased impacted the amount of dividends paid to shareholders in the last three years? In your answer, comment on the point in the article that IBM increased its dividend 33% last year. 5.) Summarize the reasons given in the article explaining why IBM has repurchased significant amounts of its outstanding common stock. 6.) Why do you think that a program of share repurchases can "speak to strong faith in [IBM's] business model" by company management? What arguments are made against this assessment as stated in the article? 7.) What tax implications did IBM integrate into their share repurchase plans? 8.) Refer again to question 7. Given that the IRS ultimately disallowed use of the tax plan that IBM developed in relation to share repurchases, would you characterize the company's action in undertaking the plan as tax avoidance or tax evasion? Support your answer.   Reviewed By: Judy Beckman, University of Rhode Island

"IBM Plots Another Share Buyback," by William M. Bulkeley, The Wall Street Journal, February 27, 2008; Page B2 --- http://online.wsj.com/article/SB120404278177393945.html?mod=djem_jiewr_AC

International Business Machines Corp. announced its second $15 billion stock-buyback plan in less than a year, boosting its share price and igniting a stock-market rally.

The announcement helped convince investors that IBM, which had a strong fourth quarter, is confident in its strategy and outlook and believes its stock is underpriced. IBM shares rose $4.30, or 3.9%, to $114.38 in 4 p.m. composite trading on the New York Stock Exchange, leading a rally that boosted the Dow Jones Industrial Average by nearly 1%.

Few companies have relied on share buybacks as much as IBM. The Armonk, N.Y., company has spent $46.2 billion the last five years on repurchasing its shares -- a sum equal to about 30% of its current market capitalization, or stock-market value, and more than twice the $20 billion it spent on acquisitions during that period.

The latest buyback comes as Samuel J. Palmisano enters his sixth year as chief executive officer. During the early years of his tenure, IBM went through a rocky period of lowered forecasts and divestitures of businesses including its disk-drive and personal-computer units. Until recently, its stock was stuck at less than its level when Mr. Palmisano took over, while chief rival Hewlett-Packard Co. has seen a sharp rise in its share price.

IBM's growing profits from an expanded line of software, steady services business and sales in foreign markets have helped the company produce a lot of cash. Last year, it reported free cash flow of $12.4 billion, and it had $16.1 billion in cash at the end of the year.

IBM said it expects to spend about $12.4 billion of the latest authorized buyback amount during the current year. Funds will come from operations. It said the reduction in shares will increase its per-share earnings by five cents to at least $8.25 for the current year, up at least 16% from 2007. It has forecast $10 to $11 a share in 2010.

"The willingness to make continued share buybacks speaks to strong faith in the business model," said Thomas Smith, an equity analyst with Standard & Poor's who recommends the stock. Andrew Neff, an analyst with Bear Stearns Cos., said, "We like where they're positioned, in big markets where they have a compelling advantage." He said that IBM has been successful in purchasing software companies and increasing their sales by training its huge sales force to peddle the programs.

Last year, IBM spent $18.8 billion on stock buybacks, including a $12.5 billion accelerated share repurchase in May for which it borrowed money through a foreign subsidiary in order to avoid U.S. taxes. The Internal Revenue Service prohibited further use of that technique, which was known as a "Killer B" because it was designed to circumvent IRS Section 367 (b) covering U.S. tax on repatriated foreign earnings.

Despite the big gain in IBM shares yesterday, buybacks don't have a very good recent record of providing superior returns to shareholders and are sometimes criticized as poor uses of corporate cash. S&P said that 423 members of the S&P 500-stock index did buybacks in the 18-month period ended June 30, 2007, but only one-quarter of them, including IBM, outperformed the S&P index through Sept. 30. Buybacks reached record-setting levels in the first half of last year.

Ed Barbini, an IBM spokesman, said the company isn't stinting on investment in its operations and has increased spending on research and development in all but one of the past five years. He noted IBM also has been aggressively purchasing small companies, especially software makers. The company raised its dividend 33% last year.

Jensen Comment
It might be useful to assign this case to students with some added questions:

1. What situations arise when a company may want to hedge cash flow risk in its own shares?
   How does hedge accounting vary when the equity shares are your own versus those of another corporation?
    
2. What situations arise when a company may want to hedge fair value in its own shares?
   How does hedge accounting vary when the equity shares are your own versus those of another corporation?
3. What are the reasons for and against allowing hedge accounting for derivative instrument hedges of other derivative instruments?

What are the rules for hedge accounting? --- http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#HedgeAccounting

Small Business Helpers
Smart Stops on the Web, Journal of Accountancy, March 2008 --- http://www.aicpa.org/pubs/jofa/mar2008/smart_stops.htm

SMALL BUSINESS SOX ASSISTANCE www.sec.gov/info/smallbus/404guide.shtml This site features content from the SEC’s Sarbanes-Oxley Section 404—A Guide for Small Business, a publication for small public company managers and their auditors as they begin to assess internal control over financial reporting. Sections such as “What Constitutes Effective Internal Controls?,” “Identifying Financial Reporting Risks and Controls That Address Them,” and “Do Your Controls Work in Practice?” guide small business managers through the assessment process for the first time. The complete guide is also available in a printable version. FOCUS ON SMALL FIRMS http://pcps.aicpa.org Visit the AICPA’s PCPS Firm Practice Center for the most recent installment of Small Firm Solutions, a new e-newsletter for small firms and sole practitioners. The quarterly publication, part of the Institute’s “Small Firm Advantage” initiative, features “Hot Topics for Small Firms” from James Metzler, CPA, AICPA vice president–Small Firm Interests. The site hosts a collection of helpful resources from the Small Business Administration on startup businesses and on managing existing businesses. PCPS members can also access the “Risk Assessment Standards Toolkit” for SAS nos. 104–111, as well as small firm marketing brochures. LEARN FROM EXPERIENCE www.smallbiztrends.com/resources/the-experts Here, dozens of small business experts share their wealth of knowledge in articles, interviews and book reviews. A pull-down menu lets you choose information in your area of interest or by specific expert. These business owners and guest columnists offer information on topics such as globalization, Web design, employment trends and sales. You can also link to other small business resources, subscribe to the twice-monthly Small Business Trends newsletter and comment on articles. SMALL BIZ SUPPORT www.sba.gov/advo Stay current on federal regulatory policies and proposals—including Sarbanes-Oxley compliance deadlines for small public companies—that could affect your small business clients at this Smart Stop from the Small Business Administration. You can electronically subscribe to the Office of Advocacy’s newsletter, The Small Business Advocate, or sign up for RSS feeds of regulatory news and research, such as state economic profiles and banking and financial research. There is even a complete chronology of the organization’s Sarbanes-Oxley activities at www.sba.gov/advo/laws/comments/sarbanes_oxley.html.   GENERAL INTEREST WORD OF MOUTH www.automatic-referrals.com Written by Miriam Lawrence, director of Horsemouth, a business-building resource for financial advisers, the site provides tactics and tips for professionals who use referrals for business development and growth. Find articles such as “Five Great Times to Ask for Referrals” and “Keep a Referral Scorecard,” or catch up on Lawrence’s “ABCs of Automatic Referrals” series, which starts with “A is for Action” and works through the alphabet, including “K is for K.I.S.S. (Keep It Simple and Specific).” The site also touches on topics such as client service and relationships, marketing and communicating value. FINANCIAL REPORTING PORTAL www.financialexecutives.org/blog Find news highlights from the SEC, FASB and the International Accounting Standards Board on this financial reporting blog from Financial Executives International. The site, updated daily, compiles regulatory news, rulings and statements, comment letters on standards, and hot topics from the Web’s largest business and accounting publications and organizations. Look for continuing coverage of SOX requirements, fair value reporting and the Alternative Minimum Tax, plus emerging issues such as the subprime mortgage crisis, international convergence, and rules for tax return preparers. GETTING A CLUE http://10qdetective.blogspot.com The mission statement says it all: “It is the job of the 10Q Detective to dig through businesses’ 8-K and 10-Q SEC filings, looking for financial statement ‘soft spots.’ ” The blog, run by David Phillips, a financial statement analyst, features several posts a week, including investment news, opinions, trading alerts and stock alerts. There are also links to financial Web sites, corporate governance news, educational sites and other investment-related blogs. —Megan Pinkston

Bob Jensen's small business helpers are at http://www.trinity.edu/rjensen/Bookbob1.htm#SmallBusiness

Question
Are our U.S. standard setters bent transitioning to IFRS (and its loopholes) in the U.S. like fools rushing in where angels fear to tread?

"IFRS Chaos in France: The Incredible Case of Société Générale," by Tom Selling, The Accounting Onion, March 7, 2008 ---
http://accountingonion.typepad.com/

IFRS Chaos in France: The Incredible Case of Société Générale "Breaking the Rules and Admitting It" is the title of Floyd Norris's column describing the accounting by Société Générale for the losses incurred by their rogue trader Jérôme Kerviel; the title is provocative enough, but it's still not adequate to describe this amazing story. Although I am reluctant to come off as a prudish American unfairly criticizing suave and sophisticated French norms, what Société and its auditors have perpetrated would be regarded here as the accounting equivalent of pornography.

I don't aim to re-write Norris's excellent column, who rightly asks what a case like this says about the prospects for IFRS adoption in the U.S. But, I want to make two additional points. To tee them up, here's an encapsulation of the sordid tale:

Société Générale chose to lump Kerviel's 2008 trading losses in 2007's income statement, thus netting the losses of the later year with his gains of the previous year. There is no disputing that the losses occurred in 2008, yet the company's position is that application of specific IFRS rules (very simply, marking derivatives to market) would, for reasons unstated, result in a failure of the financial statements to present a "true and fair view." You might also be interested to know that the financial statements of French companies are opined on by not just one -- but two -- yes, two -- auditors. Even by invoking the "true and fair" exception, Société Générale must still be in compliance with IFRS as both E&Y and D&T have concurred. How could both auditors be wrong? C'est imposible. The first point I want to make is that Société's motives to commit such transparent and ridiculous shenanigans are not clearly apparent from publicly available information. My unsubstantiated hunch is that it has to do with executive compensation. For example, could it be that 2007 bonuses have already been determined on same basis that did not have to include the trading losses (maybe based on stock price appreciation)? Moreover, pushing the losses back to 2007 could have bee the best way to clear the decks for 2008 bonuses, which could be based on reported earnings -- since the stock price has already tanked.

The second point was made by Lynn Turner, former SEC Chief Accountant in a recent email. The PCAOB and SEC are considering a policy of mutual recognition of audit firms whereby the PCAOB would promise not to inspect foreign auditors opining on financial statements filed with the SEC. Instead, the U.S. investors would have to settle for the determination of foreign authorities. Thus, if the French regulators saw nothing wrong with the actions of local auditors -- even operating under the imprimaturs of EY or D&T -- then the PCAOB could not say otherwise.

Never mind the black eye the Société debacle gives IFRS, this sordid case must surely signal the SEC that mutual recognition would be a step too far; however, I'm not counting on the current SEC leadership to get the message.

"Loophole Lets Bank Rewrite the Calendar," by Floyd Norris, The New York Times, March 7. 2008 --- http://www.nytimes.com/2008/03/07/business/07norris.html?ref=business

It is not often that a major international bank admits it is violating well-established accounting rules, but that is what Société Générale has done in accounting for the fraud that caused the bank to lose 6.4 billion euros — now worth about $9.7 billion — in January.

In its financial statements for 2007, the French bank takes the loss in that year, offsetting it against 1.5 billion euros in profit that it says was earned by a trader, Jérôme Kerviel, who concealed from management the fact he was making huge bets in financial futures markets.

In moving the loss from 2008 — when it actually occurred — to 2007, Société Générale has created a furor in accounting circles and raised questions about whether international accounting standards can be consistently applied in the many countries around the world that are converting to the standards.

While the London-based International Accounting Standards Board writes the rules, there is no international organization with the power to enforce them and assure that companies are in compliance.

In its annual report released this week, Société Générale invoked what is known as the “true and fair” provision of international accounting standards, which provides that “in the extremely rare circumstances in which management concludes that compliance” with the rules “would be so misleading that it would conflict with the objective of financial statements,” a company can depart from the rules.

In the past, that provision has been rarely used in Europe, and a similar provision in the United States is almost never invoked. One European auditor said he had never seen the exemption used in four decades, and another said the only use he could recall dealt with an extremely complicated pension arrangement that had not been contemplated when the rules were written.

Some of the people who wrote the rule took exception to its use by Société Générale.

“It is inappropriate,” said Anthony T. Cope, a retired member of both the I.A.S.B. and its American counterpart, the Financial Accounting Standards Board. “They are manipulating earnings.”

John Smith, a member of the I.A.S.B., said: “There is nothing true about reporting a loss in 2007 when it clearly occurred in 2008. This raises a question as to just how creative they are in interpreting accounting rules in other areas.” He said the board should consider repealing the “true and fair” exemption “if it can be interpreted in the way they have interpreted it.”

Société Générale said that its two audit firms, Ernst & Young and Deloitte & Touche, approved of the accounting, as did French regulators. Calls to the international headquarters of both firms were not returned, and Société Générale said no financial executives were available to be interviewed.

In the United States, the Securities and Exchange Commission has the final say on whether companies are following the nation’s accounting rules. But there is no similar body for the international rules, although there are consultative groups organized by a group of European regulators and by the International Organization of Securities Commissions. It seems likely that both groups will discuss the Société Générale case, but they will not be able to act unless French regulators change their minds.

“Investors should be troubled by this in an I.A.S.B. world,” said Jack Ciesielski, the editor of The Analyst’s Accounting Observer, an American publication. “While it makes sense to have a ‘fair and true override’ to allow for the fact that broad principles might not always make for the best reporting, you need to have good judgment exercised to make it fair for investors. SocGen and its auditors look like they were trying more to appease the class of investors or regulators who want to believe it’s all over when they say it’s over, whether it is or not.”

Not only had the losses not occurred at the end of 2007, they would never have occurred had the activities of Mr. Kerviel been discovered then. According to a report by a special committee of Société Générale’s board, Mr. Kerviel had earned profits through the end of 2007, and entered 2008 with few if any outstanding positions.

But early in January he bet heavily that both the DAX index of German stocks and the Dow Jones Euro Stoxx index would go up. Instead they fell sharply. After the bank learned of the positions in mid-January, it sold them quickly on the days when the stock market was hitting its lowest levels so far this year.

In its annual report, Société Générale says that applying two accounting rules — IAS 10, “Events After the Balance Sheet Date,” and IAS 39, “Financial Instruments: Recognition and Measurement” — would have been inconsistent with a fair presentation of its results. But it does not go into detail as to why it believes that to be the case.

One rule mentioned, IAS 39, has been highly controversial in France because banks feel it unreasonably restricts their accounting. The European Commission adopted a “carve out” that allows European companies to ignore part of the rule, and Société Générale uses that carve out. The commission ordered the accounting standards board to meet with banks to find a rule they could accept, but numerous meetings over the past several years have not produced an agreement.

Investors who read the 2007 annual report can learn the impact of the decision to invoke the “true and fair” exemption, but cannot determine how the bank’s profits would have been affected if it had applied the full IAS 39.

It appears that by pushing the entire affair into 2007, Société Générale hoped both to put the incident behind it and to perhaps de-emphasize how much was lost in 2008. The net loss of 4.9 billion euros it has emphasized was computed by offsetting the 2007 profit against the 2008 loss.

It may have accomplished those objectives, at the cost of igniting a debate over how well international accounting standards can be policed in a world with no international regulatory body.

Bob Jensen's threads on controversies of accounting standard setting are at http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Bob Jensen's threads on "Rotten to the Core" are at http://www.trinity.edu/rjensen/FraudRotten.htm

"FSP 140-3: Plugging a Hole in GAAP, or Another Off-Balance Sheet Financing Gimmick?" by Tom Selling, The Accounting Onion, March 4, 2008 --- http://accountingonion.typepad.com/

 I subscribe to a listserv for professors of accounting ( http://pacioli.loyola.edu/aecm/ ) to discuss emerging technologies, pedagogy, and pretty much anything else. One of the recent topics of discussion on the listserv had to do with the impact of accounting complexity on preparing students to become auditors. One participant in the conversation offered up the following quotation from a masters student's paper on the bogus reinsurance transactions between AIG and General Re:

"When companies are involved in these complicated transactions, auditors often don't have the time, training, or knowledge to spot questionable items. When I audited a financial services company during my internship, I didn't really understand their business let alone the documentation that I was reviewing to ensure that controls were operating properly. So much of the work we conducted was based on mimicking the prior year's work papers that even after levels of review I believe fraud could have easily slipped by." [italics supplied]

Coincidentally, FASB Staff Position (FSP) FAS140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, has been recently finalized; this student's lament came to my mind while I was attempting to decipher the new accounting rule.

In order to begin to explain the FSP, you need to know that FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, contains criteria that restrict "sale accounting" on transferred financial assets when there is a concurrent purchase agreement. Consequently, “repurchase agreements” (repos) may be subject to "loan accounting" instead of sale accounting. The difference in accounting treatments is as follows: under sale accounting, the asset comes off the balance sheet and is replaced by the proceeds from sale; under loan accounting, the asset stays on the balance sheet, so the credit offset to recognition of the proceeds is to debt. So most significantly, sale accounting is off-balance sheeting financing, and loan accounting is on-balance sheet financing.

To the financial engineer attempting to defeat the best efforts of investors and/or regulators of financial institutions, loan accounting is a bad thing, and sale accounting is good. So one important for them is how to fabricate an 'arrangement' that gets under FAS 140's fence to permit sale accounting. Thus appears to have been invented by a mortgage REIT a variation on the repo (essentially a round trip for the asset) whereby the financial instrument now makes one more trip back to the original transferee. If you're confused, this picture may help:

Continued in article (with exhibits)

Bob Jensen's threads on General Re and AIG are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/Theory01.htm

Bob Jensen's threads on off balance sheet financing are at http://www.trinity.edu/rjensen/Theory01.htm#OBSF2

"Bringing down Public Enemy No. 1: IRS makes Al Capone’s records public," AccountingWeb, March 6, 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=104748
The IRS archives are at http://www.irs.gov/foia/article/0,,id=179352,00.html

All Federal tax records are confidential by law. The availability of historical records is highly unusual. However, the records of the criminal investigation of Al Capone below are of historical significance and of interest to the public. Therefore, they are being made available under the Freedom of Information Act (FOIA). The IRS is committed to its FOIA obligations and to an open government by making information available as authorized by law. No other IRS records meet the unique set of circumstances that make the Capone records publicly available.

Two stories forwarded by my good friend Bob Every

STORY NUMBER ONE  
Many years ago, Al Capone virtually owned Chicago. Capone wasn't famous for anything heroic. He was notorious for enmeshing the windy city in everything from boot-legged booze and prostitution to murder. 

Capone had a lawyer nicknamed "Easy Eddie." He was Capone's lawyer for a good reason. Eddie was very good! In fact, Eddie's skill at legal maneuvering kept Big Al out of jail for a long time.  To show his appreciation, Capone paid him very well. Not only was the money big, but also, Eddie got special dividends. For instance, he and his family occupied a fenced-in mansion with live-in help and all of the conveniences of the day. The estate was so large that it filled an entire Chicago City block. 

Eddie lived the high life of the Chicago mob and gave little consideration to the atrocity that went on around him.  Eddie did have one soft spot, however. He had a son that he loved dearly. Eddie saw to it that his young son had clothes, cars, and a good education. Nothing was withheld. Price was no object.  And, despite his involvement with organized crime, Eddie even tried to teach him right from wrong. Eddie wanted his son to be a better man than he was.  Yet, with all his wealth and influence, there were two things he couldn't give his son; he couldn't pass on a good name or a good example.  One day, Easy Eddie reached a difficult decision. Easy Eddie wanted to rectify wrongs he had done. 

He decided he would go to the authorities and tell the truth about Al "Scarface" Capone, clean up his tarnished name, and offer his son some semblance of integrity. To do this, he would have to testify against The Mob, and he knew that the cost would be great.  So, he testified.  Within the year, Easy Eddie's life ended in a blaze of gunfire on a lonely Chicago Street  But in his eyes, he had given his son the greatest gift he had to offer, at the greatest price he could ever pay. Police removed from his pockets a rosary, a crucifix, a religious medallion, and a poem clipped from a magazine. The poem read: "The clock of life is wound but once, And no man has the power to tell Just when the hands will stop At late or early hour. Now is the only time you own. Live, love, toil with a will. Place no faith in time. For the clock may soon be still. 

---

STORY NUMBER TWO  World War II produced many heroes. One such man was Lieutenant Commander Butch O'Hare. He was a fighter pilot assigned to the aircraft carr ier Lexington in the South Pacific. One day his entire squadron was sent on a mission. After he was airborne, he looked at his fuel gauge and realized that someone had forgotten to top off his fuel tank. He would not have enough fuel to complete his mission and get back to his ship. His flight leader told him to return to the carrier.

Reluctantly, he dropped out of formation and headed back to the fleet. As he was returning to the mother ship he saw something that turned his blood cold: a squadron of Japanese aircraft was speeding its way toward the American fleet. The American fighters were gone on a sortie, and the fleet was all but defenseless. He couldn't reach his squadron and bring them back in time to save the fleet. Nor could he warn the fleet of the approaching danger. There was only one thing to do. He must somehow divert them from the fleet.

Laying aside all thoughts of personal safety, he dove into the formation of Japanese planes. Wing-mounted 50 caliber's blazed as he charged in, attacking one surprised enemy plane and then another. Butch wove in and out of the now-broken formation and fired at as many planes as possi ble until all his ammunition was finally spent. Undaunted, he continued the assault. He dove at the planes, trying to clip a wing or tail in hopes of damaging as many enemy planes as possible and rendering them unfit to fly. Finally, the exasperated Japanese squadron took off in another direction.

Deeply relieved, Butch O'Hare and his tattered fighter limped back to the carrier. Upon arrival, he reported in and related the event surrounding his return . The film from the gun-camera mounted on his plane told the tale. It showed the extent of Butch's daring attempt to protect his fleet. He had, in fact, destroyed five enemy aircraft. This took place on February 20, 1942, and for that action Butch became the Navy's first Ace of W.W.II, and the first Naval Aviator to win the Congressional Medal of Honor. A year later Butch was killed in aerial combat at the age of 29.

His hometown would not allow the memory of this WW II hero to fade, and today, O'Hare Airport in Chicago is named in tribute to the courage of this great man. So, the next time you find yourself at O'Hare International, give some thought to visiting Butch's memorial displaying his statue and his Medal of Honor. It's located between Terminals 1 and 2. 

SO WHAT DO THESE TWO S TORIES HAVE TO DO WITH EACH OTHER?
Butch O'Hare was "Easy Eddie's" son.?

Jensen Comment
Snopes says parts of the stories are true albeit exaggerated --- http://www.snopes.com/glurge/ohare.asp
The Senior Eddie in reality was a really bad gangster!

Humor Between March 1 and March 31, 2008

"'Will This Shroud Make Me Look Fat?'" by Gina Bareca, Chronicle of Higher Education, February 27, 2008 ---
http://chronicle.com/review/brainstorm/barreca/

What are some last lines you’d bet have NEVER been uttered on a deathbed? Here are my suggestions, and I’d like to hear yours: 1. I’m really, really sorry I had all that passionate sex when I was young and beautiful. 2. Why didn’t I ever learn how to floss properly? 3. I wish there had been many more opportunities to watch The Weakest Link. 4. If only I’d carefully read every issue of SHAPE Magazine…. 5. Why, oh why, didn’t I organize my closet according to color and texture of garment? 6. That Kia was the best investment I ever made. 7. I wish I’d learned all the words to the theme songs from Davey Crockett, Growing Pains, and Friends. 8. Why didn’t I spend more time playing the nickel slots? 9. If only I’d had my hair frosted! 10. I wish I had rolled up every single one of my coins into those convenient little paper cylinders…. 11. Is the picture on my driver’s license a good likeness? 12. Can I please have one more spoonful of fat-free yogurt? 13. Life would have had more meaning if only I’d never broken anything in the kitchen. 14. I wish I had spent more time alphabetizing my spices. 15. If only I had mastered the art of decoupage! 16. Why, oh why, wasn’t I given more time to watch all the reruns of Celebrity Rehab? 17. If only my combined S.A.T. score had been 20 points higher, I could rest in peace. 18. Well, I certainly am glad I never told members of my family that I love them. 19. Would that there were one last chance for me to understand fully the intricate workings of my George Foreman’s Lean Mean Grilling Machine! 20. Do you think this shroud will make me look fat? Comments Posted Up To March 3, 2008 Comments 21. I should have saved more money in my rainy day fund – just in case! — D. · Feb 27, 06:22 PM · # 22. Dang it! I think I left the milk out. — EM · Feb 27, 07:59 PM · # 3. I wish I’d spent more time revising. — gigi · Feb 27, 10:59 PM · # 24. I should have spent far more time in committee meetings discussing whether or not sub-categories might be established within the main body of the document in order to clarify the main points. That would have been a good use of my weekend afternoons. — Freddy Uptown · Feb 27, 11:03 PM · # I wish I’d argued more forcefully for the Second Amendment than the First. You gotta problem with that? — S. Britchky · Feb 28, 06:30 AM · # 52.75.C2 Why is this taking so long? — Jesse · Feb 28, 07:15 AM · # I wish I spent more sleepless nights worrying about what color to paint the dining room. — EBC · Feb 28, 08:09 AM · # Why, oh why could I not get the mildew out of my grout in the bathroom? — Kim Wells · Feb 28, 09:35 AM · # I wish I’d named my little sailboat in San Diego Harbor, “Rather be Commuting” like I thought of doing but feared I’ld be taken literally for a drudge rather than for the wild and crazy guy I sometimes fancy myself as or as … (cut off, truncatedly, by the Great Editor in the Sky.)). — Bill Burke · Feb 28, 10:06 AM · # Why didn’t I get into World of Warcraft when I had the chance? — CV · Feb 28, 10:26 AM · # Why didn’t I enlist in the navy so I could see the world? — ddl · Feb 28, 10:39 AM · # Why didn’t I spend more time crying over that milk I spilled back in ’81?! — Nina Lomando-Grigoreas · Feb 28, 11:52 AM · # If only I could remember what that Gypsy told me in Seville. — Lee A. Jacobus · Feb 28, 02:04 PM · # I’m so glad I’m dying before my spouse does! — Emile Discard · Feb 28, 02:55 PM · # Why didn’t I ever use my crockpot? — Elizabeth Welch · Feb 28, 02:57 PM · # Why did I spend all that time worrying about retirement when I could have spent my money on plastic surgery and a cruise in the Greek Isles instead of leaving it to my kids – the little bast….. — MUAP · Feb 28, 03:16 PM · # Well…this is nice. — Mark · Feb 28, 03:35 PM · # Why didn’t I spend the HOURS it would take to figure out the convuluted rules customers of Staples are supposed to know in order to benefit from the Staples Rewards retail scam? Why oh why didn’t I leap into the car and drive to the nearest Borders the moment the 20% coupon-that-only-counts-for-the-next-six-hours lands in my email box? Why didn’t I LEAP at that Kohl’s come-on (the 14th to arrive this week) saying this was THE BEST SALE YET!!!—? — upside · Feb 28, 04:37 PM · # If only I had time to finish Atlas Shrugged. — David · Feb 28, 05:33 PM · # If only I had not finished Atlas Shrugged. — C · Feb 28, 06:54 PM · # If only I’d slept with that college professor… — Milena · Feb 28, 08:43 PM · # Where are my keys? — Rena · Feb 29, 12:53 AM · # My last words might be, “I wish I had spent more time alphabetizing my spices.” I really like doing that. — madame smartypants · Feb 29, 06:23 AM · # Should have bought the brown mascara. Waterproof. ggg — sephora · Feb 29, 08:21 AM · # Paper or plastic? — Bible Spice · Feb 29, 08:38 AM · # Oh, come on! You get it. The people who say that mean that one should spend more time with family or just loving those around us (not at work as most people aren’t teachers) and doing things that are emotionally restoring and envigorating. — Linda Petty · Feb 29, 09:49 AM · # If only I had conclusive proof that pro wrestling wasn’t real. — Anna B. · Feb 29, 10:23 AM · # Finally I can do something to significantly reduce my carbon footprint. — Erik D. · Feb 29, 10:44 AM · # One more hit off the morphine drip, please. — marci · Feb 29, 11:15 AM · # 1. I wish I’d stayed with that first job and earned a bigger pension. 2. I wish I’d worked harder to save my first marriage. — Don P. · Feb 29, 01:17 PM · # If only I’d spent more time and patience on that useless lump of a man who truly believed a woman’s place is pregnant in the kitchen! Four years was not enough, I should have given him one more chance! Woe, woe is poor career-centered me! — KAD · Feb 29, 02:52 PM · # If only I hadn’t had that second scoop of ice cream or that second slice of cake…. If only I had drunk the recommended ounces of water… If only I had spend more time waiting by the phone… — Hannah · Mar 1, 10:45 AM · # Thank L. Ron I discovered Scientology. Gasp…. — C · Mar 1, 05:11 PM · # I wish, just ONCE, I could have gotten up to 10,000 steps a day… I just kept losing count. Sigh… and I did never learn how to apply make-up… — Catalin Dunnett · Mar 1, 08:49 PM · # Sure wish I’d been an administrator.

Jensen Comment
Actually I prefer some of the famous epitaphs and parting words --- http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Quotations

Forwarded by Paula

Forwarded by Paula

AN IRISH GHOST STORY

This story happened a while ago in Dublin, and even though it sounds like an Alfred Hitchcock tale, it’s true.

John Bradford, a Dublin University student, was on the side of the road hitchhiking on a very dark night and in the midst of a big storm.

The night was rolling on and no car went by. The storm was so strong he could hardly see a few feet ahead of him. Suddenly, he saw a car slowly coming towards him and stopped. John, desperate for shelter and without thinking about it, got into the car and closed the door... only to realize there was nobody behind the wheel and the engine wasn't on.

The car started moving slowly. John looked at the road ahead and saw a curve approaching. Scared, he started to pray, begging for his life.

Then, just before the car hit the curve, a hand appeared out of nowhere through the window, and turned the wheel. John, paralyzed with terror, watched as the hand came through the window, but never touched or harmed him.

Shortly thereafter, John saw the lights of a pub appear down the road, so, gathering strength, he jumped out of the car and ran to it. Wet and out of breath, he rushed inside and started telling everybody about the horrible experience he had just had.

A silence enveloped the pub when everybody realized he was crying… and wasn't drunk.

Suddenly, the door opened, and two other people walked in from the dark and stormy night. They, like John, were also soaked and out of breath. Looking around, and seeing John Bradford sobbing at the bar, one said to the other...

"Look Paddy.....there's that fooking idiot that got in the car while we were pushing it!!!!"

Forwarded by a fun neighbor

How to use the economic stimulus tax rebate:

As you may have heard the Bush Administration said each and every one of us would now get a nice rebate.

If we spend that money at Wal-Mart, all the money will go to China . If we spend it on gasoline it will all go to the Arabs, if we purchase a computer it will all go to India , if we purchase fruit and vegetables it will all go to Mexico , Honduras , and Guatemala, if we purchase a good car it will all go to Japan , if we purchase useless crap it will all go to Taiwan and none of it will help the American economy.

We need to keep that money here in America , so the only way to keep that money here at home is to buy prostitutes, beer and visit Indian casinos, since those are the only businesses still in the US.

Forwarded by Paula

Wrong Lessons

A foursome of guys is waiting at the men's tee, while another foursome of women is hitting from the ladies' tees.

The ladies are taking their time. When the final lady is ready to hit her ball, she hacks it ten feet. She goes over and whiffs it completely. Then she hacks it another ten feet, and finally hacks it another five feet.

She looks up at the patiently waiting men and says apologetically, 'I guess all those f--king lessons I took over the winter didn't help.

One of the men immediately responds, 'Well, there you have it, you should have taken golf lessons instead!'

He never even had a chance to duck.

Not Humor
I don't know how many of these are true and how many are urban legends, but some of them make sense. This morning I peeled my banana from the bottom and got as many "stringy things" as ever. Maybe I'm just not a primate!

Bob Jensen

Forwarded by Auntie Bev

DID YOU KNOW?

Peel a banana from the bottom and you won't have to pick the little "stringy things" off of it. That's how the primates do it.

Take your bananas apart when you get home from the store. If you leave them connected at the stem, they ripen faster.

Store your opened chunks of cheese in aluminum foil. It will stay fresh much longer and not mold!

 Peppers with 3 bumps on the bottom are sweeter and better for eating. Peppers with 4 bumps on the bottom are firmer and better for cooking.

Add a teaspoon of water when frying ground beef. It will help pull the grease away from the meat while cooking.

To really make scrambled eggs or omelets rich add a couple of spoons full of sour cream, cream cheese , or heavy cream in and then beat them up.

For a cool brownie treat, make brownies as directed. Melt Andes mints in double broiler and pour over warm brownies. Let set for a wonderful minty frosting.

Add garlic immediately to a recipe if you want a light taste of garlic and at the end of the recipe if your want a stronger taste of garlic.

Leftover snickers bars from Halloween make a delicious dessert. Simple chop them up with the food chopper. Pe el, core and slice a few apples. Place them in a baking dish and sprinkle the chopped candy bars over the apples. Bake at 350 for 15 minutes!!! Serve alone or with vanilla ice cream. Yum!

1. Reheat Pizza Heat up leftover pizza in a nonstick skillet on top of the stove, set heat to med-low and heat till warm. This keeps the crust crispy. No soggy micro pizza. I saw this on the cooking channel and it really works.

2. Easy Deviled Eggs Put cooked egg yolks in a zip lock bag. Seal, mash till they are all broken up. Add remainder of ingredients, reseal, keep mashing it up mixing thoroughly, cut the tip of the baggy, squeeze mixture into egg. Just throw bag away when done easy clean up.

3. Expanding Frosting When you buy a container of cake frosting from the store, whip it with your mixer for a few minutes. You can double it in size. You get to frost more cake/cupcakes with the same amount. You also eat less sugar and calories per serving.

4. Reheating refrigerated bread To warm biscuits, pancakes, or muffins that were refrigerated, place them in a microwave with a cup of water. The increased moisture will keep the food moist and help it reheat faster.

5. Newspaper weeds away Start putting in your plants, work the nutrients in your soil. Wet newspapers, put layers around the plants overlapping as you go cover with mulch and forget about weeds. Weeds will get through some gardening plastic they will not get through wet newspapers.

6. Broken Glass Use a wet cotton ball or Q-tip to pick up the small shards of glass you can't see easily.

7. No More Mosquitoes Place a dryer sheet in your pocket. It will keep the mosquitoes away.

8. Squirrel Away! To keep squirrels from eating your plants sprinkle your plants with cayenne pepper. The cayenne pepper doesn't hurt the plant and the squirrels won't come near it.

9. Flexible vacuum To get something out of a heat register or under the fridge add an empty paper towel roll or empty gift wrap roll to your vacuum. It can be bent or flattened to get in narrow openings.

10. Reducing Static Cling Pin a small safety pin to the seam of your slip and you will not have a clingy skirt or dress. Same thing works with slacks that cling when wearing panty hose. Place pin in seam of slacks and -- ta da! -- static is gone.

11. Measuring Cups Before you pour sticky substances into a measuring cup, fill with hot water. Dump out the hot water, but don't dry cup. Next, add your ingredient, such as peanut butter, and watch how easily it comes right out.

12. Foggy Windshield? Hate foggy windshields? Buy a chalkboard eraser and keep it in the glove box of your car. When the windows fog, rub with the eraser! Works better than a cloth!

13. Reopening envelope If you seal an envelope and then realize you forgot to include something inside, just place your sealed envelope in the freezer for an hour or two. Viola! It unseals easily.

14. Conditioner Use your hair conditioner to shave your legs. It's cheaper than shaving cream and leaves your legs really smooth. It's also a great way to use up the conditioner you bought but didn't like when you tried it in your hair.

15. Good-bye Fruit Flies To get rid of pesky fruit flies, take a small glass fill it 1/2" with Apple Cider Vinegar and 2 drops of dish washing liquid, mix well. You will fi nd those flies drawn to the cup and gone forever!

16. Get Rid of Ants Put small piles of cornmeal where you see ants. They eat it, take it "home," can't digest it so it kills them. It may take a week or so, especially if it rains, but it works & you don't have the worry about pets or small children being harmed!

17. INFO ABOUT CLOTHES DRYERS The heating unit went out on my dryer! The gentleman that fixes things around the house for us told us that he wanted to show us something and he went over to the dryer and pulled out the lint filter. It was clean. (I always clean the lint from the filter after every load clothes.) He told us that he wanted to show us something; he took the filter over to the sink, ran hot water over it. The lint filter is made of a mesh material - I'm sure you know what your dryer's lint filter looks like.

Well,...the hot water just sat on top of the mesh! It didn't go through it at all! He told us that dryer sheets cause a film over that mesh that's what burns out the heating unit. You can't SEE the film, but it's there. It's what is in the dryer sheets to make your clothes soft and static free -- that nice fragrance too, you know how they can feel waxy when you take them out of the box, well this stuff builds up on your clothes and on your lint screen. This is also what causes dryer units to catch fire & potentially burn your house down with it! He said the best way to keep your dryer working for a very long time (& to keep your electric bill lower) is to take that filter out & wash it with hot soapy water & an old toothbrush (or other brush) at least every six months. He said that makes the life of the dryer at least twice as long! How about that!! Learn something new everyday! I certainly didn't know dryer sheets would do that. So, I thought I'd share!

Note: I went to my dryer & tested my screen by running water on it. The water ran through a little bit but mostly collected all the water in the mesh screen. I washed it with warm soapy water & a nylon brush & I had it done in 30 seconds. Then when I rinsed it -- the water ran right thru the screen! There wasn't any pudding at all! That repairman knew what he was talking about!

Forwarded by Auntie Bev

Californians

So as not to be outdone by all the redneck, hillbilly, and Texan jokes, somebody had to come up with this, you know you're from California if:

1. Your coworker has 8 body piercings and none are visible.

2. You make over $300,000 and still can't afford a house.

3. You take a bus and are shocked at two people carrying on a conversation in English.

4. Your child's 3rd-grade teacher has purple hair, a nose ring, and is named Flower.

5. You can't remember . . is pot illegal?

6. You've been to a baby shower that has two mothers and a sperm donor.

7. You have a very strong opinion about where your coffee beans are grown, and you can taste the difference between Sumatran and Ethiopian.

8. You can't remember . . . is pot illegal?

9. A really great parking space can totally move you to tears.

10. Ga s costs $1.00 per gallon more than anywhere else in the U.S.

11. Unlike back home, the guy at 8:30 am at Starbucks wearing a baseball cap and sunglasses who looks like George Clooney really IS George Clooney.

12. Your car insurance costs as much as your house payment.

13. You can't remember . . .is pot illegal?

14. It's barely sprinkling rain and there's a report on every news station: "STORM WATCH."

15. You pass an elementary school playground and the children are all busy with their cells or pagers.

16. It's barely sprinkling rain outside, so you leave for work an hour early to avoid all the weather-related accidents.

17. HEY!!!! Is pot illegal????

18. Both you AND your dog have therapists, psychics, personal trainers and cosmetic surgeons.

19. The Terminator is your governor.

20. If you drive illegally, they take your driver's license. If you're here illegally, they want to give you one.

Forwarded by Barb Hessel

WHAT IS A GRANDPARENT? (taken from papers written by a class of 8-year-olds)

Grandparents are a lady and a man who have no little children of their own. They like other people's. A grandfather is a man & a grandmother is a lady! Grandparents don't have to do anything except be there when welcome to see them.

They are so old they shouldn't play hard or run. It is good if they drive us to the shops and give us money. When they take us for walks, they slow down past things like pretty leaves and caterpillars. They show us and talk to us about the colors of the flowers and also why we shouldn't step on 'cracks.'

They don't say, 'Hurry up.' Usually grandmothers are fat but not too fat to tie your shoes. They wear glasses and funny underwear. They can take their teeth and gums out. Grandparents don't have to be smart. They have to answer questions like 'Why isn't God married?' and 'How come dogs chase cats?'

When they read to us, they don't skip. They don't mind if we ask for the same story over again. Everybody should try to have a grandmother, especially if you don't have television because they are the only grownups who like to spend time with us. They know we should have snack time before bedtime and they say prayers with us and kiss us even when we've acted bad.

A 6 YEAR OLD WAS ASKED WHERE HIS GRANDMA LIVED. ''OH,'' HE SAID, ''SHE LIVES AT THE AIRPORT AND WHEN WE WANT HER WE JUST GO GET HER. THEN WHEN WE'RE DONE HAVING HER VISIT, WE TAKE HER BACK TO THE AIRPORT.'' GRANDPA IS THE SMARTEST MAN ON EARTH! HE TEACHES ME GOOD THINGS BUT I DON'T GET TO SEE HIM ENOUGH TO GET AS SMART AS HIM!

It's funny when they bend over, you hear gas leaks and they blame their dog.'

Send this to other grandparents. It will make their day.

Forwarded by Lynn

FINALLY..THE BLONDE JOKE TO END ALL BLONDE JOKES

A blonde woman was speeding down the road in her little red sports car and was pulled over by a woman police officer who was also a blonde.

The blonde cop asked to see the blonde driver's license.

She dug through her purse and was getting progressively more agitated. "What does it look like?" she finally asked.

The policewoman replied, "It's square and it has your picture on it."

The driver finally found a square mirror in her purse, looked at it and handed it to the policewoman.

"Here it is," she said. The blonde officer looked at the mirror, then handed it back saying, "Okay, you can go. I didn't realize you were a cop."

Forwarded by Gene and Joan

MARCH CAME IN LIKE A LAMB WILL GO OUT LIKE A LION

A curious fellow died one day and found himself waiting in the long line of judgment. As he stood there he noticed that some souls were allowed to march right through the pearly gates into Heaven.

Others though, were led over to Satan who threw them into the burning fire. But every so often, instead of hurling a poor soul into the fire, Satan would toss a soul off to one side into a small pile.

After watching Satan do this several times, the fellow's curiosity got the best of him. So he strolled over and asked Satan what he was doing.

"Excuse me, Prince of Darkness," he said. "I'm waiting in line for Judgment, but I couldn't help wondering. Why are you tossing those people aside instead of flinging them into the Fires of Hell with the others?"

"Oh those . . " Satan groaned. "They're all from New Hampshire. They're still too cold and wet to burn.

Forwarded by Dick Haar

Put your dog and your wife in the trunk of the car for an hour.

When you open the trunk, see who is really happy to see you!

A Woman's Poem forwarded by Gene and Joan

He didn't like the casserole
And he didn't like my cake.
He said my biscuits were too hard...
Not like his mother used to make.

I didn't perk the coffee right
He didn't like the stew,
I didn't mend his socks
The way his mother used to do.

I pondered for an answer
I was looking for a clue.
Then I turned around and smacked the shit out of him...
Like his mother used to do.

Humor Between February 1 and February 29, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor022908   

Humor Between January 1 and January 31, 2008 --- http://www.trinity.edu/rjensen/book08q1.htm#Humor013108  

Tidbits Directory for Earlier Months and Years --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm