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Year 2008 Quarter 1:  January 1 - March 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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March 31, 2008

February 29, 2008

January 31, 2008  






    March 31, 2008



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

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    Accountancy Discussion ListServs:

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

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

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    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 ---,,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 ---,,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]

    In my Masters of Accountancy class last Wednesday, we discussed the guilty verdicts of the General Reinsurance and AIG people who were involved in the phony reinsurance transaction that allowed AIG to overstate its reserves for losses by $500 million. A few of the students chose to prepare one page papers on the article, which is one of the class requirements. I thought the excerpts below from two of the papers were particularly interesting.

    "When I made the choice to be an accounting major I thought that revenues came from sales and that was it. I was ignorant to the complex transactions in the real world. "

    That student apparently is used to revenue recognition for "plain vanilla" transactions like tangible products. Apparently he hasn't spent much timing thinking about the complex financial transactions and other tough revenue situations that are so common in today's world.

    The other student's comments were more troubling - see the following.

    "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."

    In thinking back to my own early experiences in public accounting, I remember feeling somewhat overwhelmed when asked to read a government contract for a major aerospace company or a complex lease agreement for a major real estate company. And that was well before derivatives, securitizations, and most of the other instruments that Wall Street has invented over the years.

    A couple of years ago when I was asked at a presentation what I would do to help assure that there were no more problems like Enron, etc. I suggested that the large auditing firms should hire entry level people with a minimum of 5 years business experience. Short of that, I wonder if there are more ways we can help prepare our students for today's complex economy.


    March 2, 2008 reply from Bob Jensen

    Hi Denny,

    My threads on the revenue recognition mess are at 

    In particular I find Bill and Hold issues vexing since they so often arise to deceive about revenue --- 

    My threads on the AIG mess are at 
    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 ---

    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 

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

    “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

    "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 ---
    Link forwarded by Glen Gray

    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 ---

    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 ---

    "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).)


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


    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
    ( )
    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:

    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 ---
    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 ---

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

    Especially note the revenue recognition issues at 

    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 ---
    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

    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 ---
    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

    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

    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 ---

    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 ---

    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.

    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 --- 

    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) ---

    Bob Jensen's threads on fair value accounting are at

    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 ---

    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 

    Bob Jensen's threads on audit professionalism are at

    From McGraw-Hill in 2008
    Architect's Square Foot Costbook ---

    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 ---

    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.

    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 " 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 ---

    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

    "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 --- 

    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

    Bob Jensen's threads on fair value accounting are at

    "CHECKLIST Implementing Enterprise Risk Management," Journal of Accountancy, March 2008 ---

    "The Accounting Cycle Arbitrary and Capricious Rules: Lease Accounting -- FAS 13 v. IAS 17," by: J. Edward Ketz, SmartPros, March 2008 ---

    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

    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 

    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.




    Bob Jensen's threads on rules-based versus principles-based standards are at

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

    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

    You can read more about FAS 106 at
    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 ---


    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.

  • From The Wall Street Journal Accounting Weekly Review on June 1, 2007

    Lifting the Veil on Tax Risk
    by Jesse Drucker
    The Wall Street Journal
    May 25, 2007
    Page: C1
    Click here to view the full article on

    TOPICS: Accounting, Accounting Theory, Advanced Financial Accounting, Disclosure Requirements, Financial Accounting Standards Board, Financial Analysis, Financial Statement Analysis, Income Taxes

    SUMMARY: FIN 48, entitled Accounting for Uncertainty in Income Taxes--An Interpretation of FASB Statement No. 109, was issued in June 2006 with an effective date of fiscal years beginning after December 15, 2006. As stated on the FASB's web site, "This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition." See the summary of this interpretation at  As noted in this article, "in the past, companies had to reveal little information about transactions that could face some risk in an audit by the IRS or other government entities." Further, some concern about use of deferred tax liability accounts to create so-called "cookie jar reserves" useful in smoothing income contributed to development of this interpretation's recognition, timing and disclosure requirements. The article highlights an analysis of 361 companies by Credit Suisse Group to identify those with the largest recorded liabilities as an indicator of risk of future settlement with the IRS over disputed amounts. One example given in this article is Merck's $2.3 billion settlement with the IRS in February 2007 over a Bermuda tax shelter; another is the same company's current dispute with Canadian taxing authorities over transfer pricing. Financial statement analysis procedures to compare the size of the uncertain tax liability to other financial statement components and follow up discussions with the companies showing the highest uncertain tax positions also is described.

    1.) Summarize the requirements of Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes--An Interpretation of FASB Statement No. 109 (FIN 48).

    2.) In describing the FIN 48 requirements, the author of this article states that "until now, there was generally no way to know about" the accounting for reserves for uncertain tax positions. Why is that the case?

    3.) Some firms may develop "FIN 48 opinions" every time a tax position is taken that could be questioned by the IRS or other tax governing authority. Why might companies naturally want to avoid having to document these positions very clearly in their own records?

    4.) Credit Suisse analysts note that the new FIN 48 disclosures about unrecognized tax benefits provide investors with information about risks companies are undertaking. Explain how this information can be used for this purpose.

    5.) How are the absolute amounts of unrecognized tax benefits compared to other financial statement categories to provide a better frame of reference for analysis? In your answer, propose a financial statement ratio you feel is useful in assessing the risk described in answer to question 4, and support your reasons for calculating this amount.

    6.) The amount of reserves recorded by Merck for unrecognized tax benefits, tops the list from the analysis done by Credit Suisse and the one done by Professors Blouin, Gleason, Mills and Sikes. Based only on the descriptions given in the article, how did the two analyses differ in their measurements? What do you infer from the fact that Merck is at the top of both lists?

    7.) Why are transfer prices among international operations likely to develop into uncertain tax positions?

    Reviewed By: Judy Beckman, University of Rhode Island

  • 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]


    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,


    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

    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 ( 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,


    May 16, 2008 reply from

    I took a quick look at the "secret reserve' article and most of them aren't secret at all. You just have to teach analysts and accountants how to read footnotes. I taught a financial statement analysis class for years at the U. of Maryland in their MBA program and did just that. Annectodally, I was repeated told by my students who work as analysts for major firms that analysts never read footnotes. I guess my basic point about all these reserves is that most can be detected easily if you know how to read financial statements and footnotes.

    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.

    Income Tax Asset Valuation                             2005      2004          2003          2002          2001           2000           1999          1998            1997

    Total deferred tax assets                                      104          19         1,132            747         7,675          3,562          1,848         3,326           3,313

    Tax Asset Valuation Allowance                       7,298     8,027         9,934        9,989            742             197              179           261              234

    Gross Deferred tax assets                                  7,402     8,046       11,066      10,736         8,417          3,759           2,027        3,587            3,547

    Valuation account as % of gross tax assets    98.6%    99.8%        89.8%       93.0%        8.8%         5.2%           8.8%         7.3%             6.6%

    Gross tax asset as a % of total assets              45.1%      47.4%       70.2%       60.3%       25.0%       7.7%            5.7%      13.4%           14.9%

    Tax asset valuation as a % of revenues          77.3%       88.7%     117.3%      81.1%        3.5%        0.7%            0.6%        1.1%             0.9%

    I guess that is my main point. In my opinion, analysts that complain about hidden researves are just lazy and won't take the time to really analyze a firm's financial statements, including footnotes. Of course, managers know that analysts are lazy and so they will pull this sort of "stuff." Also, it is fair to ask "where were the auditors?" First, I think auditors are too fixated on increasing assets and revenues and decreasing liabilities and expenses, which, of course, is the opposite of setting up reserves. I also teach auditing and have never seen an auditing text refer to settting up these sorts of reserves as an audit issue. Second, I do think auditors will never be truly independent as long as they audit the hand that feeds them and I have publically advocated nationalizing auditing by having a Federal agency, structured similarly to the Federal Reserve or GAO whose directors are appointed for 15 years, take over hiring, monitoring, and firing the auditors and just have the firms pay for them. However, I get called a communist a lot for that suggestion.


    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
    (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 ---

    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 (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, 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, 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

    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 --- 

    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


    "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 ---

    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

    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 ---

    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 ---

    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 ---

    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 ---

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

    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 ---

    Bob Jensen's threads on KPMG are at

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

    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
    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?
    by Peter Eavis
    The Wall Street Journal

    Mar 11, 2008
    Page: C1
    Click here to view the full article on

    TOPICS: Allowance For Doubtful Accounts, Financial Accounting, Financial Statement Analysis, Loan Loss Allowance

    SUMMARY: "'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."

    CLASSROOM APPLICATION: This article covers details of financial statement ratios used to analyze Target Corp.'s credit card business. It can be used in a financial statement analysis course or while covering accounting for receivables in a financial accounting course

    1. (Introductory) What types of credit cards has Target Corp. issued? Why do companies such as Target issue these cards?

    2. (Introductory) In general, what concerns analysts about Target Corp.'s portfolio of receivables on credit cards?

    3. (Introductory) How can a sufficient allowance for uncollectible accounts alleviate concerns about potential problems in a portfolio of loans or receivables? What evidence is given in the article about the status of Target's allowance for uncollectible accounts?

    4. (Advanced) "...High growth may make it [hard] to see credit deterioration that already is happening..." What calculation by analyst William Ryan is described in the article to better "see" this issue? From where does he obtain the data used in the calculation? Be specific in your answer.

    5. (Advanced) Refer again to the calculation done by the analyst Mr. Ryan. How does that calculation resemble the analysis done for an aging of accounts receivable?

    6. (Advanced) What other financial analysis ratio is used to assess the status of a credit-card loan portfolio such as Target Corp.'s?

    7. (Advanced) If analysts prove correct in their concern about Target Corp.'s credit-card receivable balance, what does that say about the profitability reported in this year? How will it impact next year's results?

    Reviewed By: Judy Beckman, University of Rhode Island

    "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 ---


    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 ---

    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

    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 ---

    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.

    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 (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 ---

    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? ---

    What is an equity derivative? ---

    Small Business Helpers
    Smart Stops on the Web, Journal of Accountancy, March 2008 ---



    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.


    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.


    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.


    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




    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.


    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.


    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

    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 ---

    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 ---

    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.

    From Jim Mahar's blog on January 25, 2008 ---

    Saturday, January 26, 2008

    Kerviel joins ranks of master rogue traders:
    "In being identified as the lone wolf behind French investment bank Société Générale's staggering $7.1-billion loss Thursday, Jérôme Kerviel joined the ranks of a rare and elite handful of rogue traders whose audacious transactions have single-handedly brought some of the world's financial powerhouses to their knees.

    This notorious company includes Nick Leeson, who brought down Britain's Barings Bank in 1995 by blowing $1.4-billion, Yasuo Hamanaka, who squandered $2.6-billion on fraudulent copper deals for Sumitomo Corp. of Japan in 1998, John Rusnak, who frittered away $750-million through unauthorized currency trading for Allied Irish Bank in 2002 and Brian Hunter of Calgary, who oversaw the loss of $6-billion on hedge fund bets at Amaranth Advisors in 2006.

    Bob Jensen's threads on controversies of accounting standard setting are at

    Bob Jensen's threads on "Rotten to the Core" are at

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

     I subscribe to a listserv for professors of accounting ( ) 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

    Bob Jensen's threads on accounting theory are at

    Bob Jensen's threads on off balance sheet financing are at

    "Bringing down Public Enemy No. 1: IRS makes Al Capone’s records public," AccountingWeb, March 6, 2008 ---
    The IRS archives are at,,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

    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. 

    Butch O'Hare was "Easy Eddie's" son.?

    Jensen Comment
    Snopes says parts of the stories are true albeit exaggerated ---
    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 ---

    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


    1. 21. I should have saved more money in my rainy day fund – just in case!

      — D. · Feb 27, 06:22 PM · #

    2. 22. Dang it! I think I left the milk out.

      — EM · Feb 27, 07:59 PM · #

    3. 3. I wish I’d spent more time revising.

      — gigi · Feb 27, 10:59 PM · #

    4. 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 · #

    5. 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 · #

    6. 52.75.C2 Why is this taking so long?

      — Jesse · Feb 28, 07:15 AM · #

    7. I wish I spent more sleepless nights worrying about what color to paint the dining room.

      — EBC · Feb 28, 08:09 AM · #

    8. Why, oh why could I not get the mildew out of my grout in the bathroom?

      — Kim Wells · Feb 28, 09:35 AM · #

    9. 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 · #

    10. Why didn’t I get into World of Warcraft when I had the chance?

      — CV · Feb 28, 10:26 AM · #

    11. Why didn’t I enlist in the navy so I could see the world?

      — ddl · Feb 28, 10:39 AM · #

    12. Why didn’t I spend more time crying over that milk I spilled back in ’81?!

      — Nina Lomando-Grigoreas · Feb 28, 11:52 AM · #

    13. If only I could remember what that Gypsy told me in Seville.

      — Lee A. Jacobus · Feb 28, 02:04 PM · #

    14. I’m so glad I’m dying before my spouse does!

      — Emile Discard · Feb 28, 02:55 PM · #

    15. Why didn’t I ever use my crockpot?

      — Elizabeth Welch · Feb 28, 02:57 PM · #

    16. 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 · #

    17. Well…this is nice.

      — Mark · Feb 28, 03:35 PM · #

    18. 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 · #

    19. If only I had time to finish Atlas Shrugged.

      — David · Feb 28, 05:33 PM · #

    20. If only I had not finished Atlas Shrugged.

      — C · Feb 28, 06:54 PM · #

    21. If only I’d slept with that college professor…

      — Milena · Feb 28, 08:43 PM · #

    22. Where are my keys?

      — Rena · Feb 29, 12:53 AM · #

    23. 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 · #

    24. Should have bought the brown mascara. Waterproof.

      — sephora · Feb 29, 08:21 AM · #

    25. Paper or plastic?

      — Bible Spice · Feb 29, 08:38 AM · #

    26. 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 · #

    27. If only I had conclusive proof that pro wrestling wasn’t real.

      — Anna B. · Feb 29, 10:23 AM · #

    28. Finally I can do something to significantly reduce my carbon footprint.

      — Erik D. · Feb 29, 10:44 AM · #

    29. One more hit off the morphine drip, please.

      — marci · Feb 29, 11:15 AM · #

    30. 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 · #

    31. 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 · #

    32. 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 · #

    33. Thank L. Ron I discovered Scientology. Gasp….

      — C · Mar 1, 05:11 PM · #

    34. 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 · #

    35. Sure wish I’d been an administrator.


    Jensen Comment
    Actually I prefer some of the famous epitaphs and parting words ---

    Famous peoples last words ---
    Last Words of Real People ---
    Last Words of Fictional Characters ---
    Famous Epitaphs ---
    Other Last Words ---


    Forwarded by Paula

    Hollywood Squares:

     If you remember the Original Hollywood Squares and its comics, this may bring a tear to your eyes. These great questions and answers are from the days when 'Hollywood Squares' game show responses were spontaneous, not scripted, as they are now.  Peter Marshall was the host asking the questions, of course...

    Q. Do female frogs croak? 
    A. Paul Lynde: If you hold their little heads under water long enough.

    Q.If you're going to make a parachute jump, at least how high should you be? 
    A. Charley Weaver: Three days of steady drinking should do it.

    Q. True or False, a pea can last as long as 5,000 years...
    A. George Gobel: Boy, it sure seems that way sometimes. 

    Q.You've been having trouble going to sleep.  Are you probably a man or a woman? 
    A. Don Knotts: That's what's been keeping me awake.

    Q. According to Cosmopolitan, if you meet a stranger at a party and you think that he is attractive, is it okay to come out and ask him if he's married? 
    A. Rose Marie: No; wait until morning.

    Q. Which of your five senses tends to diminish as you get older? 
    A. Charley Weaver: My sense of decency.

    Q. in Hawaiian, does it take more than three words to say 'I Love You'?
    A.  Vincent Price: No, you can say it with a pineapple and a twenty.

     Q. What are 'Do it,' 'I can help,' and 'I can’t get enough'?
    A. George Gobel: I don't know, but it's coming from the next apartment.

    Q. As you grow older, do you tend to gesture more or less with your hands while talking? 
    A. Rose Marie: You ask me one more growing old question, Peter, and I'll give you a gesture you'll never forget!

    Q. Paul, why do Hell's Angels wear leather?
    A. Paul Lynde: Because chiffon wrinkles too easily.

    Q.Charley, you've just decided to grow strawberries.  Are you going to get any during the first year? 
    A.  Charley Weaver:  Of course not
    , I'm too busy growing strawberries.

    Q. In bowling, what's a perfect score?

    A. Rose Marie: Ralph, the pin boy.

    Q. It is considered in bad taste to discuss two subjects at nudist camps.  One is politics, what is the other?
    A. Paul Lynde: Tape measures.

    Q. During a tornado, are you safer in the bedroom or in the closet?
    A. Rose Marie: Unfortunately Peter, I'm always safe in the bedroom.

    Q. Can boys join the Camp Fire Girls? 
    A. Marty Allen: Only after lights out.

    Q. When you pat a dog on its head he will wag his tail.  What will a goose do?
    A. Paul Lynde: Make him bark?

    Q. If you were pregnant for two years, what would you give birth to? 
    A. Paul Lynde: Whatever it is, it would never be afraid of the dark.

    Q. According to Ann Landers, is there anything wrong with getting into the habit of kissing a lot of people? 
    A. Charley Weaver: It got me out of the army.

    Q. It is the most abused and neglected part of your body, what is it? 
    A. Paul Lynde: Mine may be abused, but it certainly isn't neglected.

    Q. Back in the old days, when Great Grandpa put horseradish on his head, what was he trying to do ? 
    A. George Gobel: Get it in his mouth.

    Q. Who stays pregnant for a longer period of time, your wife or your elephant? 
    A. Paul Lynde: Who told you about my elephant?

    Q. When a couple have a baby, who is responsible for its sex? 
    A. Charley Weaver: I'll lend him the car, the rest is up to him.

    Q. Jackie Gleason recently revealed that he firmly believes in them and has actually seen them on at least two occasions. What are they?
    A. Charley Weaver: His feet.

    Q.  According to Ann Landers, what are two things you should never do in bed?
    A. Paul Lynde: Point and laugh



    Forwarded by Paula


    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


    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


    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.


    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


    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


    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 ---   

    Humor Between January 1 and January 31, 2008 ---  

    Tidbits Directory for Earlier Months and Years ---


    And that's the way it was on March 31, 2008 with a little help from my friends.


    Fraud Updates ---


    Facts about the earth in real time --- 

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

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

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

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---

    Tom Selling's blog The Accounting Onion (great on theory and practice) ---


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


    Bob Jensen's bookmarks for accounting newsletters are at 

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


    Jack Anderson's Accounting Information Finder ---


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    The Finance Professor --- 


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    How stuff works --- 


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


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


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








    February 29, 2008




    Bob Jensen's New Bookmarks on February 29, 2008
    Bob Jensen at Trinity University 

     I would have to call the following March 3 message from Denny Beresford an understatement:

    Warren Buffett's always interesting annual letter to shareholders for2007 is now available at ---


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

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

    Bob Jensen's Blogs ---
    Current and past editions of my newsletter called New Bookmarks ---
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           (Also scroll down to the table at )

    Roles of a ListServ ---

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

    Bob Jensen's Home Page is at

    CPA Examination ---

    Wikipedia has a rather nice summary of accounting software at

    Bob Jensen’s accounting software bookmarks are at

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---

    Tom Selling's blog The Accounting Onion (great on theory and practice) ---

    Accountancy Discussion ListServs:

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

    Roles of a ListServ ---

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

    Tidbits Directory for Earlier Months and Years ---

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    Large International Accounting Firm History ---

    The accounting community mourns the death of Homer Black. Homer was Chairman of the Accounting Department at Florida State University for 34 years and was a major force in that Department's growth and success. When I became Chair of that Department in 1978, Homer was always in my corner and helped me in every way possible. Dr. Black was a scholar and a gentleman and one heck of an accounting teacher.

    A native of Cartersville, Georgia, Homer was a graduate of the University of Georgia and received a doctorate in Business Administration from the University of Michigan. He served as a lieutenant in the Navy, stationed in the Marshall Islands during World War II.

    Homer moved to Tallahassee in 1957 to join the School of Business faculty at Florida State University. He held visiting faculty appointments with MIT, Northeastern University and IMEDE in Lausanne, Switzerland. He was Chairman of the Accounting Department for 34 years and retired as Professor Emeritus.

    . . .

    In lieu of flowers, donations may be made to the Holy Cross Anglican Church office at 2878-A Remington Green Circle, Tallahassee, Florida 32308 or the Academy for Ethics in Financial Reporting, Inc, c/o Rob Robinson, SunTrust Bank, 3522 Thomasville Road, Tallahassee, Florida 32309

    FASB's Accounting Standards Codification ---

    FASB Master Glossary ---

    "FASB Governance: Damn the Feedback, Full Speed Ahead to IFRS!," by Tom Selling, The Accounting Onion, February 26, 2008 ---

    The Financial Accounting Foundation (FAF), the body that governs the FASB, has issued a press release announcing the results of their one meeting to consider the feedback on their proposals to change the way the FASB operates.  To reiterate from a prior post (though somewhat less gentle this time!) the proposing document was a model of obfuscation.  It was clear from the outset that FAF wasn't at all interested in knowing what anyone else had to say about reducing the size of the FASB, voting rules, or how the FASB would set its agenda.  Any discussion of past problems, current needs, etc. were vague (more accurately, not mentioned) in a thinly veiled attempt to frustrate and limit comments.  It certainly frustrated me; I abandoned the effort as soon as I realized that anything I wrote could, by design, amount to no more than the equivalent of shooting at a flea with an elephant gun while blindfolded. 

    So, predictably -- and despite the clear protests of Financial Executives International, the CFA Institute and numerous former board members -- all the proposals passed muster with flying colors.  One of my readers, who shall remain anonymous, wrote to me soon after he heard the FAF news to tell me that he had spoken to a former FASB project manager about it, and the only comment he had was "unbelievable."   

    Would You Trust the Future of U.S. GAAP to These Guys?

    The rat I had been smelling for weeks walked right into the middle of the room during the FAF press conference in which its members rationalized their actions with comments to the effect that requiring new board members to all have knowledge of "investing" (whatever that means) will assure that the entire board will give adequate consideration to investor needs.  Right.  Guess who will be excluded: someone to replace Donald Young, the current investor representative, whose term expires this year; and you can forget about any more academics, lest some pesky dissenter asks too many uncomfortable questions that could slow down the IFRS convergence train. 

    And, what kind of convergence are we going to get under the new FASB?  If facilitating a constructive and stable convergence with IFRS is the real goal, why is it appropriate for the IASB to have fourteen members, and now the FASB only five?   No good answer.  Why is it appropriate for the IASB to require a super-majority vote of nine members to adopt a new rule, and the FASB only a simple majority of three -- the FASB chair, who now sets the agenda, plus two handpicked shills?  No good answer.  What evidence is there that it will be difficult to find new board members who are sufficiently knowledgeable of IFRS to hit the ground running when they are appointed?  LOL.

    It's obvious to me that the real goal is not a convergence to benefit U.S. investors; for that would require careful study, thinking and time.  The real goal is quick-and-dirty convergence -- so that the big audit firms can get on with the business of charging large fees for the accounting changeovers while at the same time lowering their long-term audit risk -- and so that their clients can manage earnings with less fear of interference by the SEC (see my earlier posts here and here for the reasons why this is so, and why it is harmful to investors).

    Speaking of the SEC, What's Their Take?

    By the way, FASB's pronouncements are rules for public companies to follow whilst the SEC so deigns. One would think, therefore, that the SEC would have taken more than a passing interest in changes to how the FASB is organized and governed.  Yet, I haven't noticed a peep out of Conrad Hewitt, the SEC's chief accountant.  Given his recent track record, I can't say I'm surprised.  All I can say is that I'm glad that I served in the Office of the Chief Accountant in a different era.  Under the current administration the SEC has become more the captain of the public company cheerleaders and less the watchdog of investors. 

    It's a shame.   

    Also see Andy Bailey's letter at

    Bob Jensen's threads on the history of and controversy of accounting standard setting are at

    What do CFO's think of Robert Herz's (Chairman of the FASB) radical proposed  format for financial statements that have more disaggregated financial information and no aggregated bottom line?

    As we moved to fair value accounting for derivative financial instruments (FAS 133) and financial instruments (FAS 157 and 159) coupled with the expected new thrust for fair value reporting on the international scene, we have filled the income statement and the retained earnings statement with more and more instability due to fluctuating unrealized gains and losses.

    I have reservations about fair value reporting ---

    But if we must live with more and more fair value reporting, the bottom line has to go. But CFOs are reluctant to give up the bottom line even if it may distort investing decisions and compensation contracts tied to bottom-line reporting.

    Before reading the article below you may want to first read about radical new changes on the way ---

    "A New Vision for Accounting:  Robert Herz and FASB are preparing a radical new format for financial, CFO Magazine, by Alix Stuart, February 2008, pp. 49-53 ---

    Last summer, McCormick & Co. controller Ken Kelly sliced and diced his financial statements in ways he had never before imagined. For starters, he split the income statement for the $2.7 billion international spice-and-food company into the three categories of the cash-flow statement: operating, financing, and investing. He extracted discontinued operations and income taxes and placed them in separate categories, instead of peppering them throughout the other results. He created a new form to distinguish which changes in income were due to fair value and which to cash. One traditional ingredient, meanwhile, was conspicuous by its absence: net income.

    Kelly wasn't just indulging a whim. Ahead of a public release of a draft of the Financial Accounting Standards Board's new format for financial statements in the second quarter of 2008, the McCormick controller was trying out the financial statements of the future, a radical departure from current conventions. FASB's so-called financial statement presentation project is ostensibly concerned only with the form, or the "face," of financial statements, but it's quickly becoming clear that it will change and expand their content as well. "This is a complete redefinition of the financial statements as we know them," says John Hepp, a former FASB project manager and now senior manager at Grant Thornton.

    Some of the major changes under discussion: reconfiguring the balance sheet and the income statement to follow the three categories of the cash-flow statement, requiring companies to report cash flows with the little-used direct method; and introducing a new reconciliation schedule that would highlight fair-value changes. Companies will also likely have to report more about their segments, possibly down to the same level of detail as they currently report for the consolidated statements. Meanwhile, net income is slated to disappear completely from GAAP financial statements, with no obvious replacement for such commonly used metrics as earnings per share.

    FASB, working with the International Accounting Standards Board (IASB) and accounting standards boards in the United Kingdom and Japan, continues to work out the precise details of the new financial statements. "We are trying to set the stage for what financial statements will look like across the globe for decades to come," says FASB chairman Robert Herz. (Examples of the proposed new financial statements can be viewed at FASB's Website.) If the standard-setters stay their course, CFOs and controllers at every publicly traded company in the world could be following Kelly's lead as soon as 2010.

    It's too early to predict with confidence which changes will ultimately stick. But the mock-up exercise has made Kelly wary. He considers the direct cash-flow statement and reconciliation schedule among the "worst aspects" of the forthcoming proposal, and expects they would require "draconian exercises" from his finance staff, he says. And he questions what would result from the additional details: "If all of a sudden your income statement has 125 lines instead of 25, is that presentation more clarifying, or more confusing?"

    Other financial executives share Kelly's skepticism. In a December CFO survey of more than 200 finance executives, only 17 percent said the changes would offer any benefits to their companies or investors (see "Keep the Bottom Line" at the end of this article). Even some who endorsed the basic aim of the project and like the idea of standardizing categories across the three major financial statements were only cautiously optimistic. "It may be OK, or it may be excessive." says David Rickard, CFO of CVS/Caremark. "The devil will be in the details."

    Net Loss From the outset, corporate financial officers have been ambivalent about FASB's seven year-old project, which was originally launched to address concerns that net income was losing relevance amid a proliferation of pro forma numbers. Back in 2001, Financial Executives International "strongly opposed" it, while executives at Philip Morris, Exxon Mobil, Sears Roebuck, and Microsoft protested to FASB as well.

    (Critics then and now point out that FASB will have little control over pro forma reporting no matter what it does. Indeed, nearly 60 percent of respondents to CFO's survey said they would continue to report pro forma numbers after the new format is introduced.)

    Given the project's starting point, it's not surprising that current drafts of the future income statement omit net income. Right now that's by default, since income taxes are recorded in a separate section. But there is a big push among some board members to make a more fundamental change to eliminate net income by design, and promote business income (income from operations) as the preferred basis for investment metrics.

    "If net income stays, it would be a sign that we failed," says Don Young, a FASB board member. In his mind, the project is not merely about getting rid of net income, but rather about capturing all income-related information in a single line (including such volatile items as gains and losses on cash-flow hedges, available-for-sale securities, and foreign-exchange translations) rather than footnoting them in other comprehensive income (OCI) as they are now. "All changes in net assets and liabilities should be included," says Young. "Why should the income statement be incomplete?" He predicts that the new subtotals, namely business income, will present "a much clearer picture of what's going on."

    Board member Thomas Linsmeier agrees. "The rationale for segregating those items [in OCI] is not necessarily obvious, other than the fact that management doesn't want to be held accountable for them in the current period," he says.

    Whether for self-serving or practical reasons, finance chiefs are rallying behind net income. Nearly 70 percent of those polled by CFO in December said it should stay. "I understand their theories that it's not the be-all and end-all measure that it's put up to be, but it is a measure everyone is familiar with, and sophisticated users can adjust from there," says Kelly. Adds Rickard: "They're treating [net income] as if it's the scourge of the earth, which to me is silly. I think the logical conclusion is to make other things available, rather than hiding the one thing people find most useful."

    . . .


    Bob Jensen's threads on this proposed "radical change" in financial reporting are at 

    Jensen Comment
    As we moved to fair value accounting for derivative financial instruments (FAS 133) and financial instruments (FAS 157 and 159) coupled with the expected new thrust for fair value reporting on the international scene, we have filled the income statement and the retained earnings statement with more and more instability due to fluctuating unrealized gains and losses.

    I have reservations about fair value reporting ---

    But if we must live with more and more fair value reporting, the bottom line has to go. But CFOs are reluctant to give up the bottom line even if it may distort investing decisions and compensation contracts tied to bottom-line reporting.

    Bob Jensen's threads on the radical new changes on the way ---


    Should your paycheck be impacted contractually by FAS 133?

    I was contacted by the representative of a major and highly reputable transportation company union concerning possible manipulation of FAS 133 accounting (one of the many tools for creative accounting) for purposes of lowering compensation payments to employees. He wanted to engage me on a consulting basis to examine a series of financial statements of the company. It would be great if I could inspire some public debate on the following issue. The message below follows an earlier message to XXXXX concerning how hedging ineffectiveness works under FAS 133 accounting rules ---


    Hi XXXXX,

    You wrote:
    “Does the $502 million hedging ineffectiveness pique your interest?”

    My answer is most definitely yes since it fits into some research that I am doing at the moment. But the answers cannot be obtained from financial statements. Financial statements are (1) too aggregated (across multiple derivative hedging contracts) and (2) snapshots at particular points in time. Answers lie in tracing each contract individually (or at least a sampling of individual contracts) from inception to settlement. Results of effectiveness testing throughout the life of each hedging contract must be examined (on a sampling basis).


    Recall that there were enormous scandals concerning financial instruments derivatives that led up to FAS 133 and IAS 39. See
    The SEC pressured the FASB to come up with a new standard that would overcome the problem of so much unbooked financial liability risk due to derivative financial instruments. FAS 133 and IAS 39 got complicated when standard setters tried to book the derivative assets and liabilities on the balance sheet without impacting current earnings for qualified effective hedges of financial risk.

    When the FASB issued FAS 133, The FASB and the SEC were concerned about unbooked financial risk of every active derivative contract if the contract was settled on the interim balance sheet date. When a contract like an option is valued on a balance sheet date, its premature settlement value that day may well be deemed ineffective relative to the value of the hedged item. The reason is that derivative contracts are traded in different markets (usually more speculative markets) than commodities markets themselves (where buyers actually use the commodities). But the hedging contracts deemed ineffective on interim dates may not be ineffective at all across the long haul. Usually they are perfectly effective on hedging maturity dates.

    Temporal ineffectiveness more often than not works itself out such that all those gains and losses due to hedging ineffectiveness on particular interim dates exactly wash out such there is no ultimate cash flow gain or loss when the contracts are settled at maturity dates. I attached an Excel workbook that explains how some commodities hedges work out over time. The Graphing.xls file can also be downloaded from
    Note in particular the “Hedges” spreadsheet in that file. These explain the outcomes at the settlement maturity dates that yield perfect hedges. But at any date before maturity (not pictured in the graphs), the hedges may not be perfect if settled prematurely on interim balance sheet dates.

    I illustrate the accounting for ineffective interim hedges in both the 03forfut.pps and 05options.ppt PowerPoint files at
    The hedges may deemed ineffective under FAS 133 at interim balance sheet dates with gains and losses posted to current earnings. However, over time the gains and losses perfectly offset such that the hedges are perfectly effective when they are settled at maturity dates.

    The real problem with FAS 133 is that compensation contracts are generally tied to particular balance sheet dates where interim hedging contracts may be deemed ineffective and thereby affect paychecks. But some of those FAS 133 interim gains and losses may in fact never be realized in cash over the life of the each commodity hedging contract.

    What has to happen is for management to be very up front about how FAS 133 and other accounting standards may give rise to artificial gains and losses that are never realized unless the hedging contracts are settled prematurely on balance sheet dates. Compensation contracts should be hammered out with that thought in mind rather than blindly basing compensation contracts on bottom-line earnings that are mixtures of apples, oranges, toads, and nails due to accounting standards.

    Of course management is caught in a bind because investors follow bottom-line as the main indicator of performance of a company. The FASB recognizes this problem and is now trying to work out a new standard that will eliminate bottom-line reporting. The idea will be to provide information for analysts to derive alternative bottom-line numbers based upon what they want included and excluded in that bottom line. XBRL may indeed make this much easier for investors and analysts ---

    If I were working out a compensation contract based on accounting numbers, I would probably exclude FAS 133 unrealized gains and losses.

    In any case, back to your original question. I would love to work with management to track a sampling of fuel price hedging contracts from beginning to end. I would like to see what effectiveness tests were run on each reporting date and how gains and losses offset over the life of each examined contract. But this type of study cannot be run on aggregated financial statements.

    If I can study some of those individual hedging contracts over time I would be most interested. It will take your clout with management, however, to get me this data. I have such high priors on the integrity of your company's management that I seriously doubt that there is any intentional manipulation going on witth FAS 133 implementation. Rather I suspect that management is just trying to adhere as closely as possible with FAS 133 rules. What I would like to do is help enlighten the world about the bad things FAS 133 can do with compensation contracts and investment decisions by users of statements who really do not understand the temporal impacts of FAS 133 on bottom-line earnings.

    I fear that my study would, however, be mostly one of academic interest that I can report to the public. Only an inside whistleblower could pinpoint hanky-pank within a company, and I seriously doubt that your company is engaged in disreputable FAS 133 hanky-pank beyond that of possibly not fully explaining to unions how FAS 133 losses in general may be phantom losses over the long haul.

    Bob Jensen

    "The 10 Emerging Technologies of 2008:  Technology Review presents its annual list of the 10 most exciting technologies," MIT's Technology Review, March/April 2008 ---
    They're listed at

    • Modeling Surprise
    • Probabilistic Chips
    • Nano Radio
    • Wireless Power
    • Atomic Magnetometers
    • Offline Web Applications
    • Offline Web Applications
    • Offline Web Applications
    • TR10: Reality Mining
    • TR10: Cellulolytic Enzymes

    Past 10 Emerging Technologies:
    2007 | 2006 | 2005 | 2004 | 2003 | 2001

    Bob Jensen's threads on emerging technologies are at

    Forwarded by Roger Roger Debreceny [Roger@DEBRECENY.COM]

    "2008 Top Technologies and Honorable Mentions," AICPA Information Technology Center, February 2008 --- Click Here

    February 7, 2008 question from Miklos A. Vasarhelyi [miklosv@ANDROMEDA.RUTGERS.EDU]

    Does anyone understand what this is?

    Jensen Comment
    Miklos forwarded interactive graphics video link on monoline insurance --- Click Here

    February 7, 2008 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]


    Buyers of bonds can insure against default risks by buying policies from monoline insurance companies who service exclusively the capital markets. To protect against default by the monoline on its policy, you buy a credit swap on it from another monoline insurance company (which would be obligated to either buy the bonds at face value or to pay the difference between that and the recovery value in case of default).

    When such trades take place, the buyer of the bonds (usually investment banks) have theoretically transferred the risk in bonds, and so can account for the bundle of transactions and recognise "profits".

    Apparently, these trades have been very lucrative for banks and so have taken the profits in such transactions over the entire life of the bonds at the consummations of such transactions.

    The problem with such accounting for profits is that, if the monoline insurance companies are downgraded, the risk on the bonds reverts to the holder (bank), who must reverse the profits.

    The usual culprits in these fancy transactions are investment banks. It is difficult to account for the "profits" because the bonuses paid to the traders on such transactions might have been paid years ago.

    What a wonderful fiction we accountants have created wheere profits are not what they seem. Alice in Wonderland pales by comparison.

    I should have stuck with my first intended profession (actuary).



    February 7, 2008 reply from Paul Williams [Paul_Williams@NCSU.EDU]


    Thank you for explaining this. The fault is not entirely ours. Deregulated finance entrepreneurs have invented these complex transactions, which, frankly, can't be accounted for (part of the motivation for their design is precisely because they can't be accounted for). In theory the probability that a bond issuer will default is not altered by these arrangements.

    All they do is shift the risk many degrees removed from where it originated. An interesting empirical issue is whether the probability of default does change in the presence of these risk shifting transactions. How does it alter the monitoring of debtors by their creditors when their creditors may not even know they are their creditors?

    Do these risk shifting arrangements change the risk? Anyone out there know of any literature that addresses the issue?

    February 7, 2008 reply from Bob Jensen

    Hi Miklos, Jagdish, Paul, and others,

    Actually there’s a very good module (one of the best) on the history of monoline insurance in Wikipedia ---  There are excellent references as to when (belatedly) and why monoline insurance companies have been put under review by credit rating agencies.

    Credit rating agencies placed the other monoline insurers under review [16]. Credit default swap markets quoted rates for default protection more typical for less than investment grade credits. [17] Structured credit issuance ceased, and many municipal bond issuers spurned bond insurance, as the market was no longer willing to pay the traditional premium for monoline-backed paper[18]. New players such as Warren Buffett's Berkshire Hathaway Assurance entered the market[19]. The illiquidity of the over-the-counter market in default insurance is illustrated by Berkshire taking four years (2003-06) to unwind 26,000 undesirable swap positions in calm market conditions, losing $400m in the process. By January 2008, many municipal and institutional bonds were trading at prices as if they were uninsured, effectively discounting monoline insurance completely. The slow reaction of the ratings agencies in formalising this situation echoed their slow downgrading of sub-prime mortgage debt a year earlier. Commentators such as investor David Einhorn [20] have criticized rating agencies for being slow to act, and even giving monolines undeserved ratings that allowed them to be paid to bless bonds with these ratings, even when the bonds were issued by credits superior to their own.

    It has been particularly problematic for investors in municipal bonds.

    Bob Jensen

    Bob Jensen's threads on credit derivatives accounting ---

    Bob Jensen's threads on derivative financial instrument frauds are at

    Bob Jensen’s “Rotten to the Core” threads are at 

    February 12, 2008 message from Dexter Woods [d-woods@ONU.EDU]

    If there is a better list to send the following question to, please let me know.  However, I thought some AECMers could help with the following question:

    “I have several undergraduate accounting students who have an interest in obtaining a masters degree and in pursuing a tax accounting career.  I see at least three different types of academic programs that they might be interested in…(1) a masters in accounting with a concentration in tax; (2) a masters in taxation with courses taken in a school of accounting: (3) a masters in taxation with some or all of the courses taken in a law school.  What would be the relative advantages and disadvantages of each of these programs?”

    Thank you very much!

    Dexter R. Woods, Jr.
    Professor of Legal Studies and Taxation
    James F. Dicke College of Business Administration
    Ohio Northern University
    525 South Main Street (USPS)
    4611 State Route 235 (UPS, FedEx, DHL)
    Ada, Ohio  45810
    419-772-2075 (voice)
    419-772-3125 (fax)

    February 12, 2008 reply from Bob Jensen

    Hi Dexter,

    I’m certain that some of the tax professors can give you a more complete answer than me. However I am somewhat familiar with the law school programs at the University of Denver. What you will find are more numerous and more specialized tax courses than you will ever find in any school/department of accountancy.

    You can read the following at

    We also offer a distinctive dual J.D./Master of Laws (LL.M.) degree in Tax Law.   The Graduate Tax Program, established in 1975, was one of the first programs of its kind offered in the United States.  Students pursuing the dual degree can complete both degrees within four years as a full-time student.

    We also offer a distinctive dual J.D./Master of Laws (LL.M.) degree in Tax Law.   The Graduate Tax Program, established in 1975, was one of the first programs of its kind offered in the United States.  Students pursuing the dual degree can complete both degrees within four years as a full-time student.

    The Graduate Tax Program has nothing but tax courses ---

    Some of the courses are listed here ---

    Although I was in the MBA program years ago at DU, at the time the Law School had over 40 specialized courses in tax. I think there are not quite so many these days, but there are still a lot of courses. For a complete list today, you will probably have to download the DU Course Bulletin.

    In those days both the College of Business and the College of Law were located in downtown Denver (my office when I taught accounting as a graduate student looked right across the lawn at the State Capitol Building). It was possible with this downtown location for DU to offer many specialized tax courses that were taken by both degree-seeking and nondegree-seeking students. The nondegree students were mostly practicing lawyers who sought out the specialized tax courses at the convenient downtown Denver location. The courses were generally taught by practicing tax attorneys (read that tax angels on the head of the IRS Code pin).

    Bob Jensen 

    Are GE's Recent Restatements Part of Jack Welch's Legacy?

    In this post-Enron and S-OX 404 environment, would a CEO today would so openly express such a blatant disregard for reporting to investors?

    The WSJ article also mentions that in addition to the firing of some division managers (perhaps one or more of the same cookie sharers), the SEC probe lead to the resignation of Phil Ameen, long-time VP and comptroller -- and prime specimen of the accounting equivalent of a wolf in sheep's clothing let loose in the barnyard. (Whew, that was a long way to go for a metaphor!) Believe it or not, Ameen was a member of the FASB's Emerging Issues Task Force (EITF) during much of the 1990s.  He was also an active and influential FASB lobbyist.  Separately, out of one side of this mouth came exhortations to simplify accounting, and out of the other side, to ditch simple solutions that might have impaired GE's ability to manage its earnings and reported debt . . .
    Tom Selling, The Accounting Onion, February 18, 2008 ---

    Bob Jensen's threads on off balance sheet financing are at

    Bob Jensen's threads on corporate governance are at

    Link forwarded by Glen Gray

    "SEC Told to Mandate XBRL: The commission's committee for simplifying financial reporting pushes hard for interactive technology, in a document sent to Chairman Cox," by Sarah Johnson, CFO Magazine, February 12, 2008 ---

    On Monday, the SEC Advisory Committee on Improvements to Financial Reporting (CIFR) voted to submit its midpoint progress report to chairman Christopher Cox later this week. It will also be available for public comment. CIFR's recommendations include: reduce industry-specific accounting rules, add more investor representation on the Financial Accounting Standards Board, and create guidance for auditors' professional judgment.

    The committee's recommendations also ask the regulator to eventually mandate that all public companies use XBRL, following a phased-in transition based on company size and reviews of the program's progress. The SEC, whose staff members participate in the meetings, plans to act quickly on considering these recommendations. On Friday, Cox said he has asked the SEC staff to make an XBRL-related proposal to the commission later this year.

    Continued in article

    Bob Jensen's threads on XBRL are at

    "SEC unveils 'Financial Explorer' investor tool using XBRL," AccountingWeb, February 20, 2008 ---

    Securities and Exchange Commission Chairman Christopher Cox has announced the launch of the "Financial Explorer" on the SEC Web site to help investors quickly and easily analyze the financial results of public companies. Financial Explorer paints the picture of corporate financial performance with diagrams and charts, using financial information provided to the SEC as "interactive data" in eXtensible Business Reporting Language (XBRL).

    At the click of a mouse, Financial Explorer lets investors automatically generate financial ratios, graphs, and charts depicting important information from financial statements. Information including earnings, expenses, cash flows, assets, and liabilities can be analyzed and compared across competing public companies. The software takes the work out of manipulating the data by entirely eliminating tasks such as copying and pasting rows of revenues and expenses into a spreadsheet. That frees investors to focus on their investments' financial results through visual representations that make the numbers easier to understand. Investors can use Financial Explorer by visiting .

    "XBRL is fast becoming the universal language for the exchange of business information and it is the future of financial reporting," said Cox. "With Financial Explorer or another XBRL viewer, investors will be able to quickly make sense of financial statements. In the near future, potentially millions of people will be able to analyze and compare financial statements and make better-informed investment decisions. That's a big benefit to ordinary investors."

    David Blaszkowsky, Director of the SEC's Office of Interactive Disclosure, encouraged investors to try out the new software. "Financial Explorer will help investors analyze investment choices much quicker. I encourage both companies and investors to visit the SEC Web site, try the software, and get a first-hand glimpse of the future of financial analysis, especially for the retail investor."

    Financial Explorer is open source, meaning that its source code is free to the public, and technology and financial experts can update and enhance the software. As interactive data becomes more commonplace, investors, analysts, and others working in the financial industry may develop hundreds of Web-based applications that help investors garner insights about financial results through creative ways of analyzing and presenting the information.

    Continued in article

    Jensen Comment
    The Financial Explorer link ---
    Note the "Take a Tour" option.

    Bob Jensen's threads on XBRL are at

    Bob Jensen's videos (created before the SEC created the Financial Explorer) are at
    When I can find some time, I'll create a Financial Explorer update video.

    Buffett Won’t Be Witness in Fraud Trial
    Defense lawyers rested their case at the fraud trial of General Reinsurance executives accused of helping the American International Group mislead investors, without jurors hearing from the billionaire investor Warren E. Buffett. Closing arguments are scheduled for Monday, and the case is expected to go to the jury shortly after that. Mr. Buffett’s holding company, Berkshire Hathaway, owns General Re. In the case, four former executives from General Reinsurance and one from A.I.G. are accused of conspiring on a transaction that let A.I.G. inflate loss reserves by $500 million in 2000 and 2001. Lawyers for two defendants presented character witnesses on Thursday.
    "Buffett Won’t Be Witness in Fraud Trial," Bloomberg News via The New York Times, February 8, 2008 ---

    Accounting Fraud Can Cost Billions
    AIG is close to a deal involving a payment of at least $1.5 billion to resolve accounting fraud and other allegations with federal and state authorities. The expected agreement could be the largest finance-industry regulatory settlement with a single company in U.S. history.
    Kara Scannell and Ian McDonald, "AIG Close to Deal To Settle Charges, Pay $1.5 Billion," The Wall Street Journal, February 6, 2006; Page C1 ---

    Bob Jensen's threads on the A.I.G. frauds are at 

    The Justice Racer Cannot Beat a Snail:  Andersen's David Duncan Finally Has Closure

    "Andersen Figure Settles Charges: Former Head of Enron Team Barred From Some Professional Duties," by Kristen Hays, SmartPros, January 29, 2008 --- 

    The former head of one-time Big Five auditing firm Arthur Andersen's Enron accounting team has settled civil charges that he recklessly failed to recognize that the risky yet lucrative client cooked its books.

    David Duncan, who testified against his former employer after Andersen cast him aside as a rogue accountant, didn't admit or deny wrongdoing in a settlement with the Securities and Exchange Commission announced Monday.

    The SEC said in the settlement that he violated securities laws and barred him from ever practicing as an accountant in a role that involves signing a public company's financial statements, such as a chief accounting officer. But he could be a company director or another kind of officer and was not assessed any fines or otherwise sanctioned.

    Three other former partners at the firm have been temporarily prohibited from acting as accountants before the SEC in separate settlements unveiled Monday.

    Andersen crumbled amid the Enron scandal after the accounting firm was indicted, tried and found guilty -- a conviction that eventually was overturned on appeal.

    The settlements came six years after Andersen came under fire for approving fudged financial statements while collecting tens of millions of dollars in fees from Enron each year.

    Greg Faragasso, an assistant director of enforcement for the SEC, said Monday that the agency focused on wrongdoers at Enron first and moved on to gatekeepers accused of allowing fraud to thrive at the company.

    "When auditors of public companies fail to do their jobs properly, investors can get hurt, as happened quite dramatically in the Enron matter," he said.

    Barry Flynn, Duncan's longtime lawyer, said his client has made "every effort" to cooperate with authorities and take responsibility for his role as Andersen's head Enron auditor.

    That included pleading guilty to obstruction of justice in April 2002, testifying against his former employer and waiting for years to be sentenced until he withdrew his plea with no opposition from prosecutors.

    "After six years of government investigations and assertions, surrounding his and Andersen's activities, it was decided that it was time to get these matters behind him," Flynn said.

    Duncan, 48, has worked as a consultant in recent years.

    He was a chief target in the early days of the government's Enron investigation as head of a team of 100 auditors who oversaw Enron's books. In the fall of 2001, he and his staff shredded and destroyed tons of Enron-related paper and electronic audit documents as the SEC began asking questions about Enron's finances.

    Andersen fired Duncan in January 2002, saying he led "an expedited effort to destroy documents" after learning that the SEC had asked Enron for information about financial accounting and reporting.

    The firm also disciplined several other partners, including the three at the center of the other settlements announced Monday. They are Thomas Bauer, 54, who oversaw the books of Enron's trading franchise; Michael Odom, 65, former practice director of the Gulf region for Andersen; and Michael Lowther, 51, the former partner in charge of Andersen's energy audit division.

    Their settlement agreements said that they weren't skeptical enough of risky Enron transactions that skirted accounting rules. Odom and Lowther were barred from accounting before the SEC for two years, and Bauer for three years. None was fined.

    Their lawyer, Jim Farrell, declined to comment Monday.

    Duncan's firing and the other disciplinary moves were part of Andersen's failed effort to avoid prosecution. But the firm was indicted on charges of obstruction of justice in March 2002, and Duncan later pleaded guilty to the same charge.

    In Andersen's trial, Duncan recalled how he advised his staff to follow a little-known company policy that required retention of final audit documents and destruction of drafts and other extraneous paper.

    That meeting came 11 days after Nancy Temple, a former in-house lawyer for Andersen, had sent an e-mail to Odom advising that "it would be helpful" that the staff be reminded of the policy.

    Duncan testified that he didn't believe their actions were illegal at the time, but after months of meetings with investigators, he decided he had committed a crime.

    Bauer and Temple invoked their 5th Amendment rights not to testify in the Andersen trial. However, Bauer testified against former Enron Chairman Ken Lay and CEO Jeff Skilling in their 2006 fraud and conspiracy trial.

    Andersen insisted that the document destruction took place as required by policy and wasn't criminal, but the firm was convicted in June 2002.

    Three years later the U.S. Supreme Court unanimously overturned the conviction because U.S. District Judge Melinda Harmon in Houston gave jurors an instruction that allowed them to convict without having to find that the firm had criminal intent.

    That ruling paved the way for Duncan -- the only individual at Andersen charged with a crime -- to withdraw his guilty plea in December 2005.

    In his plea, he said he instructed his staff to comply with Andersen's document policy, knowing the destroyed documents would be unavailable to the SEC. But he didn't say he knew he was acting wrongfully.

    Frontline (from PBS) videos on accounting and finance regulation and scandals in the U.S. ---
    This link was forwarded by Richard Cambell.

    Andersen's demise didn't solve the broader problem of the cozy collaboration between auditors and their corporate clients. "This is day-to-day business in accounting firms and on Wall Street," says former SEC Chief Accountant Lynn Turner. "There is nothing extraordinary, nothing unusual, with respect to Enron." Will Congress and the SEC do what's needed to restore trust in the system?
    See "More Enrons Ahead" video in the list of Frontline (from PBS) videos on accounting and finance regulation and scandals ---

    I draw some conclusions about David Duncan (they're not pretty) at

    My Enron timeline is at

    My thread on the Enron/Worldcom scandals are at

    WorldCom's head of internal auditing blew the whistle on the accounting fraud (over $1 billion) by the highest WorldCom executives and the worst Big Five accounting firm audit in the history of the world. She's now viewed as the "Mother of Sarbanes-Oxley Section 404."

    Recent Interview
    In February 2008, CFO Magazine did an article about her and her new book:
    "WorldCom Whistle-blower Cynthia Cooper: What she was feeling and thinking as she took the steps that, as it turned out, would change Corporate America," by . David M. Katz and Julia Homer, CFO Magazine, February 1, 2008, pp. 38-40.

    Blowing the Whistle on Cynthia Cooper (the Worldcom scandal's main whistleblower) in a critical review of her book
    Extraordinary Circumstances
    by Cynthia Cooper, former Internal Auditor of Worldcom
    Barnes and Noble ---
    Publisher: Wiley, John & Sons, Incorporated Pub. Date: February 2008 ISBN-13: 9780470124291 Sales Rank: 27,246

    ""Extraordinary Circumstances": Take it to the Beach ," by Tom Selling, The Accounting Onion, February 7, 2008 --- 

    I decided to read "Extraordinary Circumstances" because I wanted to learn more about the major players at WorldCom, how the fraud was discovered, and how it was perpetrated. I was also curious to learn how the story of a fraud that was so simple at its core could take more than 350 pages to tell.

    As it turns out, the story I was expecting could have easily been told in about one hundred pages; even the chapter titles indicated that it would take me at least 200 pages to get where I thought I actually wanted to begin. But, as I was reading the book, impatient to get to the good stuff, I got hooked on the seeming mundaneness of how a smart but not brilliant, hardworking but not obsessed teenager, got hired and fired, married and divorced, have children, and marry again to a stay-at-home Dad. Much of this was skillfully interwoven with the history of WorldCom, along with the pathos of good corporate soldier accountants meeting their end, and the tragedy of the demigods of the telecommunications industry going to any extreme to avoid experiencing the consequences of their own fallibility.

    Continued in article

    Jensen Comment
    After reading Tom's full critical review I have the feeling that when he says "Take it to the Beach" he means throw it as far as possible into the water. Cynthia spoke at a plenary session a few years ago at an American Accounting Association annual meeting. I don't think the AAA got its money's worth that day. She seems to be exploiting this sad event year after year for her own personal gain as well as an ego trip.

    Bob Jensen's threads on the Worldcom fraud (read that the worst audit in the history of the world by a major international auditing firm) are at

    February 8, 2008 reply from Dennis Beresford

    Bob, For a slightly different perspective, I bought copies for each of my MAcc students and gave the books to them this week. I'm not requiring the students to read the book but I told them it would be a good idea to do so. As Tom indicates, this is not a complete analysis of WorldCom's accounting. Interested parties can get that from the report of the special board committee that investigated the WorldCom fraud. That report is available through the company's filings in the SEC Edgar system.

    What the book is, however, is a highly personal story of how Cynthia courageously blew the whistle on what became the world's largest accounting fraud. I've plugged the book to students, audit committes, and others who can learn from her difficulties and be better prepared if ever faced with an ethical challenge of their own. There have been very few true heros of the accounting fiascos of the early 2000's, but Cynthia is definitely one of them.

    Rather than disparaging her efforts to educate others about her experiences, I think we should all glorify one who clearly did the right thing at immense cost to her personally.

    Denny Beresford

    February 8, 2008 reply from Bob Jensen

    Hi Denny

    My position is that Cynthia Cooper is indeed one of the three most courageous women that were featured on the cover of Time Magazine in 2002. I'll forward a second post about those three heroes.

    Indeed I agree with Denny that Ms. Cooper is a hero, but that does not mean we have to praise her book. Efforts to get rich (from speeches and books) after blowing the whistle push ethics to the edge, some far worse than these three heroes.

    You can read the following among my other whistle blower threads at

    "Time Names Whistle-Blowers as Persons of the Year 2002", Reuters, December 22, 2002 --- 

    Time Magazine named a trio of women whistle-blowers as its Persons of the Year on Sunday, praising their roles in unearthing malfeasance that eroded public confidence in their institutions.

    Two of the women, Sherron Watkins, a vice president at Enron Corp., and Cynthia Cooper of WorldCom Inc., uncovered massive accounting fraud at their respective companies, which both went bankrupt.

    The third, Coleen Rowley, is an agent for the Federal Bureau of Investigation. In May, she wrote a scathing 13-page memo to FBI Director Robert Muller detailing how supervisors at a Minneapolis, Minnesota field office brushed aside her requests to investigate Zacarias Moussaoui, the so-called "20th hijacker" in the Sept. 11th attacks, weeks before the attacks occurred.

    "It came down to did we want to recognize a phenomenon that helped correct some of the problems we've had over the last year and celebrate three ordinary people that did extraordinary things," said Time managing editor Jim Kelly.

    Other people considered by the magazine, which hits stores on Monday, included President Bush, al Qaeda leader Osama bin Laden, Vice President Dick Cheney and New York attorney general Eliot Spitzer.

    Bush was seen by some as the front-runner, especially after he led his party to a mid-term electoral upset in November that cemented the party's majority in Congress.

    However, Kelly said "some of (Bush's) own goals: the capture of Osama bin Laden, the unseating of Saddam Hussein, the revival of a sluggish economy, haven't happened yet. There was a sense of bigger things to come, and it might be wise to see how things played out," he added.

    Watkins, 43, is a former accountant best known for a blunt, prescient 7-page memo to Enron chairman Kenneth Lay in 2001 that uncovered questionable accounting and warned that the company could "implode in a wave of accounting scandals."

    Her letter came to light during a post-mortem inquiry conducted by Congress after the company declared bankruptcy.

    Cooper undertook a one-woman crusade inside telecommunications behemoth WorldCom, when she discovered that the company had disguised $3.8 billion in losses through improper accounting.

    When the scandal came to light in June after the company declared bankruptcy, jittery investors laid siege to global stock markets.

    FBI agent and lawyer Rowley's secret memo was leaked to the press in May. Weeks before Sept. 11, Rowley suspected Moussaoui might have ties to radical activities and bin Laden, and she asked supervisors for clearance to search his computer.

    Her letter sharply criticized the agency's hidebound culture and its decision-makers, and gave rise to new inquiries over the intelligence-gathering failures of Sept. 11.

    My Foremost Whistle Blower Hero Who's Heads and Shoulders Above the Time Magazine Trio
    Cindy Ossias not only risked her job, she risked her law license to ever work again as an attorney. She also blew the whistle at the risk of going to jail.  Unlike the Time Magazine Women of the Year, Cindy Ossias knew there was no hope in blowing the whistle to her boss. Her boss was the big crook when she blew the whistle on him and the large home owner insurance companies operating in the State of California. 

    January 6, 2002 message form Hossein Nouri

    -----Original Message----- 
    From: Hossein Nouri [mailto:hnouri@TCNJ.EDU]  
    Sent: Monday, January 06, 2003 10:46 AM 
    Subject: Re: Time Magazine's Persons of the Year 2002 

    In the case of Enron, I remember I read (I think in US News) that the whistle-blower sold her Enron's shares before speaking out and made a significant profit. I do not know whether or not she returned that money to the people who lost their money. But if she did not, isn't this ethically and morally wrong?

    January 6, 2002 reply from Bob Jensen

    Hi Hossein,

    This is a complex issue. In a sense, she might have simply taken advantage of insider information for financial gain. That is unethical and in many instances illegal.

    She also may have acted in a manner only to ensure her own job security --- See "Sherron Watkins Had Whistle, But Blew It" That would be unethical.

    However, in this particular case, she allegedly believed that it was not too late to be corrected by Ken Lay and Andersen auditors. Remember that she did not whistle blow to the public. Whistle blowers face a huge dilemma between whistle blowing on the inside versus whistle blowing on the outside.

    Quite possibly (you will say "Yeah sure!") Watkins really had reasons to sell even if she had not detected any accounting questions? There are many reasons to sell, such as a timing need for liquidity and a need to balance a portfolio.

    Somewhat analogous dilemmas arise when criminals cooperate with law enforcement to gain lighter punishments. Is it unethical to let a criminal off completely free because that criminal testifies against a crime figure higher up the chain of command? There are murderers (one named Whitey from Boston) who got off free by testifying. Incidentally, Whitey went on to commit more murders!

    PS, I think Time Magazine failed to make a hero out of the most courageous whistle blower in recent years. Her name is Cindy Ossias --- 

    Cindy Ossias not only risked her job, she risked her law license to ever work again as an attorney. She also blew the whistle at the risk of going to jail.  Unlike Sherron Watkins, Cindy Ossias knew there was no hope in blowing the whistle to her boss. Her boss was the big crook when she blew the whistle on him and the large home owner insurance companies operating in the State of California.

    Bob Jensen

    Rick Telberg has a summary review in his CPA Trendlines ---

    You can read more about the WorldCom fraud and Cynthia Cooper at

    You can read more about whistle blowing at

    As a hobby collector are you evading taxes illegally?

    From The Wall Street Journal Accounting Weekly Review on February 22, 2008

    If You Collect, the IRS May Collect From You
    by Arden Dale
    The Wall Street Journal

    Feb 14, 2008
    Page: D5
    Click here to view the full article on ---

    TOPICS: Personal Taxation

    SUMMARY: This article discusses implications of gains on collectible items, such as artwork, automobiles or "Elvis's guns." "Capital gains, estate and gift taxes may all come into play depending on whether you decide to sell off parts of the collection or bequeath it to an heir. Experts advise that you start by deciding [the taxpayer's] tax status....A collector, for tax purposes, is one who buys and owns items primarily for personal pleasure. An investor, on the other hand, buys chiefly to make a profit. A dealer is in the business of buying and selling. For the average person, the big distinction is between collector and investor." The article goes on to discuss the tax implications of gains on collectible items.

    CLASSROOM APPLICATION: This article may be used in Personal Tax classes, Personal Financial Planning classes or Investment classes to pull together the various possibilities in this area of taxation. Also, the orientation of the article allows for combining discussion of three taxation approaches on collectible items typically covered in different tax courses.

    1.) What is the reasoning behind categorizing a taxpayer as a collector, an investor or a dealer of collectible items?

    2.) What code sections are relevant to the taxability of gains, deductibility of losses and deductibility of expenses related to collectible items?

    3.) What are the requirements of code section 212? What actions by a taxpayer would support the notion that code section 212 is the relevant tax code section to decide on the tax treatment of expenditures related to collectible items?

    4.) How does the "special 28% capital gains tax" on collectible items compare to taxes on gains related to other investments?

    5.) How are capital gains and losses accumulated for the purpose of applying capital gains taxes?

    Reviewed By: Judy Beckman, University of Rhode Island


    "If You Collect, the IRS May Collect From You Capital-Gains Tax And Estate Levies Could Be Payable," by Arden Dale, The Wall Street Journal, February 14, 2008; Page D5 ---

    Oil paintings, old cars or Elvis's guns: Whatever you collect is a tax bill waiting to happen.

    Capital gains, estate and gift taxes may all come into play depending on whether you decide to sell off parts of the collection or bequeath it to an heir.

    Experts advise that you start by deciding your tax status: collector, investor or dealer. Tax rules recognize these three categories, and deductions are handled differently for each under the Internal Revenue Code.

    A collector, for tax purposes, is one who buys and owns items primarily for personal pleasure. An investor, on the other hand, buys chiefly to make a profit. A dealer is in the business of buying and selling.

    For the average person, the big distinction is between collector and investor. Collectors can't take a deduction for keeping up a collection because expenses are considered personal under Section 262 of the code. Investors, however, may deduct costs as expenses incurred in the production of income under Section 212.

    To prove that you are an investor, for example, you must be able to show that you are tracking ups and down in the value of your objects. It's a good idea to get appraisals on a regular basis and subscribe to journals that help keep a pulse on the market.

    "It's always good to keep businesslike records, keep an inventory and watch market trends," says Ralph E. Lerner, a partner in the New York office of law firm Sidley Austin. "If you don't, then you look more like a collector."

    Once you've established your tax status, give some thought to what you are planning to do with the collectibles in the long run.

    If you sell them, you will pay a special 28% capital-gains tax, nearly double the current 15% rate for long-term capital gains on other investments.

    Don't hold your breath waiting for the capital-gains rate on collectibles to be lowered. A perennial fight over this issues keeps the legislative pot stirred; a bill now in the Senate would cut the rate from 28% to 15%, but many in the art business don't expect that to happen anytime soon.

    "I think it's exceedingly unlikely to move this Congress," says Robert Kerr, senior director of government relations at the National Association of Enrolled Agents, which represents a group of tax preparers federally licensed by the Internal Revenue Service.

    Another option is to swap one collectible for another. A strategy called a "like-kind exchange" can let you do this and defer capital-gains tax. Such exchanges, often used with real estate, can also be used on stamps, coins, gems and other collectibles. It's tricky, though, and may only be used by investors.

    How do you do a like-kind exchange? "Very carefully," says Claudia Hill, an enrolled agent who owns the tax services company Tax Mam Inc., in Cupertino, Calif. "While the law allows it, the difficulty is in assuring the assets being exchanged are 'like kind.'"

    If you don't plan to sell, you need to think about estate and gift taxes because the collectibles will be included in your estate at their fair-market value. (Determining fair-market value requires a number of actions, including having the items appraised.)

    Estate-tax planning is complicated, especially right now, because a 2001 law phased in a series of complex changes. This year, a tax of as much as 45% will be levied on estates worth more than $2 million. In 2009, the threshold will rise to $3.5 million. In 2010, the tax will be lifted completely for a year, but reinstated at a lower threshold in 2011.

    The estate-tax return is due nine months after death, according to Jere Doyle, senior vice president of Bank of New York Mellon Corp. A shortage of cash may force a sale of the collectibles to pay the estate tax.

    Failing to anticipate the estate tax can make heirs' lives "miserable," says Mr. Doyle. "The estate tax is one reason why a charitable gift of collectibles is a good idea. The amount given to charity is deductible for estate-tax purposes."

    Lifetime charitable gifts are also an option, but they must be planned carefully to let the collector reap a maximum tax benefit. The rules on such deductions are more complicated.

    Bob Jensen's tax helpers ---

    From The Wall Street Journal Accounting Weekly Review on February 22, 2008

    Gauging the Worth of 'Market Value'
    by David Reilly
    The Wall Street Journal

    Feb 20, 2008
    Page: C1
    Click here to view the full article on ---


    TOPICS: Accounting, Advanced Financial Accounting, Fair Value Accounting, FASB, Financial Accounting, Historical Cost Accounting

    SUMMARY: This article discusses the pros and cons of the use of market value in financial accounting. Alternative support for continued use of the historical cost method, issues in the subjectivity of values determined and resulting volatility of reported income -- all of which are subjects touched on in the article.

    CLASSROOM APPLICATION: The article may be used in any Financial Accounting course to assist in covering fair value versus historical cost measures, the "going concern" and other assumptions used in accounting and the objectives and qualitative characteristics supporting financial accounting and reporting

    1.) State the definition of the concept of "fair value" (market value) in financial reporting from authoritative accounting literature. In your answer, provide a reference to the source in accounting literature.

    2.) Compare the concept of fair value to the historical cost principle. In your answer, provide a definition of that latter principle from any valid source, such as an accounting textbook. Provide a citation to your source in appropriate bibliographic format.

    3.) What statements in the article support use of fair value in financial reporting? What statements support the use of the historical cost principle? Support your answer.

    4.) How does the concept of the going concern interact with these issues in relation to fair value versus historical cost? In your answer, specifically describe the way in which the going concern assumption is discussed in the article.

    5.) What are the concerns with subjectivity in determining market values for financial reporting? Is there subjectivity in preparing financial reports using historical cost accounting?

    6.) What is the lower-of-cost or market approach to valuing financial statement (primarily balance sheet) items? What statements in the article support the use of that approach?

    7.) How does the use of fair values potentially lead to greater volatility in reported earnings? Cite an example given in the article about that issue.

    Reviewed By: Judy Beckman, University of Rhode Island

    Credit Suisse's Surprise
    by Carrick Mollenkamp and Alistair MacDonald
    Feb 20, 2008
    Page: C1

    "Gauging the Worth of 'Market Value'," by David Reilly, The Wall Street Journal, February 20, 2008; Page C1 ---

    Credit Suisse Group yesterday said it expects to take a $2.85 billion write-down of financial instruments affected by the credit crunch, which will result in a $1 billion drop in quarterly profit, just a week after telling investors it had largely escaped the worst of the financial crisis. American International Group Inc. was forced a week ago to increase by about $3.6 billion estimates of potential losses it had made to investors in late 2007.

    The quick about-faces highlight the problem that companies, even those that are supposed to be financial experts, are having with a seemingly straightforward question: How much is something worth?

    The difficulty lies in part in the increasing use of so-called market values to determine prices for items that companies aren't necessarily selling. This has become especially tough since the debt crisis has caused large parts of markets to seize up, meaning there often aren't any prices to use as reference points.

    Supporters of the market-value approach say it will help prevent the kind of long-term economic malaise that gripped Japan in the 1990s, when that country's banks sat on problem loans. But companies fear it is distorting returns and speeding the financial crisis, even as investors wonder if companies may be overestimating potential losses to establish cookie-jar reserves.

    The debate over how best to figure values is more than just academic. Major financial firms have recognized more than $150 billion in losses, based mostly on the use of market values. At the same time, the Securities and Exchange Commission and federal prosecutors are investigating whether some firms may have applied different market values to the same securities, depending on whether they were held by the firm or its clients.

    No one disputes that the use of market values has potential problems, especially during a time of severe market stress. But advocates say they can also provide a needed reality check, even if imperfect.

    When conversations turn to the use of market values, "the initial response is often, 'I don't like the answer the market is giving me,' " says Mark Olson, chairman of the audit-firm regulator the Public Company Accounting Oversight Board. "But you can't ignore what the market is telling you."

    Coming up with realistic market values isn't easy, but is ultimately worth it, says Lynn Turner, a former SEC chief accountant. "If you really do [market] values right, you don't want it too hot or too cold, you want it just right," he says. When those values are right, "it forces management to deal with reality, it forces you to deal with problems sooner rather than later," Mr. Turner adds.

    Alternatives to market values have their own problems. Basing values on an item's cost wouldn't necessarily give investors an idea of the scope of current problems facing financial institutions.

    Allowing management to base values on models that look to long-term values, rather than on current, potentially stressed market conditions, also opens the door to abuses. That allowed Enron Corp. to book profits that didn't exist.

    Even when used properly, market values can prove problematic, because in trying to reflect investors' perceptions, they can ignore the underlying economic reality, says Damon Silvers, associate general counsel for the AFL-CIO, which has long been critical of the increasing use of market values in accounting. "You have a portfolio of real-estate loans, and those loans are performing, but now you're making it look like you're losing money, when in fact you're not," he says.

    Plus, the approach "treats all the assets of an ongoing enterprise as though they are constantly for sale, and that does not convey very good information about the profit of the business, because they're not actually for sale," Mr. Silvers adds.

    The debate about the appropriateness of the market-value approach aside, using market values holds another challenge for investors. It requires them to think differently about debt instruments and loans, viewing them like stocks whose value can swing from day to day or quarter to quarter.

    Even more unsettling: Today's write-down could be tomorrow's write-up if market values change. That is a possibility that companies already have signaled. A day after disclosing its losses, AIG told investors that the shortfalls might not be real and that the instruments it was marking down could eventually be worth far more.

    Late last year, when Citigroup Inc. warned investors that it could be facing multibillion-dollar write-downs, Chief Financial Officer Gary Crittenden cast similar doubts about the hits his bank expected to take. "We've had an accounting hit," Mr. Crittenden told investors on a conference call. "But, you know, a year from now, two years from now, three years from now, the real question is going to be how much cash do we receive from these securities?"

    Bob Jensen's threads on fair value accounting are at

    "What Good Comes from Goodwill Accounting?" by Tom Selling, The Accounting Onion, February 18, 2008 ---

    In an earlier post, I described how SFAS 141R resulted in some incremental improvements to the accounting for business combinations.  However, warts remain, and the purposes of this post is describe the ugliest and most painful of them all: the accounting for so-called 'goodwill.'

    Here's a simple example to contemplate:

    • Company P determines that Company S has a value of $1,100, and negotiates an acquisition for 100% of its outstanding shares for $1,000.
    • S has the following assets:
      • Plant and equipment with a fair value of $200.
      • An assembled workforce with a fair value of $100.
    • S has no liabilities eligible for accounting recognition.
    • Company S will be run independently from Company P; thus, any synergies created by the acquisition are negligible. 

    The root of the problem is literally that debits (the assets acquired) do not equal credits (the purchase price).  Business combination accounting is a collision of fantasy and reality: the fantasy is that accounting can fully reflect the economic impact of past events on an enterprise, and the reality is that it cannot be so. A balance sheet produced by even the most principled of accounting systems imaginable cannot possibly comprehend the entire set of economic assets and liabilities.  One example on the asset side would be that S has been put together in such a way as to rapidly and inexpensively expand or contract capacity as market conditions change.  In other words, S holds 'real options', and the shareholders of S would want P to pay for them. On the liability side, not all obligations are legal, amounts are highly uncertain, and the probability of payment may be low. 

    The FASB's solution to the debit and credit problem is to plug the shortfall in debits and to weave a fantasy around it.  The plug is euphoniously dubbed 'goodwill' -- to be classified on the balance sheet as an asset and tested for impairment at least once each year. In the above example, the amount reported as goodwill would be $800 (=$1,000 - $200). 

    Whipped Cream on the Balance Sheet   

    As described above, the amount reported as goodwill is, at its best, a conglomeration of assets offset by liabilities.  Nowhere else in accounting would there be permitted such a hodgepodge, and by no other means other than a narrowly defined 'business combination' may it -- whatever it is -- be recognized.  But even granting that offsetting assets with unrelated liabilities may be permissible, of what use to investors is the assignment of a number to something that, by definition, is beyond description?  (Ironically, even though the value of S's assembled workforce may be measurable and significant, separate recognition of this asset is streng verboten and kept a dark secret from investors.) 

    As I have reported in my earlier post, Walter Schuetze (former SEC Chief Accountant and FASB member) derisively characterizes reported goodwill as "the lump left over." Actually, I think he was being generous.  FAS 141R contains some significant exceptions to fair valuation of assets acquired and liabilities assumed.  Thus, the unknown difference between recorded amounts and their fair values are  shoveled into the goodwill muddle.  As if that weren't enough, the math of the goodwill calculation blithely compares apples with oranges: prices paid with values received.  "Lump", "goodwill" or whatever name you can think of implies that the number is associated with actual attributes, but what we are dealing with here is nothing more than just a number--an arbitrary number.

    So, dear readers, I hope you are not disillusioned to realize that 'goodwill' is invariably anything but.  If it must be recognized at all, let's drop the obvious pretension and call it what it is: in this example, "excess of purchase price over recognized amounts of identified assets acquired and liabilities assumed."  However, dropping the pretension is not as easy as it seems.  If a muddle is to be reported as an asset, it must be subject to an impairment test; and without a dressy name that belies the muddle that is 'goodwill', there can be no pretense for the charade of an impairment test that is FAS 142. 

    The Goodwill Impairment Mess

    Recognition of goodwill may seem but a curious anomaly until you get to the impairment test specified in FAS 142.  It's a real money pit:  goodwill has to be assigned to "reporting units" (a new concept rife with opportunities for manipulation); the fair value of each reporting unit has to be assessed at least once a year (another opportunity for manipulation); and the real mayhem begins if, heaven forbid, you are required to estimate the "implied fair value of goodwill" (another new concept rife with opportunities for manipulation).  The only good that comes out of goodwill impairment testing are the jobs created for valuation consultants, accountants and attorneys. 

    A Proposed Solution

    In olden days, the British permitted a charge to contributed capital for the amount that would otherwise have been recognized as goodwill.  While imperfect, it may well be the only reasonable solution to the problem; for as I have shown above, there can be no perfect solution.  If you can't describe what something is, than what possible good can come from purporting to measure it?

    By the way, even though business combinations rules have been somewhat converged by the issuance of FAS 141R and a revised IFRS 3, goodwill impairment remains one of the most significant differences between IFRS and U.S. GAAP. The two approaches are fundamentally at odds, but it should be said that IFRS's impairment rules are much less worse.  But that's not the most important point I want to make.  Whatever the merits of the two approaches, by eliminating goodwill and the inevitably screwball impairment tests, standard setters would not only be improving financial reporting, they could also say that they have resolved one of the thorniest convergence issues.   

    Tom Selling poses some added Catch 22 issues about goodwill accounting in
    "FAS 52: Another Goodwill Charade, and IFRS Convergences To Boot," The Accounting Onion, February 25, 2008 ---

    Bob Jensen's threads on FAS 141R , contingencies, and intangibles are at

    Some related earlier tidbits:

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

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

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

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

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

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

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

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

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


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

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

    Merry Christmas!


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

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

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

    Amy Dunbar

    Jensen Comment
    You can download FAS 141(R) from 

    February 21, 2008 reply from David Fordham, James Madison University [fordhadr@JMU.EDU]

    I'm not up on SFAS 141R, but I have to wonder why we accountants even bother dibbling around with non-quantifiable amounts like "utility" and "expectations" and other "value judgments"? We don't bother with other similar concepts, such as training, collegiality, preferences, love, aspirations, etc. which also affect the "value of assets".

    I have a rock that I consider very valuable, and a few other experts who have analyzed it have declared it very valuable (at least one thinks its more valuable than I do) and the values vary all over the map, and yet there are others who believe it is worthless, merely an interesting-looking rock. While I'm willing to part with it for a princely sum, and several have offered me near that amount, others think we are foolish. I would be amused to see what happens if I were to list it on my net worth statement next time I apply for a loan. How valuable is the name "Exxon"? How valuable is custom software? How valuable is a gold doubloon retrieved from the Notre-Dame-de-Deliverance, or a lock of wool from Dolly the sheep?

    Instead of "how much", it seems like the question we *should* be asking is, "Why?"

    Aren't these individualized answers? Why do any of us pretend there is a single right answer, then?

    As an aside, a couple of years ago, my wife was called for jury duty, on a case involving goodwill. A stonemason had decided to retire and sold his business to his young apprentice. At the time of sale, the mason had a state-wide reputation, so the transaction involved considerable goodwill beyond the tools and other tangible assets. Within a year, the apprentice had gotten lazy, had botched several high-profile jobs, had alienated customers, and otherwise ruined the company. Several customers approached the retired mason and asked him to do personal jobs for them, which he did since there was no non-compete clause in the contract. When the apprentice tried to sell out to another mason, he wasn't offered but a fraction of what he'd originally paid. The apprentice sued the mason, claiming his actions had "impaired the goodwill of the company". The interesting thing was, the jury was given no definition (none, nada, zip, zilch) or guidance of what "goodwill" was supposed ! ! to be, only that it was an asset that could be impaired. There was no explanation of where it came from, what created it, why it existed, how it could be destroyed, etc. The jury begged the judge for more guidance, and he claimed he could only read the lawbooks to them, and the lawbooks contained no definition or other information which said what goodwill was or how it could be changed. The jury at first agreed that they could not reach a verdict without more information, but the judge demanded that they reach one, without any further guidance. After three days of working "in the dark" with nothing to go on but opposing lawyers' recognizably-ridiculous claims, they reached a verdict agreeing that the goodwill had been impaired and the apprentice had been harmed by the retiree's taking the new jobs. After the trial, when my wife learned a little bit about it, she was angered that the jury wasn't told so they could have made a better decision.

    The public is under the impression that if everything goes right, the accounting reports always show the "correct" number. Why do we continue to deceive them so?

    David "Rhetorical Questionmaker" Fordham

    February 21, 2008 message from Paul Williams [Paul_Williams@NCSU.EDU]

    Dilbert recently ran a series of cartoons in which the pointy-haired boss opines about raising some cash by selling the Goodwill. When an ex-engineer/cartoonist can so easily see the silliness of what we try to foist off as "professional expertise", perhaps the public isn't so deceived as we have deceived ourselves. Makes one nostalgic for the old days when we argued about "costs" and "market values (entry or exit)". One might be able to make a case that sufficient evidence is available to ascertain what something cost or what it could fetch in some broad market. But fair value?

    In the article we are assured that S has an asset "assembled workforce" worth $100. Just exactly how would one obtain that $100 cash? On what market do we buy and sell "assembled workforces?" Even if that were possible (which it isn't, at least not in the US) how long does a workforce stay assembled? Our NHL franchise is celebrating its 10th anniversary as the team (assembled workforce) labeled Carolina Hurricanes. Only one person (Glen Wesley) has been part of that assembled workforce the entire time. Dozens and dozens of players have come and gone as part of the "assembled workforce."

    In 2002 the team went to the Stanley Cup finals and, with the team (assembled workforce) intact finished 30th (dead last) in 2003. They did likewise in 2006 and won the Cup and with virtually the same "assembled workforce" failed to make the playoffs in 2007. The "fair value" of an assemble workforce seems to be a rather ephemeral thing. To assign a single number value to it at an arbitrary point in time does seem to an active that can be nothing other than deceptive.

    David raises a most critical issue for a group that claims some kind of professional expertise. One can entertain the notion that there could be a coherent "cost" or "market value" accounting, but a "fair value" accounting? But in the academy we have been speaking for so long and so matter of factly about earnings expectations and models that provide those numbers, which are sufficient for scientific precision, that we have conned ourselves into believing that we actually can provide "fair values." We abandoned SFAS #33 because "market values" were too difficult to ascertain with any degree of reliability. But fair values don't have to be reliable, only relevant to some hypothetical world populated by persons who don't actually exist (Joe Doodlebugs, e.g.); we can just make them up.

    Accountants have been victimized by finance hubris. There is a significant historical irony in this since the "positivists" (I can name names but will not do so publicly) dogma was that accounting was too normative and that concepts like "true and fair" view were intellectually vacuous because terms like "true" and "fair" were references to subjective notions. Yet the influence of positive economics on accounting has produced a system of financial reporting focused on the manufacture of "fair" values, which in too many cases are the hypothetical products of the imaginary world of the positive economists. Normative accounting gave us positive measures. Positive accounting has provided us with normative measures. A classic example of unintended consequences?

    February 21, 2008 reply from Bob Jensen

    Hi Paul and David,

    Actually valuation is at last as easy as it can get. Below is an email that I received today offering to let me try this little black box in which I feed in financial statements and out pops the value of the firm. I don't quite know how the black box deals with intangibles, but maybe there's magic inside that box.

    Actually all valuation experts use magic dust. I protested my land and home valuations at various times in Maine, Texas, and New Hampshire. In each case, the appraiser carefully documented square footage, construction quality, location, view quality, landscape, school district, etc. Good work! Then each initial appraisal, say V dollars, was multiplied by a mysterious M coefficient such that my property tax appraisal was T=MV. For example, in Maine the M was 2.85. When I asked where the 2.85 came from, the appraiser admitted that he stood in front of my house and used magic dust to set the value of T. Then he divided T by V to get M. In other words M was truly a magic dust derivation. I don’t even know why the appraisers bother with calculating V in the first place. I guess it’s just to make naïve property owners think the appraiser is earning his fee. In reality, he probably rode slowly through the neighborhood and calculated T values for each house in about five minutes or less.

    When something similar happened in New Hampshire last year, I carefully compared in a spreadsheet the difference in the M coefficient between me and my neighbors having identical views and much newer and bigger homes.

    Why was my M coefficient so much larger such that my T real estate appraisal was so much larger than my neighbors’ T values? My wife called me the Big M Guy!

    I was told by the Sugar Hill Selectmen that the magic dust M coefficients could not be changed. So I hired a property tax pro who actually got this issue docketed for court down in the State Capitol of Concord. One day before the first court hearing, the town’s appraiser sheepishly came to my home and asked if I would accept a lower magic dust coefficient. We finally agreed on a revised M coefficient so I guess magic dust can be affected by new magic the closer you get to your day in court.

    Note the magic-dust black box described below in a message from XXXXX. He doesn’t mention magic dust, but I’m sure its floating around in there just like snowflakes swirl up when you shake a glass-ball paper weight.

    Bob Jensen’s threads on the realities of valuation are at


    February 21, 2008 message from XXXXX

    Hi, Bob,

    I have been spending time absorbing as much as I can from the many resources you have about the world of accounting. We have a server based application that we tout as “our application starts where accounting software ends.” A bit camp, I agree, but, in truth, that’s what it does. Input an Income Statement and the basic P&L info, and we can calculate the value of a business. Take that and adjust with normalizations to forecast where the business will be in the future. Then adjust expenses, and apply some basic strategies to get the profits where you want/hope they should be. Then generate reports, including monthly line by line budgets to track all the line items as you move forward. Oh, and calculate Burden rates to guide the pricing of your product/service to achieve your forecast revenue goals. I have no idea whether you are at all interested in looking at what we have, but, if so, let me know and I will be happy to provide you with log in ID and Password.

    On a slightly different note…have you ever heard of K2 Enterprises? If so, can you share any feedback about them with me.


    February 22, 2008 reply from Tom Selling [tom.selling@GROVESITE.COM]

    On cost (replacement) versus (fair) value, Walter Teets and I have written a paper that we recently submitted to FAJ.  The basic thrust is that cost can be associated with principles-based accounting, and value cannot.  That’s why FAS 157 is rules based and filled with anomalies.  You can read the working paper here, or read my blog post that it was based on here.  Comments, especially on the working paper, would be much appreciated.

    Thomas I. Selling PhD, CPA
    602-228-4871 (M)
    602-952-9880 x205 (O)



    "Will the Alphabet Soup of GAAP Soon Become Consommé?" by Tom Selling, The Accounting Onion, February 4, 2008 --- 

    ARB, APB, SFAS, SOP, EITF, FSP, AIN, FIN, CON, SAB, AAER, FRP, ASR, S-X.  These are all authoritative sources of GAAP, and I probably left some out. So, four years ago, the FASB began work on its project to simplify the process of finding answers to accounting questions by creating a single, authoritative on-line Codification—with the significant exception of SEC literature. On January 15th, the FASB launched a one-year “verification” period, during which the Codification Research System will be available online free of charge.  To access the Codification, a user must first register at

    I have by no means done a thorough review of the Codification software, but I decided to replicate a research project I recently performed for a client as a test of its usability.  My client had a series of questions about an anticipated sale of part of their operations, and in particular whether presentation as discontinued operations was specified for the current and future periods.  My resulting first impressions of the Codification as a research tool are these:

    • Response time is slow.  I'm concerned that as more users access the codification, performance will degrade even further.
    • The organization of topics could be more logical.  For example, the FASB is working toward an asset/liability approach to recognition and measurement; so, why are revenues and expenses discussed separately from their balance sheet counterparts?  However, I was able to the place where discontinued operation guidance resides very quickly.
    • The ability to place the cursor over a defined term and read its definition without clicking is very convenient.  The organization of each topic in a systematic series of sections and subsections  appears logical, consistent and potentially helpful.  However, reading off the computer screen gets old very quickly, in no small part because the subsections are too granular to be reader-friendly.   For my task, I chose to simplify things by using the command to join all subsections together -- and then dump everything to paper along with citations to the source documents.  I suppose that if you are looking for a particular sentence or two in answer to a very narrow question, reading off the screen and jumping around using hyperlinks could work fine; but I wonder if that's more the exception than the rule.  Usually, I need to be able to scan the entire content with my eyes before I can hone in on the words I need.

    Overall, the codification project continues to hold high promise and is proceeding apace.  A logical next step for the SEC would be to determine how they can reasonably make accounting researcher more efficient and definitive by incorporating their own literature into the FASB's codification. At present, the Codification does include "authoritative" content issued by the SEC (though not all), as well as selected SEC staff interpretations. Under the current regime, GAAP can be created in an instant practically every time an enforcement action takes place; or a commissioner or high ranking staff member opes their ruby lips to offer their two cents worth about accounting.

    Continued in article

    "FASB Launches GAAP Codification System:  Free access granted, feedback requested," SmartPros, January 16, 2008 --- 

    Rick Telberg forwarded a summary link of Cooper's new book in his blog CPA Trendlines ---

    Bob Jensen's threads on accountancy standard setting controversies are at

    On January 30, 2008 Dr. Andrew D. Bailey, Jr. (former AAA president, SEC Deputy Chief Accountant, and faculty member at several universities) wrote a long letter to the U.S. Department of Treasury's Advisory Committee on the Accounting Profession.


    January 30, 2008

    Mr. Arthur Levitt,  Jr.  
    Mr. Don Nicolaisen  
    Advisory Committee on the Accounting Profession  
    Office of Financial Institutions Policy, Room 1418  
    Department of the Treasury  
    1500 Pennsylvania Avenue, NW  
    Washington, DC 20220  

     Dear Mr. Levitt and Mr. Nicolaisen:

    I am pleased to submit comments about a number of the issues under consideration by the Treasury Department’s Advisory Committee on the Auditing Profession. I would be pleased to discuss my views with the Committee or the Staff.

     You can read the letter at


    First it was back dating of stock options. Now its back loading of pensions
    From the U.S. Treasury Department, February 1, 2008 ---

    The Treasury Department and the Internal Revenue Service (IRS) today issued Revenue Ruling 2008-7 that addresses the application of the accrual rules for pension plans under section 411(b)(1) of the Internal Revenue Code (commonly referred to as "backloading" rules).

    Revenue Ruling 2008-7 analyzes a traditional pension plan that was converted into a cash balance pension plan prior to the effective date of the new conversion requirements under the Pension Protection Act of 2006. The scenario analyzed in the revenue ruling is one in which certain participants had their pensions determined using the greater of (1) the benefit under a continuation of the pre-conversion plan formula for a limited number of years after the conversion date and (2) the benefit under the new cash balance formula.

    The ruling illustrates how, under the current regulations, the backloading rules apply to this scenario. The ruling provides relief to ensure that plans that have requested or received a determination letter from the IRS and certain other plans will not be disqualified for plan years beginning before January 1, 2009 solely because the plan provides benefits based on the greatest of two or more formulas.

    In addition, Treasury and the IRS anticipate proposing amendments to the regulations that will allow separate testing of backloading with respect to the scenario under the revenue ruling and other "greater of" formulas. It is expected that the regulations will be issued soon and will be proposed to be effective for plan years beginning on or after January 1, 2009.

    Revenue Ruling 2008-7 --- end.pdf

    You can read more about back loading and retirement plans at

    From The Wall Street Journal Accounting Educators Review on February 15, 2008

    After Losses, Auditors Take a Hard Line
    by David Reilly
    The Wall Street Journal

    Feb 13, 2008
    Online Exclusive
    Click here to view the full article on ---

    TOPICS: Audit Firms, Audit Quality, Auditing, Auditing Services, Auditor Independence, Auditor/Client Disagreements, loan guarantees, Reserves, Restatement

    SUMMARY: The author argues that while auditors "fell down badly during the tech-stock bubble," they have been using "tight standards" in the recent credit market debacle, in contrast to "many big Wall Street firms [who] were asleep at the switch in the years leading up to the credit crisis." As evidence, the author offers the recent increase in AIG Inc.'s loss estimates for its credit default swaps and a general downward trend in accounting restatements.

    CLASSROOM APPLICATION: Discussing the role of auditors in generating market confidence in financial statements can be made in any accounting or finance course using this article.

    1.) How do restatements of previously issued financial statements impact confidence in financial reporting?

    2.) How does confidence in financial reporting impact securities markets?

    3.) What evidence does the author offer to argue that auditors have been holding high standards in this year and, in particular, through the credit market crunch?

    4.) Does every restatement of financial statements indicate an audit failure? Support your answer.

    5.) What happens when auditors and clients disagree over asset valuation through loss provisions and related balance sheet allowance accounts? What factors allow for auditors to take tough stances with their clients?

    6.) Do you agree that "markets tend to be healthier when auditors insist that companies value their assets conservatively"? In your answer, consider the possible impact on subsequent years' income from a current year's conservative asset values.

    7.) Is conservatism is a qualitative characteristic of accounting information that is part of the conceptual framework? Support your answer with reference to authoritative accounting literature.

    Reviewed By: Judy Beckman, University of Rhode Island

    "After Losses, Auditors Take A Hard Line," by David Reilly, The Wall Street Journal, February 13, 2008; Page C1 ---

    Many big Wall Street firms were asleep at the switch in the years leading up to the credit crisis. At least another group -- the auditors -- seems to be minding the store.

    They fell down badly during the tech-stock bubble, but their standards seem to be pretty tight these days.

    The most recent evidence: The apparently hard line taken by American International Group Inc.'s auditor, PricewaterhouseCoopers, when it came to how the insurer valued credit default swaps -- which are contracts AIG wrote as insurance against default on securities sometimes linked to subprime mortgages. That resulted in AIG upping its loss estimates for these contracts by about $3.6 billion, a move that shocked investors and sent its stock plunging.

    Markets tend to be healthier when auditors insist that companies value their assets conservatively. The result: Investors can place more faith in the numbers they are getting.

    There's other evidence that auditors have been on the job. Companies aren't restating previously reported results as much as they used to. Restatements fell in 2007 for the first time in the post-Enron era, according to separate studies by research firms Glass Lewis & Co. and Audit Analytics.

    Audit Analytics said the number of restatements in 2007 was 1,237 compared to a peak of 1,801 the year before. Glass Lewis said the number of companies restating fell to 1,172, compared with 1,346 in 2006. Back in 2001, as the last financial crisis gathered steam, there were only about 600 restatements.

    The average hit to profit caused by a restatement also fell to about $3.6 million in 2007, according to Audit Analytics. That compared with $17.8 million in 2006 and $21.3 million the prior year.

    These numbers might not seem like much when big banks are recording billions of dollars of losses almost every week for their bets on mortgage-linked securities. Still, the decline in restatements, which are akin to a product recall of financial statements, mean investors might not need to add overly rosy accounting to their list of worries this time around.

    Continued in article

    Bob Jensen's threads on audit professionalism are at

    From Jim Mahar's blog on February 5, 2008 ---

    How 'cash' at companies became risky - MarketWatch

    There is cash and then there is cash:

    How 'cash' at companies became risky - MarketWatch:
    " strange as this may sound, Bristol-Myers Squibb was the latest company to do the equivalent of taking a charge against cash when it announced a $275 million impairment of debt investments that held such things as surprise! subprime and home-equity loans.

    Companies don't really take charges against cash, of course, but investments that double as cash might as well be cash. Auction-rate securities, as these arcane investments are called, were deemed so safe that they sat on the balance sheet not far from Treasurys in a near-cash category called 'marketable securities.'

    Until a few years ago, before a change in accounting rules, Bristol-Myers accounted for auction-rate securities as actual cash. They are so much like cash that they yield just a fraction of a percent above cash and, as Bristol-Myers regulatory filings say, can 'be liquidated for cash at a short notice.'"

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

    Microsoft just launched a new comprehensive online resource called Investor Central ( ), which will serve as a resource to find in one location the company’s publicly available financial information. It is linked off of the primary Investor Relations webpage (   ), and will be updated on a regular basis. <>

    Investor Central is intended to help all shareholders better understand Microsoft's business strategies and financial results. As an example, there is an expanded list of Key Performance Indicators (KPIs) available to augment the table provided in the earnings slide deck. The site aims to improve the efficiency of communication to investors, as well as the aggregation and analysis of business information, and financial statements.

    Denny Beresford

    Jensen Comment
    Accounting and finance instructors may especially want to note the links to pivot tables on financial history and "What if" analysis at

    I have a somewhat older video on how to use these pivot tables at
    Also I have some pivot tables that Microsoft no longer serves up from its own site.

    From Jim Mahar's Blog on February 1, 2008 ---

    Friday, February 01, 2008

    Why do firms hold so much cash?

    Why do U.S. firms hold so much more cash than they used to? by Bates, Kahle, and Stulz.

    Short version: firms are holding more cash now than they used to. This runs counter to theory that would suggest that as transaction costs decrease and hedging opportunities increase, cash holdings would decrease. Interestingly the increased cash holding does not appear related to agency cost explanations.

    Longer Version: Bates, Kahle, and Stulz look at the surprising fact that firms hold more cash than they did 20 years ago. In what is even more surprising, this increased cash holding does not appear to be caused by agency costs.

    In the words of the authors:

    "[We] investigate how the cash holdings of U.S. firms have evolved since 1980 and whether this evolution can be explained by changes in known determinants of cash holdings. We find that there is a secular increase in the cash holdings of the typical firm from 1980-2006....the average cash-to-assets ratio (the cash ratio) has increased by 0.46% per year. Another way to see this evolution is that the average cash ratio more than doubles over our sample period, from 10.5% in 1980 to 23.2% in 2006....In the absence of agency problems, improvements in information and financial technology since the early 1980s should have led to a reduction in corporate cash holdings."

    and later

    "...Foley, Hartzell, Titman, and Twite (2007) show that one reason for the cash buildup is that U.S. firms had profits trapped abroad that would have been taxed had they been repatriated. In our sample, we find that firms with no foreign income also experience a secular increase in the cash ratio."

    In what may be seen as the surprise of the paper, the authors look at several proxies for agency costs but do not find there to be a relationship. In the least surprising finding, they report that the increase is most concentrated in firms that do not pay dividends.

    So why the increase? It seems that much of it is attributed to increases in business risk. Again from the paper:

    "It is well-known that idiosyncratic risk increased over much of our sample period (see Campbell, Lettau, Malkiel, Xu, 2001). When we divide the industries in our sample into quintiles according to the increase in idiosyncratic cash flow volatility, we find that the average cash ratio increases by less than 50% for firms in the industries that experience the smallest increase in risk but by almost 300% for firms in the industries that experience the greatest increase in risk"

    Another REALLY important finding of the paper is that common measures of leverage may not be good indicators of debt levels once cash is accounted for:

    "...the net debt ratio (defined as debt minus cash, divided by book assets), a
    common measure of leverage for practitioners, exhibits a sharp secular decrease; most of this decrease in net debt is explained by the increase in cash holdings. The fall in net debt is so dramatic that average net debt for U.S. firms is negative in each of the last three years of the sample (2004, 2005, and 2006). Consequently, using net debt leads to dramatically different conclusions about both the current level of leverage in U.S. firms and the evolution of leverage over the last twenty-five years."

    Good stuff! Will DEFINITELY be used in class! Read it in its entirety here.


    Bates, Thomas W., Kahle, Kathleen M. and Stulz, René M., "Why Do U.S. Firms Hold so Much More Cash than They Used to?" (October 2007). Fisher College of Business Working Paper No. 2007-03-006 Available at SSRN:


    We hang the petty thieves and appoint the great ones to public office.

    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

    "Holding back the banks:  Predatory banking practices are likely to continue while political parties are too close to corporations and regulators lack teeth," by Prem Sikka, The Guardian (in the U.K.), February 15, 2008 ---

    Politicians and regulators have been slow to wake up to the destructive impact of banks on the rest of society. Their lust for profits and financial engineering has brought us the sub-prime crisis and possibly a recession. Billions of pounds have been wiped off the value of people's savings, pensions and investments.

    Despite this, banks are set to make record profits (in the U.K.) and their executives will be collecting bumper salaries and bonuses. These profits are boosted by preying on customers in debt, making exorbitant charges and failing to pass on the benefit of cuts in interest rates. Banks indulge in insider trading, exploit charity laws and have sold suspect payment protection insurance policies. As usual, the annual financial reports published by banks will be opaque and will provide no clues to their antisocial practices.

    Some governments are now also waking up to the involvement of banks in organised tax avoidance and evasion. Banks have long been at the heart of the tax avoidance industry. In 2003, the US Senate Permanent Subcommittee on Investigations concluded (pdf) that the development and sale of potentially abusive and illegal tax shelters have become a lucrative business for accounting firms, banks, investment advisory firms and law firms. Banks use clever avoidance schemes, transfer pricing schemes and offshore (pdf) entities, not only to avoid their own taxes but also to help their rich clients do the same.

    The role of banks in enabling Enron, the disgraced US energy giant, to avoid taxes worldwide, is well documented (pdf) by the US Senate joint committee on taxation. Enron used complex corporate structures and transactions to avoid taxes in the US and many other countries. The Senate Committee noted (see pages 10 and 107) that some of the complex schemes were devised by Bankers Trust, Chase Manhattan and Deutsche Bank, among others. Another Senate report (pdf) found that resources were also provided by the Salomon Smith Barney unit of Citigroup and JP Morgan Chase & Co.

    The involvement of banks is essential as they can front corporate structures and have the resources - actually our savings and pension contributions - to provide finance for the complex layering of transactions. After examining the scale of tax evasion schemes by KPMG, the US Senate committee concluded (pdf) that complex tax avoidance schemes could not have been executed without the active and willing participation of banks. It noted (page 9) that "major banks, such as Deutsche Bank, HVB, UBS, and NatWest, provided purported loans for tens of millions of dollars essential to the orchestrated transactions," and a subsequent report (pdf) (page111) added "which the banks knew were tax motivated, involved little or no credit risk, and facilitated potentially abusive or illegal tax shelters".

    The Senate report (pdf) noted (page 112) that Deutsche Bank provided some $10.8bn of credit lines, HVB Bank $2.5bn and UBS provided several billion Swiss francs, to operationalise complex avoidance schemes. NatWest was also a key player and provided about $1bn (see page 72 [pdf]) of credit lines.

    Deutsche Bank has been the subject of a US criminal investigation and in 2007 it reached an out-of-court settlement with several wealthy investors, who had been sold aggressive US tax shelters.

    Some predatory practices have also been identified in other countries. In 2004, after a six-year investigation, the National Irish Bank was fined £42m for tax evasion. The bank's personnel promoted offshore investment policies as a secure destination for funds that had not been declared to the revenue commissioners. A government report found that almost the entire former senior management at the bank played some role in tax evasion scams. The external auditors, KPMG, and the bank's own audit committee were also found to have played a role in allowing tax evasion.

    In the UK, successive governments have shown little interest in mounting an investigation into the role of banks in tax avoidance though some banks have been persuaded to inform authorities of the offshore accounts held by private individuals. No questions have been asked about how banks avoid their taxes and how they lubricate the giant and destructive tax avoidance industry. When asked "if he will commission research on the levels of use of offshore tax havens by UK banks and the economic effects of that use," the chancellor of the exchequer replied: "There are no plans to commission research on the levels of use of offshore tax havens by UK banks and the economic effects of that use."

    Continued in article

    "Bringing banks to book Financial institutions are not going to voluntarily embrace honesty and social responsibility - there is little evidence they do so now," by Prem Sikka, The Guardian, February 27, 2008 ---

    Anyone visiting the websites of banks or browsing through their annual reports will find no shortage of claims of "corporate social responsibility". Yet their practices rarely come anywhere near their claims.

    In pursuit of higher profits and bumper executive rewards, banks have inflicted both the credit crunch and sub-prime crisis on us. Their sub-prime activities may also be steeped in fraud and mis-selling of mortgage securities. They have developed onshore and offshore structures and practices to engage in insider trading, corruption, sham tax-avoidance transactions and tax evasion. Money laundering is another money-spinner.

    Worldwide over $2tn are estimated to be laundered each year. The laundered amounts fund private armies, terrorism, narcotics, smuggling, corruption, tax evasion and criminal activity and generally threaten quality of life. Large amounts of money cannot be laundered without the involvement of accountants, lawyers, financial advisers and banks.

    The US is the world's biggest laundry and European countries are not far behind. Banks are required to have internal controls and systems to monitor suspicious transactions and report them to regulators. As with any form of regulation, corporations enjoy considerable discretion about what they record and report. Profits come above everything else.

    A US government report (see page 31) noted that "the New York branch of ABN AMRO, a banking institution, did not have anti-money laundering program and had failed to monitor approximately $3.2 billion - involving accounts of US shell companies and institutions in Russian and other former republics of the Soviet Union".

    A US Senate report on the Riggs Bank noted that it had developed novel strategies for concealing its trade with General Augusto Pinochet, former Chilean dictator. It noted (page 2) that the bank "disregarded its anti-money laundering (AML) obligations ... despite frequent warnings from ... regulators, and allowed or, at times, actively facilitated suspicious financial activity". The committee chairman Senator Carl Levin stated that "the 'Don't ask, Don't tell policy' at Riggs allowed the bank to pursue profits at the expense of proper controls ... Million-dollar cash deposits, offshore shell corporations, suspicious wire transfers, alteration of account names - all the classic signs of money laundering and foreign corruption made their appearance at Riggs Bank".

    The Senate committee report (see page 7) stated that:

    "Over the past 25 years, multiple financial institutions operating in the United States, including Riggs Bank, Citigroup, Banco de Chile-United States, Espirito Santo Bank in Miami, and others, enabled [former Chilean dictator] Augusto Pinochet to construct a web of at least 125 US bank and securities accounts, involving millions of dollars, which he used to move funds and transact business. In many cases, these accounts were disguised by using a variant of the Pinochet name, an alias, the name of an offshore entity, or the name of a third party willing to serve as a conduit for Pinochet funds."

    The Senate report stated (page 28) that "In addition to opening multiple accounts for Mr Pinochet in the United States and London, Riggs took several actions consistent with helping Mr Pinochet evade a court order attempting to freeze his bank accounts and escape notice by law enforcement". Riggs bank's files and papers (see page 27) contained "no reference to or acknowledgment of the ongoing controversies and litigation associating Mr Pinochet with human rights abuses, corruption, arms sales, and drug trafficking. It makes no reference to attachment proceedings that took place the prior year, in which the Bermuda government froze certain assets belonging to Mr Pinochet pursuant to a Spanish court order - even though ... senior Riggs officials obtained a memorandum summarizing those proceedings from outside legal Counsel."

    The bank's profile did not identify Pinochet by name and at times he is referred to (see page 25) as "a retired professional, who achieved much success in his career and accumulated wealth during his lifetime for retirement in an orderly way" (p 25) ... with a "High paying position in Public Sector for many years" (p 25) ... whose source of his initial wealth was "profits & dividends from several business[es] family owned" (p 27) ... the source of his current income is "investment income, rental income, and pension fund payments from previous posts " (p 27).

    Finger is also pointed at other banks. Barclays France, Société Marseillaise de Credit, owned by HSBC, and the National Bank of Pakistan are facing allegations of money laundering. In 2002, HSBC was facing a fine by the Spanish authorities for operating a series of opaque bank accounts for wealthy businessmen and professional football players. Regulators in India are investigating an alleged $8bn (£4bn) money laundering operation involving UBS.

    Nigeria's corrupt rulers are estimated to have stolen around £220bn over four decades and channelled them through banks in London, New York, Jersey, Switzerland, Austria, Liechtenstein, Luxembourg and Germany. The Swiss authorities repatriated some of the monies stolen by former dictator General Sani Abacha. A report by the Swiss federal banking commission noted (page 7) that there were instances of serious individual failure or misconduct at some banks. The banks were named as "three banks in the Credit Suisse Group (Credit Suisse, Bank Hofmann AG and Bank Leu AG), Crédit Agricole Indosuez (Suisse) SA, UBP Union Bancaire Privée and MM Warburg Bank (Schweiz) AG".

    Continued in article

    Jensen Comment
    Prem Sikka has written a rather brief but comprehensive summary of many of the bad things banks have been caught doing and in many cases still getting away with. Accounting standards have be complicit in many of these frauds, especially FAS 140 (R) which allowed banks to sell bundles of "securitized" mortgage notes from SPE's (now called VIEs) using borrowed funds that are kept off balance sheet in these entities called SPEs/VIEs. The FASB had in mind that responsible companies (read that banks) would not issue debt in excess of the value of the collateral (e.g., mortgage properties). But FAS 140 (R) fails to allow for the fact that collateral values such as real estate values may be expanding in a huge bubble about to burst and leave the bank customers and possibly the banks themselves owing more than the values of the securities bundles of notes. Add to this the frauds that typically take place in valuing collateral in the first place, and you have FAS 140 (R) allowing companies, notably banks, incurring huge losses on debt that was never booked due to FAS 140 (R).

    FAS 140 (R) needs to be rewritten ---
    However, the banks now control their regulators! We're not about to see the SEC, FED, and other regulators allow FAS 140 (R) to be drastically revised.

    Also banks are complicit in the "dirty secrets" of credit cards and credit reporting ---

    Then there are the many illegal temptations which lure in banks such as profitable money laundering and the various departures from ethics discussed above by Prem Sikka.

    Bob Jensen's "Rotten to the Core" threads are at


    Lessons Not Learned from Enron
    Bad SPE Accounting Rules are Still Dogging Us

    From The Wall Street Journal Accounting Weekly Review on October 19, 2007

    Call to Brave for $100 Billion Rescue
    by David Reilly
    The Wall Street Journal

    Oct 16, 2007
    Page: C1
    Click here to view the full article on

    TOPICS: Advanced Financial Accounting, Securitization

    SUMMARY: This article addresses a proposed bailout plan for $100 billion of commercial paper to maintain liquidity in credit markets that have faced turmoil since July 2007, and the fact that this bailout "...raises two crucial questions: Why didn't investors see the problems coming? And how could they have happened in the first place?" The author emphasizes that post-Enron accounting rules "...were supposed to prevent companies from burying risks in off-balance sheet vehicles." He argues that the new rules still allow for some off-balance sheet entities and that "...the new rules in some ways made it even harder for investors to figure out what was going on."

    CLASSROOM APPLICATION: The bailout plan is a response to risks and losses associated with special purpose entities (SPEs) that qualified for non-consolidation under Statement of Financial Accounting Standards 140, Accounting for Transfers and Servicing of financial Assets and Extinguishments of Liabilities, and Financial Interpretation (FIN) 46(R), Consolidation of Variable Interest Entities.

    1.) Summarize the plan to guarantee liquidity in commercial paper markets as described in the related article. In your answer, define the term structured investment vehicles (SIVs).

    2.) The author writes that SIVs "...don't get recorded on banks books...." What does this mean? Present your answer in terms of treatment of qualifying special purpose entities (SPEs) under Statement of Financial Accounting Standards 140, Accounting for Transfers and Servicing Financial Assets and Extinguishments of Liabilities.

    3.) The author argues that current accounting standards make it difficult for investors to figure out what was going on in markets that now need bailing out. Explain this argument. In your answer, comment on the quotations from Citigroup's financial statements as provided in the article.

    4.) How might reliance on "principles-based" versus "rules-based" accounting standards contribute to solving the reporting dilemmas described in this article?

    5.) How might the use of more "principles-based standards" potentially add more "fuel to the fire" of problems associated with these special purpose entities?

    Reviewed By: Judy Beckman, University of Rhode Island

    Call to Brave to $100 Billion Rescue: Banks Seek Investors for Fund to Shore Up Commercial Paper
    by Carrick Mollenkamp, Deborah Solomon and Craig Karmin
    The Wall Street Journal
    Oct 16, 2007
    Page: C1

    Plan to Save Banks Depends on Cooperation of Investors
    by David Reilly
    The Wall Street Journal
    Oct 15, 2007
    Page: C1


    Bob Jensen's threads on accounting theory are at

    "After Northern Rock: The government's proposals for preventing another banking crisis are inadequate and will not work without major surgery," by Prem Sikka,  The Guardian, February 19, 2008 ---

    February 19, 2008 message from Prem N. Sikka  []

    I have an article today on The Guardian website with the title "After Northern Rock". The lead line reads "The government's proposals for preventing another banking crisis are inadequate and will not work without major surgery". It is available at 

    As many of you will know Northern Rock, a UK bank, is a casualty of the subprime crisis and has been bailed out by the UK government, which could possibly cost the UK taxpayer £100 billion. My article looks at the reform proposals floated by the government to prevent a repetition. These have been formulated without any investigation of the problems. Within the space permitted, the article refers to a number of major flaws, including regulatory, auditing and governance failures, as well offshore, remuneration and moral hazard issues.

    The above may interest you and you may wish to contribute to the debate by adding comments.

    As always there is more on the AABA website (  <>  ).


    Prem Sikka
    Professor of Accounting
    University of Essex
    Colchester, Essex CO4 3SQ UK

    "Canada Confirms Changeover Date to IFRS," SmartPros, February 19, 2008 --- 

    The Canadian Accounting Standards Board has confirmed that use of International Financial Reporting Standards (IFRS) will be required in 2011 for publicly accountable profit-oriented enterprises.

    IFRS will replace Canada's current generally accepted accounting principles for listed companies and other profit-oriented enterprises that are responsible to large or diverse groups of stakeholders.

    The official changeover date is for interim and annual financial statements relating to fiscal years beginning on or after Jan. 1, 2011. Private companies (non-publicly accountable enterprises), and not-for-profit organizations are not required, but are permitted, to adopt IFRS in 2011.

    The Canadian standards board originally proposed the 2011 changeover date in January 2006 when it announced its plan to adopt IFRS.

    "With the date firmly established, enterprises can plan for the changeover with certainty about the timetable," said Paul Cherry, chair of the board. "A significant challenge lies ahead but it will be made far more manageable if business leaders prepare early."

    Companies will have to provide comparative IFRS information for the previous fiscal year. Therefore, enterprises must be ready to prepare comparative information a year prior to the 2011 changeover date.

    "This clearly demonstrates why planning for the transition to IFRS must begin now," said Cherry.

    Deloitte Canada Countdown IFRS transition newsletters ---
    See the February 16, 2008 blog entry at

    Jensen Comment
    Although the above article seems to imply a full changeover to IFRS, I was under the assumption, based upon earlier conversations with Paul Pacter, that there would still be some selective Canadian GAAP required.

    "Is IFRS Compatible with U.S.-Style Corporate Governance?" by Tom Selling, The Accounting Onion, December 10, 2007 ---

    I just finished reading a brief, highly readable and interesting article by a Columbia Law School professor, John C. Coffee, Jr., entitled A Theory of Corporate Scandals: Why the U.S. and Europe Differ.*  The purpose of this post is to piggyback on his framework to also provide an explanation for the difference in basic approaches between U.S. GAAP and IFRS; and most importantly, why political pressure to trash U.S. GAAP and adopt IFRS should be resisted. 

    How and Why, According to Coffee, U.S. and European Scandals Differ

    Coffee's thesis is that corporate governance of majority-owned corporations (predominant in Europe) should be fundamentally different than corporate governance of corporations that lack a controlling shareholder group (predominant in the U.S.). It's not necessarily because there are fewer incentives to rip off other shareholders, but the feasible means to do so will differ.

    Scandals in Europe involving majority-owned corporations usually do not feature an accounting manipulation. First, financial reporting is less important to the majority owners because they rarely sell shares; and if they do, they usually receive a control premium that is uncorrelated with recent earnings (and generally larger than control premia in U.S. transactions).  Second, fraud is more easily accomplished by misappropriation of the private benefits of control: authorization of related-party transactions at advantageous prices, below-market tender offers, are prime examples.  Any trading that takes place between minority owners has less to do with recent earnings reports, and more to do with an assessment of how minority shareholders will be treated by controlling interests. 

    In dispersed-ownership corporations, managers do not possess private benefits of control.  Moreover, a significant portion of manager's compensation may be in the form of stock options or other forms of equity.  Therefore, stock price can have a significant effect on a manager's compensation, providing them with strong incentives to manipulate accounting earnings.

    The Implications for Accounting

    Professor Coffee's thesis is that differences in ownership patterns have important implications for the selection of gatekeepers: auditors, analysts, independent directors, etc.  His observations and recommendations are interesting, but I want to advance a related thesis, namely that different ownership patterns call for different types of accounting regimes. 

    It stands to reason that accounting should be difficult to manipulate, if it can be used to rip off shareholders.  Thus, the evolution of U.S. GAAP can be seen as a response to the need for specific rules that minimized the role of management judgment because of their strong self-interest in the reported earnings and financial position.  This has occurred in part because U.S. gatekeepers have shown themselves to often lack sufficient resolve or power to prevent management from under-reserving, overvaluing, or just plain ole making up numbers.  U.S. managers effectively control the "independent" directors and auditors; and prior to Regulation FD, analysts bartered glowing assessment in exchange for tidbits inside information.  Without empowered gatekeepers to prevent accounting fraud, we have had to place our hopes on very inflexible accounting rules, and sheriffs like the SEC and private attorneys to catch the cases where management has attempted to surreptitiously cross the bright line.

    Thus, it should be self-evident that IFRS-style accounting, replete with gray areas, would be a gift to U.S. managers.  Outright fraud would be replaced by more subtle means of "earnings management," rendering the SEC and private attorneys much less potent. Is it any wonder why U.S. corporations and their auditors are practically begging to have IFRS available to them? 

    In short, it would be a grave mistake to adopt IFRS in the U.S. simply because it seems to work well elsewhere.  As corporate ownership patterns in Europe change, it may well be that IFRS may evolve to look more like U.S. GAAP.  Only after that occurs may it make more sense to have a single worldwide financial reporting regime.      

    Imagine if Enron Had Applied IFRS

    One of the scapegoats of the Enron scandal was "rules-based"  U.S. GAAP. The libel was that Andrew Fastow was a mad genius, capable of walking an accounting tightrope by creating complex special-purpose entities (SPEs).  But, GAAP wasn't the culprit in the Enron scandal. Frustrated Fastow was only able to get the accounting treatment he needed past the auditors by hiding from them side agreements that unwound critical provisions requiring the new investors to have a sufficient amount of capital at risk in the SPEs. 

    The enduring legacy of the libel is the erroneous conventional wisdom that GAAP is responsible for Enron; and what's more, Enron et. al. might not have happened if our financial reporting system were more like IFRS.  More likely, if IFRS had been the basis of accounting for Enron instead of GAAP, it might have taken longer to discover the fraud, or to pin the blame for the fraud where it belonged.

    Neither GAAP nor IFRS are principles-based, but GAAP certainly has more rules and bright lines.  At least there seems to be some method to the madness, but it would be nice if more of the rules were based on sound principles. 


    *There are two versions of this paper.  The working paper is available at no charge from the Social Sciences Research Network electronic library at  The published version is in Oxford Review of Economic Policy, Vol. 21, No. 2 (2005).


    Bob Jensen's threads on the differences between U.S. versus International GAAP are at

    "The Accounting Cycle:  FASB Needs to Change Accounting for SPEs," by: J. Edward Ketz, SmartPros, January 2008 ---

    The CDO imbroglio that has enveloped the financial sector created quite a stir in 2007. Mortgage foreclosures have led to losses for the banks, and investors in CDOs have been surprised by the degree of their risk exposure. "Super seniors" have not been super or senior.

    Amid this disarray, a simple question has to be asked: why are the activities and transactions of special purpose entities (SPEs), legal entities that run collateralized debt obligations (CDOs) and similar financial vehicles, not displayed on the financial reports of corporate America? These SPEs remain hidden from view and corporate disclosures about them mist like a Chicago fog.

    Recall that Enron's episodes were sprinkled with many an SPE shenanigan. The old accounting rule said that if the SPE had at least 3 percent of its total capital from some outside source, then the business enterprise did not have to consolidate the SPE with its own affairs. While EITF 90-15 originally applied to certain leasing activities, business managers quickly applied it to all sorts of SPEs, and the Financial Accounting Standards Board and the Securities and Exchange Commission allowed them to do so. The threshold was so low that managers found it easy to keep SPE debt off the balance sheet and to make few disclosures.

    Because of Enron, FASB finally updated the rules to require consolidation unless outsiders contributed at least 10 percent of the capital to the SPE and this capital is at risk. Funny, FASB sat on its collective backside for over a decade before it took action. It seems the board members are incapable of taking proactive steps in any area.

    One of the criticisms was that 3 percent equity does not really put the equity at risk. While the 10 percent cutoff remains arbitrary, it clarifies the situation -- until the board muddied this clarity with some mystical, principles-based goobledy-gook. Many managers complained because they perceived that billions of dollars would be added to the corporate balance sheet. Apparently the appeals had some effect, for FASB modified the final rule. Interpretation No. 46R now states:

    9. An equity investment at risk of less than 10 percent of the entity's total assets shall not be considered sufficient to permit the entity to finance its activities without subordinated financial support in addition to the equity investment unless the equity investment can be demonstrated to be sufficient. The demonstration that equity is sufficient may be based on either qualitative analysis or quantitative analysis or a combination of both. Qualitative assessments, including but not limited to the qualitative assessments described in paragraphs 9(a) and 9(b), will in some cases be conclusive in determining that the entity's equity at risk is sufficient. If, after diligent effort, a reasonable conclusion about the sufficiency of the entity's equity at risk cannot be reached based solely on qualitative considerations, the quantitative analyses implied by paragraph 9(c) should be made. In instances in which neither a qualitative assessment nor a quantitative assessment, taken alone, is conclusive, the determination of whether the equity at risk is sufficient shall be based on a combination of qualitative and quantitative analyses.

    a. The entity has demonstrated that it can finance its activities without additional subordinated financial support.

    b. The entity has at least as much equity invested as other entities that hold only similar assets of similar quality in similar amounts and operate with no additional subordinated financial support.

    c. The amount of equity invested in the entity exceeds the estimate of the entity's expected losses based on reasonable quantitative evidence.

    Note that the 10 percent threshold can be ignored under several scenarios using either quantitative or qualitative excuses. As I said in 2003, this rule or standard is suspect and board members are spineless. The debt of an SPE is similar to the debt of a subsidiary. If FASB thinks that SPE debt does not have to be consolidated, it might as well announce that parent companies no longer have to show the liabilities of their subsidiaries.

    We can forget substance over form. While we are at it, we might as well toss out decision usefulness and relevance because FASB really doesn't promote these ideals, despite the rhetoric in the so-called conceptual framework.

    Given the ethical failures of both managers and auditors, I predicted in Hidden Financial Risk (2003) that many SPEs would remain unconsolidated. Indeed the majority of SPEs not only remain unconsolidated, but also the sponsoring organizations provide precious little disclosures about them. With the help of investment bankers, corporate managers have been highly creative in finding rhetoric that skirts principled accounting. When the corporate executives are managers of the investment banks, well, the creativity is off the charts.

    Years ago FASB and the SEC should have required the consolidation of SPEs. The last six months or so have clearly displayed the need for improved corporate reporting. This directive applies to the sponsors of CDOs including Citicorp and Merrill Lynch: they should consolidate their special purpose vehicles.

    How many more debacles in the market place will occur before FASB and the SEC get it right? When will they have men and women of courage?

    Bob Jensen's threads on CDO failed accounting (as unbooked debt that won't go away) are at

    "Former Banker Convicted of Insider Trading," by Michael J. de la Merced, The New York Times, February 5, 2008 ---

    A former Credit Suisse banker accused of leaking confidential information about several major deals, including the $45 billion buyout of TXU, as part of a $7.5 million insider trading scheme was convicted Monday in Federal District Court in Manhattan

    After three days of deliberation, the jury found the former banker, Hafiz Muhammad Zubair Naseem, 37, guilty of one count of conspiracy and 28 counts of insider trading for relaying insider information to Ajaz Rahim, a high-level banker in Pakistan and once Mr. Naseem’s boss.

    From the beginning, the case against Mr. Naseem was notable for its scope and the way it coincided with a two-year boom in mergers. In the last two years, prosecutors have filed insider trading cases, some involving broad schemes, involving bankers at nearly all the top securities firms.

    But none roped in financiers as high-ranking as Mr. Rahim, the former head of investment banking at Faysal Bank in Karachi and one of the most successful traders in Pakistan. And few involved deals as big as the acquisition of TXU, the Texas power giant that was bought by Kohlberg Kravis Roberts and TPG Capital.

    “We respectfully disagree with the jury’s verdict,” a lawyer for Mr. Naseem, Michael F. Bachner, said Monday, adding that Mr. Naseem would file an appeal.

    Mr. Naseem came to the United States in 2002 to earn a business degree at New York University. He worked briefly at JPMorgan Chase before moving to Credit Suisse’s energy group in March 2006.

    Prosecutors said that Mr. Naseem used his position as a banker almost immediately to feed information about deals to Mr. Rahim, who traded on the tips before the mergers were announced. They offered as evidence scores of phone calls Mr. Naseem made and e-mail messages he sent from his office, including one message that read, “Let the fun begin.”

    Beginning in the fall of 2006, regulators at the New York Stock Exchange were tracking suspicious trading in the options of Trammell Crow before its purchase by the CB Richard Ellis Group. The investigation eventually widened to nine deals, including the TXU buyout and Express Scripts’ failed bid for Caremark Rx. Credit Suisse was an adviser on all nine deals.

    Lawyers for Mr. Naseem have derided prosecutors’ evidence as circumstantial at best.

    Mr. Rahim, who also faces charges, remains in Pakistan. But Mr. Naseem has borne the brunt of the government’s case. He was initially denied bail after prosecutors deemed him a flight risk. Mr. Naseem later posted a $1 million bond but was mostly confined to his home in Rye Brook, N.Y.

    Continued in article

    Bob Jensen's "Rotten to the Core" threads are at

    From The Wall Street Journal Accounting Weekly Review on February 1, 2008

    SEC Unhappy with Answers on Executive Pay
    by Kara Scannell and JoAnn S. Lublin
    The Wall Street Journal

    Jan 29, 2008
    Page: B1
    Click here to view the full article on ---

    TOPICS: Accounting, Disclosure, Disclosure Requirements, Executive compensation, SEC, Securities and Exchange Commission, Stock Options

    SUMMARY: During summer and fall 2007, the SEC sent letters to 350 companies regarding the way in which they make financial disclosures about top executive pay. The SEC has reviewed the disclosures as "...part of its effort to bring more information about executive pay to shareholders after years of high-profile pay packages and perquisites that many view as excessive. Shareholder advocates are also pressing hard to give shareholders a greater say in executive pay." Of particular concern is the role of individual performance in Boards of Directors pay decisions about chief executives. As a result, some practitioners and academics think that companies may switch to using performance targets that they prefer to disclose. The article focuses on SEC interaction with Bristol-Myers Squibb.

    CLASSROOM APPLICATION: Issues surrounding disclosure of executive pay packages can be discussed in MBA courses on financial reporting, prior to coverage of stock compensation accounting in intermediate and advanced accounting courses, and other ways.

    1.) Based on discussion in the article, what are the current difficulties with disclosures regarding executive compensation?

    2.) Based on discussion in the related article, what SEC disclosure requirements for executive compensation were recently established?

    3.) Consider the requirement to describe performance targets that form the basis for executive compensation. Why are investors interested in that information? What information does it provide beyond presentation of annual executive compensation in historical cost based financial statements? In your answer, address comments from Baxter International's corporate secretary and associate general counsel, David P. Scharf, and quoted in the article.

    4.) Consider the opinion, held by some, that companies might prefer not to disclose performance targets and therefore change the measures by which their Boards assess executive compensation. Why might disclosure of these targets cause competitive harm? Should competitive harm be considered in the SEC's assessment of the disclosures it requires? Support your answer.

    5.) From where did the authors obtain the data about SEC letters that is included in this article? In your answer, specifically examine data for one of the companies referenced in the article that is available through the SEC's web site.

    6.) What is a proxy statement? Describe the compensation disclosures given by one of the companies referenced in the article in its 2006 proxy statement.

    Reviewed By: Judy Beckman, University of Rhode Island

    SEC Asks Firms to Detail Top Executives' Pay
    by Kara Scannell and JoAnn S. Lublin
    Aug 31, 2007
    Page: B1


    "SEC Unhappy With Answers on Executive Pay," by Kara Scannell and Joann S. Lublin, The Wall Street Journal, January 29, 2008; Page B1 ---

    The Securities and Exchange Commission sent letters to 350 companies last summer and fall critiquing the way they described the pay of their top executives. But the federal watchdog isn't happy with most of the answers it got.

    A majority of the companies have now received second letters, according to an SEC official, and of 26 companies whose cases were closed, 21 were chided for not giving enough information about the role of individual performance in their pay decisions.

    In writing to one of them, Bristol-Myers Squibb Co., the SEC noted that individual performance "was a primary determinate of compensation" but that the New York drug maker didn't properly describe how that measure translated to the pay it handed out.

    Sandra Leung, Bristol-Myers's general counsel and corporate secretary, promised to do better in the future -- in so many words. In an Oct. 10 letter, she said Bristol-Myers will elaborate in future filings "on the manner in which the named executive officers' performance against individual financial and operational objectives...impacted their resultant compensation." And Robert Zito, a Bristol-Myers spokesman, added that this year's proxy statement "will certainly be prepared consistent with our response to the SEC comment letter."

    The increasing SEC scrutiny could spur changes in how companies calculate compensation, including moving away from individual performance as a measure of success -- one of the areas the SEC focused on as particularly weak -- in favor of companywide financial targets, such as earnings or stock prices.

    "Quantifying individual performance targets isn't the easiest thing to do," said James D.C. Barrall, a Los Angeles attorney and executive-pay specialist at Latham & Watkins LLP, who expects to see such a shift.

    The companies most likely to change would be those that use performance targets they'd prefer to keep confidential, such as return on capital, said Ronald Mueller, a compensation expert at the law firm Gibson, Dunn & Crutcher in Washington, D.C. "In my experience, some companies switched to performance targets that they would be more comfortable disclosing," he said.

    Another possible result is that companies will stuff even more information into company proxy statements, which are already larded with charts and footnotes. That could mean an additional table with top officers' individual goals and how their pay stacks up against colleagues' rewards. Scott Olsen, head of the rewards practice at PricewaterhouseCoopers in New York, says a lot of people think that's what "the SEC is looking for."

    The scrutiny could have the unintended consequence of pushing companies to focus on short-term measures such as earnings or stock prices, which, critics say, can distort how companies are managed. An obsession with stock prices was one factor in the raft of corporate frauds that accompanied the end of the boom. Last year a panel organized by the U.S. Chamber of Commerce, the nation's largest business lobby, recommended that CEOs stop giving quarterly earnings guidance as part of a push to refocus on long-term results.

    The review by the SEC is part of its effort to bring more information about executive pay to shareholders after years of high-profile pay packages and perquisites that many view as excessive. Shareholder advocates are also pressing hard to give shareholders a greater say in executive pay.

    Letters from the 26 completed cases were recently made public on the SEC's Web site. The others will be posted 45 days after the SEC considers itself satisfied.

    In response, Mr. Tobin wrote on Nov. 9 that his "limited" raise reflected that "the company had only achieved quarterly sales and earnings targets in two of four quarters in 2005, Taxus market share lagged expectations and the launch of Taxus in Japan had been delayed." The company didn't state the specific quarterly targets.

    Spokesmen for Baxter International Inc., DuPont Co., Safeway Inc. and Electronic Data Systems Corp. -- other recipients of SEC letters -- said it is too early to offer details beyond their response letters because they're still discussing possible changes with directors or preparing their 2008 proxy statements.

    "We are just now completing financial reporting and analysis for the year and are evaluating performance and potential compensation decisions with our board," said a spokeswoman for Baxter, a health-products concern in Deerfield, Ill.

    David P. Scharf, Baxter's corporate secretary and associate general counsel, wrote that there were limits on what he was willing to tell the SEC.

    In his Oct. 22 response, he said additional information will be limited by the company's desire to avoid disclosing confidential information about unquantifiable "qualitative elements" of each top officer's pay. In any case, he continued, such revelations would not provide "substantial value to investors in understanding our compensation policies and decisions."

    Bob Jensen's threads on outrageous executive compensation are at

    "Credit Rating Agencies and Auditors Have Something in Common: Independence Problems," Tom Selling, The Accounting Onion, September 9, 2008 ---

    Sarah Johnson of has written a nice summary of congressional concerns about the independence and role of credit rating agencies arising out of Enron and now, the subprime loan debacle. 

    Accounting and finance researchers have documented in numerous studies that rating agencies consistently lag market assessments of credit quality that is reflected in securities prices.  Is the reason due to the conflicts of interest of the kind pointed out in the article, or that too much is expected of the rating agencies, even in the best of circumstances?  It is probably a little of both, so SEC investigations won't help to fix the problem--unless it leads them to undo the lucrative franchise they created for credit rating agencies in their own regulations.  At the very least, if credit assessments are provided to potential investors through SEC filings, they must come from experts that meet strict independence requirements.

    But, as with auditors, it is impossible to be truly independent from the person who signs your paycheck, so maybe the SEC should hire the rating agency and pass on the cost to the issuer. Until then, the most reliable credit ratings will be ones that investors pay for themselves.


    From The Wall Street Journal Accounting Weekly Review on February 1, 2008

    French Bank Rocked by Rogue Trader
    by David Gauthier-Villars, Carrick Mollenkamp and Alistair MacDonald
    The Wall Street Journal

    Jan 25, 2008
    Page: A1
    Click here to view the full article on ---

    TOPICS: Banking, Derivatives, Internal Auditing, Internal Controls, International Auditing, Transactions

    SUMMARY: "In one of the banking world's most unsettling recent disclosures, France's Société Générale SA said Mr. Kerviel had cost the bank ?4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some ?50 billion, or $73 billion."

    CLASSROOM APPLICATION: This article serves to illustrate to students the need for tight internal controls in order to prevent such unauthorized activity from harming other companies in the future. It also makes clear that it is difficult to detect fraud when a perpetrator is intent on covering it, though a related article indicates that one simple control procedure--requiring employees to take at least one or two full weeks' vacation each year--could have caught the problem earlier or prevented it from developing.

    1.) How did a lone trader wrack up such huge losses for a French banking concern?

    2.) What internal controls are designed to detect fraud of the type committed by Mr. Kerviel? List all that you can think of and that are mentioned in the three related articles.

    3.) Why do "experts note that it is difficult to create safeguards that a determined and intelligent fraudster can't circumvent"?

    4.) What are the Basel Accords? Why does the first related article note that reliance on financial numbers alone is insufficient to maintain control?

    5.) How do the circumstances described in the two articles evidence the importance of international agreements on banking control and regulation?

    Reviewed By: Judy Beckman, University of Rhode Island

    Vast Deception Puts Risk Controls Under Scrutiny
    by Alistair MacDonald and Leila Abboud
    Jan 25, 2008
    Page: A12

    Breakingviews: Too Many Days on the Job
    by Jeff Goldfarb, Dwight Cass and Cyrus Sanati
    Jan 29, 2008
    Page: C14


    "French Bank Rocked by Rogue Trader Société Générale Blames $7.2 Billion in Losses On a Quiet 31-Year-Old," by David Gauthier-Villars, Carrick Mollenkamp, and Alistair MacDonald, The Wall Street Journal, January 25, 2008; Page A1 ---

    The rogues' gallery of banking has a new candidate for membership: 31-year-old trader Jérôme Kerviel.

    In one of the banking world's most unsettling recent disclosures, France's Société Générale SA said Mr. Kerviel had cost the bank €4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion.

    The loss -- dwarfing the $1.3 billion Nick Leeson cost British bank Barings in 1995 -- has forced Société Générale to seek a capital infusion. It is expected to try to raise €5.5 billion, chiefly from its existing shareholders.

    The loss exposes the latest breakdown of risk controls at a big international financial institution, along with U.S. banks that have hemorrhaged billions of dollars since the crisis in subprime mortgages developed last summer. Some analysts speculate that the French bank's frantic efforts to unwind the unauthorized trades over 72 hours may have contributed to the volatility and declines that rattled European markets on Monday. (See related article.)

    In addition to the billions, Société Générale appeared for a time to have lost Mr. Kerviel as well. Executives at the bank, still stunned at the magnitude of the scandal, told reporters yesterday they hadn't kept track of his whereabouts since questioning him on Saturday.

    But an attorney at a law firm representing Mr. Kerviel said the trader had spent much of the week with his lawyer. Asked whether Mr. Kerviel rejects the banks' accusations, the lawyer said only: "He is not on the run. He is standing by to answer to justice. He spent the day at our office."

    Early details, including accounts from executives at the French bank, paint a picture of an ordinary trader who used extraordinary means to game the bank's own system and hide massive unauthorized trades on stock-index futures. Even as bank executives were scrambling to deal with the trail of destruction, they were at a loss to describe his motivations. Société Générale executives said that the early investigation indicated the trader didn't earn a dime on his actions. They also said he appeared to be acting alone.

    "He was mentally weak," said the bank's co-chief executive, Philippe Citerne. "I have no idea why he did that." Société Générale -- France's second-largest bank after BNP Paribas, founded by a decree signed by Napoleon III -- has lodged a complaint against him with French prosecutors.

    Mr. Kerviel is no trading legend who let a transaction get out of hand. He was a low-level trader in the bank's "Delta One" desk in western Paris, earning about €100,000 ($145,000) a year. His job was to make bets on how large European stock indexes would move, according to bank officials. His expertise was trading baskets of stocks such as the Euro Stoxx 50.

    Dodging Controls

    At some point last year, bank executives say, Mr. Kerviel started using futures on the European stock indexes to place huge bets that European markets would continue to rise. He was able to skillfully circumvent controls, they added, because he had worked in the "back office" and had an intimate knowledge of how trades are processed and monitored.

    People who know Mr. Kerviel describe him as single and a quiet type, but one who had friends on the trading desk and kept up his friendships in the back office. Indeed, Mr. Citerne speculated that such friendships may have helped him stay on top of the latest risk-control procedures.

    Toward the end of 2007, Mr. Citerne said, Mr. Kerviel's trades were winning. But after the holidays, the market turned against him. One index he traded, the CAC-40 in Paris, began to fall sharply. That meant big losses for his positions.

    Though he tried to cover his tracks over the past few weeks, the scheme started unraveling last Friday, according to Société Générale executives, who said Mr. Kerviel made a false move and red flags were raised by a computer system. He changed a tactic he had been using to conceal his trades and, said Mr. Citerne, "took a position that prompted a possible margin call," or demand for funds. "That triggered some alerts."

    Société Générale Chairman Daniel Bouton declined to provide details about the positions the trader built up over the past months. But he warned: "Had we not acted swiftly, the loss could have been 10 times worse." The bank said it would dismiss several of Mr. Kerviel's supervisors.

    Its evident failure of risk assessment may raise fresh questions about how well banks globally are set up to monitor the market dangers that the U.S. mortgage-market downturn has exposed. The mortgage mess has made clear that many risk systems weren't properly set up to measure the likelihood of defaults and how these would affect debt slices rated as super-safe.

    The disclosure of allegedly fraudulent trading overshadowed fourth-quarter write-downs by Société Générale totaling €2.05 billion to cover its mortgage exposure.

    Concerns that Société Générale would take at least a €1 billion write-down had hurt its stock over the past week. Many of the world's biggest banks, including Citigroup Inc., Merrill Lynch & Co. and UBS AG, have struggled to identify the value of these thinly traded mortgage securities.

    Derivatives House of the Year

    Société Générale is known internationally for its expertise in equity derivatives, which has become a big money spinner for it. Risk Magazine awarded the bank its Equity Derivatives House of the Year this month. "With one of the largest exotics books on the Street, one would imagine that Société Générale Corporate and Investment Banking (SG CIB) would be licking its wounds and coping with hundreds of millions of euros in losses," the magazine said. "There was some impact, but the losses have been relatively minor and entirely manageable, says Christophe Mianne, SG CIB's head of market activities...."

    Société Générale says it first learned of problems on its trading desk a week ago and on Saturday uncovered what it termed "massive fraudulent directional positions." It says it waited six days to go public with the news, giving itself time to unwind the positions and avoid greater losses. But a top bank executive also said officials kept mum to avoid leaks that would disrupt the markets.

    Grinding Out Transactions

    Mr. Kerviel joined Société Générale's investment banking unit in mid-2000, according to bank officials, after earning an advanced degree in trading from the University of Lyon in central France. He was assigned to units that handled core trading operations where bankers and support staff grind out transactions. In 2005, he moved to the trading desk.

    Mr. Kerviel essentially made bets on which way large European stocks would move, in one of the most liquid markets linked to equities globally. His expertise was trading futures tied to baskets of stocks such as the Euro Stoxx 50. In normal markets, some $40 billion to $50 billion of the futures of that index trade daily. The index gives traders such as pension and hedge funds quick access to a large swath of the European economy, by investing on the belief the index will rise or fall to a certain point in the future. Mr. Kerviel also made trades in Germany's DAX Index and France's CAC-40.

    Continued in article

    Bob Jensen's threads on derivatives scandals are at


    Before reading this module you may want to read about Governmental Accounting at

    "Taxpayers distrustful of government financial reporting," AccountingWeb, February 22, 2008 ---

    The federal government is failing to meet the financial reporting needs of taxpayers, falling short of expectations, and creating a problem with trust, according to survey findings released by the Association of Government Accountants (AGA). The survey, Public Attitudes to Government Accountability and Transparency 2008, measured attitudes and opinions towards government financial management and accountability to taxpayers. The survey established an expectations gap between what taxpayers expect and what they get, finding that the public at large overwhelmingly believes that government has the obligation to report and explain how it generates and spends its money, but that that it is failing to meet expectations in any area included in the survey.

    The survey further found that taxpayers consider governments at the federal, state, and local levels to be significantly under-delivering in terms of practicing open, honest spending. Across all levels of government, those surveyed held "being open and honest in spending practices" vitally important, but felt that government performance was poor in this area. Those surveyed also considered government performance to be poor in terms of being "responsible to the public for its spending." This is compounded by perceived poor performance in providing understandable and timely financial management information.

    The survey shows:

  • The American public is most dissatisfied with government financial management information disseminated by the federal government. Seventy-two percent say that it is extremely or very important to receive this information from the federal government, but only 5 percent are extremely or very satisfied with what they receive.


  • Seventy-three percent of Americans believe that it is extremely or very important for the federal government to be open and honest in its spending practices, yet only 5 percent say they are meeting these expectations.


  • Seventy-one percent of those who receive financial management information from the government or believe it is important to receive it, say they would use the information to influence their vote.

    Relmond Van Daniker, Executive Director at AGA, said, "We commissioned this survey to shed some light on the way the public perceives those issues relating to government financial accountability and transparency that are important to our members. Nobody is pretending that the figures are a shock, but we are glad to have established a benchmark against which we can track progress in years to come."

    He continued, "AGA members working in government at all levels are in the very forefront of the fight to increase levels of government accountability and transparency. We believe that the traditional methods of communicating government financial information -- through reams of audited financial statements that have little relevance to the taxpayer -- must be supplemented by government financial reporting that expresses complex financial details in an understandable form. Our members are committed to taking these concepts forward."

    Justin Greeves, who led the team at Harris Interactive that fielded the survey for the AGA, said, "The survey results include some extremely stark, unambiguous findings. Public levels of dissatisfaction and distrust of government spending practices came through loud and clear, across every geography, demographic group, and political ideology. Worthy of special note, perhaps, is a 67 percentage point gap between what taxpayers expect from government and what they receive. These are significant findings that I hope government and the public find useful."

    This survey was conducted online within the United States by Harris Interactive on behalf of the Association of Government Accountants between January 4 and 8, 2008 among 1,652 adults aged 18 or over. Results were weighted as needed for age, sex, race/ethnicity, education, region, and household income. Propensity score weighting was also used to adjust for respondents' propensity to be online. No estimates of theoretical sampling error can be calculated.

    You can read the Survey Report, including a full methodology and associated commentary.

  • "The Government Is Wasting Your Tax Dollars! How Uncle Sam spends nearly $1 trillion of your money each year," by Ryan Grim with Joseph K. Vetter, Readers Digest, January 2008, pp. 86-99 ---

    1. Taxes:
    Cheating Shows. The Internal Revenue Service estimates that the annual net tax gap—the difference between what's owed and what's collected—is $290 billion, more than double the average yearly sum spent on the wars in Iraq and Afghanistan.

    About $59 billion of that figure results from the underreporting and underpayment of employment taxes. Our broken system of immigration is another concern, with nearly eight million undocumented workers having a less-than-stellar relationship with the IRS. Getting more of them on the books could certainly help narrow that tax gap.

    Going after the deadbeats would seem like an obvious move. Unfortunately, the IRS doesn't have the resources to adequately pursue big offenders and their high-powered tax attorneys. "The IRS is outgunned," says Walker, "especially when dealing with multinational corporations with offshore headquarters."

    Another group that costs taxpayers billions: hedge fund and private equity managers. Many of these moguls make vast "incomes" yet pay taxes on a portion of those earnings at the paltry 15 percent capital gains rate, instead of the higher income tax rate. By some estimates, this loophole costs taxpayers more than $2.5 billion a year.

    Oil companies are getting a nice deal too. The country hands them more than $2 billion a year in tax breaks. Says Walker, "Some of the sweetheart deals that were negotiated for drilling rights on public lands don't pass the straight-face test, especially given current crude oil prices." And Big Oil isn't alone. Citizens for Tax Justice estimates that corporations reap more than $123 billion a year in special tax breaks. Cut this in half and we could save about $60 billion.

    The Tab* Tax Shortfall: $290 billion (uncollected taxes) + $2.5 billion (undertaxed high rollers) + $60 billion (unwarranted tax breaks) Starting Tab: $352.5 billion

    2. Healthy Fixes.
    Medicare and Medicaid, which cover elderly and low-income patients respectively, eat up a growing portion of the federal budget. Investigations by Sen. Tom Coburn (R-OK) point to as much as $60 billion a year in fraud, waste and overpayments between the two programs. And Coburn is likely underestimating the problem.

    The U.S. spends more than $400 per person on health care administration costs and insurance -- six times more than other industrialized nations.

    That's because a 2003 Dartmouth Medical School study found that up to 30 percent of the $2 trillion spent in this country on medical care each year—including what's spent on Medicare and Medicaid—is wasted. And with the combined tab for those programs rising to some $665 billion this year, cutting costs by a conservative 15 percent could save taxpayers about $100 billion. Yet, rather than moving to trim fat, the government continues such questionable practices as paying private insurance companies that offer Medicare Advantage plans an average of 12 percent more per patient than traditional Medicare fee-for-service. Congress is trying to close this loophole, and doing so could save $15 billion per year, on average, according to the Congressional Budget Office.

    Another money-wasting bright idea was to create a giant class of middlemen: Private bureaucrats who administer the Medicare drug program are monitored by federal bureaucrats—and the public pays for both. An October report by the House Committee on Oversight and Government Reform estimated that this setup costs the government $10 billion per year in unnecessary administrative expenses and higher drug prices.

    The Tab* Wasteful Health Spending: $60 billion (fraud, waste, overpayments) + $100 billion (modest 15 percent cost reduction) + $15 billion (closing the 12 percent loophole) + $10 billion (unnecessary Medicare administrative and drug costs) Total $185 billion Running Tab: $352.5 billion +$185 billion = $537.5 billion

    3. Military Mad Money.
    You'd think it would be hard to simply lose massive amounts of money, but given the lack of transparency and accountability, it's no wonder that eight of the Department of Defense's functions, including weapons procurement, have been deemed high risk by the GAO. That means there's a high probability that money—"tens of billions," according to Walker—will go missing or be otherwise wasted.

    The DOD routinely hands out no-bid and cost-plus contracts, under which contractors get reimbursed for their costs plus a certain percentage of the contract figure. Such deals don't help hold down spending in the annual military budget of about $500 billion. That sum is roughly equal to the combined defense spending of the rest of the world's countries. It's also comparable, adjusted for inflation, with our largest Cold War-era defense budget. Maybe that's why billions of dollars are still being spent on high-cost weapons designed to counter Cold War-era threats, even though today's enemy is armed with cell phones and IEDs. (And that $500 billion doesn't include the billions to be spent this year in Iraq and Afghanistan. Those funds demand scrutiny, too, according to Sen. Amy Klobuchar, D-MN, who says, "One in six federal tax dollars sent to rebuild Iraq has been wasted.")

    Meanwhile, the Pentagon admits it simply can't account for more than $1 trillion. Little wonder, since the DOD hasn't been fully audited in years. Hoping to change that, Brian Riedl of the Heritage Foundation is pushing Congress to add audit provisions to the next defense budget.

    If wasteful spending equaling 10 percent of all spending were rooted out, that would free up some $50 billion. And if Congress cut spending on unnecessary weapons and cracked down harder on fraud, we could save tens of billions more.

    The Tab* Wasteful military spending: $100 billion (waste, fraud, unnecessary weapons) Running Tab: $537.5 billion + $100 billion = $637.5 billion

    4. Bad Seeds.
    The controversial U.S. farm subsidy program, part of which pays farmers not to grow crops, has become a giant welfare program for the rich, one that cost taxpayers nearly $20 billion last year.

    Two of the best-known offenders: Kenneth Lay, the now-deceased Enron CEO, who got $23,326 for conservation land in Missouri from 1995 to 2005, and mogul Ted Turner, who got $590,823 for farms in four states during the same period. A Cato Institute study found that in 2005, two-thirds of the subsidies went to the richest 10 percent of recipients, many of whom live in New York City. Not only do these "farmers" get money straight from the government, they also often get local tax breaks, since their property is zoned as agricultural land. The subsidies raise prices for consumers, hurt third world farmers who can't compete, and are attacked in international courts as unfair trade.

    The Tab* Wasteful farm subsidies: $20 billion Running Tab: $637.5 billion + $20 billion = $657.5 billion

    5. Capital Waste.
    While there's plenty of ongoing annual operating waste, there's also a special kind of profligacy—call it capital waste—that pops up year after year. This is shoddy spending on big-ticket items that don't pan out. While what's being bought changes from year to year, you can be sure there will always be some costly items that aren't worth what the government pays for them.

    Take this recent example: Since September 11, 2001, Congress has spent more than $4 billion to upgrade the Coast Guard's fleet. Today the service has fewer ships than it did before that money was spent, what 60 Minutes called "a fiasco that has set new standards for incompetence." Then there's the Future Imagery Architecture spy satellite program. As The New York Times recently reported, the technology flopped and the program was killed—but not before costing $4 billion. Or consider the FBI's infamous Trilogy computer upgrade: Its final stage was scrapped after a $170 million investment. Or the almost $1 billion the Federal Emergency Management Agency has wasted on unusable housing. The list goes on.

    The Tab* Wasteful Capital Spending: $30 billion Running Tab: $657.5 billion + $30 billion = $687.5 billion

    6. Fraud and Stupidity.
    Sen. Chuck Grassley (R-IA) wants the Social Security Administration to better monitor the veracity of people drawing disability payments from its $100 billion pot. By one estimate, roughly $1 billion is wasted each year in overpayments to people who work and earn more than the program's rules allow.

    The federal Food Stamp Program gets ripped off too. Studies have shown that almost 5 percent, or more than $1 billion, of the payments made to people in the $30 billion program are in excess of what they should receive.

    One person received $105,000 in excess disability payments over seven years.

    There are plenty of other examples. Senator Coburn estimates that the feds own unused properties worth $18 billion and pay out billions more annually to maintain them. Guess it's simpler for bureaucrats to keep paying for the property than to go to the trouble of selling it.

    The Tab* General Fraud and Stupidity: $2 billion (disability and food stamp overpayment) Running Tab: $687.5 billion + $2 billion = $689.5 billion

    7. Pork Sausage.
    Congress doled out $29 billion in so-called earmarks—aka funds for legislators' pet projects—in 2006, according to Citizens Against Government Waste. That's three times the amount spent in 1999. Congress loves to deride this kind of spending, but lawmakers won't hesitate to turn around and drop $500,000 on a ballpark in Billings, Montana.

    The most infamous earmark is surely the "bridge to nowhere"—a span that would have connected Ketchikan, Alaska, to nearby Gravina Island—at a cost of more than $220 million. After Hurricane Katrina struck New Orleans, Senator Coburn tried to redirect that money to repair the city's Twin Span Bridge. He failed when lawmakers on both sides of the aisle got behind the Alaska pork. (That money is now going to other projects in Alaska.) Meanwhile, this kind of spending continues at a time when our country's crumbling infrastructure—the bursting dams, exploding water pipes and collapsing bridges—could really use some investment. Cutting two-thirds of the $29 billion would be a good start.

    The Tab* Pork Barrel Spending: $20 billion Running Tab: $689.5 billion + $20 billion = $709.5 billion

    8. Welfare Kings.
    Corporate welfare is an easy thing for politicians to bark at, but it seems it's hard to bite the hand that feeds you. How else to explain why corporate welfare is on the rise? A Cato Institute report found that in 2006, corporations received $92 billion (including some in the form of those farm subsidies) to do what they do anyway—research, market and develop products. The recipients included plenty of names from the Fortune 500, among them IBM, GE, Xerox, Dow Chemical, Ford Motor Company, DuPont and Johnson & Johnson.

    The Tab* Corporate Welfare: $50 billion Running Tab: $709.5 billion + $50 billion = $759.5 billion

    9. Been There,
    Done That. The Rural Electrification Administration, created during the New Deal, was an example of government at its finest—stepping in to do something the private sector couldn't. Today, renamed the Rural Utilities Service, it's an example of a government that doesn't know how to end a program. "We established an entity to electrify rural America. Mission accomplished. But the entity's still there," says Walker. "We ought to celebrate success and get out of the business."

    In a 2007 analysis, the Heritage Foundation found that hundreds of programs overlap to accomplish just a few goals. Ending programs that have met their goals and eliminating redundant programs could comfortably save taxpayers $30 billion a year.

    The Tab* Obsolete, Redundant Programs: $30 billion Running Tab: $759.5 billion + $30 billion = $789.5 billion

    10. Living on Credit.
    Here's the capper: Years of wasteful spending have put us in such a deep hole, we must squander even more to pay the interest on that debt. In 2007, the federal government carried a debt of $9 trillion and blew $252 billion in interest. Yes, we understand the federal government needs to carry a small debt for the Federal Reserve Bank to operate. But "small" isn't how we would describe three times the nation's annual budget. We need to stop paying so much in interest (and we think cutting $194 billion is a good target). Instead we're digging ourselves deeper: Congress had to raise the federal debt limit last September from $8.965 trillion to almost $10 trillion or the country would have been at legal risk of default. If that's not a wake-up call to get spending under control, we don't know what is.

    The Tab* Interest on National Debt: $194 billion Final Tab: $789.5 billion + $194 billion = $983.5 billion

    What YOU Can Do Many believe our system is inherently broken. We think it can be fixed. As citizens and voters, we have to set a new agenda before the Presidential election. There are three things we need in order to prevent wasteful spending, according to the GAO's David Walker:

    • Incentives for people to do the right thing.

    • Transparency so we can tell if they've done the right thing.

    • Accountability if they do the wrong thing.

    Two out of three won't solve our problems.

    So how do we make it happen? Demand it of our elected officials. If they fail to listen, then we turn them out of office. With its approval rating hovering around 11 percent in some polls, Congress might just start paying attention.

    Start by writing to your Representatives. Talk to your family, friends and neighbors, and share this article. It's in everybody's interest.

    The Most Criminal Class is Writing the Laws ---


    Humor Between February 1 and February 29, 2008

    Forwarded by Auntie Bev
    Funny British Signs --- Click Here

    Forwarded by Moe











    What's! the difference between a girlfriend and a wife?
    ABOUT 45 LBS.






    ROW, ROW, ROW YOUR BOAT........

    Forwarded by Moe

    Don't eat chicken sandwiches, A little boy and a little girl attended the same school and became friends. Every day they would sit together to eat their lunch. They discovered that they both brought chicken sandwiches every day! This went on all through the fourth and fifth grades, until one day he noticed that her sandwich wasn't a chicken sandwich. He said, 'Hey, how come you're not eating chicken, don't you like it anymore?' She said 'I love it but I have to stop eating it.'

    'Why?' he asked. She pointed to her lap and said 'Cause I'm starting to grow little feathers down there!'

    'Let me see' he said.

    'Okay' and she pulled up her skirt.

    He looked and said, 'That's right. You are! Better not eat any more chicken.' He kept eating his chicken sandwiches until one day he brought peanut butter. He said to the little girl, 'I have to stop ea ting chicken sandwiches, I'm starting t o get feathers down there too!'

    She asked if she could look, so he pulled down his pants for her!

    She said 'Oh, my Gosh, it's too late for you! You've already got the NECK and GIZZARDS!!!

    Forwarded by a friend

    This is sent only to those whose level of maturity qualifies them to relate to it... (and a few who might soon appreciate it)

    1977 : Long hair
    2007 : Longing for hair

    1977 : KEG
    2007 : EKG

    1977 : Acid rock
    2007 : Acid reflux

    1977 : Moving to California because it's cool
    2007 : Moving to Arizona because it's warm

    1977 : Trying to look like Marlon Brando or Liz Taylor
    2007: Trying NOT to look like Marlon Brando or Liz Taylor

    1977 : Seeds and stems
    2007 : Roughage

    1977 : Hoping for a BMW
    2007 : Hoping for a BM

    1977 : Going to a new, hip joint
    2007 : Receiving a new hip joint

    1977 : Rolling Stones
    2007: Kidney Stones

    1977 : Screw the system
    2007: Upgrade the system

    1977 : Disco
    2007 : Costco

    1977 : Parents begging you to get your hair cut
    2007 : Children begging you to get their heads shaved

    1977 : Passing the drivers' test
    2007 : Passing the vision test

    1977 : Whatever
    2007 : Depends

    Just in case you weren't feeling too old today, this will certainly change things. Each year the staff at Beloit College in Wisconsin puts together a list to try to give the faculty a sense of the mindset of this year's incoming freshmen. Here's this year's list:

    The people who are starting college this fall across the nation were born in 1989.

    They are too young to remember the 1st space shuttle blowing up.

    Their lifetime has always included AIDS.

    Bottle caps have always been s crew off and plastic.

    The CD was introduced the year they were born.

    They have always had an answering machine.

    They have always had cable.

    They cannot fathom not having a remote control.

    Jay Leno has always been on the Tonight Show.

    Popcorn has always been cooked in the microwave.

    They never took a swim and thought about Jaws.

    They can't imagine what hard contact lenses are.

    They don't know who Mork was or where he was from.

    They never heard: "Where's the Beef?", "I'd walk a mile for a Camel", or "de plane, Boss, de plane."

    They do not care who shot J. R. and have no idea who J. R. even is.

    McDonald's never came in Styrofoam containers.

    They don't have a clue how to use a typewriter.

    I don't mind going to work, But that eight hour wait to go home is a bitch.
    Maxine's sister

    Forwarded by Paula


    1. He does not have a 'BEER GUT' - He has developed a 'LIQUID GRAIN STORAGE FACILITY.'

    2. He is not a 'BAD DANCER' - He is ' OVERLY CAUCASIAN.'


    4. He is not 'BALDING' - He is in 'FOLLICLE REGRESSION.'

    5. He does not act like a 'TOTAL ASS' - He develops a case of RECTAL-CRANIAL INVERSION.'

    6. It's not his 'CRACK' you see hanging out of his pants - It's 'REAR CLEAVAGE.'

    Forwarded by Paula

    Last January the New Orleans Times Picayune reported that “A Cajun amateur archeologist, having dug to a depth of 10 meters, found traces of copper wire dating back 100 years...and came to the conclusion that their ancestors already had a telephone network more than 100 years ago. “

    Not to be outdone by the Cajuns, in the weeks that followed, Texas scientists dug to a depth of 20 meters. Shortly after, headlines in the Dallas Morning News read: “Texas archaeologists have found traces of 200-year old copper wire, and have concluded that their ancestors already had an advanced high-tech communications network one hundred years earlier than the Cajuns.”

    One week later, The Grant County Press reported the following: “After digging as deep as 30 meters in fields near Cabins, West Virginia, Cooder Williams, a self-taught archeologist, reported that he found absolutely nothing. Cooder has therefore concluded that 300 years ago in West Virginia they were already using wireless.”

    Forwarded by Auntie Bev
    Jokes to Offend Everyone ---

    These are repeats, but they're still funny.

    Colonoscopies are no joke , but these comments during the exam were quite = humorous..... A physician claimed that the following are actual comments made by his = patients (predominately male) while he was performing their colonoscopies:

    1. 'Take it easy, Doc. You're boldly going where no man has gone before!

    2. 'Find Amelia Earhart yet?'

    3. 'Can you hear me NOW?'

    4. 'Are we there yet? Are we there yet? Are we there yet?'

    5. 'You know, in Arkansas, we're now legally married.'

    6. 'Any sign of the trapped miners, Chief?'

    7. 'You put your left hand in, you take your left hand out...'

    8. 'Hey! Now I know how a Muppet feels!'

    9. 'If your hand doesn't fit, you must quit! =

    10. 'Hey Doc, let me know if you find my dignity.' =

    11. 'You used to be an executive at Enron, didn't you?'

    12. 'God, now I know why I am not gay.'

    And the best one of all..

    13. 'Could you write a note for my wife saying that my head is not up there?'

    Forwarded by Auntie Bev

    An elderly couple, who were both widowed, had been going out with each other for a long time.

    Urged on by their friends, they decided it was finally time to get married.

    Before the wedding, they went out to dinner and had a long conversation regarding how their marriage might work. They discussed finances, living arrangements and so on.

    Finally, the old gentleman decided it was time to broach the subject of their physical relationship.

    "How do you feel about sex?" he asked, rather hesitantly.

    "Well," she said, responding very carefully, "I'd have to say, I would like it infrequently."

    The old gentleman sat quietly for a moment, then, looking over his glasses, he quietly asked, "Is that one word or two?"

    Forwarded by Team Carper

    Essential vocabulary additions for the workplace (and elsewhere)!!!

    1. BLAMESTORMING : Sitting around in a group, discussing why a deadline was missed or a project failed, and who was responsible.

    2. SEAGULL MANAGER : A manager, who flies in, makes a lot of noise, craps on everything, and then leaves.

    3. ASSMOSIS : The process by which some people seem to absorb success and advancement by kissing up to the boss rather than working hard.

    4. SALMON DAY : The experience of spending an entire day swimming upstream only to get screwed and die in the end.

    5. CUBE FARM : An office filled with cubicles.

    6. PRAIRIE DOGGING : When someone yells or drops something loudly in a cube farm, and people's heads pop up over the walls to see what's going on.

    7. MOUSE POTATO : The on-line, wired generation's answer to the couch potato.

    8. SITCOMs : Single Income, Two Children, Oppressive Mortgage. What Yuppies get into when they have children and one of them stops working to stay home with the kids.

    9. STRESS PUPPY : A person who seems to thrive on being stressed out and whiny.

    10. SWIPEOUT : An ATM or credit card that has been rendered useless because magnetic strip is worn away from extensive use.

    11. XEROX SUBSIDY : Euphemism for swiping free photo-copies from one's workplace.

    12. IRRITAINMENT : Entertainment and media spectacles that are Annoying but you find yourself unable to stop watching them.

    13. PERCUSSIVE MAINTENANCE : The fine art of whacking the crap out of an electronic device to get it to work again. Often feel like doing this to my computer------

    14. ADMINISPHERE : The rarefied organizational layers beginning just above the rank and file. Decisions that fall from the adminisphere are often profoundly inappropriate or irrelevant to the problems they were designed to solve.

    15. 404 : Someone who's clueless. From the World Wide Web error Message "404 Not Found," meaning that the requested site could not be located.

    16. GENERICA: Features of the American landscape t hat are exactly the same no matter where one is, such as fast food joints, strip malls, and subdivisions.

    17. OHNOSECOND: That minuscule fraction of time in which you realize that you've just made a BIG mistake. (Like after hitting send on an email by mistake).

    18. WOOFS : Well-Off Older Folks.

    19. CROP DUSTING : Surreptitiously passing gas while passing through a Cube Farm.

    Jensen Comment
    My favorite is
    ELECTILE DYSFUNCTION: In ability to get aroused by any of the candidates for the U.S. presidential elections in 2008.

    Forwarded by Moe

    An elderly man and his nagging wife were vacationing in Israel when his wife up and died. He investigated and found out that it would cost $2,500 to have her buried in Israel as opposed to $25,000 to have her body flown home and buried in North Carolina. He opted to have her flown home.

    An American customs agent questioned why he would pay so much more when he could've had her buried in the Holy Land for so much less money at that.

    The husband replied that over two thousand years ago a man died and arose again from the dead after only three days. "Even though the odds were slight, I just didn't want to take that chance with Mabel." he said.

    Forwarded by Auntie Bev

    When Albert Einstein was making the rounds of the speaker's circuit, he usually found himself eagerly longing to get back to his laboratory work. One night as they were driving to yet another rubber-chicken dinner, Einstein mentioned to his chauffeur (a man who somewhat resembled Einstein in looks & manner) that he was tired of speechmaking.

    "I have an idea, boss," his chauffeur said. "I've heard you give this speech so many times. I'll bet I could give it for you." Einstein laughed loudly and said, "Why not? Let's do it!" When they arrive at the dinner, Einstein donned the chauffeur's cap and jacket and sat in the back of the room. The chauffeur gave a beautiful rendition of Einstein's speech and even answered a few questions expertly.

    Then a supremely pompous professor asked an extremely esoteric question about anti-matter formation, digressing here and there to let everyone in the audience know that he was nobody's fool. Without missing a beat, the chauffeur fixed the professor with a steely stare and said, "Sir, the answer to that question is so simple that I will let my chauffeur, who is sitting in the back, answer it for me."

    Forwarded by Auntie Bev

    A man had 50 yard line tickets for the Super Bowl. As he sits down, a man comes down and asked the man if anyone is sitting in the seat next to him.

    "No", he said, "the seat is empty".

    "This is incredible", said the man. "Who in their right mind would have a seat like this for the Super Bowl , the biggest sport event in the world, and not use it ?" Somberly, the man says, "Well... the seat actually belongs to me. I was supposed to come here with my wife, but she passed away. This is the first Super Bowl we have not been together since we got married in 1967." "Oh I'm sorry to hear that. That's terrible. But couldn't you find someone else - a friend or relative or even a neighbor to take the seat?" The man shakes his head, "No. They're all at the funeral."

    The Bear & The Pope --- 

    The Pope took a couple of days off to visit the mountains of Alaska for some sight-seeing. He was cruising along the campground in the Pope-mobile when there was a frantic commotion just at the edge of the woods.

    A helpless Democrat, wearing sandals, shorts, a "Save the Whales" hat, and a "To Hell with Bush" T-shirt, was screaming while struggling frantically, thrashing around trying to free himself from the grasp of a 10 foot grizzly bear.

    As the Pope watched horrified, a group of Republican loggers came racing up. One quickly fired a .44 magnum into the bear's chest. The other two reached up and pulled the bleeding, semiconscious Democrat from the bear's grasp, then using long clubs, the three loggers finished off the bear and two of them threw it onto the bed of their truck while the third tenderly placed the injured Democrat in the back seat.

    As they prepared to leave, the Pope summoned them to come over. "I give you my blessing for your brave actions!" he told them. "I heard there was a bitter hatred between Republican loggers and Democratic Environmental Activists but now I've seen with my own eyes that this is not true."

    As the Pope drove off, one of the loggers asked his buddies "Who was that guy?"

    "It was the Pope," another replied. "He's in direct contact with heaven and has access to all wisdom."

    "Well," the logger said, "he may have access to all wisdom but he sure don't know anything about bear hunting! Is the bait holding up, or do we need to go back to Massachusetts and get another one?"

    Forwarded by Sid and Eileen
    Oldies but Goodies

    Why did the chicken cross the road?

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

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

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

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

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

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

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

    ERNEST HEMINGWAY : To die in the rain. Alone.

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

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

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

    BILL GATES: I have just released eChicken2008, which will not only cross roads, but will lay eggs, file your important documents, and balance your check book. Internet Explorer is an integral part of eChicken. This new platform is much more stable and will never cra...#@&&^(C% <mailto:cra...#@&amp;&amp;%5E%28C%> <mailto: cra...#@&amp;&amp;%5E%28C%> ....... reboot.

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

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

    AL GORE : I invented the chicken!

    COLONEL SANDERS : Did I miss one?

    DICK CHENEY : Where's my gun?

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



    Humor Between January 1 and January 31, 2008 ---  


    And that's the way it was on February 29, 2008 with a little help from my friends.


    Fraud Updates ---


    Facts about the earth in real time --- 

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

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

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

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---

    Tom Selling's blog The Accounting Onion (great on theory and practice) ---


    Free Harvard Classics ---
    Free Education and Research Videos from Harvard University ---


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


    Bob Jensen's bookmarks for accounting newsletters are at 

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


    Jack Anderson's Accounting Information Finder ---


    Gerald Trite's great set of links --- 


    The Finance Professor --- 


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


    How stuff works --- 


    Household and Other Heloise-Style Hints --- 


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


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


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









    January 31, 2008




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

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

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

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

    Bob Jensen's past presentations and lectures ---   

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

    Roles of a ListServ ---

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

    Bob Jensen's Home Page is at

    CPA Examination ---

    Wikipedia has a rather nice summary of accounting software at

    Bob Jensen’s accounting software bookmarks are at

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---

    Tom Selling's blog The Accounting Onion (great on theory and practice) ---

    Accountancy Discussion ListServs:

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

    Roles of a ListServ ---

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

    Tidbits Directory ---

    New Bookmarks Directory for Earlier Months and Years ---

    Fraud Updates is now available at

    Links to my other fraud modules can be found at

    Bob Jensen's Threads ---


    Humor Between January 1 and January 31, 2008 ---  

    Links to Documents on Fraud ---

    Bob Jensen's search helpers are at

    Bob Jensen's Bookmarks ---

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

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

    Bob Jensen's documents on accounting theory are at 

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

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

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

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

    Bob Jensen's home page ---

    Bob Jensen's complete set of Enron Updates are at

    Bob Jensen's threads on the Enron scandal are at

    Large International Accounting Firm History ---

    My December 31, 2007 edition of Fraud Updates is now available at

    Links to my other fraud modules can be found at

    The great strength of the AICPA is that it brings so many men and women together as members of a single profession. Individually, we do great things for American households, businesses and governments. Together, we are an even more powerful force for prosperity in the economy at large—we pool our knowledge and speak with one voice. In the face of many challenges, we—as a united profession—have a fantastic future ahead of us.
    AICPA Chairman Randy Fletchall’s inaugural speech delivered as he accepted the chairmanship of the Institute’s Board of Directors at the governing Council’s October 2007 meeting in Tampa, Fla. ---
    AICPA=American Institute of Certified Public Accountants ---
    AICPA Accounting Education Center ---

    Accounting is the most popular major on US college campuses, according to the Job Outlook 2005 survey by the National Association of Colleges and Employers. The study found more college students are choosing to pursue accounting than any other discipline, followed by electrical engineering, mechanical engineering and business administration/management.
    CA Magazine, "The New IT Profession," April 2006 ---
    Jensen Comment
    Statistics such as this depend upon how categories are packaged. For example, business disciplines might be aggregated (including accounting) or disaggregated. Education majors may be aggregated or disaggregated. Where do you put the ever-popular Sports Management majors when making such comparisons? In the 1990s Accountancy became less popular when technology opportunities falsely appeared to be unbounded. Since the 1990s accountancy soared back with a little help by having its SOX up.

    January 30, 2008 message from Bikesh Shrestha []

    Dear Jensen,

    Greetings from the top of the world

    We are involved in Nepalese Accountants Association since 2002 and would like to setup a library for its members. We do not have access to high speed internet and we have not much resources (books and magazines). Can you tell us where we find donor for such old accounting magazines and books. CD rom and pdf files are also okay.

    Thank you for your cooperation. Your site is superb and your work is simply indescribable.

    Sincerely yours,

    Bikesh Shrestha
    Nepalese Accountants Association
    PO BOX # 5235, Maharajgunj, Chakra Path
    Kathmandu, Nepal
    Tel 00977 1 9803 485 433

    January 31, 2008 reply from Bob Jensen

    Hi Bikesh,

    You might try contacting the largest international accounting firms to see if they can help with your plight.
    You can read about the Big Four at
    The above link also discusses accounting firms in other countries.

    Note that in the US a great deal is free from the FASB and the SEC, although the IASB literature may be more relevant to your country.
    FASB ---
    SEC ---

    You might also contact the International Accounting Standards Board (IASB) see if they can make some price concessions on your behalf ---  

    My good friend and former student Paul Pacter in Hong Kong may also lend some assistance ---
    His blog is a great bridge to a vast amount of free international accounting literature ---

    You might also find my theory links helpful ---
    My home page is at

    Bob Jensen

    January 29, 2008 message from Prem N. Sikka []

    Dear Bob,

    Here is an item for your website.

    I have been writing regular blogs for The Guardian, a UK national newspaper. The articles are available at and offer a critical commentary on business and accountancy matters. For three days after each article the website takes readers' comments and colleagues are welcome to add comments, critical or otherwise. The most recent article appeared on 29 January 2008.

    There is now also an extensive database of corporate and accountancy misdemeanours on the AABA website ( <> ) and may interest scholars, students, journalists and citizens concerned about the abuse of power.


    Prem Sikka
    Professor of Accounting
    University of Essex
    Colchester, Essex CO4 3SQ
    Office Tel: +44(0)1206 873773
    Office Fax: +44 (01206) 873429


    Jensen Comment
    I added Professor Sikka's message to the following sites:

    Heart of darkness:  Accounting firms have penetrated the UK state and their many antisocial activities are going unchecked
    The brief evidence cited above shows that there is an unhealthy relationship between the UK state and major accounting firms. Accounting firms have penetrated the state and their many anti-social activities go unchecked. Despite dodgy audits and dubious tax avoidance schemes no UK government has ever prosecuted any major accounting firm. Is it any wonder that the public confidence in political institutions is low?

    Prem Sikka, "Heart of darkness:  Accounting firms have penetrated the UK state and their many antisocial activities are going unchecked," The Guardian, January 9, 2008 ---

    "KPMG Debuts College Faculty Web Portal," SmartPros, January 11, 2008 ---

    KPMG LLP, the U.S. audit, tax and advisory firm, announced the launch of a Web-based portal containing accounting and business resources designed specifically for university professors.

    The site, , is open to any university faculty member. Once the free registration is completed, users have access to items such as news, events, and curriculum content designed by KPMG, a Big Four accounting firm.

    One such resource currently available is an ethics toolkit with scenarios, presentations and other materials designed to explore real-world business ethics in a classroom setting.

    Professors registered on the site are provided access to the materials and information is shared about how to secure a KPMG professional's involvement in the course itself.

    "KPMG is committed to working with professors to do everything we can to better bring the classroom into the profession, and the profession into the classroom," said Manny Fernandez, KPMG's National Managing Partner – Campus Recruiting. "KPMG's Faculty Portal is an important resource that we expect professors will use to help drive their own curricula and remain informed on key industry issues and events."

    Accounting and business professors, this one is for you. KPMG, the tax and audit consulting firm, this week opened its Faculty Portal online. The site is free, if your e-mail address ends in ".edu" and you don't mind giving KPMG a bunch of contact and professional information in order to register. Once in, professors can get news on accounting practices that they can incorporate into their classroom talks. They can also get access to the "Ethical Compass," a tool with scenarios for students that can help illustrate what is good and what is bad. (Helping to set up illegal tax shelters, something that KPMG apologized for doing in 2005, presumably is the type of bad thing that students will be steered away from.)
    Josh Fischman, Chronicle of Higher Education, January 15, 2008 ---

    The longest running listserv of worldwide accounting educators will still be active at
    Most large accounting firms offer a variety of online services for accounting educators.
    Probably the best sites for happenings in international accounting are at the following two links:

    January 15, 2008 message from Manny Fernandez (KPMG Campus Recruiting) []

    With more than 55 million unique (YouTube) users each month – a large percentage of whom are among the age group of university students –YouTube provides the 8th largest audience on the Internet and a prime media location to deliver KPMG’s “Great Place to Build Your Career” message. In fact, just last week, at KPMG's National Internship Training, almost 100% of the more than 600 interns indicated they visited YouTube in the last month. And now, KPMG is the first of the Big Four firms to create a branded YouTube Channel. Check it out yourself ---

    Bob Jensen's threads on accounting careers are at

    The Berkeley Electronic Press publishes the Journal of Business Valuation and Economic Loss Analysis ---

    Why does the title of this journal strike me as funny?
    Is there a hidden message here?

    Bob Jensen's threads on valuation are at

    "The Accounting Cycle:  FASB Needs to Change Accounting for SPEs," by: J. Edward Ketz, SmartPros, January 2008 ---

    The CDO imbroglio that has enveloped the financial sector created quite a stir in 2007. Mortgage foreclosures have led to losses for the banks, and investors in CDOs have been surprised by the degree of their risk exposure. "Super seniors" have not been super or senior.

    Amid this disarray, a simple question has to be asked: why are the activities and transactions of special purpose entities (SPEs), legal entities that run collateralized debt obligations (CDOs) and similar financial vehicles, not displayed on the financial reports of corporate America? These SPEs remain hidden from view and corporate disclosures about them mist like a Chicago fog.

    Recall that Enron's episodes were sprinkled with many an SPE shenanigan. The old accounting rule said that if the SPE had at least 3 percent of its total capital from some outside source, then the business enterprise did not have to consolidate the SPE with its own affairs. While EITF 90-15 originally applied to certain leasing activities, business managers quickly applied it to all sorts of SPEs, and the Financial Accounting Standards Board and the Securities and Exchange Commission allowed them to do so. The threshold was so low that managers found it easy to keep SPE debt off the balance sheet and to make few disclosures.

    Because of Enron, FASB finally updated the rules to require consolidation unless outsiders contributed at least 10 percent of the capital to the SPE and this capital is at risk. Funny, FASB sat on its collective backside for over a decade before it took action. It seems the board members are incapable of taking proactive steps in any area.

    One of the criticisms was that 3 percent equity does not really put the equity at risk. While the 10 percent cutoff remains arbitrary, it clarifies the situation -- until the board muddied this clarity with some mystical, principles-based goobledy-gook. Many managers complained because they perceived that billions of dollars would be added to the corporate balance sheet. Apparently the appeals had some effect, for FASB modified the final rule. Interpretation No. 46R now states:

    9. An equity investment at risk of less than 10 percent of the entity's total assets shall not be considered sufficient to permit the entity to finance its activities without subordinated financial support in addition to the equity investment unless the equity investment can be demonstrated to be sufficient. The demonstration that equity is sufficient may be based on either qualitative analysis or quantitative analysis or a combination of both. Qualitative assessments, including but not limited to the qualitative assessments described in paragraphs 9(a) and 9(b), will in some cases be conclusive in determining that the entity's equity at risk is sufficient. If, after diligent effort, a reasonable conclusion about the sufficiency of the entity's equity at risk cannot be reached based solely on qualitative considerations, the quantitative analyses implied by paragraph 9(c) should be made. In instances in which neither a qualitative assessment nor a quantitative assessment, taken alone, is conclusive, the determination of whether the equity at risk is sufficient shall be based on a combination of qualitative and quantitative analyses.

    a. The entity has demonstrated that it can finance its activities without additional subordinated financial support.

    b. The entity has at least as much equity invested as other entities that hold only similar assets of similar quality in similar amounts and operate with no additional subordinated financial support.

    c. The amount of equity invested in the entity exceeds the estimate of the entity's expected losses based on reasonable quantitative evidence.

    Note that the 10 percent threshold can be ignored under several scenarios using either quantitative or qualitative excuses. As I said in 2003, this rule or standard is suspect and board members are spineless. The debt of an SPE is similar to the debt of a subsidiary. If FASB thinks that SPE debt does not have to be consolidated, it might as well announce that parent companies no longer have to show the liabilities of their subsidiaries.

    We can forget substance over form. While we are at it, we might as well toss out decision usefulness and relevance because FASB really doesn't promote these ideals, despite the rhetoric in the so-called conceptual framework.

    Given the ethical failures of both managers and auditors, I predicted in Hidden Financial Risk (2003) that many SPEs would remain unconsolidated. Indeed the majority of SPEs not only remain unconsolidated, but also the sponsoring organizations provide precious little disclosures about them. With the help of investment bankers, corporate managers have been highly creative in finding rhetoric that skirts principled accounting. When the corporate executives are managers of the investment banks, well, the creativity is off the charts.

    Years ago FASB and the SEC should have required the consolidation of SPEs. The last six months or so have clearly displayed the need for improved corporate reporting. This directive applies to the sponsors of CDOs including Citicorp and Merrill Lynch: they should consolidate their special purpose vehicles.

    How many more debacles in the market place will occur before FASB and the SEC get it right? When will they have men and women of courage?

    Bob Jensen's threads on CDO failed accounting (as unbooked debt that won't go away) are at

    What's Right and What's Wrong With (SPE, SPEs), SPVs, and VIEs? --- 

    Former accounting professor Tom Selling (Dartmouth, Wake Forest, SEC, and Thunderbird) started the Grovesite Software Company ---

    He also maintains a blog called The Accounting Onion ---

    Accounting and finance professors should use this video every semester in class!
    The best explanation ever of the sub-prime (meaning lending to borrowers with much less than prime credit ratings) mortgage greed and fraud.
    The best explanation ever about securitized financial instruments and worldwide banding frauds using such instruments.
    The best explanation ever about how greedy employees will cheat on their employers and their customers.

    "House Of Cards: The Mortgage Mess Steve Kroft Reports How The Mortgage Meltdown Is Shaking Markets Worldwide," Sixty Minutes Television on CBS, January 27, 2008 ---
    For a few days the video may be available free.
    The transcript will probably be available for a longer period of time.

    Bob Jensen's "Rotten to the Core" threads are at

    January 29, 2008 reply from Jim Fuehrmeyer []

    Bob, you don’t know me, but I’m new to academia – I took early retirement from Deloitte & Touche in Chicago to teach accounting & auditing. I replied to the email, but it was rejected so I’m going to send you my two cents. It’s probably a bit naïve, but what the heck.

    Two things:

    First, when do we start asking “the question” about sub-prime lending in the first place? People who make the loans, sell the loans and invest in the loans are making money (and now losing money) off of folks who have no business being placed in a position to get easy credit to begin with. I’m sorry, but I find it disgusting. I have no sympathy for investors in these instruments and no sympathy for the lenders who originated the loans.

    Second, whether the standard is 10% or 3% or 0.01% so long as there’s a political process around that allows for the banks that have “no continuing involvement” with the loans to be in a position to amend them, we’re going to continue to live with the fiction that these financial instruments can be off balance sheet. If the QSPE purchaser of the loans doesn’t have the ability to amend them, I find it difficult to understand how one argues it truly owns them; that it has the risks and rewards of ownership. These securitized loans should be on balance sheet – and I think that would put the breaks on sub-prime lending.

    Jim Fuehrmeyer

    January 29, 2008 reply from Bob Jensen

    Hi Jim,

    Thank you for the reply. May I share it with the AECM and in my SPE module?

    Actually the Sixty Minutes show is very, very good with respect to your first question. The two main problems were as follows:

    1. Too many employees all along the way wanted to make a quick buck even if it screwed their employers and customers.
    2. Real estate valuation for lending purposes has always be ridden with fraud (remember the S&L fiasco back in the 1980s). The fraud simply heated up in the sub-prime bubble to a point where appraisers were valuing houses at 125% or more of any realistic market value. Buyers loved it because they could borrow more than value. Some borrowers took out second and third mortgages and pocketed the cash. Then when the real estate market took a nose dive, borrowers discovered that the value of their homes was way below what they owed on their property. They walked away from their homes rather than continue to pay off the debt.

    What the Sixty Minutes show did not stress is the inadequate accounting internal controls all along this lending chain from a house in Stockton to a bundled securitized financial instrument sold to a European bank. Internal controls were either not put in place or ignored all along the chain. And the auditors themselves signed off on these bad internal controls just like they did in the S&L bubble.

    Did the perpetrators all along the chain know the risks of these poor internal controls? Absolutely, at least up to the point where the final buyers of the financial instruments that thought mortgaged-backed securities had more value than the collateral itself. Was Merrill Lynch and the NYC banks parties to the fraud just as much as the crooks that originally brokered the fraudulent mortgages in Stockton --- Absolutely!!!!

    Bob Jensen

    Credit Default Swaps:  Another Stumbling Block for Fair Value Accounting and FAS 133/IAS 39
    The banks, as counterparties, are on the hook for billions in insurance they bought to hedge credit-derivatives positions. The insurance policies, called credit default swaps, have exploded in popularity in the last few years, with some $45 trillion outstanding. Closely watched bond guru Bill Gross of Pacific Investment Management calls banks' participation in the CDS market a ponzi scheme that may trigger losses of $250 billion. Bank disclosure is sketchy, and the market is hard to evaluate for lack of information. Credit default swaps are sold over the counter, are not traded on an exchange and are outside the close scrutiny of regulators. 'The ultimate systemic risk caused by the weakened positions of the monoline insurers is overwhelming and scary,' said CIBC World Markets analyst Meredith Whitney in a late-December research note. 'The impact will be sizable and very negative for the banks.'"
     Liz Moyer, "You Should Worry About Ambac, Forbes, January 17, 2008 --- Click Here

    Bob Jensen's fraud updates are at

    Bob Jensen's threads on credit swaps can be found under "Credit Derivative and Credit Risk Swap" at

    SEC reaches settlement with Monster's McKelvey for stock options backdating
    McKelvey caused Monster to misrepresent in its periodic filings and proxy statements filed with the Commission that all stock options were granted at the fair market value of the stock on the date of the award, when that was not the case. McKelvey also caused Monster to file materially misstated financial statements with the Commission in its Forms 10-K and 10-Q that did not recognize compensation expense for the company's stock option grants, as required by generally accepted accounting principles. As a result, Monster overstated its aggregate pretax operating income by approximately $339.5 million, for fiscal years 1997 through 2005. Although McKelvey did not receive backdated options, he benefited from the scheme by granting backdated options to four individuals that he personally employed, including three pilots and a mechanic. Under the settlement, McKelvey will be permanently enjoined from violating Section 17(a) of the Securities Act of 1933, and Sections 10(b), 13(b)(5) and 14(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13a-14, 13b2-1, 13b2-2 and 14a-9, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Additionally, McKelvey will pay $275,989.72 in disgorgement and prejudgment interest, and will be barred from serving as an officer or director of a public company. The settlement does not include a civil penalty due to overriding personal circumstances related to McKelvey. McKelvey agreed to the settlement without admitting or denying the allegations in the complaint.
    AccountingWeb, January 29, 2008 ---

    Bob Jensen's threads on options backdating are at

    How do accounting rules differ for the Britney Spears Economy versus the traditional corporate world economy?

    January 24, 2008 message from David Albrecht [albrecht@PROFALBRECHT.COM]

    Perhaps I've stumbled onto something.

    A week ago I mentioned that the topic we were working on didn't seem that sexy to me, and a class really laughed. Since then I've been occasionally mentioning the term "sexy accounting" and it still seems to have legs in getting a laugh.

    Now, should I ever want to deliver on sexy accounting I need something sexy. Any ideas?

    Dave Albrecht

    January 27, 2008 reply from Bob Jensen

    Hi David,

    Britney Spears isn't just a pop icon and tabloid regular. According to Portfolio magazine, she may also be a major economic engine. Portfolio magazine's Duff McDonald discusses "the Britney economy."

    Duff McDonald, "The Economics of Britney Spears," NPR, January 21, 2008 ---

    You might then launch into how accounting for the Britney Spear's economy differs from that of the traditional corporate GAAP economy. For example, the basis of corporate GAAP is still historical cost accounting with selected modifications such as the accounting for financial instruments and derivative financial instruments.

    In Britney's economy (and for any other set of financial statements) GAAP disallows historical cost. Exit value accounting is required for personal financial statements.

    You might then launch into why personal financial statements are more sexy.

    Bob Jensen


    "IRS Names Four New Frivolous Claims to Avoid," SmartPros, January 15, 2008 ---

    The four new frivolous claims pertain to the following:
    • Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
    • Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
    • A nonexistent "Mariner's Tax Deduction" (or the like) related to invalid deductions for meals.
    • Certain instances of misuse or excessive use of the section 6421 fuels credit.

    An individual or group may not avoid paying their fair share of taxes by making "frivolous" legal arguments. The IRS publicizes these frivolous claims to help taxpayers understand the law and avoid penalties.

    Continued in article

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

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

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

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

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

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

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

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

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

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

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

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

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

    . . .

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

    Continued in article

    Jensen Comment
    I inclined to think that more people evade taxes than Becker and Posner suggest, although this evasion has declined due to added reporting of revenues, particularly 1099 forms for miscellaneous income. In the United States, the IRS estimated in 2007 that Americans owed $345 billion more than they paid, or about 14% of federal revenues for FY2007. But these estimates are very soft numbers based largely on intense audits of a miniscule proportion of taxpayers filing returns ---


    You can learn a lot about taxation at
    Also see

    Bob Jensen's taxation helpers are at

    The FEI has a new 16-page fraud checklist that can be downloaded for $50. Access to an online database is $129 --- Click Here

    "New research provides resources on fraud prevention and financial reporting," AccountingWeb, January 18, 2008 ---

    Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International (FEI), has announced the release of two important new pieces of research designed to aid public company management and corporate boards in the efficient evaluation of their assessment of reporting issues and internal controls. A new FERF Study, entitled "What's New in Financial Reporting: Financial Statement Notes from Annual Reports," examines disclosures from 2006 annual reports for the 100 largest publicly-traded companies which used particularly innovative techniques to clearly address difficult accounting issues. The study identifies and analyzes recent reporting trends and common practices in financial statements.

    The report illustrates how companies addressed specific accounting issues recently promulgated by the Financial Accounting Standards Board (FASB), and by the Securities and Exchange Commission (SEC), and in doing so, uncovered a number of trends, which included:
    • Most of the disclosures selected appear to have been developed specifically for a company's own operations and industry standards, rather than "boilerplate" disclosures.
    • Four accounting areas identified with a considerable variation in disclosures. The examples cited in these areas used innovative techniques to clearly address difficult accounting issues.
      1. Commitments and contingencies
      2. Derivatives and financial instruments
      3. Goodwill and intangibles
      4. Revenue recognition
  • Twenty-five out of 100 filers in the 2006 reporting season reported tangible asset impairments as a critical accounting policy.
  • Many companies report condensed consolidating cash flows statements as part of their segment disclosures, although not required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

    To further facilitate use of this report as a reference tool, all of the financial statement footnotes gathered for the study are available to members on the Financial Executives International Web site.

    "FERF undertook this study to provide our members with an illustration of how companies have used innovative techniques to clearly address difficult accounting concerns," said Cheryl Graziano, vice president, research and operations for FERF. "Recent accounting issues publicized by the FASB and the SEC have had a direct impact on members of the financial community, and the report shows that many companies are taking action."

    "We hope that all financial executives can utilize the report as both a quick update to summarize recent trends in the most annual reporting season, as well as a reference to address common accounting issues. The convenience of the online database will provide executives with a readily handy tool when drafting their own annual reports," said Graziano.

    A second piece of research by FEI, entitled the "FERF Fraud Risk Checklist," provides boards of directors and management with a series of questions to help in assessing the potential risk factors associated with fraudulent financial reporting and the misappropriation of assets. These questions were developed from a number of key sources on financial fraud and offer executives a single framework in which to evaluate their company's reporting, while providing a sample structure for management to use in documenting its thought process and conclusions.

    "Making improvements to compliance with Sarbanes Oxley is a daily practice for financial executives, and the first step in efficient evaluation of internal controls is the proper assessment of potential exposures or risks associated with fraud," said Michael Cangemi, president and CEO, Financial Executives International. "Through conversations with members of the financial community, we learned that, while this type of risk assessment is a routine skill for auditors, many members of management are not always familiar with this concept. This checklist combines knowledge from the leading resources on fraud to help financial management take a proactive step in evaluating their company's practices and identifying areas for improvement."

    The annual report study, including the full report and access to the online database, and the fraud checklist, are available for purchase on the FEI Web site

    Bob Jensen's threads on fraud are at

    From "Smart Stops on the Web," Journal of Accountancy, January 2008 ---


    What does it take to become a CPA these days? Follow a few New Jersey Society of CPAs student members, who are chronicling their trials, tribulations and triumphs on the society’s Exam Cram blog. Browse the archives to read Scott Sandford’s journey as he studied for and took the CPA Exam while working at Deloitte, or join the NJSCPA’s new student recruit, Priscilla Jenkins of Merrill Lynch & Co. in Pennington, N.J., as she sits for part of the exam in February. Also take some time to read Tomorrow’s CPA, a monthly
    e-newsletter for accounting students, written by accounting students, on the NJSCPA’s Students and Educators site (

    January 14, 2008 message from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

    Here's a link to a very interesting recent speech by SEC Chairman Chris Cox -

    Among other things he says:
    "So to sum up, this is what you need to know from the SEC's standpoint: IFRS is coming. XBRL is coming. And mutual recognition is coming."

    From this and many other recent activities at the SEC, FASB, Congress and elsewhere, it appears that both IFRS and XBRL are nearer than some might have imagined.  And educators should be taking these developments into consideration now, or may be left behind.

    Denny Beresford


    SEC releases new XBRL analytical tool
    XBRL US, Inc., the nonprofit consortium dedicated to the adoption of XBRL (eXtensible Business Reporting Language), a technology standard for the reporting of financial and business information in the U.S., strongly supports the Securities and Exchange Commission's launch of an online, interactive tool that allows investors to instantly extract, compare, and analyze executive compensation for the largest 500 companies in the United States . . . This tool relies on the power of XBRL for the compensation data and underscores the flexibility and usefulness of "tagged" data. The SEC announcement comes a year after it adopted stricter rules on executive pay disclosure that now require more detail in annual shareholder proxy statements. The new application uses XBRL data created by the SEC and allows investors and researchers to immediately create reports showing salary, bonus, stock awards, option awards, non-equity incentive plan compensation, change in pension value, and other compensation figures for executives at the top 500 companies.
    "SEC releases new XBRL analytical tool," AccountingWeb, January 10, 2008 ---

    Bob Jensen's threads on XBRL are at

    Bob Jensen's video demos of XBRL are at

    Student News from the AccountingWeb ---

    GAAP on Tap

    January 18, 2008 message from Neal Hannon []

    Hi Bob, I thought this article would be interesting for AECM, especially the part about being free for the first year.



    "GAAP on tap," by Andrew Osterland, Financial Week, January 16, 2008 ---

    The giant, amorphous mass that is U.S. GAAP has been tamed and is now available for your viewing pleasure.

    The Financial Accounting Standards Board officially launched a website yesterday that codifies the reams of standards, opinions and guidance that comprise generally accepted accounting principles in the United States. The site includes pronouncements from FASB, the American Institute of Certified Public Accountants (AICPA) and the Emerging Issues Task Force, along with authoritative content and interpretations by the SEC. The information is organized into accounting topics—90 of them in all.

    Like most things related to accounting rules, the codification project has been a long time coming. The building of the database, a pet project of FASB Chairman Robert Herz, was commenced in 2004.

    The website is intended to help corporate practitioners and auditors comply with accounting rules and principles that have become increasingly voluminous and complex. “This should be a substantial improvement for people from a research point of view,” said Tom Hoey, director of the codification project.

    FASB has set a one-year verification period. During that time, constituents can use the database for free and provide feedback on whether it accurately reflects U.S. GAAP. It is not intended, said Mr. Hoey, as a free forum for carping about accounting practices. “The idea is not for people to submit whether they like particular standards, but whether the codification reflects existing GAAP,” he said.

    After the feedback process is complete, the board is expected to formally approve the codification as the “single source of authoritative U.S. GAAP,” with the exception of SEC guidance. Any literature not included at that point will be considered non-authoritative.

    Barry Melancon, president and CEO of the AICPA, hailed the completion of the database. “For a long time, many users have said that GAAP is confusing. The codification represents a simplification of the enormous body of accounting standards,” he said in a statement. “It renders GAAP more understandable and accessible for research.”

    The site can be accessed at FASB has not yet determined whether it will charge users a fee to access the database after the one-year verification period is complete. That decision may require a comment period of its own.

    "Bye-bye, GAAP? Not yet SEC’s Cox says international standards still years away for U.S. biz ," by Nicholas Rummell,  Financial Week, January 16, 2008 --- or Click Here

    While the push toward merged accounting standards has gained considerable momentum in recent months, finance chiefs may not need to start boning up on principles-based accounting—yet. In fact, Securities and Exchange Commission chairman Christopher Cox stated last week that U.S. generally accepted accounting principles (GAAP) aren’t going away anytime soon.

    Speaking at an American Institute of Certified Public Accountants conference, Mr. Cox said the Financial Accounting Standards Board will not be replaced for many years. He said that the current push merely aims to converge U.S. accounting standards with international ones. “I worry that people think there is something imminent here,” he said. “U.S. GAAP is deeply entrenched in the United States.”

    Mr. Cox stressed that there are too many imperfections in international accounting standards to switch wholesale to IFRS at this point. Additional work must be done—including changing language in the Sarbanes-Oxley Act—before the SEC would be able to recognize the International Accounting Standards Board as the sole accounting regulator.

    That’s probably good news for Robert Herz, chairman of FASB. Last month, Mr. Herz cautioned against switching to international standards too swiftly. “We have to get beyond just common accounting standards, we have to get to a common reporting system,” he said. “Standards are a big element of this, but it requires common application of the standards, common disclosures, audit practices, regulatory review, training. We ain’t there yet.”

    Nevertheless, some finance executives say the switch to international standards could pay unexpected dividends. “We see this as more of an opportunity if this [convergence] trend continues,” said PepsiCo controller Peter Bridgman. About 30 of the company’s reporting entities are already using IFRS. “We will be able to set up regional accounting centers,” noted Mr. Bridgman, “be able to consolidate training onto one platform, and we can simplify our auditing processes.”

    Comments like that may explain, in part, why the SEC has been working to end the need for companies to reconcile their financial reports between the two standards. The commission is now considering a plan that would allow U.S. companies to use IFRS. In November, the regulatory agency voted to allow foreign companies raising capital in U.S. markets to include addendums explaining the differences between IFRS and U.S. GAAP.

    Another sign of convergence: The International Accounting Standards Board late last week published revised rules on mergers and acquisitions. The new rules basically realign IASB’s standards for M&A with U.S. GAAP. The new standards take effect in July 2009, though companies can adopt them sooner.

    During his speech at the AICPA meeting, Mr. Cox noted that the fledgling XBRL reporting format—more widely embraced in Europe—goes hand in hand with the shift to international accounting standards. An internal cost-benefit study by the SEC of a two-year pilot program, in which companies were allowed to voluntarily file using XBRL taxonomies, is expected to be completed by the end of February.

    “IFRS is coming,” the SEC chairman said. “XBRL is coming. And mutual recognition [of foreign exchanges and securities regulators] is coming.”

    Interview with Sir David Tweedie
    "Tweedie's Best of Breed," Accountancy, January 18, 2008 ---
    Excerpt from IASPlus, January 18, 2008 ---

    The January 2008 issue of Accountancy magazine includes an interview with IASB Chairman Sir David Tweedie titled Tweedie's Best of Breed. In the interview, Sir David comments on some of the key events relating to IFRSs in 2007, including:
    • eliminating the IFRS reconciliation in the United States
    • US consideration of allowing domestic companies to use IFRSs
    • the recent ICAEW study that found widespread benefits of adoption of IFRSs in Europe
    • progress on convergence with FASB
    • success in engaging stakeholders in IASB's due process
    • efforts to maintain the IASB 'brand' and ensure that assertions of compliance with IFRSs are made only when there is compliance with full uo-to-date IFRSs

    Click to download Accountancy's Interview with Sir David (PDF 202k). The article is copyrighted by Wolters Kluwer (UK) Ltd. We are grateful to Accountancy Magazine for giving us permission to post it on IAS Plus. Here's an excerpt:

    An excerpt from the Accountancy interview with Sir David Tweedie:

    [Removing the SEC's reconciliation requirement for IFRS filers in the USA] is not the only feather in the cap for the Scot who is helping to make the vision of a global set of reporting standards a reality. Something of a watershed year, 2007 also saw the 108th country sign up to International Financial Reporting Standards. And more are queuing up behind – Canada, Israel, Chile, Japan are waiting in the wings. "We reckon by about 2011 there'll be 150 – all the major economies", he announces triumphantly.

    Not only that, but the world's largest capital market, the US, is on the verge of coming on board – also by 2011, hopes Tweedie.

    "Six years ago, when we started, if someone said, 'Describe where you'll be in 2007', I wouldn't have described this. This is much, much better than we thought, and it's happened much, much faster – and that's indicative of the markets and globalisation in general."

    Bob Jensen's threads on the difference between U.S. and International GAP are at

    Big Four Dominance OK?

    From SmartPros, January 14, 2008 ---

    The Government Accountability Office issued a report last week on the concentration of the audit market, stating there is "no compelling need for immediate action" to reduce the concentration of the Big Four accounting firms and increase competition in the industry.

    According to the report, 82 percent of large public companies saw their choice of auditor as limited to three or fewer firms, and about 60 percent viewed competition in their audit market as insufficient.

    But despite the limited choice, large public companies surveyed said that smaller accounting firms lacked the capacity and technical expertise they wanted in an auditor. In comparison, most small public companies reported being very satisfied with their auditor choices available to them.

    The report also found that most smaller accounting firms are not interested in large public company clients. The minority of firms that are interested in expanding their clientele to the larger companies said increasing their name recognition and finding qualified staff are their most significant challenges.

    While audit fees have increased significantly since Sarbanes-Oxley's passage, the higher cost is associated with increased audit quality, according to public company officials surveyed by GAO.

    Academics and business groups have proposed to reduce audit market concentration and address challenges facing smaller accounting firms, including capping auditors' liability and creating an office to share technical expertise.

    2003 audit concentration study conducted by GAO confirmed Big Four dominance and the reluctance of smaller firms to audit large companies.

    Last April, Grant Thornton CEO Edward Nusbaum called for an audit concentration study, arguing "more accounting firms means greater competition and increases quality and lowers costs to the end user."

    Bob Jensen's threads on professionalism in accountancy are at

    "SEC Advisory Panel Recommends Wholesale Changes in U.S. Accounting," by Judith Burns (Dow Jones Newswires), SmartPros, January 14, 2008 --- 

    A Securities and Exchange Commission advisory group voted Friday to approve recommendations for wholesale changes in U.S. accounting and financial reporting.

    Among the changes unanimously backed by the panel: base U.S. accounting rules on transactions and activities to avoid special treatment for various industries, limit corporate financial restatements to meaningful mistakes, and provide more protections from lawsuits or SEC enforcement actions for companies and auditors exercising "reasonable" professional judgment.

    Any move away from industry-specific accounting would be a big change likely to touch off controversy, according to MFS Investment Management Co. Chairman Robert Pozen, who heads the SEC advisory panel on improvements to financial reporting. Pozen predicted "all hell's going to break loose" once the group issues the recommendation, intended to reduce complexity and make corporate results more comparable from industry to industry.

    Shielding companies and auditors from second-guessing or lawsuits when they exercise professional judgment is sure to be controversial as well. The advisory group urged the SEC to issue a policy statement or a legal "safe harbor" protecting firms and auditors from enforcement action or legal challenge provided they acted in good faith and made a "reasoned" evaluation based on relevant information available to them at the time.

    On restatements, the advisory group called for companies to correct errors when they are discovered and issue restatements only for material items, an approach that would reduce the number of restatements.

    The group also wants to shed more light during the so-called "dark period" after a company announces that it has found a material error but before it issues a restatement of prior financial results. The advisory panel called for companies to describe the error, the periods that might be affected and that are under review, and give an estimated range of the error's size, any impact it might have and what management plans to do to prevent such errors in the future.

    Deloitte Touche Chief Executive James Quigley, who serves on the panel, called the recommended approach "a giant step forward" and panel member Scott Evans, a senior vice president for asset management at TIAA-Cref, a pension fund for teachers, said expanded disclosure "will definitely help investors."

    The group also endorsed a compromise proposal on data-tagging technology by calling for the 500 largest U.S. public companies to furnish reports to the SEC using data tags for part of the financial statements. The tags, akin to bar codes for individual items in a financial report, make it easy to find and compare corporate results. That, advocates say, will benefit investors, analysts and regulators.

    The SEC advisory panel is slated to meet again in March and issue a final recommendation this summer.

    January 15, 2008 reply from Paul Polinski [paulp_is@YAHOO.COM]

    I recommend that everyone read the draft discussion memo and/or stream the web cast of the 1/11/2008 meeting when it becomes available; the URL is 

    The draft has a lot more detail about what the committee has in mind, and justifications for its recommendations.

    Bob Jensen's threads on controversies in the setting of accounting standards are at

    Should "principles-based" standards replace more detailed requirements for complex financial contracts such as structured financing contracts and financial instruments derivatives contracts?

    From IASPlus, January 15, 2008 ---

    'Big-6' joint paper on principles-based accounting standards

    The six largest global accounting networks, including Deloitte Touche Tohmatsu, have jointly published a paper on Principles-Based Accounting Standards. The paper was launched to coincide with a global public policy symposium in New York, hosted by the firms. The paper, which sets out six key criteria for principles based standards, was debated in a panel that included IASB Chairman Sir David Tweedie and FASB Chairman Robert Herz at the symposium. The six attributes proposed for principles based standards are:

    1. Faithful presentation of economic reality
    2. Responsive to users' needs for clarity and transparency
    3. Consistency with a clear Conceptual Framework
    4. Based on an appropriately defined scope that addresses a broad area of accounting
    5. Written in clear, concise, and plain language
    6. Allows for the use of reasonable judgment
    Click to Download the Paper (PDF 607k). In releasing the paper, the CEOs of the six global accounting networks said:

    Over the past several years, a growing dialogue has developed about the future of financial reporting and the public company audit profession. In order to advance that dialogue, during the past year, we have engaged in discussions with stakeholders around the world on a number of issues critical to the longterm strength and stability of global capital markets.

    In these talks, we have been struck by the breadth of support for International Financial Reporting Standards (IFRSs) as a single set of high-quality, accounting standards that ultimately can be used around the world. Stakeholders indicated their support for IFRS in part because it is more principles-based than US GAAP. There was, however, a lack of consensus on the key characteristics of principles-based standards.

    Preliminary decisions by SEC's financial reporting review panel

    In June 2007, the US Securities and Exchange Commission formed the SEC Advisory Committee on Improvements to Financial Reporting to study the causes of complexity in the US financial reporting system and to recommend ways to make financial reports clearer and more beneficial to investors, reduce costs and unnecessary burdens for preparers, and better utilize advances in technology to enhance all aspects of financial reporting. See our News Story of 28 June 2007. Last week, the Advisory Committee held its third meeting and reached some tentative decisions on changes that it might propose. The Committee's deliberations were based on a Draft Decision Memo (PDF 878k) that sets out the definition and causes of compelxity and proposals for reducing complexity. The Committee tentatively agreed to support the following proposals, among others:

    • GAAP should be based on transactions and activities, rather than industries, and most existing industry-specific guidance should be eliminated.
    • GAAP should provide for a single method of accounting for a given transaction or event and should not normally include accounting policy choices.
    • The FASB should be the source of interpretations of US GAAP, not other parties.
    • The SEC and others should acknowledge that principles-based standards may result in a reasonable amount of diversity in practice, and the SEC's compliance and enforcement activities should not require restatements that may not be material to users/investors, so long as the basic principles in US GAAP are followed. The SEC should promulgate guidance on materiality in this context.
    • Prior period financial statements should only be restated for errors that are material to those prior periods.
    • The SEC and PCAOB should provide more protections from lawsuits or SEC enforcement actions for companies and auditors exercising reasonable professional judgment.
    • The SEC should require XBRL filings by the 500 largest domestic listed companies, followed by evaluation and a decision whether to extend this to all listed companies.
    • The SEC should provide guidance on corporate websites that provide financial information to investors.
    The Advisory Committee will meet again in March and plans to publish its final recommendations in third quarter 2008. Click to go to the Advisory Committee's Web Page on the SEC website.

    Jensen Comment
    Because of the inconsistencies that will arise with "principles-based" standards, I'm agin em! But that's like spitting into the wind!

    Principles-Based Versus Rules-Based Accounting Standards

    "Standing on Principles In a world with more regulation than ever, can the accounting rulebook be thrown away?" byAlix Nyberg Stuart, CFO Magazine September 01, 2006 ---

    As Groucho Marx once said, "Those are my principles, and if you don't like them...well, I have others."

    Groucho would enjoy the heated stalemate over principles-based accounting. Four years after the Sarbanes-Oxley Act required the Securities and Exchange Commission to explore the feasibility of developing principles-based accounting standards in lieu of detailed rules, the move to such standards has gone exactly nowhere. ad

    Broadly speaking, principles-based standards would be consistent, concise, and general, requiring CFOs to apply common sense rather than bright-lines. Instead of having, say, numerical thresholds to define when leases must be capitalized, a CFO could use his or her own judgment as to whether a company's interest was substantial enough to put a lease on the balance sheet. If anything, though, accounting and auditing standards have reached new levels of nitpickiness. "In the current environment, CFOs are second-guessed by auditors, who are then third-guessed by the Public Company Accounting Oversight Board [PCAOB], and then fourth- and fifth-guessed by the SEC and the plaintiffs' bar," says Colleen Cunningham, president and CEO of Financial Executives International (FEI).

    Indeed, the Financial Accounting Standards Board seems to have taken a principled stand in favor of rule-creation. The Board continues to issue detailed rules and staff positions. Auditors have amped up their level of scrutiny, in many cases leading to a tripling of audit fees since 2002. And there is still scant mercy for anyone who breaks the rules: the annual number of restatements doubled to more than 1,000 between 2003 and 2005, thanks to pressure from auditors and the SEC. The agency pursued a record number of enforcement actions in the past three years, while shareholder lawsuits, many involving accounting practices, continued apace, claiming a record $7.6 billion in settlements last year and probably more in 2006.

    Yet the dream won't die. On the contrary, principles are at the heart of FASB's latest thinking about changes to its basic accounting framework, as reflected in the "preliminary views" the board issued in July with the International Accounting Standards Board (IASB) as part of its plan to converge U.S. and international standards. Principles-based accounting has been championed by FASB chairman Robert Herz, SEC commissioner Paul Atkins, SEC deputy chief accountant Scott Taub, and PCAOB member Charlie Niemeier in various speeches over the past six months. And they're not just talking about editing a few lines in the rulebook.

    "We need FASB, the SEC, the PCAOB, preparers, users, auditors, and the legal profession to get together and check their respective agendas at the door in order to collectively think through the obstacles," says Herz. "And if it turns out some of the obstacles are hardwired into our structure, then maybe we need some legal changes as well," such as safe harbors that would protect executives and auditors from having their judgments continually challenged. Even the SEC is talking about loosening up. Most at the agency favor the idea of principles instead of rules, says Taub, even knowing that "people will interpret them in different ways and we'll have to deal with it."

    Standards Deviation Why lawmakers are so set on principles and what exactly those principles would look like is all a bit hazy right now. "Post-Enron, the perception was that people were engineering around the accounting rules. We looked around the world and saw that England had principles-based accounting and they didn't have scandals there, so we decided this was the way to go," recounts CVS Corp. CFO David Rickard, a Financial Accounting Standards Advisory Committee (FASAC) member.

    But Rickard considers the approach "naive." His firsthand experience with principles-based accounting, as a group controller for London-based Grand Metropolitan from 1991 to 1997, left him unimpressed. "We had accounting rules we could drive trucks through," he says.

    Would such a change be worth the trouble? A recent study that compared the accrual quality of Canadian companies reporting under a relatively principles-based GAAP to that of U.S. companies reporting by the rules suggests that there may be no effective difference between the two systems. The authors, Queen's University (Ontario) professors Daniel B. Thornton and Erin Webster, found some evidence that the Canadian approach yields better results, but conclude that "stronger U.S. oversight and greater litigation risk" compensate for any differences.

    U.S. GAAP is built on principles; they just happen to be buried under hundreds of rules. The SEC, in its 2003 report on principles-based accounting, labeled some standards as being either "rules" or "principles." (No surprise to CFOs, FAS 133, stock-option accounting, and lease accounting fall in the former category, while FAS 141 and 142 were illustrative of the latter.) The difference: principles offer only "a modicum" of implementation guidance and few scope exceptions or bright-lines. ad

    For FASB, the move to principles-based accounting is part of a larger effort to organize the existing body of accounting literature, and to eliminate internal inconsistencies. "Right now, we have a pretty good conceptual framework, but the standards have often deviated from the concepts," says Herz. He envisions "a common framework" with the IASB, where "you take the concepts," such as how assets and liabilities should be measured, and "from those you draw key principles" for specific areas of accounting, like pensions and business combinations. In fact, that framework as it now stands would change corporate accounting's most elemental principle, that income essentially reflects the difference between revenues and expenses. Instead, income would depend more on changes in the value of assets and liabilities (see "Will Fair Value Fly?").

    For its part, the SEC has also made clear that it does not envisage an entirely free-form world. "Clearly, the standard setters should provide some implementation guidance as a part of a newly issued standard," its 2003 report states.

    The catch is that drawing a line between rules and principles is easier said than done. Principles need to be coupled with implementation guidance, which is more of an art than a science, says Ben Neuhausen, national director of accounting for BDO Seidman. That ambiguity may explain why finance executives are so divided on support for this concept. Forty-seven percent of the executives surveyed by CFO say they are in favor of a shift to principles, another 25 percent are unsure of its merits, and 17 percent are unfamiliar with the whole idea. Only 10 percent oppose it outright, largely out of concern that it would be too difficult to determine which judgments would pass muster.

    A Road to Hell? As it stands now, many CFOs fear that principles-based accounting would quickly lead to court. "The big concern is that we make a legitimate judgment based on the facts as we understand them, in the spirit of trying to comply, and that plaintiffs' attorneys come along later with an expert accountant who says, 'I wouldn't have done it that way,' and aha! — lawsuit! — several billion dollars, please," says Rickard.

    Massive shareholder lawsuits were a concern for 36 percent of CFOs who oppose ditching rules, according to CFO's survey, and regulators are sympathetic. "There are institutional and behavioral issues, and they're much broader than FASB or even the SEC," says Herz, citing "the focus on short-term earnings, and the whole kabuki dance around quarterly guidance."

    Continued in article

    Controversies in the setting of accounting standards ---

    "FASB Launches GAAP Codification System:  Free access granted, feedback requested," SmartPros, January 16, 2008 --- 

    The Financial Accounting Standards Board on Tuesday launched the one-year verification phase of its Accounting Standards Codification, a system that reorganizes the thousands of U.S. GAAP pronouncements into accounting topics using a consistent structure.

    he Codification organizes U.S. GAAP by 90 topics or issues on a new Web site, FASB expects the new structure and system will reduce the amount of time and effort required to solve an accounting research issue, improve usability of the literature thereby mitigating the risk of noncompliance with standards, and provide real-time updates as new standards are released. In addition, the system should become the authoritative source of literature for the completed XBRL taxonomy.

    The structure includes all accounting standards issued by a standard-setter within levels A through D of the current U.S. GAAP hierarchy, including FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related literature. It excludes governmental accounting standards.

    "For a long time, many users have said that GAAP is confusing," said Barry Melancon, AICPA president and CEO. "The Codification represents a simplification of the enormous body of accounting standards. It renders GAAP more understandable and accessible for research."

    During the one-year verification period, FASB will make the Codification available through a new Web-based research system to solicit feedback from constituents to confirm that the Codification accurately reflects existing GAAP for nongovernmental entities.

    After receiving feedback, FASB is expected to formally approve the Codification as the single source of authoritative U.S. GAAP, other than guidance issued by the Securities and Exchange Commission. The Codification will include authoritative content issued by the SEC, as well as selected SEC staff interpretations.

    Upon approval by FASB, all accounting standards (other than the SEC guidance) used to populate the Codification will be superseded. At that time, with the exception of any SEC or grandfathered guidance, all other accounting literature not included in the Codification will become nonauthoritative.

    Users who register at are able to review the Codification free of charge and provide specific content-related feedback at the individual paragraph level as well as general system-related feedback. During the verification period, Codification content will be updated for changes resulting from constituent feedback and new standards.

    FASB provides a 52-page document on how to use the new tool at:

    Bob Jensen's threads on accounting theory are at

    "New Keyboard Saves Accountants Time," SmartPros, January 18, 2008 ---

    Accountants handling data entry have a new best friend: a keyboard with the tab key located to the right of the number pad, rather than clear across the keyboard.

    Wayne Wilson understands an accountant's pain. He's worked for 33 years in data entry, including 21 years as a CPA. Those years showed him how inefficient the regular keyboard setup is for accountants.

    "When you're entering data, you type all the numbers with your right hand and then have to stop and use your left to hit the tab key," Wilson said. "It's completely inefficient."

    He looked for two years for other keyboards with a different setup, but couldn't find any. That's when he decided to build and patent his own keyboard.

    Wilson's R-Tab keyboard  has the tab key on the right of the number pad, making it easier and more efficient for accountants to use.

    "Instead of having to interrupt the left hand and hit the tab key, you don't even have to break the typing stride of your right hand," Wilson said. "The tab key is right there."

    Wilson's not the only one who's had the idea of altering a keyboard to help accountants. Microsoft had built a keyboard that had the tab key where the num lock key typically is, but Wilson found that it was actually slower than a regular keyboard.

    "I built one of those Microsoft keyboards, and it tested slower than normal," Wilson said. "No point in using a keyboard that is supposed to be more efficient when it really turns out to be less so."

    The R-Tab keyboard, on the other hand, was considerably more efficient when tested.

    "When we tested, the keyboard improved efficiency by 15 percent to 27 percent," Wilson said. "And the longer people used it, the more their productivity increased."

    According to Wilson, accountants who use the R-Tab keyboard will find that they're able to finish data and number entry in a much quicker manner.

    "If you use it, you're going to fall in love with it," Wilson said. "You won't be able to go back to the old keyboard."

    Once again the R-Tab Keyboard homepage is at

    Tax Lesson for the Month

    "Why Are Tax Burdens So Different in Different Developed Countries?" by Richard Posner, The Becker-Posner Blog, January 27, 2008 ---

    In all 20 countries except the Netherlands, the tax burden has increased since 1975, though in some countries, such as the United States, the increase has been slight--only 2.6 percent. In others, however--Denmark Greece, Italy, Portugal, South Korea, Spain, and Turkey--it has exceeded 10 percent. Spain's increase has been the greatest, at 18.3 percent, followed by Italy's at 17.3 percent and Turkey's at 16.5 percent.

    The OECD report explains that the increase in tax burden is due to increased revenues from "direct" taxes--income (including payroll) and corporate taxes--rather than from "indirect" taxes such as VAT, sales taxes, and other excise taxes. Even though most countries, including the United States, have cut income and corporate tax rates, the cuts have been more than offset by increases in income and corporate profits; of course the cuts may have helped generate those increases. The OECD favors indirect taxes because they tax only consumption, whereas direct taxes tax income that is saved, and thus discourage investment.

    Continued in article

    "Why Are Tax Burdens So Different in Different Developed Countries?" by Nobel Laureate Gary Becker, The Becker-Posner Blog, January 27, 2008 ---

    The burden of taxes to a country depends not only on the fraction of its gross domestic product GDP that are collected as tax revenue –the data shown in Posner's chart- but on many other factors as well. Since my comment is brief I will confine my discussion to the link between tax burdens, the level of government spending, and the structure and incidence of taxes.

    It is not possible to separate tax burdens from government spending. Obviously, as Posner makes clear, how governments spend their tax revenues makes an enormous difference to the functioning of an economy. In addition, however, the level of government spending also affects the tax burden. If spending exceeds the amount collected in taxes, the excess spending must be financed by an increase in government debt (I ignore inflationary printing of money). Interest payments on the higher government debt have to be financed by higher taxes in the future, so the full tax burden is determined not by tax revenues alone but also by government spending. Senator McCain has justified his initial opposition to the Bush tax cuts by indicating that they were not combined with cuts in government spending -in fact, just the opposite occurred.

    The tax burden depends in addition on the type of taxes used and their structure. What economists call the "excess burden" is measured by the difference between the cost to those paying taxes and the revenue collected by government. The excess burden is zero for a head tax, which is an equal tax per person, since the amounts paid to governments from such a tax equals the cost to taxpayers. Taxes on income do have an excess burden because they distort taxpayers' decisions toward greater leisure. The higher the marginal tax rate, the greater are these and other distortions induced in labor supply, and hence the greater the excess burden of income taxes.

    To reduce distortions, broader and flatter taxes are better because then marginal tax rates are lower. Rudy Giuliani has proposed a flat and rather broad income tax with a highest marginal tax rate of only 30 percent to complement the present complicated income tax system. Consumption taxes, such as value added taxes, have lower excess burdens than income taxes. Like an income tax, a general tax on consumption does discourage work in favor of leisure essentially because individuals can avoid both consumption and income taxes by taking additional leisure since leisure is not taxed. However, an income tax has other distortions as well since income is both taxed when received, and also taxed again when the savings out of income produces additional income. Income taxes in effect tax savings twice, while consumption taxes only tax savings once, when they are spent. In order to reduce this double taxation of savings from income taxes, the US and other countries allow families to save in ways that are free of income taxes until the savings are spent, such as through saving with IRAs.

    There is a natural tendency to assume that the burden of taxes falls on persons or companies that mail the tax checks into the government. To show why this is generally false, consider a 10 percent tax on capital that initially reduces returns on capital from say 8 percent to 7.2 percent. This initial impact is clearly on owners of this capital, who are generally wealthier than the average individual. Over time, however, the capital stock would fall because companies reduce their investments in reaction to the lowering of after-tax returns on investments due to the capital tax. As the capital stock falls, the after-tax return would begin to increase because the productivity of capital is higher when capital is scarcer relative to labor. The capital stock would continue to fall essentially until after-tax returns climb back up to the 8 percent level they were at before the tax on capital was imposed.

    Since studies confirm that in the long run owners of capital get about the same rate of return that they would have without any taxes on capital, who then pays the capital tax in the long run? The answer is not capital but labor because wages and earnings are lower when workers have less capital to work with. Owners of capital continue to send in the checks to pay a capital tax, but the negative response of investments to a capital tax shifts the burden of a capital tax away from capital to labor. That eventually labor pays a tax on capital even though it is placed on capital explains why economists generally oppose long-term taxes on capital even though in the short run capital taxes have many desirable properties. Investment tax credits, accelerated depreciation, and low taxes on capital gains are some of the ways that the effective long run tax on capital is reduced toward zero.

    "Smart Stops on the Web," Journal of Accountancy, January 2008 ---



    Want to offer financial planning services to your clients? Visit the AICPA’s Personal Financial Planning Center for PFP resources to get you started. Click the “Events” tab to register for Web seminars, including “The Mathematics of Estate Planning” on Jan. 16, or research the requirements and application process for the Personal Financial Specialist credential. In the upcoming months, the section’s Executive Committee will roll out a suite of updated practice guides on various PFP technical and practice management topics, available to PFP Section members and PFS credential holders at no cost.


    Individuals and financial institutions can buy and redeem Treasury securities, including bills, notes, TIPS and series I and EE savings bonds, directly from the U.S. Treasury at this Smart Stop. Not confident enough to invest yet? Enter the “Individuals” or “Institutions” sections, and then use the “Research Center” to access a glossary of terms and in-depth coverage of auctions and products or to take a guided tour of the site. There is also a calendar of upcoming Treasury auctions, as well as auction regulations and recent results.


    At this “Guide to Financial Fitness,” author Erik Folgate chronicles his experience with getting into and out of debt, providing recent graduates and young professionals with the education needed to be financially successful. Follow the “11 Principles” series, which includes tips on saving money for the unexpected and creative ways to boost your income, or read articles on financial planning, such as “Don’t Let Your Fears Stand in the Way of Investing” and “Stay Positive When Paying Off Debt.”




    Developed by the Employee Benefits Security Administration, this site’s fiduciary adviser provides an overview of the basic fiduciary responsibilities applicable to private-sector retirement plans under the Employee Retirement Income Security Act (ERISA). Designed for accountants and other third-party service providers, the adviser uses a series of questions to determine whether a retirement plan falls under ERISA requirements, and if so, what they are. This Smart Stop also has a comprehensive listing of ERISA resources at


    Whether you’re planning a vacation months in advance or jetting off for a last-minute business trip, use Yapta as “Your Amazing Personal Travel Assistant.” Registered users tag their desired or frequently traveled flights, then are alerted by e-mail when the prices of those routes drop. Already bought a ticket? If you booked through an airline’s Web site, submit your confirmation code or forward Yapta your confirmation e-mail. If the ticket price drops below what you paid, the site will let you know whom to call and what to say to receive a refund for the difference or a travel voucher.


    What does it take to become a CPA these days? Follow a few New Jersey Society of CPAs student members, who are chronicling their trials, tribulations and triumphs on the society’s Exam Cram blog. Browse the archives to read Scott Sandford’s journey as he studied for and took the CPA Exam while working at Deloitte, or join the NJSCPA’s new student recruit, Priscilla Jenkins of Merrill Lynch & Co. in Pennington, N.J., as she sits for part of the exam in February. Also take some time to read Tomorrow’s CPA, a monthly
    e-newsletter for accounting students, written by accounting students, on the NJSCPA’s Students and Educators site (


    Jim Hamilton, a principal analyst at Wolters Kluwer Law & Business and a leading contributor to the CCH Federal Securities Law Reporter, emphasizes SEC rulemaking, international, federal and state regulations, and industry trends on his “World of Securities Regulation” blog. Under “Tools,” click “Posts by Topic” for a complete listing of the blog’s auditing, financial reporting, Sarbanes-Oxley and PCAOB coverage, or look for new posts on principles-based regulations, the mortgage lending market and international issues.

    —Megan Pinkston


    A Government Website for Helpers in Personal Finance is the U.S. government's website dedicated to teaching all Americans the basics about financial education. Whether you are planning to buy a home, balancing your checkbook, or investing in your 401k, the resources on can help you do it better. Throughout the site, you will find important information from 20 federal agencies government wide.
    My ---

    The AICPA's Financial Literacy Helper Site ---

    Bob Jensen's finance helpers ---

    From the IRS Site
    If you earned $54,000 or less in 2007, you can use Free File to prepare your taxes online at the IRS website

    e-file Using a Computer

    IRS e-file is the fastest most accurate way to file your taxes.

    Filing your federal tax return using IRS e-file is easier and more convenient than ever before! Most taxpayers can use this program. Access to a personal computer and the Internet is necessary to conveniently, quickly and safely transmit your return and receive proof of acknowledgement. You decide the manner of tax preparation to quickly and conveniently e-file your Form 1040, Form 1040A, Form 1040EZ or Form 1040SS (PR) using a personal computer. You can:

    • Purchase commercially available software from a retailer,
    • Download software from an Internet site and prepare your return offline, or
    • Prepare and file your return online.

    NOTE: IRS cannot compete with private enterprise and does not offer free e-file software or direct filing. A number of companies, tested and approved by the IRS, do offer free use of their software and free filing, while others will charge nominal fees. Terms and conditions vary among companies and you are advised to review the information on each company's web site and choose the product that is right for you.

    Anyway you choose, it's a simple process. As always, IRS e-file means a more accurate return, fast refunds - in half the time compared to filing a paper return - and even faster and safer with Direct Deposit! IRS e-file also offers the convenience of filing your tax return early and delaying payment up until the due date.

    You can choose to file a completely paperless tax return by using a Self-Select PIN as your signature. With a Self-Select PIN, there is no paper signature document to send in!

    And don't forget, in 37 states and in the District of Columbia you can simultaneously e-file your Federal and state tax returns. Your personal computer and IRS e-file does it all!

    NOTE: Prior Year 1040 series returns may not be filed electronically.

    Continued in article ---,,id=98294,00.html

    Tax Cut Only Provides Free Online Preparation (Federal Only) for Taxpayers Earning Less Than $52,000 ---
    Others must pay ---

    Turbo Tax Appears More Generous for "Simple" Federal Returns --- Click Here

    January 4, 2008 reply from John Stancil [jstancil@VERIZON.NET]

    TaACT ( ) has its standard 1040 product free for download. The deluxe is $12.95 and the ultimate (which includes stat) is $19.95. The standard only allows one return, with the others you can do multiple returns. E-file is free.

    John Stancil

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

    IRS Site Map ---

    FAQs and answers ---

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

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

    Taxpayer Advocate Service ---

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

    Is it wise to advise older widows, widowers, and divorcees to live in sin?

    Answer: Probably Yes!

    "Senior Marriage Penalty," AccountingWeb, February 8, 2006 ---

    “It’s galling that they have a marriage penalty for seniors, when they’ve addressed it for everyone else,” Lonell Spencer, a 77-year-old retiree from Arcadia, Connecticut, told the Hartford Courant. The penalty he’s referring to is the tax on Social Security income, which applies to every dollar of income over $32,000 for married couples, compared to $25,000 for a single taxpayer. Recent efforts to eliminate marriage penalties for most married taxpayers have not significantly affected married seniors because the taxable income threshold is only slightly higher for couples than it is for singles. Further, the median family income for those over 50 is $35,200, according to AARP’s annual report, The State of 50+ America, indicating that more than half the families would be subject to the Social security income tax if one or more family members are receiving Social Security benefits.

    For nearly 50 years, Social Security benefits were tax-free; then in 1983 the rules were changed because the Social Security system was underfunded. Since then, while inflation adjustments have more than doubled the standard deduction and personal exemption write-offs, the tax on income from Social Security benefits has not been adjusted for inflation. If it had been, the Hartford Courant reports, then the threshold would be $50,000. Instead, the tax actually begins accelerating at $44,000 for married couples. According to The State of 50+ America,the real income of those over 50 has not increased since 1999. In fact, real income for 2004, the last period for which The State of 50+ America collected data, is actually lower than the real income levels of 1999.

    The issue is not just about taxing Social Security benefits. The law was intended to tax “high income” taxpayers but increasingly affects middle-income seniors, the Fresno Bee reports. The State of 50+ America found that more than half the income of 50.1 percent of Americans over 62 comes from sources other than Social Security. In addition, the financial assets of those over 65, adjusted for inflation, increased by 94 percent between 1992 and 2004, and more Americans over 50 are employed, The State of 50+ America reports.

    Unlike other “marriage penalties,” the senior marriage penalty has not received much attention. That is likely to change as baby boomers reach retirement age and get caught by the tax, Mark Luscombe, principal tax analyst for CCH, a Wolters Kluwer company, told the Fresno Bee. A search of the AARP web site however, indicates that either the issue has not yet become a significant issue to boomers or that it has not been incorporated into the organization’s lobbying efforts to date.

    Bob Jensen's taxation helpers are at

    Is Fair Tax Advocate Mike Huckabee a "fair tax" huckter?

    From The Wall Street Journal Accounting Weekly Review on January 11, 2008

    Fair Tax Flaws
    by Jerry Bowyer
    The Wall Street Journal

    Jan 08, 2008
    Page: A20
    Click here to view the full article on ---

    TOPICS: State Income Tax, Tax Avoidance, Tax Evasion, Tax Laws, Tax Reform, Taxation

    SUMMARY: In this opinion page item, Mr. Bowyer writes in a funny and entertaining way about the difficulties in replacing the current U.S. income tax system with a sales tax, as currently proposed by one candidate for president, Mike Huckabee. For example, he writes, "There is a large category of economic activity designed to avoid sales taxes -- it's called smuggling. We don't hear that word much anymore, because we're not a sales-tax or tariff-based system anymore. Increase sales taxes to a combined state and federal 30%, up from a state-based 6% now, and watch the dodging begin." Mr. Bowyer is chief economist of BenchMark Financial Network and a CNBC contributor.

    CLASSROOM APPLICATION: Taxation and the impact of the political process on it.

    1.) What is tax reform? Why is it a topic on the current presidential campaign trail?

    2.) What is presidential candidate Mike Huckabee's proposal to reform U.S. tax laws? How might a national sales tax provide tax reform?

    3.) In this Opinion page article, Mr. Bowyer refers to raising sales tax rates from 6% to 30%--what is the meaning of these two rates?

    4.) What is the "complexity argument" in relation to our current tax code? In sum, what is Mr. Bowyer's response to this argument?

    5.) What is the notion of exempting businesses from a national sales tax? How likely is that proposal to come to fruition?

    6.) Mr. Bowyer lists installment sales, inventory accounting, wholesale purchases and eBay transactions as items leading to problems in applying sales tax laws. For each, what do you think is the problem or questionable tax treatment? Do these areas lead to problems in our current tax reporting system? Explain.

    Reviewed By: Judy Beckman, University of Rhode Island

    Republican Candidates Spar in New Hampshire Forum
    by Alex Frangos
    Jan 07, 2008
    Online Exclusive

    Review & Outlook: McCain's Mojo
    by WSJ Opinion Page Editors
    Jan 09, 2008
    Page: A14

    "FairTax Flaws," by Jerry Bowyer, The Wall Street Journal, January 8, 2008; Page A20 ---

    If talk show hosts ran the world, we'd have a national sales tax. We'd have no immigration, and we would have long ago carpet-bombed the entire Middle East. We'd also have something called "fair trade," which means no real trade at all.

    But they don't run the world; they just pretend that if they did, everything would be great. I would be a lot more confident that this was true if I didn't know so many talk show hosts. I would be even more confident if they had really run anything of consequence before. But I do, and they haven't.

    I mention this because last week Mike Huckabee won the Iowa caucus partly on a movement incubated in large part on radio talk shows: the FairTax. If words were deeds, then life would be great. We could simply declare that by switching from a federal income tax to a national retail sales tax, tax cheating would end, code complexity would be a thing of the past, and illegal immigrants would start paying taxes. And, of course, we'd switch into high economic growth -- forever.

    The problem is that none of this would happen. People would simply switch from cheating on income taxes to cheating on sales taxes.

    Small vendors often fail to withhold sales taxes. Buyers cheat on sales taxes now. They often fail to pay taxes on interstate catalogue sales. They buy some goods in black markets.

    This doesn't happen much because sales taxes are much lower than income taxes, but if that were reversed, consumers would cheat more. Look at cigarettes. Organized crime sells smokes on the black market in jurisdictions that impose high cigarette taxes.

    There is a large category of economic activity designed to avoid sales taxes -- it's called smuggling. We don't hear that word much anymore, because we're not a sales-tax or tariff-based system anymore. Increase sales taxes to a combined state and federal 30%, up from a state-based 6% now, and watch the dodging begin.

    The immigrant stuff is nonsense on stilts. Let me ask you this: If they're here illegally, why won't they also buy and sell goods on the black market?

    Then there's the complexity argument. You don't think the lobbyists and lawyers will get involved in this, looking for exemptions on houses, medical services and education? You're going to put a 30% tax on my home purchase, and my doctor visits and my kids' tuition? Yeah, great idea.

    And what about business transactions? If you tax business-to-business transactions, then you'll set off a wave of corporate consolidation. Instead of buying from a supplier at a 30% markup, I'll just buy my supplier and be tax free. And what about financial firms like Goldman Sachs, which spend most of their money on payroll and investments, and very little on goods and services? Goldman will pay taxes on what? Paper clips?

    If, on the other hand, we institute the most widely supported version of the national sales tax, then business transactions are to be exempted. In addition to the colossal job of selling America on a zero tax rate for business, a rigorous definition of the term "business transaction" would have to be provided. What is a business transaction, exactly? I write articles for publication. I consider it a hobby. Sometimes I get paid. Should I pay sales taxes on money I earn for writing this article?

    What about the Internet connection I used to send it? Should readers pay taxes on the connection they use to read my article? What if a reader uses it for his job? If he is a financial adviser, then no, but otherwise it's yes? Will I pay taxes on gas I used to drive to the studio to talk about this article? What if I stop to buy my son Jack a birthday present on the way home?

    I'm a recovering tax accountant (and not a good one at that) and I've got 50 ways to avoid this tax swimming around in my head. What about the really smart guys?

    And what about transition rules? There are millions of transactions that are, at any given moment, occurring over an extended time. The most obvious example is retirement. I defer taxes now, for retirement later. So I make a decision based on an income-tax regime that doesn't make any sense in a sales-tax regime. Do I get my money back? What about Roth IRAs? I pay income taxes on the money now, and then pay again later when I spend it during retirement? Double taxation isn't really a "fair" tax, is it?

    These are the easy-to-see cases, but what about the incredible variety of tax questions raised by installment sales? Inventory accounting? Wholesale purchases? Ebay?

    None of this matters anyway. We will never make this change. The 16th Amendment will not be repealed in favor of a tax vigorously opposed by an army of restaurants, pubs and retail stores. It's hard to get good ideas through the ratification process; imagine how hard it would be to push this stinker. In point of fact, the FairTax serves one main purpose right now: It gives Mr. Huckabee the chance to sum up his economic plan in one line. And that just doesn't seem, well, fair.

    Bob Jensen's taxation helpers are at

    January 29, 2008 message from Dr. David Sauer []

    Dear Dr. Jensen,

    I am writing you to share details about an exciting program co-sponsored by the University of Dayton and the United Nations Global Compact.  The program is R.I.S.E. (Redefining Investment Strategy Education), a Global Student Investment Forum that will be held March 27-29, 2008 on the University of Dayton campus.  This will be the 8th year for this first-of-its-kind, completely interactive event between leading students, faculty, and Wall Street professionals.  In addition, R.I.S.E. will host the first ever NASDAQ Remote Closing Bell Ceremony to be held on a university campus.

    R.I.S.E. VIII will include:

    ·   Keynote presentations by internationally renowned industry leaders discussing the Economy; Markets; Federal Reserve Perspective; Corporate Governance and Responsibility; Political, Regulatory and Legislative Issues; Leadership Perspective; Global Perspective; and Wall Street Perspective

    ·   Breakout sessions focusing on Alternative Investments, Ethics, Fixed Income, Hedge Funds, International Markets, Portfolio Manager Perspectives, and Risk Management, to name a few

    ·    Portfolio Management and Security Analysis Workshops

    ·   Career Strategies Forum where recent college graduates working in asset management and capital markets will explore techniques for succeeding in a competitive marketplace  

    ·   Multiple opportunities for networking and sharing of best practices with faculty and students from other leading investment programs

    ·   An optional student-managed portfolio competition in growth, value, blend, alternative, and fixed income styles of management at both the undergraduate and graduate levels (registration deadline for the optional portfolio competition is February 8, 2008) 

    The University of Dayton hosts this international forum in order to provide schools with an opportunity to share best practices in investment education.  Last spring, more than 1,700 participants representing 218 colleges and universities from 58 countries participated in this unique educational event.  In addition, portions of R.I.S.E. were broadcast to 900,000 professionals in 140 countries, making R.I.S.E. the largest student investment conference in the world.  I hope that you and your students will join us in Dayton as we build on the work of the past seven years.  Together, we can raise the bar on investment education!  

    A link to the R.I.S.E. VIII brochure is listed below.  The early registration rates are $200 for students and $300 for faculty until March 1, 2008.   The registration fee includes three continental breakfasts, two lunches, a networking reception and five breaks.  Optional Thursday and Friday evening dinners are also available for a nominal fee.  I hope you will consider participating at R.I.S.E. VIII on March 27-29, 2008.  To register, visit our web site at  If you have any questions, please email or call 937-229-3384.


    David A. Sauer, Ph.D.
    Managing Director and Program Co-Chair
    of Dayton R.I.S.E. VIII Forum

    Web link to R.I.S.E. VIII Brochure:

    IMPORTANT:  Early Registration Closes March 1, 2008 and online registration closes March 14, 2008.

    We are sending this information to you in hopes that you will share it with your colleagues and students that might have an interest in the financial services industry.  If you would like to be removed from our invitation list, please reply to this email with the subject REMOVE and you will be removed immediately.  Thank you.


    "My Life in Crime: Chronicles of a Forensic Accountant," by William C. Barrett III, SmartPros, January 2008 ---

    The profession of forensic accounting is like any other industry niche: You evolve to a plateau where track record and honed skills permit you to "hold out" as a professional. Then, like any other business, you starve a lot before you become an overnight sensation -- in demand and truly at the top of your practice in providing value -- both on scene and in the courtroom.

    Here are a few of the cases I have directed to give you an idea of how well-developed professional skepticism prevails to reveal the fraudster -- usually a well-educated, respected member of the community, quite adept at concealing and perpetuating fraud by bending others to his or her will.

    Continued in article at

    Bob Jensen's fraud updates are at

    Accounting Videos on YouTube ---
    Search for “campbell79” or “susancrosson”
    Links forwarded by Richard Campbell

    Fascinating Statistics ---

    Construction Cost Accounting Books ---

    The task of defending macroeconomics (in PhD core courses in economics) was left to Michael Woodford, a professor of political economy at Columbia University. Mr. Woodford argued that all economists should learn the dynamic-modeling tools that are taught in macroeconomics courses. "A lot of students find that the macro sequence is the hardest part of the core," he said. "That makes me reluctant to believe that we could radically reduce the length of it and people would still get the important parts."
    See Below

    "Economists Call for Rethinking of Core Course Work for Ph.D.'s in the Discipline," by David Glenn, Chronicle of Higher Education, January 7, 2008 --- 

    Doctoral programs in economics should radically redesign the grueling first-year course work known as "the core," several prominent scholars said on Friday during a panel here at the annual meeting of the American Economic Association.

    Many elements of the core were set in stone shortly after World War II, and the courses have not always evolved to make room for emerging fields of study, the scholars said. They also complained that the courses tend to emphasize the abstract manipulation of equations, with little sustained attention given to real-world problems and data.

    "The core needs to have a certain element of fun," said Bo E. Honoré, a professor of economics at Princeton University. "I think it's important that students come out of the first year with a sense of excitement about economics and excitement about doing research."

    Putting Macroeconomics in Its Place

    The panelists were far from unanimous, however, about exactly how the core should be changed. One thorny topic was macroeconomics, which traditionally occupies roughly a third of the course work in the core. Macroeconomics­—the study of how fiscal and monetary policies shape economies at the national level—was the terrain on which the most famous battles of mid-20th-century economics were fought. But if it seemed natural to devote a huge portion of the curriculum to macroeconomics in 1950, not all scholars feel the same way today.

    "It's not clear why macroeconomics is given an entire year in the core," said Susan C. Athey, a professor of economics at Harvard University and the winner of the 2007 John Bates Clark Medal, which is given biennially to a distinguished economist under the age of 40. "I think macro is very important, but it's not clear to me that monetary theory is more important for everyone to learn than, for example, theories about social-entitlement programs or international trade."

    Most of the other five panelists agreed with Ms. Athey, though all conceded that macroeconomics has been a source of models and techniques that have shaped the entire discipline.

    The task of defending macroeconomics was left to Michael Woodford, a professor of political economy at Columbia University. Mr. Woodford argued that all economists should learn the dynamic-modeling tools that are taught in macroeconomics courses. "A lot of students find that the macro sequence is the hardest part of the core," he said. "That makes me reluctant to believe that we could radically reduce the length of it and people would still get the important parts."

    Facts vs. Tools

    On a broader level, the panelists disagreed about whether the core should be imagined as a set of crucial, substantive facts or as a package of techniques that would allow students to take more specialized courses in the second year and begin their own research. Ms. Athey argued for the latter approach. "Instead of trying to think about every possible thing that every economist should know," she said, "we should be thinking about, What's really going to help these second-year courses move along very quickly into the substance?"

    The panel was organized by David C. Colander, a professor of economics at Middlebury College who has written extensively on doctoral education in the field. "I just teach undergraduates," he said, "so I can sort of throw bombs over toward the graduate schools and try to raise questions that otherwise can't be raised."

    In The Making of an Economist, Redux (Princeton University Press, 2007), Mr. Colander argued that doctoral programs have improved in some respects during the last 20 years. (For example, he sees much more engagement today with empirical data and public-policy problems.) But he also argued for substantial changes in the core, which he views as dominated by sterile mathematics. "If ... creativity and economic reasoning, not mathematics, is the core of economics," he wrote, "then it seems reasonable that the core courses should focus somewhat more on creativity and economic reasoning and somewhat less on technique."

    Despite their broad agreement about the need to redesign the core, no one on the panel was hopeful that departments would embrace the idea. Ms. Athey said that the status quo seems to be rigidly entrenched, even at elite universities that one might expect would be open to new approaches.

    Derek A. Neal, a professor of economics at the University of Chicago, agreed, and he used economic metaphors sardonically to make the point. "All of us who have ever been chairs know that there's a huge agency problem that individual departments have to face," he said. Faculty members can be persuaded to say, ""'Yes, I understand that the core is a public good,'" he said. "But after you give them the property rights to teach in the first year, getting them to behave as if it's a public good and not a private platform is—well, it's another problem in agency theory."

    But even if revising the core would require bruising departmental battles, that didn't stop one panelist from dreaming about a much larger change.

    "We actually shouldn't be thinking narrowly in terms of first-year economics," said Edward L. Glaeser, a professor of economics at Harvard University. "We should be thinking about first-year social science. The whole division between economics, sociology, and political science feels like a hangover from the 19th century. So many of the people in our profession are working on problems that have traditionally been seen as part of sociology or political science.

    "We should probably be rethinking from the ground up all of the social sciences," Mr. Glaeser continued. "A more attractive model might be a first-year course sequence that trains a social scientist to work on anything, rather than having separate first-year economics, sociology, and political science course work. But maybe that's a discussion for a different panel."

    Jensen Comment
    Almost the same core is required in accounting and finance doctoral programs. In fact when I went to Stanford we had to take the same core core courses alongside economics doctoral students. The only difference was, the final examinations in these courses were part of their doctoral qualifying examinations. For us they were just final examinations. We had to go back to the Graduate School of Business to take three separate doctoral qualifying examinations called "internal, external, and major" qualifying examinations. We always felt like we were burdened with more qualifying examinations than students in Stanford's Economics Department doctoral program.

    I repeatedly harp on the the narrowness of current accounting doctoral programs in virtually all universities in the U.S. and most other universities in the world that have accounting doctoral programs. If economics doctoral programs can change, why can't we change?

    “How many professors does it take to change a light bulb?”
    Answer: “Whadaya mean, “change”?”
    Bob Zemsky, Chronicle of Higher Education's Chronicle Review,  December 2007 --- Click Here

    The schism between academic research and the business world: 
    The outside world has little interest in research of the business school professors
    If our research findings were important, there would be more demand for replication of findings

    "Business Education Under the Microscope:  Amid growing charges of irrelevancy, business schools launch a study of their impact on business,"
    Business Week
    , December 26, 2007 --- 

    The business-school world has been besieged by criticism in the past few months, with prominent professors and writers taking bold swipes at management education. Authors such as management expert Gary Hamel and Harvard Business School Professor Rakesh Khurana have published books this fall expressing skepticism about the direction in which business schools are headed and the purported value of an MBA degree. The December/January issue of the Academy of Management Journal includes a special section in which 10 scholars question the value of business-school research.

    B-school deans may soon be able to counter that criticism, following the launch of an ambitious study that seeks to examine the overall impact of business schools on society. A new Impact of Business Schools task force convened by the the Association to Advance Collegiate Schools of Business (AACSB)—the main organization of business schools—will mull over this question next year, conducting research that will look at management education through a variety of lenses, from examining the link between business schools and economic growth in the U.S. and other countries, to how management ideas stemming from business-school research have affected business practices. Most of the research will be new, though it will build upon the work of past AACSB studies, organizers said.

    The committee is being chaired by Robert Sullivan of the University of California at San Diego's Rady School of Management, and includes a number of prominent business-school deans including Robert Dolan of the University of Michigan's Stephen M. Ross School of Business, Linda Livingstone of Pepperdine University's Graziado School of Business & Management, and AACSB Chair Judy Olian, who is also the dean of UCLA's Anderson School of Management. Representatives from Google (GOOG) and the Educational Testing Service will also participate. The committee, which was formed this summer, expects to have the report ready by January, 2009. reporter Alison Damast recently spoke with Olian about the committee and the potential impact of its findings on the business-school community.

    There has been a rising tide of criticism against business schools recently, some of it from within the B-school world. For example, Professor Rakesh Khurana implied in his book From Higher Aims to Hired Hands (, 11/5/07) that management education needs to reinvent itself. Did this have any effect on the AACSB's decision to create the Impact of Business Schools committee?

    I think that is probably somewhere in the background, but I certainly don't view that as in any way the primary driver or particularly relevant to what we are thinking about here. What we are looking at is a variety of ways of commenting on what the impact of business schools is. The fact is, it hasn't been documented and as a field we haven't really asked those questions and we need to. I don't think a study like this has ever been done before.

    Continued in article

    Bob Jensen's threads on the growing irrelevance of academic accounting research are at

    The dearth of research findings replications ---

    Bob Jensen's threads on higher education controversies are at

    January 2, 2008 reply from David Albrecht [albrecht@PROFALBRECHT.COM]


    AACSB chair Judy Olian (dean, UCLA school of biz) is quoted as saying that 39% of Fortune 500 CEOs are graduates of a businesss school.

    I am surprised that this is such a low number. Why shouldn't this number be very much higher? Given that corporations are run by professional managers, why wouldn't the college degree that prepares professional managers show up with greater frequency in the profile of the top professional managers?

    I don't know how it is possible for this group of deans to design a research study to show the relevance of business school education. Well, I don't know how it would be possible for anyone to design it. Isn't relevance a judgment call?

    David Albrecht

    January 2, 2008 reply from Bob Jensen

    Hi David,

    CEOs rise up from many walks of life, especially engineering, economics, law, and the specialties of an industry such as chemistry, medicine, agriculture, etc. CFOs and CAOs are another matter entirely.

    As far as research impacts are determined, subjective judgment is certainly a huge factor but there are other indicators. Can executives recall a single article published in The Accounting Review or other leading academic accounting journal upon which academic reputations are built? Can executives name one author who received the AAA Seminal Contributions Award or any other academic award of major academic associations?

    One indicator in accounting is practitioner membership in the American Accounting Association. The AAA started out as primarily an association for accounting practitioners and teachers of accounting. For four decades practitioners were heavily involved in the AAA and the longest-running editor of The Accounting Review was a practitioner (Kohler) --- 

    All this changed with what Jean Heck and I call the "perfect storm" of the 1960s. Since then, practitioner membership steadily declined in the AAA and readership of academic accounting research journals plummeted to virtually zero. Practitioners still send us their money and their recruiters, but leading academic researchers like Joel Demski warn against accounting researchers catching a "vocational virus" and cringe at aiming our research talent toward practical problems of the profession for which we seemingly have no comparative advantage due to our rather useless accountics skills.

    You can read much of the history of this schism at 

    The schism is probably greatest in accounting and the smallest in finance where there practitioners have relied more on research findings and fads in economics and finance journals.

    Some universities are more focused on industry than others. Harvard certainly has tried very hard in this regard, but Harvard's case method research just cannot pass the hurdles of the journal referees of our leading accounting research journals.

    And even accounting academics are bored with the (yawn) articles appearing in our academic research journals. Ron Dye is probably one of our most esoteric accountics researchers (his degrees are in mathematics and economics even though he's an "accounting professor"). Ron stated the following at 

    Begin Quote from Ron Dye***************

    About the question: by and large, I think it is a mistake for someone interested in pursuing an academic career in accounting not to get a phd in accounting. If you look at the "success" stories, there aren't many: most of the people who make a post-phd transition fail. I think that happens for a couple reasons. 1. I think some of the people that transfer late do it for the money, and aren't really all that interested in accounting. While the $ are nice, it is impossible to think about $ when you are trying to come up with an idea, and anyway, you're unlikely to come up with an idea unless you're really interested in the subject. 2. I think, almost independent of the field, unless you get involved in the field at an early age, for some reason it becomes very hard to develop good intuition for the area - which is a second reason good problems are often not generated by "crossovers."

    The bigger thing - not related to the question you raise - but maybe you could add to the discussion is that there are, as far as I can tell, not a lot of new ideas being put forth by anyone in accounting nowadays (with the possible exception of John Dickhaut's neuro stuff). In most fields, the youngsters are supposed to come up with the new problems, techniques, etc., but I see a lot more mimicry than innovation among newly minted phds now.

    Anyway, for what it's worth....

    End Quote from Ron Dye****************


    Perhaps the AACSB can make some progress toward bridging the schism. But I leave you with a forthcoming quote in the January 6 edition of Tidbits:

    Question "How many professors does it take to change a light bulb?"

    Answer "Whadaya mean, "change"?" Bob Zemsky, Chronicle of Higher Education's Chronicle Review, December 2007

    Reviving Journalism Schools and Business Schools
    For as long as doomsayers have predicted the decline of civic-minded reportage as we know it, reformers have sought to draft a rewrite of the institutions that train many undergraduate and graduate students pursuing a career in journalism. Criticisms of journalism schools have ranged from questioning whether the institutions are necessary in the first place (since many journalists, and most senior ones, don’t have journalism degrees) to debating the merits of teaching practical skills versus theory and whether curriculums should emphasize broad knowledge or specialization in individual fields . . . The sessions were part of an effort to evaluate the function of journalism schools in an age of new media and the public’s declining faith in the fourth estate: the Carnegie-Knight Initiative on the Future of Journalism Education, which in 2005 enlisted top institutions in the country to bolster their curriculums with interdisciplinary studies and expose students to different areas of knowledge, including politics, economics, philosophy and the sciences. The initiative, funded by the Carnegie Corporation of New York and the John S. and James L. Knight Foundation, also works with journalism schools to incubate selected students working on national reporting projects.
    Andy Guess, "Reviving the J-School," Inside Higher Ed, January 10, 2008 ---

    There are an increasing number of scholarly videos on this topic at
    BigThink:  YouTube for Scholars (where intellectuals may post their lectures on societal issues) ---

    Some of you may benefit by analyzing similarities and differences between the above tidbit on J-Schools versus the AACSB effort to examine needs for change in B-Schools.

    Key AACSB sites include the following:



    From The Wall Street Journal Accounting Weekly Review on January 11, 2008

    Talking B-School: Teaching the Gospel of Management
    by Ron Alsop
    The Wall Street Journal

    Jan 08, 2008
    Page: B4
    Click here to view the full article on

    TOPICS: Accounting, Internal Controls

    SUMMARY: Professor Charles Zech, director of the Center for the study of Church Management and a professor of economics at Villanova University, discusses their new MBA program. The article mentions internal controls needed in church management practices.

    CLASSROOM APPLICATION: Familiarity with specific types of MBA programs, general educational issues, and the issues of internal control evident in recent church and clergy scandals can be discussed in an introductory accounting, accounting information systems, or auditing class.

    1.) You may have seen advertisements for MBA programs targeted to golf course or ski resort management. In general, why are different industries targeted in management education?

    2.) Why did Villanova University decide to offer an MBA in church management? In what ways will Villanova target the MBA program?

    3.) Not all universities may be able to offer this targeted MBA. Why not?

    4.) What is transparency in financial reporting? How do examples given in the article indicate insufficient transparency in church management and reporting practices?

    5.) What internal control weaknesses are identified in the article? List each weakness and describe a solution for the weakness.

    6.) How do properly functioning internal controls support sufficient transparency in financial reporting?

    7.) What is the concept of stewardship? How is it discussed in the objectives of financial reporting in both U.S. and international conceptual frameworks of accounting?

    8.) How do the comments in the article make it clear that focusing on stewardship better fits church management than does focusing on other objectives and qualitative characteristics identified in the conceptual framework of accounting?

    Reviewed By: Judy Beckman, University of Rhode Island

    "Teaching the Gospel of Management Program Aims to Bring Transparency To Church Business Practices," by Ron Alsop, January 8, 2008; Page B4---

    The reputations of many Roman Catholic parishes have been tarnished in recent years, both by the priest sex-abuse scandals and a growing number of embezzlement cases. That has prompted a burgeoning movement to improve the management and leadership skills of church officials through new programs being offered primarily at Catholic universities. M.B.A. Track columnist Ron Alsop talked recently with Charles Zech, director of the Center for the Study of Church Management and a professor of economics at Villanova University's School of Business in Villanova, Pa., about the launch of its master's degree in church management in May and the need for more sophisticated and more transparent business practices in parishes and religious organizations.

    WSJ: Why did Villanova decide to create a master's degree in church management?

    Dr. Zech: We find that business managers at both the parish and diocesan level often have social work, theology or education backgrounds and lack management skills. While pastors aren't expected to know all the nitty-gritty of running a small business, they at least need enough training in administration to supervise their business managers. Before starting the degree, we ran some seminars in 2006 and 2007 as a trial balloon to see if folks were interested enough to pay for management education. The seminars proved to be quite popular, drawing people from all over the country, including high-level officials from both Catholic dioceses and religious orders.

    How have the sexual-abuse scandals and embezzlement cases put a spotlight on poor management and governance practices?

    The Catholic Church has some real managerial problems that were brought to light by the clergy abuse scandals. It became quite obvious that the church isn't very transparent and accountable in its finances. Settlements had been made off the books with abuse victims and priests had been sent off quietly for counseling, to the surprise of many parishioners. Then came a string of embezzlement cases. Our center on church management surveyed chief financial officers of U.S. Catholic dioceses in 2005 and found that 85% had experienced embezzlements in the previous five years. One of our recommendations was that parishes be audited once a year by an independent auditor. There clearly are serious questions about internal financial controls at the parish level, and we are now doing research on parish advisory councils and asking questions about such things as who handles the Sunday collection and who has check-writing authority. Does the same person count the collection, deposit the money and then reconcile the checkbook? Obviously, you're just asking for problems if it's the same person; you can imagine the temptations.

    Beyond the need for better financial controls, what other management issues should get more attention from church leaders?

    Performance management is definitely an important but neglected area. That's partly because it's a very touchy issue. Who is going to appraise the performance of a priest or a church worker who is also a member of the parish? There's great reluctance on the part of the clergy to be appraiser or appraisee. You have to view the parish as a family business and understand that it's like evaluating members of your family.

    How will Villanova's church management degree be different from what other universities have started offering?

    Some schools combine standard business classes with courses from theology and other departments. But if you're taking a regular M.B.A. finance class, you're learning about Wall Street and other things that aren't really relevant. What we're doing is creating courses specifically for this degree program, so there are both business and faith-based elements in every class. For example, the law course will deal with civil law relative to church law so students understand the possible conflicts. The accounting course will cover internal financial-control issues for churches. And the human-resource management class will include discussion of volunteers, a big part of the labor force for parishes.

    Have you encountered any resistance from church officials?

    Yes, some people say a church is not a business. But I point out that we still have to be good stewards of our resources -- our financial and human capital -- to carry out God's work on Earth. When you use management terms with bishops, they often get turned off. But when you use the word stewardship, it has more impact because it's in the Bible. Jesus talked about the importance of our being good stewards who take care of our talents and other gifts.

    Is the degree restricted to Catholic clergy and lay managers?

    The courses will have a Catholic focus because as a Catholic university, our mission is to try to meet the needs of our community. But the degree is certainly not restricted to Catholics. Every church has similar managerial problems. In fact, we're eager for other Christian denominations to become part of the program and provide some valuable contributions to class discussions. A typical course, however, would not apply to other religions because of the different way Christian churches are organized compared with synagogues and other religious institutions.

    Why is the degree being offered primarily online, with only a one-week residency on campus?

    Since we view the market for church-management education as national and even global, a distance-learning degree will attract clergy and church workers from any part of the world who can't take off for two years to come to Villanova. In fact, we already have heard from a priest in Ireland and a Presbyterian minister in Cameroon interested in enrolling in the program.

    The church management degree costs $23,400. How can clergy and church workers afford it?

    We expect the vast majority of students to be supported by a diocese or other religious or social service organizations. We will chop 25% off the price for anyone who can get their organization to pay a third of the tuition. That cuts a student's out-of-pocket costs by about half. We're trying to send the message to religious leaders that this is important and that they should invest in management training.

    Bob Jensen's threads on controversies in higher education are at

    "The Theory Fetish: Too Much of a Good Thing? Management journals demand contributions to theory. But slavish devotion to theory inhibits other valuable research," by Donald C. Hambrick, Business Week, January 13, 2008 --- Click Here 

    Recently I was at a brown-bag seminar where a pair of faculty colleagues in our business school's department of management sought advice about a preliminary research idea. We all quickly agreed that their research question was fascinating and would be of great interest to both academics and practicing managers. The only problem: The presenters had no theory.

    No theory! Everyone knows that the top scholarly journals in management require without exception that manuscripts make contributions to theory. And so we spent the entire session that day going through our collective mental catalogues of theories. Theories that I'd never heard of were proposed. Things got a little frenzied: "Good God, there must be a theory that we can latch onto," someone said.

    Losing the Trees for the Forest

    Because these researchers are savvy about academic publishing, their project likely will appear some day in a leading journal. But the straightforward beauty of the original research idea will probably be largely lost. In its place will be what we too often see in our journals and what undoubtedly puts non-scholars off: a contorted, misshapen, inelegant product, in which an inherently interesting phenomenon has been subjugated to an ill-fitting theoretical framework.

    Many nice things can be said about theory. Theories help us organize our thoughts, generate coherent explanations, and improve our predictions. But they are not ends in themselves, and in academic management we have allowed obsession with theory to compromise the larger goal of understanding. Most important, perhaps, it prevents the reporting of rich detail about interesting phenomena for which no theory yet exists but which, once reported, might stimulate the search for an explanation.

    Happily, our sister disciplines in business education—accounting, finance, and marketing—are not afflicted to the extent that those of us in management are. But the breadth and variety of the subjects that fall under the category of management exceed those of the other business school academic departments; a number of MBA-granting institutions, in fact, call themselves schools of management. If management scholars fail to connect with real-life managers or management scholarship is shrugged off by managers as irrelevant—both of which happen with regularity—the credibility of all business academe suffers.

    Management's idolization of theory began after two blue-ribbon reports of the late 1950s, from the Carnegie and Ford foundations, levied withering attacks on business schools for their lack of academic sophistication. As a result, in the 1960s and 1970s schools adopted a new commitment to drawing from basic academic disciplines (e.g., economics and psychology), and to analytic rigor, science, and—above all—theory. Since then, however, other fields have relaxed their single-mindedness about theory, while management scholars have not.

    Trapped in Inertia?

    To confirm this, I recently analyzed the 120 articles published in 2005 by three leading scholarly management journals—the Academy of Management Journal, the Administrative Science Quarterly, and Organization Science. Every one contained some variation of the word "theory." In contrast, only 78% of the 178 articles published in 2005 in the Journal of Marketing, the Journal of Finance, and Accounting Review contained those words. Moreover, they appeared 18 times, on average, in each management article, but only eight times, on average, in each non-management article. Finally, about two-thirds of the articles in the management journals had section headings that trumpeted "theory," compared with one in five headings in the non-management journals.

    I must admit to uncertainty about the reason for this continuing fetish; perhaps we in management academe are simply trapped in our own inertia. But at what a cost! To illustrate, let me take a hypothetical case from another field that has nothing to do with management or business.

    Continued in article


    Great Minds in Management:  The Process of Theory Development ---

    "Cornell Theory Center Aids Social Science Researchers," PR Web, June 19, 2006 ---

    Bob Jensen’s threads on the schism between academic research and the business world ---

    "Auditing: Solving 10 problems implementing the NEW risk assessment standards," by Gary D. Zeune, AccountingWeb, January 18, 2008 ---

    Much has been written about the technical requirements of Statements on Auditing Standards No. 104-111, collectively called the Risk Assessment Standards (Risk Standards). So we'll focus on the 10 steps to effectively implement them.

    Problem #1: Retaining Your Clients
    Problem #2: Can you really issue an opinion
    Problem #3: How the Risk Standards Affect Current Practice             

    There are two major changes for most practitioners. You can no longer:

    1. Rely on just a canned audit program.
    2. Default to maximum risk.

    Problem #4: Circumvent the Risk Standards
    Problem #5: SAS 104 defines reasonable assurance as a "high level of assurance," achieved by limiting audit risk to a low level.
    Problem #6: Understanding the differences between current practice and what the Risk Standards require.
    Problem #7: Internal control evaluation has moved...

    ...from a specific part of planning up one level in audit hierarchy to Methodology to be an ongoing, constant, part of the audit process
    Problem #8: Although what management tells you is audit evidence lite, the evidence has virtually no weight if the explanation supports something material. Thus, you now are required to obtain collaborative evidence.
    Problem #9: Financial Accounting Standards Board Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information, defines materiality as, "The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement."
    Problem #10: Fraud
    Paragraph 10 of SAS 107 says, "When the auditor encounters evidence of potential fraud, regardless of its materiality, the auditor should consider the implications for the integrity of management or employees and the possible effect on other aspects of the audit.”

    How should you account for this one?
    Fair value accounting under FAS 141?   Yeah right!

    From The Wall Street Journal Accounting Weekly Review, January 18, 2008

    Behind Bank of America's Big Gamble
    by Valerie Bauerlein and James R. Hagerty
    The Wall Street Journal

    Jan 12, 2008
    Page: A1
    Click here to view the full article on ---

    TOPICS: Advanced Financial Accounting, Banking, Mergers and Acquisitions

    SUMMARY: The article describes the process of due diligence used by Bank of America and its ultimate reasoning in deciding to offer to acquire Countrywide Funding. "Terms of the deal call for Bank of America, the largest U.S. bank by market value, to give 0.1822 shares of Bank of America for each share of Countrywide. The deal could be renegotiated if Countrywide experiences a material change that adversely affects its business, but Mr. [Kenneth D.] Lewis [CEO of Bank America] said he does not anticipate that happening....Bank of America is buying a deeply troubled company, and it faces the risk that Countrywide's assets could continue deteriorating. As of Sept. 30, Countrywide's savings bank held about $79.5 billion of loans as investments. Three-quarters of those loans were second-lien home-equity loans...or option adjustable-rate mortgages....Overdue payments by Countrywide borrowers are surging....

    CLASSROOM APPLICATION: Introducing the acquisition process in business combinations, and the business combination as a solution to the problem of a struggling bank, is the best use of this article, though other topics such as the SEC's interest in Countrywide's loan loss reserves also are discussed.

    1.) What is "due diligence"? How long did it take Bank of America to complete its due diligence prior to making an offer to Countrywide Financial Corp.?

    2.) How would Bank of America's analysts model how its portfolio of loans is likely to perform in the future? Describe the components of these models.

    3.) How do you think the results of analysts' modeling impact the negotiations between Bank of America and Countrywide? How do you think they impact the accounting for the transaction when it is completed later this spring?

    4.) How does fact that Countrywide has a book value of approximately $12 billion, triple the $4 billion price to Bank of America, provide a "cushion for potential damages, settlements and other litigation costs involving mortgages that went bad"?

    5.) Why is the SEC concerned with whether Countrywide has "...set aside enough reserves to cover potential losses on the loans on its books"? In your answer, define the term "reserves" as it is used in this quote and give other words preferred by accountants for this item.

    6.) What are the terms of the offer made by Bank of America? In your answer, be sure to address the issue of a contingency in the offer.

    7.) If the contingency described in the article were to come to pass, what would be its impact on the accounting for the business combination?

    8.) What other factors besides the performance of Countrywide's current loan portfolio are likely to impact the success of the acquisition and the mortgage lending operations in the future?

    Reviewed By: Judy Beckman, University of Rhode Island

    No 'Fun': Bank of America Pulls Back
    by Valerie Bauerlein
    Jan 16, 2008
    Page: C3


    How should you account for this one?
    Fair value accounting under FAS 141?   Yeah right! ---

    This post examines the onion skin, if you will, of the new business combination standards. I'm going to explain the differences between the so-called 'purchase' method of accounting and the new 'acquisition' method. As is my habit, let's begin with a simple example.

    Assume that ParentCo acquires 70% of the outstanding shares of SubCo for $1,000. Additional facts are as follows:

    ParentCo estimates that the fair value of 100% of SubCo is $1,405: You should note that the fair value of SubCo may not ordinarily be calculated by extrapolating the purchase price paid to the remaining shares outstanding (i.e., $1,000/70% = $1,429 is not ordinarily the fair value). The reason is that a portion of the purchase price contains a payment for the ability to exercise control. In this case, the control premium would be $55, calculated as follows: ($1000 - .7($1405))/(1-.7) = $55

    It may be difficult to estimate the control premium, because it may have to be derived from an estimate of the full fair value of the acquired company, as above. But the new requirement to do so has not been controversial. That's because the larger the control premium, the lower will be goodwill. The book value of SubCo's assets and liabilities approximate their book value, except for one asset with a remaining useful life of 10 years. For that asset, the fair value exceeds the book value by $100.

    Tom then launches into a great analysis of this illustration.

    Bob Jensen's threads on intangibles and contingency issues on accountancy are at

    Bob Jensen's threads on fair value accounting are at

    From Tom Selling's Accounting Onion Blog on January 21, 2008 ---

    Fair Value v. Replacement Cost: A Working Paper

    A few weeks ago, I wrote a post entitled "FAS 157: Fair Value Has left the Station--But Is It on the Wrong Track?Walter Teets of Gonzaga University and I have converted it to a working paper.  The new title is "Does FASB Statement No. 157 Provide 'The Most Relevant Information for Financial Decision Making?'" The main changes are an expanded and improved analysis of the rules-based details of FAS 157; and a more academic style (i.e., absence of wit and biting sarcasm).

    As always, comments and suggestions, are most appreciated.  I have set up a discussion page using GroveSite (shameless plug: that's my software company) that will allow everyone to see your comments, and also, my responses.  I'm hoping to have a real dialogue that will eventually lead to a better paper.

    Bob Jensen's threads on fair value "accounting" are at

    "Avoid These Debit Card Traps:  New scams, fees, and traps to avoid," by Teri Cettina Close, Readers Digest, (Add Date) ---

    The Latest Target of Thieves When Brad Lipman took his family out for dinner in July 2006, he had no idea it would end up costing him $1,800. Lipman paid for the $60 meal with his debit card. After the waiter took the card, someone swiped it through a portable "skimmer." This handheld electronic device allowed the thief to copy Lipman's account information and security codes, and clone his card.

    Over the following week, the culprit drained Lipman's checking account and tapped into his overdraft line. He didn't realize anything was amiss until his credit union called him about some unusual charges. "It's hard to explain the feelings of violation," says Lipman, 40, owner of a lending company in Thousand Oaks, California. "Someone had their hand directly in my money."

    Many people wrongly assume that debit cards offer the same protection against fraud as credit cards. But when a debit card is stolen or copied, there's no grace period while you contest the charges. Your cash has already been electronically zapped from your checking account. And if it falls short, as Lipman's did, you could face expensive overdraft charges that your bank isn't required to repay.

    Debit cards have overtaken credit cards as Americans' plastic of choice for in-store transactions—33 percent debit, compared with 19 percent credit. Financial experts often recommend them as a money-management tool. Three years from now, debit card use will account for more than half our retail purchases, according to the Nilson Report, a payment-systems industry publication.

    Debit cards have become the latest target of thieves, and it's not just random cases like Lipman's. In early 2007, hundreds of customers of a national chain restaurant in Sioux City, Iowa, learned their debit card numbers had been stolen. Thieves made cloned cards and are using them in stores in California and northern Mexico. And in 2006, the TJX Companies, which owns T.J. Maxx and Marshalls, reported one of the largest customer-data breaches ever: 45.7 million debit and credit card numbers were stolen from the retailer's computer systems over an 18-month period. Authorities still don't fully know the scope.

    There's little you can do to predict a mass retail theft. But you can be smarter about how you use your card to avoid these and other common pitfalls. In addition to scams, hidden overdraft fees are at an all-time high, not to mention surprise holds and mismanagement traps that could land your account in the red faster than the ATM can spit out your receipt.

    Know When to Hold 'Em

    When Ann Agent of Portland, Oregon, was planning to attend a children's book publishing conference in Tulsa, Oklahoma, she booked her hotel room over the phone by debit card. She and three colleagues intended to split the bill and each pay the hotel directly at checkout time.

    Two days into the conference, Agent's husband called from home to read her a letter from her bank: Her checking account was overdrawn, and she was being charged $35 a day in overdraft fees. "I thought there had to be a mistake," Agent, 45, says. "I keep close track of my account balance."

    Turns out when Agent reserved the room, the hotel "blocked," or held, enough money in Agent's account to cover the entire four nights' stay, plus miscellaneous charges, amounting to $580. This blocked every available penny she had and caused her to overdraw. The charges weren't reversed until Agent returned home the following Monday.

    Holds are common practice in the travel and hospitality industry. They're the merchant's way of ensuring you'll pay your bill. If you rent a car, the agency could block several thousand dollars to make sure you return the vehicle. Some restaurants will place debit card holds for large parties, and a friendly bartender can put a hold on your card if you start a tab. The hold is usually removed within five business days, sometimes much sooner.

    Gas stations are notorious for holds. On a Friday morning in January 2005, Jessica Hathaway of Allentown, Pennsylvania, bought $22.29 of gas by debit. On Saturday, the 34-year-old single mother of three checked her bank balance and learned she was almost broke. Right before the gas station debited Hathaway's account for the gas, it imposed a $75 block.

    "I was living paycheck to paycheck. I didn't have much extra in my account, and this $75 charge worried me all weekend," she says. Hathaway was out of luck—and cash—until the following Tuesday, when her bank released the hold.

    The kind of hold Hathaway described is a standard preauthorization for signature (non-PIN) transactions. Stations vary widely in their hold amounts. Because Hathaway bought gas before the weekend, her hold may have taken longer than usual to clear.

    Avoid the Trap

    Leave your debit card at home when traveling. "People should use a credit card, even if they don't any other time," advises Clark Howard, consumer advocate and radio host of The Clark Howard Show. Never use a debit card any place your card is taken out of sight, like a restaurant. Book dinner reservations on a credit card. If you must use debit at a gas station—a hot spot for skimming—use your PIN inside or at the pump. Your card is safest if it stays in your hand, and typing in a PIN eliminates the hold.

    Be Wary on the Web Say you buy an MP3 player for $80 through an Internet discounter. You wait two weeks. Your music player never arrives, and now the seller is nowhere to be found.

    If you used your credit card to buy the player, you've got options. Under the terms of the Fair Credit Billing Act, your card company must remove the questionable charge from your bill while it investigates. The law says you're liable for up to $50, but you'll most likely end up owing nothing.

    If you paid by debit card, you're doubly out of luck: no pocket tunes for you, and your money is already gone. Under the Electronic Fund Transfer Act, your debit card issuer isn't required to step in if you make a deal with an unscrupulous merchant. You get to wrangle with the seller yourself, no matter what your bank promised when you opened your account.

    Then there's the fraud issue. Federal law generally limits your liability to no more than $50 if your debit card is stolen or copied, as long as you report the crime within two days of receiving your statement. However, if you don't notice the suspicious activity till weeks later, you may be liable for up to $500 or more. As with transaction disputes, recouping your cash isn't a sure thing.

    Avoid the Trap

    Don't use debit for online purchases, especially if you don't know the retailer's reputation, says Avivah Litan, electronic security specialist for Gartner, an information technology research firm that works with banks. Also opt for credit for all expensive items, like furniture.

    Fraud is trickier because it can strike even if you're careful. Nessa Feddis, a senior federal counsel to the American Bankers Association, recommends checking your printed statements every month. Better yet, register for online banking and track your money trail even more frequently.

    Some card issuers offer zero liability policies, meaning they won't hold customers responsible for even that first $50 in fraud charges. But they are not legally bound to do so. "We get calls from listeners who struggle for weeks to get their own money back," notes Howard. Even if a store's card reader prompts for your PIN, you can override the system by pressing Credit/Other or asking the cashier to process the sale that way. When you sign a receipt, your debit transaction piggybacks on the credit card processing system, triggering the zero liability policy to kick in.

    Steer Clear of Hidden Fees At the end of the week, most of us pull a wad of debit receipts out of our wallets and purses. Do we religiously record these amounts? Probably not. And even a $5 purchase can cause you to overdraw if your balance is tight.

    "Banks sometimes change the order of transactions at night. They take your biggest transactions and run them first," says Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group. By manipulating the order of checks and debits, banks can cause you to overdraw sooner and more often than you thought, earning huge overdraft fees for themselves. Debit purchases and withdrawals are now the single largest cause of customer overdrafts, according to the Center for Responsible Lending (CRL). "Five years ago, if you didn't have enough money in your account to buy something, your card would be declined," says Leslie Parrish, a CRL senior researcher. Today banks extend "courtesy overdraft loans," the financial euphemism for letting you overdraw and then charging you for it. Charges average $34 per transaction and add up to an estimated $17.5 billion in annual fees for financial institutions, says the CRL.

    Avoid the Trap

    Link your checking account to another account in case you overdraw. The fee, if any, is much lower than overdraft loans. If you incur fees, banks will often waive them if you ask. Some banks offer e-mail or text-message alerts if your balance gets too low. That could be a warning that someone has copied your card or charged you incorrectly.

    What's Next?

    If you thought debit cards were popular now, just wait. The young tech-savvy generation is entering its prime earning and spending phase of life, and they live by their debit cards.

    All the more reason for debit card security to step up a notch. Brad Lipman, the man who lost $1,800 at a restaurant (his credit union eventually returned his money, including overdraft fees) was inspired to develop TablePay, a device that allows diners to safely swipe their debit cards right at their tables. Before long, U.S. debit card issuers may embed electronic chips in cards' magnetic strips, predicts Litan, the security specialist. These sophisticated cards are much harder to copy and use fraudulently.

    And that's good, since even fraud victims like Lipman aren't willing to part with their debit cards. "I just can't give up the convenience," he says.

    How to avoid those huge debit card fees?
    Debit cards may seem attractive to consumers who want to avoid racking up credit charges, because they appear to have the safeguard of drawing from your checking account. But it is possible to overdraw from your debit card, and the resulting fees are very high. Here's how to avoid such charges.
    Michelle Singletary, "Watch Your Debit Card Balance," NPR, July 31, 2007 ---

    Bob Jensen's threads on the dirty secrets of credit card and debit card companies are at

    I'm sorry," Reyes said. "There is much that I regret. If I could turn back the clock, I would."
    As pointed out in the Opinion Journal, January 18, 2008 Reyes' choice of words is truly ironic since he was convicted of options "backdating." When he committed the fraud he truly did turn the clock back. Now he would like to turn it back again since he got caught.

    From The Wall Street Journal Accounting Weekly Review, January 18, 2008

    Brocade Ex-CEO Gets 21 Months in Prison
    by Justin Scheck and Steve Stecklow
    The Wall Street Journal

    Jan 17, 2008
    Page: A3
    Click here to view the full article on ---

    TOPICS: Accounting, Financial Accounting, Financial Reporting, Stock Options

    SUMMARY: Gregory Reyes, the former chief executive of Brocade Communications Systems Inc. was the first to go on trial and be convicted over the improper dating of stock-option awards. The backdating scandal came to light from academic accounting research that was brought to the attention of the WSJ. Executives committing this fraudulent activity were awarded stock options that were backdated to a point at which the companies' stock prices were lower, often the lowest of the year or quarter. The related article describes the practice as "illegal if not accounted for properly." Mr. Reyes had faced a potential 20 year sentence, but that "...was reduced late last year when Judge Breyer ruled there was no quantifiable loss of money to the company."

    CLASSROOM APPLICATION: Accounting for stock options and related disclosures

    1.) Summarize the accounting and disclosure requirements for stock options. Refer to authoritative accounting literature and include a description of dates associated with stock option grants sufficient to discuss the issues in the article.

    2.) What does it mean to "back date" a stock option award?

    3.) The related article describes the practice of backdating stock options as "illegal if not accounted for properly." What accounting would have been appropriate? You may refer to your answer to question 1 as necessary.

    4.) The potential sentence and fine to Mr. Reyes was reduced by the judge in the case because he "ruled there was no quantifiable loss of money to the company." What are the costs of stock option to the issuing company? To its shareholders? Support your answer.

    Reviewed By: Judy Beckman, University of Rhode Island

    Brocade Ex-CEO Seeks To Overturn Conviction
    by Justin Scheck
    Dec 13, 2007
    Page: A15

    Bob Jensen's threads on backdating frauds are at


    Yawn:  Just Billions More in World Bank Frauds Coming to Light
    Corruption is an endemic problem in bank projects, swallowing unknown but significant chunks from its $30 billion-plus annual portfolio. No less a problem has been the bank staff's ferocious resistance to anything that might stand in the way of its lending ever more money to projects run by the same governments that tolerate this malfeasance. Yet nothing we've seen so far can compare to what has now been uncovered about five health projects in India, involving $569 million in loans. The projects were the subject of a "Detailed Implementation Review," a lengthy forensic examination undertaken by Ms. Folsom's Department of Institutional Integrity, known within the bank as INT. As of this writing the bank has not publicly released the review, though it's been shared with the bank's board. But we've seen a copy and are posting its executive summary on  and   (click here to see it).
    "World Bank Disgrace," The Wall Street Journal, January 14, 2008; Page A12 ---

    Why doesn't Section 401 of the Sarbanes-Oxley Act apply to attestation of internal controls in the World Bank?

    "World Bank Reckoning," The Wall Street Journal, September 13, 2007; Page A16 ---

    Since we're talking about the world's second most out-of-control international bureaucracy -- no prizes for guessing the first -- we shouldn't get our hopes up. But in the past week some prominent outsiders have been forcing the World Bank to reckon with the alien concept of accountability. Now it's up to new bank President Robert Zoellick to see that their efforts bear fruit.

    First up is former Federal Reserve Chairman Paul Volcker. For the past five months, Mr. Volcker and a panel of international experts have been conducting an independent review of the Department of Institutional Integrity, the bank's anticorruption unit known internally as the INT. Their report, which readers can find on, is being released to the public today.

    In sober and measured terms, Mr. Volcker's report provides a devastating indictment of what it calls the bank's "ambivalence" toward both corruption and its own anticorruption unit. "There was then, and remains now, resistance among important parts of the Bank staff and some of its leadership to the work of INT," the report says (our emphasis).

    It goes on to say that, "Some resistance is more parochial. There is a natural discomfort among some line staff, who are generally encouraged by the pay and performance evaluation system to make loans for promising projects, to have those projects investigated ex post, exposed as rife with corruption, creating an awkward problem in relations with borrowing clients." To put it more plainly, the report is saying that every incentive at the bank is to push more money out the door, and bank employees hate the anticorruption effort because it interferes with that imperative.

    The report endorses the work of the INT, which was created a mere six years ago and which has been under what it calls a "particularly strong" institutional attack ever since. The INT, the Volcker panel says, "is staffed by competent and dedicated investigators who work hard and long hours with professionalism" and deploy "advanced investigative methods to detect and substantiate allegations of fraud and corruption." And it goes on to recommend that the anticorruption crusaders "should be nurtured and maintained as an exemplary investigative organization" within the bank.

    In a phone interview yesterday, Mr. Volcker added that he gives "high marks" to current INT director Suzanne Rich Folsom. Mr. Volcker's endorsement should stop cold the recent attempts by some in the bank's entrenched bureaucracy to run Ms. Folsom out of the bank, as they did Paul Wolfowitz.

    The bank is also being put on notice by the U.S. Senate through provisions in its foreign operations appropriations bill. The provision threatens to withhold 20% of U.S. funds to the bank's International Development Association arm (which provides interest-free loans to the world's poorest countries) until it is assured that the bank "has adequately staffed and sufficiently funded the Department of Institutional Integrity." The bill also demands that the bank provide "financial disclosure forms of all senior World bank personnel." Now, that will get the bureaucracy's attention.

    Notably, it's a Democrat -- Evan Bayh of Indiana -- who's taken the lead on this issue. Mr. Bayh has ordered a Government Accountability Office report on the effectiveness of IDA loans and their susceptibility to corruption, the bank's procurement procedures, as well as the legendary pay packages enjoyed by its senior management. "There's a tendency [at the bank] to say 'just give us the money and go away,'" the Senator told us by phone yesterday. "Until there are some tangible consequences, they won't take us seriously. We shouldn't let that happen."

    Continued in article

    January 15, 2008 reply from Randy Kuhn [jkuhn@BUS.UCF.EDU]

    I am in no way surprised. As a part of the Deloitte audit team the first year after we “won” the engagement, I can clearly speak on the attitudes displayed by some World Bank staffers. The CFO at the time was an ex-employee of the previous auditing firm and frankly treated us with utter contempt repeatedly commenting on how much better the other firm was. I was not permitted to speak or ask questions in any Bank meetings that I attended (direct order from the CFO). If I wanted clarification on anything, I needed to schedule time with staffers through a central person. Even when formally scheduled, staffers would blow me off and tell me to reschedule when I arrived at the agreed upon time and the firm ate the costs of these inefficiencies. Due to confidentiality reasons, I cannot reveal any of the control weaknesses but, in general, there was either an overall lack of appreciation for the value of internal controls or lack of understanding of their purpose. As more issues like these are revealed, however, I am led to believe there might have been other underlying reasons for the constant battles we faced auditing the Bank.


    Bob Jensen's "Rotten to the Core" threads are at

    Bob Jensen's fraud updates are at

    Note that there's a pretty good summary of the Sarbanes-Oxley Act at

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

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

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

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

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

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

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

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

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

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

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

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

    Reviewed By: Linda Christiansen, Indiana University Southeast

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

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

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

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

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

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

    First-Ever Case

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

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

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

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

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

    Deloitte's Response

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

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

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

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

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

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

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

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

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

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

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

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

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

    Continued in article

    Bob Jensen's threads on Deloitte are at

    Learning Basic Financial Accounting at Brigham Young University (BYU) From Homegrown Videos
    Developer and Instructor:  Norman Nemrow [
    Title of Package of Eight CDs:  Introduction to Accounting:  The Language of Business
    Textbook:  I think this package can be used along with virtually any basic accounting textbook
    Pedagogy:  Students learn from video lesson modules before each class.  The video lessons display 
                      the course instructor in video as well as accompanying PowerPoint displays that are auto-
                      matically sequenced with the video.  Students have nifty options to both replay the previous
                      five minutes and to play the videos a double (2x) speed that is an outstanding option
                      for reviewing previously-learned material.
    Classes:  Classes are more inspirational than perspirational (e.g., frequent use of visiting speakers)
    Outcomes:  Purportedly students perform better vis-à-vis previous lecture pedagogy without video. 
                       See the following evaluation of learning:

     "Variable Speed Playback of Digitally Recorded Lectures: Evaluating Learner Feedback," by Joel D. Galbraith
    ( ) and Steven G. Spencer --- 

    Basic accounting students At BYU have great success learning accounting from special videos ---

    Contact Information: 
    Cameron Earl 801-836-5649
    Norm Nemrow 801-422-3029 

    Update message on November 3, 2005

    Bob has posted our new website in an earlier post, but the new URL to our new website describing our accounting tools is

    We have a demo of VSP (the technology that speeds up the video and audio) technology here: 

    Cameron Earl


    Also see David Cottrell's approach at BYU --- 

    Master Educators Who Deliver Exceptional Courses or Entire Programs
    But Have Little Contact With Individual Students

    Before reading this section, you should be familiar with the document at

    Master educators can also be outstanding researchers, although research is certainly not a requisite to being a master educator. Many master educators are administrators of exceptional accounting education programs. They're administrative duties typically leave little time for research, although they may write about education and learning. Some master educators are not even tenure track faculty.

    What I've noticed in recent years is how technology can make a huge difference. Nearly every college these days has some courses in selected disciplines because they are utilizing some type exciting technology. Today I returned from a trip to Jackson, Mississippi where I conduced a day-long CPE session on education technology for accounting educators in Mississippi (what great southern hospitality by the way). So the audience would not have to listen to me the entire day, I invited Cameron Earl from Brigham Young University to make a presentation that ran for about 90 minutes. I learned some things about top educators at BYU, which by the way is one of the most respected universities in the world. If you factor out a required religion course on the Book of Mormon, the most popular courses on the BYU campus are the two basic accounting courses. By popular I mean in terms of thousands of students who elect to take these courses even if they have no intention of majoring in business or economics where these two courses are required. Nearly all humanities and science students on campus try to sign up for these two accounting courses.

    After students take these two courses, capacity constraints restrict the numbers of successful students in these courses who are then allowed to become accounting majors at BYU. I mean I'm talking about a very, very small percentage who are allowed to become accounting students. Students admitted to the accounting program generally have over 3.7 minimum campus-wide grade averages.

    This begs the question of what makes the two basic accounting courses so exceptionally popular in such a large and prestigious university?

    • These two basic accounting courses are not sought out for easy grades. In fact they are among the hardest courses for high grades at BYU. I think that this is probably true in most business schools in the nation.
    • These two BYU courses are not sought out for face-to-face contact with the instructor. The courses have thousands of students each term such that most students do not see the instructor outside of class even though he's available over ten hours per week for those who seek him out. Each course only meets in live classes eight times per semester. Most of the speakers in those eight classes are outstanding visiting speakers who add a great deal to the popularity of the course. This is often one difference between a course run by a master educator versus a master teacher. A master educator often brings in top talent to inspire and educate students.
    • The courses undoubtedly benefit from the the shortage of accounting graduates in colleges nationwide and the exceptional career opportunities for students who want careers in accounting, taxation, law, business management, government, criminal justice, and other organizations. But these accountancy advantages exist for every college that has an accounting education program. Most all colleges do not have two basic accounting courses that are sought out by every student in the entire university. That makes BYU's two basic accounting courses truly exceptional.
    • Some courses in every college are popular these days because they are doing something exceptional with technology. These two BYU courses increased in popularity when a self-made young man became a multimillionaire and decided to devote his life to being a master educator in these two accountancy courses at BYU. His name is Norman Nemrow. He runs these courses full time without salary at BYU and is neither a tenure track faculty member or a noted researcher at BYU. I think he qualifies, however, as an education researcher even if he does not publish his findings in academic journals. The video disks are available to anyone in the world for a relatively small fee that goes to BYU, but BYU is not doing this for purposes of making great profits. You can read more about how to get the course disks at the following links:

      Basic accounting students At BYU have great success learning accounting from special videos --- 

      Contact Information:  Cameron Earl 801-836-5649 

      Norm Nemrow 801-422-3029  

      Also see David Cottrell's approach at BYU ---  


    • The students in these two courses learn the technical aspects of from variable-speed video disks that were produced by Norman and a team of video and learning experts. Cameron Earl is a recent graduate of BYU who is part of the technical team that delivers these two courses on video. Formal studies of Nemrow's video courses indicate that students generally prefer to learn from the video relative to live lectures. The course has computer labs run by teaching assistants who can give live tutorials to individual students, but most students who have the video disks for their own computers do not seek out the labs.

    Trivia Question
    At BYU most students on campus elect to take Norman Nemrow's two basic accounting courses. In the distant past, what exceptional accounting professor managed to get his basic accounting courses required at a renowned university while he was teaching these courses?

    Trivia Answer
    Bill Paton is one of the all-time great accounting professors in history. His home campus was the University of Michigan, and for a period of time virtually all students at his university had to take basic accounting (or at least so I was told by several of Paton's former doctoral students). Bill Paton was one of the first to be inducted into the Accounting Hall of Fame.

    As an aside, I might mention that I favor requiring two basic accounting courses for every student admitted to a college or university, including colleges who do not even have business education programs.

    But the "required accounting courses" would not, in my viewpoint, be a traditional basic accounting courses. About two thirds or more of these courses should be devoted to personal finance, investing, business law, tax planning. The remainder of the courses should touch on accounting basics for keeping score of business firms and budgeting for every organization in society.

    At the moment, the majority of college graduates do not have a clue about the time value of money and the basics of finance and accounting that they will face the rest of their lives.


    There are other ways of being "mastery educators" without being master teachers in a traditional sense. Three professors of accounting at the University of Virginia developed and taught a year-long intermediate accounting case where students virtually had to teach themselves in a manner that they found painful and frustrating. But there are metacognitive reasons where the end result made this year-long active learning task one of the most meaningful and memorable experiences in their entire education ---
    They often painfully grumbled with such comments as "everything I'm learned in this course I'm having to learn by myself."

    You can read about mastery learning and all its frustrations at 


    From The Wall Street Journal Accounting Weekly Review on January 11, 2008

    KB Results Drive New Pessimism Over Housing
    by Michael Corkery and James R. Hagerty
    The Wall Street Journal

    Jan 09, 2008
    Page: A1
    Click here to view the full article on ---

    TOPICS: Advanced Financial Accounting, Analysts' Forecasts, Earning Announcements, Earnings Forecasts, Income Taxes

    SUMMARY: KB Home reported a net loss of $772.7 million for the fiscal quarter ended November 30, 2007. This company had been viewed as healthful enough to weather the housing slump and credit market crisis, but saw its stock price drop 9.2% after reporting these losses because they totaled nine times the loss amount expected by analysts. Much of the loss stemmed from a $514 million charge from recording a valuation allowance against deferred tax assets.

    CLASSROOM APPLICATION: Accounting for income taxes, particularly deferred taxes, can be covered with this article allowing for class discussion to relate the issue to current economic circumstances.

    1.) What are analysts forecasts of earnings? How far below analysts' forecasts were the KB Home results?

    2.) How did the market react to the KB Home announcement of quarterly results for the period ended November 30, 2007?

    3.) Define the terms deferred taxes, deferred tax liabilities, deferred tax assets, and valuation allowance.

    4.) Why did KB Home record a $514 million charge against (reduction to) earnings in relation to deferred tax assets? Provide the journal entry and explain the rationale for making this entry.

    5.) The authors wrote "Much of the loss stemmed from a $514 million noncash charge due to changed accounting for tax purposes." Do you agree with the characterization of this issue as a change in accounting? Explain.

    6.) Both KB Home and another home building company, Hovnanian Enterprises Inc., have had to renegotiate debt covenants, or obtain waivers of them, because of the impact of deferred tax asset valuation allowances. What are debt covenants? Why do bankers and bondholders require them? What are debt covenant waivers?

    7.) Refer again to the issues raised in question 5. How does the entry to record a valuation allowance against deferred tax assets ultimately impact ratios used as debt covenants? In your answer, specifically define the ratio referred to in the article and show the impact on it from the entry.

    Reviewed By: Judy Beckman, University of Rhode Island


    From The Wall Street Journal Accounting Weekly Review on January 25, 2008

    Delta Reports Loss; Southwest Posts a Profit
    by Ann Keeton and Melanie Trottman
    The Wall Street Journal

    Jan 24, 2008
    Page: C6
    Click here to view the full article on ---

    TOPICS: Advanced Financial Accounting, Derivatives, Hedging

    SUMMARY: "Delta Air Lines reported a fourth-quarter loss of $70 million as the run-up in fuel prices stunted its recent recovery, but Southwest Airlines turned a profit thanks to gains from fuel hedges."

    CLASSROOM APPLICATION: General discussion of performance and use of hedging activities.

    1.) Summarize the 4th quarter 2007 performance by Delta Air Lines and Southwest Airlines. What particular economic shock affected their performance?

    2.) In what ways are Delta Airlines and Southwest Airlines trying to improve their revenues and overall profit performance?

    3.) What makes it difficult for airlines to improve revenues? In your answer, discuss the issue in terms of revenue per passenger mile flown and step costs, including definitions of these terms.

    4.) What are commodity futures? How can they be used to help develop operating budgets in this industry? To assist in your answer, access the Southwest Airlines SEC filing on Form 8K for the earnings announcement described in this article, available at Search for statements such as, "We have derivative contracts in place for approximately 75 percent of our first quarter 2008 estimated fuel consumption, capped at an average crude-equivalent price of approximately $51 per barrel."

    5.) How did derivative contracts help the 4th quarter results achieved by Southwest Airlines?

    Reviewed By: Judy Beckman, University of Rhode Island

    Most Airlines to Post Quarterly Losses
    by Melanie Trottman
    Jan 16, 2008
    Page: A8




    Humor Between January 1 and January 31, 2008

    Some Accounting Humor from

    Chapter 11

    "The job notice posted at the University placement office advertised for someone to set up a bookkeeping system for a local dinner theater that was filing for bankruptcy.

    When an eager first-year accounting student inquired, the interviewer told him that the company needed an advanced student capable of handling Chapter 11 proceedings.

    "I'm sure I could do it," the student proclaimed confidently. "My class is already up to chapter fourteen."


    An accountant is having a hard time sleeping and goes to see his doctor. "Doctor, I just can't get to sleep at night." "Have you tried counting sheep?" "That's the problem - I make a mistake and then spend three hours trying to find it."


    A guy in a bar leans over to the guy next to him and says, "Want to hear an accountant joke?" The guy next to him replies, "Well, before you tell that joke, you should know that I'm 6 feet tall, 200 pounds, and I'm an accountant. And the guy sitting next to me is 6'2" tall, 225 pounds, and he's an accountant. Now, do you still want to tell that joke?" The first guy says, "No, I don't want to have to explain it two times."


    An accountant applies for the position of Chief Financial Officer. There are a number of candidates and he is called in for an interview. They ask him a number of questions and one of the panel suddenly says "What is nine multiplied by four?"

    He thinks quickly and says "Thirty five." When the interview is over he goes outside, takes out his calculator and finds the correct answer is not thirty five. He thinks "Well, I blew that" and goes home very disappointed.

    Next day he is rung up and told he has got the job. "Wonderful," he says, "but what about nine multiplied by four? My answer wasn't right"

    "We know, but of all the candidates you came the closest."

    Bob Jensen's threads on accounting humor are at

    Videos of Accounting Humor

    Videos of Tax Humor

    From Harvard University
    Ig Nobel Prizes ---


    • Aviation: Patricia V. Agostino, Santiago A. Plano and Diego A. Golombek, for discovering that hamsters recover from jetlag more quickly when given Viagra.
    • Biology: Johanna E.M.H. van Bronswijk, for taking a census of all the mites and other life forms that live in people's beds.
    • Chemistry: Mayu Yamamoto for extracting vanilla flavour from cow dung.
    • Economics: Kuo Cheng Hsieh, for patenting a device to catch bank robbers by ensnaring them in a net.
    • Linguistics: Juan Manuel Toro, Josep B. Trobalon and Nuria Sebastian-Galles, for determining that rats sometimes can't distinguish between Japanese, played backward, and Dutch, played backward.
    • Literature: Glenda Browne, for her study of the word "the".
    • Medicine: Dan Meyer and Brian Witcombe, for investigating the side-effects of swallowing swords.
    • Nutrition: Brian Wansink, for investigating people's appetite for mindless eating by secretly feeding them a self-refilling bowl of soup.[8]
    • Peace: The Air Force Wright Laboratory in Dayton, Ohio, for suggesting the research and development of a "gay bomb," which would cause enemy troops to become sexually attracted to each other.
    • Physics: L. Mahadevan and Enrique Cerda Villablanca for their theoretical study of how sheets become wrinkled.

    Other Years ---

    Bill Enrico Project (Comedy Blog on the gay side) ---

    From Stetson University
    Math Humor (some may seem insensitive) ---

    Forwarded by Auntie Bev

    Another year has passed And we're all a little older. Last summer felt hotter And winter seems much colder.

    I rack my brain for happy thoughts, To put down on my pad, But lots of things, That come to mind Just make me kind of sad.

    There was a time not long ago When life was quite a blast. Now I fully understand About 'Living in the Past'.

    We used to go to friends homes, Baseball games and lunches. Now we go to therapy, to hospitals, And after-funeral brunches.

    We used to have hangovers, From parties that were gay.(did I say GAY??) Now we suffer body aches And sleep the night away.

    We used to go out dining, And couldn't get our fill. Now we ask for doggie bags, Come home and take a pill.

    We used to travel often To places near and far. Now we get backaches From riding in the car.

    We used to go out shopping For new clothing at the Mall But, now we never bother... All the sizes are too small.

    That, my friend is how life is, And now my tale is told. So, enjoy each day and live it up... Before you're too stinkin' old!!

    Forwarded by Auntie Bev

    Student Vs Professor
    After having failed his exam in "Logistics and Organization ", a student goes and confronts his lecturer about it.

    Student: "Sir, do you really understand anything about the subject?"

    Professor: "Surely I must. Otherwise I would not be a professor!"

    Student: "Great, well then I would like to ask you a question.

    If you can give me the correct answer, I will accept my mark as is and go. If you however do not know the answer, I want you give me an "A" for the exam. "

    Professor: "Okay, it's a deal. So what is the question?"

    Student: "What is legal, but not logical, logical, but not legal, and neither logical, nor legal?"

    Even after some long and hard consideration, the professor cannot give the student an answer, and therefore changes his exam mark into an "A", as agreed.

    Afterwards, the professor calls on his best student and asks him the same question.

    He immediately answers: "Sir, you are 63 years old and married to a 35 year old woman, which is legal, but not logical. Your wife has a 25  year old lover, which is logical, but not legal. The fact that you have given your wife's lover an "A", although he really should have failed, is neither legal, nor logical."


    Jensen Comment
    Seriously, we see many very old professors who are forced to keep on teaching well beyond when they would like to retire. In the case of very old male professors it is often due to the fact that they married trophy wives many years younger than themselves. Even though the old guys are eligible for Medicare medical insurance, their wives are not eligible for Medicare. Say a 62-year old professor has a 32-year old wife. He may have to keep on working for another 30 years just so his wife can have medical insurance under a family plan from his employer. This is not so funny when you're a student taking a class form a 90-year old has been who's very tired of teaching and can't even remember to zip his fly.

    Forwarded by Auntie Bev

    Grandma and Grandpa were visiting their kids overnight.

    When Grandpa found a bottle of Viagra in his son's medicine cabinet, he asked about using one of the pills.

    The son said, 'I don't think you should take one Dad; they're very strong and very expensive.'

    'How much?' asked Grandpa.

    '$10.00 a pill,' Answered t he son.

    'I don't care,' said Grandpa, 'I'd still like to try one, and before we leave in the morning, I'll put the money under the pillow.'

    Later the next morning, the son found $110.00 under the pillow. He called Grandpa and said, 'I told you each pill was $10.00, not $110.00.

    'I know,' said Grandpa. 'The hundred is from Grandma!'

    Forwarded by Gene and Joan

    Trivia (Sort of) Quiz ---

    Forwarded by Moe

    New Direction for the war on terrorists.

    "Send Prior Service Vets over 60 "

    I am over 60 and the Armed Forces thinks I'm too old to track down terrorists. (You can't be older than 42 to join the military.)

    They've got the whole thing backwards. Instead of sending 18-year-olds off to fight, they ought to take us old guys. You shouldn't be able to join a military unit until you're at least 35.

    For starters:

    Researchers say 18-year-olds think about sex every 10 seconds. Old guys only think about sex a couple of times a day, leaving us more than 28,000 additional seconds per day to concentrate on the enemy.

    Young guys haven't lived long enough to be cranky, and a cranky soldier is a dangerous soldier. "My back hurts! I can't sleep, I'm tired and hungry!" We are impatient and maybe letting us kill some asshole that desperately deserves it will make us feel better and shut us up for a while.

    An 18-year-old doesn't even like to get up before 10 a.m.

    Old guys always get up early to pee so what the hell. Besides, like I said, "I'm tired and can't sleep and since I'm already up, I may as well be up killing some fanatical son-of-a-bitch.

    If captured we couldn't spill the beans because we'd forget where we put them. In fact, name, rank, and serial number would be a real brainteaser.

    Boot camp would be easier for old guys. We're used to getting screamed and yelled at and we like soft food. We've also developed an appreciation for guns. We've been using them for years as an excuse to get out of the house, away from the screaming and yelling.

    They could lighten up on the obstacle course however. I've been in combat and didn't see a single 20-foot wall with rope hanging over the side, nor did I ever do any pushups after completing basic training. I can hear the Drill Sgt. now, "Get down and give me ... er ... one."

    Actually, the running part is kind of a waste of energy, too. I've never seen anyone outrun a bullet.

    An 18-year-old has the whole world ahead of him. He's still learning to shave, to start up a conversation with a pretty girl. He still hasn't figured out that a baseball cap has a brim to shade his eyes, not the back of his head. These are all great reasons to keep our kids at home to learn a little more about life before sending them off into harm's way.

    Let us old guys track down those dirty rotten cowards who attacked us on September 11. The last thing an enemy would want to see right now is a couple of million pissed off old farts with attitudes and automatic weapons who know that their best years are already behind them.

    If nothing else, put us on the border and we will have it secured the first night.

    Forwarded by Moe

    Nominated as the world's best short joke of the year. . . . ..

    A 3-year-old boy examined his testicles while taking a bath.

    "Mom", he asked, "Are these my brains?"

    "Not yet," she replied.

    Toilet Humour ---

    Bumper Stickers for Seniors ---

    Auntie Bev tells me she remembers these (I too young to remember) --- 

    Forwarded by Auntie Bev

    To be a Republican you need to believe:

     01. Jesus loves you, and shares your hatred of homosexuals and Hillary Clinton.

     02. Saddam was a good guy when Reagan armed him, a bad guy when Bush's Daddy made war on him, a good guy when Cheney did business with him, and a bad guy when Bush needed a "we can't find Bin Laden" diversion.

     03. Trade with Cuba is wrong because the country is Communist, but trade with China and Vietnam is vital to a spirit of international harmony.

     04. The United States should get out of the United Nations, and our highest national priority is enforcing U.N. Resolutions against Iraq.

     05. A woman can't be trusted with decisions about her own body, but multinational drug corporations can make decisions affecting all mankind without regulation.

     06. The best way to improve military morale is to praise the troops in speeches, while slashing veterans' benefits and combat pay.

    0 7. If condoms are kept out of schools, adolescents won't have sex.

     08. A good way to fight terrorism is to belittle our longtime allies, then demand their cooperation and money.

     09. Providing health care to all Iraqis is sound policy, but providing health care to all Americans is socialism. HMO's and insurance companies have the best interests of the public at heart.

     10. Global warming and tobacco's link to cancer are junk science, but creationism should be taught in schools.

     11. A president lying about an extramarital affair is an impeachable offense, but a president lying to enlist support for a war in which thousands die is solid defense policy.

     12. Government should limit itself to the powers named in the Constitution, which include banning gay marriages and censoring the Internet.

     13. The public has a right to know about Hillary's cattle trades, but George Bush's driving record is none of our business.

     14. Being a drug addict is a moral failing and a crime, unless you're a conservative radio host. Then it's an illness and you need our prayers for your recovery.

     15. Supporting "Executive Privilege" for every Republican ever born, who will be born or who might be born (in perpetuity.)

     16. What Bill Clinton did in the 1960's is of vital national interest, but what Bush did in the '80's is irrelevant.

     17. Support for hunters who shoot their friends and blame them for wearing orange vests similar to those worn by the quail.

    If you don't send this to at least 10 other people, we're likely to be stuck with more Republicans in '08. IS THIS WHAT YOU WANT???

    Friends don't let friends vote Republican.

    Forwarded by Dick and Cec

    Subject: Ole and Sven Turn Texan

     Ole & Sven are on vacation in Texas and walk by a store window with the sign, "Suits $5.00 each, Shirts $2.00 each, Trousers $2.50 a pair."

     Ole says to his pal, "Sven, look at dat! Ve could buy a whole bunch of dese clothes, take 'em back to Iowa, sell 'em to all da dumb Yermans up dere, and make a fortune!"

     Ole continues, "Now ven ve go in dere, don't you say a vurd, okay?

    Yust let me do the talkin''cause if dey hear your accent, they might tink ve're ignorant Norvegians, and dey von't vanna sell dem clothes to us. Now, I'll talk like I'm a Texan, so dey von't know"

    Ole and Sven go in and Ole says with his best fake Texas accent, "Howdy, y'all. Ah'll take 50 of them there suits at five dollahs each, 100 of them there shirts at two dollahs each, and 50 pairs of them there trousers at two-fifty each. So, Ah'll just back up mah  pickup and......"

    The owner of the shop interrupts, "Ya'll are a coupla Norwegians from Minnesota, ain't you?"

    "Vell . yah," sas a surprised Ole "How'd you know dat?"

    The owner replies, "Cause this here's a dry-cleaners."

    Forwarded by Bob Every

    Bubba went to a psychiatrist. 'I've got problems. Every time I go to bed I think there's somebody under it. I'm scared. I think I'm going crazy.'

    'Just put yourself in my hands for one year,' said the shrink. 'Come talk to me three times a week, and we should be able to get rid of those fears.'

    'How much do you charge?

    'Eighty dollars per visit, replied the doctor.'

    'I'll sleep on it,' said Bubba.

    Six months later the doctor met Bubba on the street. 'Why didn't you ever come to see me about those fears you were having?' asked the psychiatrist.

    'Well Eighty bucks a visit three times a week for a year is an awful lot of money! A bartender cured me for $10. I was so happy to have saved all that money that I went and bought me a new pickup!'

    'Is that so! And how, may I ask, did a bartender cure you?'

    'He told me to cut the legs off the bed! - Ain't nobody under there now !!!'

    Forwarded by Moe

    Be Careful Out There:

    IDIOT SIGHTING: We had to have the garage door repaired. The Sears repairman told us that one of our problems was that we did not have a "large" enough motor on the opener. I thought for a minute, and said that we had the largest one Sears made at that time, a 1/2 horsepower. He shook his head and said, "Lady, you need a 1/4 horsepower." I responded that 1/2 was larger than 1/4. He said, "NO, it's not." Four is larger than two.." We haven't used Sears repair since.

    IDIOT SIGHTING My daughter and I went through the McDonald' s take-out window and I gave the clerk a $5 bill. Our total was $4.25, so I also handed her a quarter. She said, "you gave me too much money." I said, "Yes I know, but this way you can just give me a dollar bill back." She sighed and went to get the manager who asked me to repeat my request. I did so, and he handed me back the quarter, and said "We're sorry but they could not do that kind of thing." The clerk then proceeded to give me back$1 and 75 cents in change. Do not confuse the clerks at McD's.

    IDIOT SIGHTING : I live in a semi rural area. We recently had a new neighbor call the local township administrative office to request the removal of the DEER CROSSING sign on our road. The reason: "Too many deer are being hit by cars out here! I don't think this is a good place for them to be crossing anymore." From Kingman , KS

    IDIOT SIGHTING IN FOOD SERVICE: My daughter went to a local Taco Bell and ordered a taco. She asked the person behind the counter for "minimal lettuce." He said he was sorry, but they only had iceburg lettuce. From Kansas City

    IDIOT SIGHTING : I was at the airport, checking in at the gate when an airport employee asked, "Has anyone put anything in your baggage without your knowledge?" To which I replied, "If it was without my knowledge, how would I know?" He smiled knowingly and nodded, "That's why we ask." Happened in Birmingham , Ala.

    IDIOT SIGHTING : The stoplight on the corner buzzes when it's safe to cross the street. I was crossing with an intellectually challenged coworker of mine. She asked if I knew what the buzzer was for. I explained that it signals blind people when the light is red. Appalled, she responded, "What on earth are blind people doing driving?!" She was a probation officer in Wichita , KS

    IDIOT SIGHTING: At a good -bye luncheon for an old and dear coworker. She was leaving the company due to "downsizing." Our manager commented cheerfully, "This is fun. We should do this more often." Not another word was spoken. We all just looked at each other with that deer-in-the-headlights stare. This was a lunch at Texas Instruments.

    IDIOT SIGHTING: I work with an individual who plugged her power strip back into itself and for the sake of her life, couldn't understand why her system would not turn on. A dep uty with the Dallas County Sheriffs office, no less.

    IDIOT SIGHTING: When my husband and I arrived at an automobile dealership to pick up our car, we were told the keys had been locked in it. We went to the service department and found a mechanic working feverishly to unlock the drivers side door. As I watched from the passenger side, I instinctively tried the door handle and discovered that it was unlocked. "Hey," I announced to the technician, "its open!" His reply, "I know. I already got that side." This was at the Ford dealership in Canton , Mississippi

    STAY ALERT! They walk among us ... and the scary part is that they VOTE and they REPRODUCE

    Forwarded by Auntie Bev


    A priest dies and is waiting in line at the Pearly Gates. Ahead of him is a guy who's dressed in sunglasses, a loud shirt, leather jacket and jeans. Saint Peter addresses this cool guy, "Who are you, so that I may know whether or not to admit you to the Kingdom of Heaven?"

    The guy replies, "I'm Peter Pilot, retired American Airlines Pilot from Dallas." Saint Peter consults his list. He smiles and says to the pilot, "Take this silken robe and golden staff and enter the Kingdom."

    The pilot goes into Heaven with his robe and staff. Next it's the priest's turn. He stands erect and booms out, "I am Father Joe, pastor of Saint Mary's in Pasadena for the last 43 years." Saint Peter consults his list. He says to the priest, "Take this Cotton robe and wooden staff and enter the Kingdom."

    Just a minute", says the good father, "that man was a pilot and he gets a silken robe and golden staff, and I get only cotton and wood. How can this be?"

    Up here, we go by results," says Saint Peter. "When you preached, people slept; when he flew, people prayed.

    Forwarded by Auntie Bev


    There were 3 good arguments that Jesus was Black:

    1. He called everyone brother.

    2. He liked Gospel.

    3. He didn't get a fair trial.

    But then there were 3 equally good arguments that Jesus was Jewish:

    1. He went into His Father's business.

    2. He lived at home until he was 33.

    3. He was sure his Mother was a virgin and his Mother was sure He was God.

    But then there were 3 equally good arguments that Jesus was Italian:

    1. He talked with His hands.

    2. He had wine with His meals.

    3. He used olive oil.

    But then there were 3 equally good arguments that Jesus was a Californian:

    1. He never cut His hair.

    2. He walked around barefoot all the time.

    3. He started a new religion.

    But then there were 3 equally good arguments that Jesus was an American Indian:

    1. He was at peace with nature.

    2. He ate a lot of fish.

    3. He talked about the Great Spirit.

    But then there were 3 equally good arguments that Jesus was Irish:

    1. He never got married.

    2. He was always telling stories.

    3. He loved green pastures.

    But the most compelling evidence of all - 3 proofs that Jesus was a woman:

    1. He fed a crowd in a moments notice when there was virtually no food.

    2. He kept trying to get a message across to a bunch of men who just didn't get it.

    3. And even when He was dead, He had to get up because there was still work to do.


    Forwarded by Gene and Joan

    Subject: Preachers Son

    An old country preacher had a teenage son, and it was getting time the boy should give some thought to choosing a profession.

    Like many young men, the boy didn't really know what he wanted to do, and he didn't seem too concerned about it.

    One day, while the boy was away at school, his father decided to try an experiment. He went into the boy's room and